Speeches

John Hofmeister's '07 Speech - Louisville

11/01/2007

John Hofmeister's remarks to the World Affairs Council of Kentucky in Louisville, Kentucky

Thank you, ladies and gentlemen, for the opportunity to be here in Louisville.

I did visit Louisville a number of times when I was based in Ft. Wayne, but it was usually a fight between the appliance business and the motor business because motors are what make an appliance go.

You can’t do much without a motor in an appliance, but the appliance folks felt that the biggest problem they faced were the motors. And so we had a natural internal tension that we had to resolve.

Fortunately, we all worked for the same company. Fortunately, we were able to resolve our differences. But I do remember some of the tension on the way to Louisville.
 
It is a pleasure to be here and to be with you at the World Affairs Council and thank you for having us here today.

This is a subject that I think is important for two fundamental reasons. Our way of life is energy-dependent. The choices that we make in life in terms of how we live, how we travel, how we raise our families, how we enjoy the benefits of life are extraordinarily energy-dependent.

And secondly, our economy is fundamentally based on affordable energy in everything that we do. And when the cost of that energy rises, manufacturers, farmers, commuters, business people, telephone people who have big network servers who have to pay for electricity – everyone pays a higher price and it has an economic effect. 

So the job of an oil company, like Shell, is to take the supply side of the business as seriously as we possibly can because you are the demand side. The people of America, the businesses of America are the demand side and it’s our job to supply you.

And the issues that we have faced as an industry and as an American people, with respect to energy security and the cost of energy (which is part of that energy security issue) really emanate from around early 2004, 2005 and really came home to hit us in 2006 in the form of price.

That’s where we saw it most emphatically, but we didn’t get there overnight. Some wonder, “What’s a company like Shell doing out here in the public domain talking about this subject?”

And the way I say this is coming from an industry, which in the course of the last 18 to 24 months in the opinion of some writers, has zero credibility. A company that produces a product that no one wants to see, touch, taste or smell.  A company that is banging on doors of Congress incessantly, “More access, please.

More access, please.” Which is where we get our supplies – access to the Gulf of Mexico; access to the Outer Continental Shelf.  A company that’s interested in energy efficiency – but energy efficiency, as we know, is a long-term process. Energy efficiency does not come about by lightening up on the accelerator pedal or by jiggling the thermostat at home.

Energy efficiency comes about through design, through technology – the kind of engine technology; or the kind of heating technology or cooling technology; the kind of construction technology that we use.

These are ways by which energy efficiency is secured, not by simple consumer behavioral changes, although those can help as well. But a kind of company that’s also talking about the environmental impact of a hydrocarbon economy and how responsibility plays out on both the supply side and the demand side from hydrocarbon greenhouse gas emission.

And so these sort of negative aspects surrounding a company like mine say, “Why are we out here?  Why are we talking to city after city and stakeholder after stakeholder?” And frankly there are two fundamental reasons.
 
One – respect for our customers.  We believe that you have a right to as much information as you can obtain on what goes into the price of energy because you buy it. You should know as much as can be known about it and we’re here to talk about it.
 
Secondly – respect for our employees. Every time I hear the term, “Big Oil,” I think, “What does that really mean?”  “Big Oil” to me is some kind of nonsense, a myth because Shell is made up of tens of thousands of real people – individuals who make their living bringing energy out of the ground and distributing that energy across the country.

The only thing “big” is our brand. And it is our brand that is our most precious resource. To we want to do whatever we can to protect that brand, to protect the jobs of our employees and to meet the needs of our customers, which is why we as a leadership team decided a year ago to spend more time in the marketplace talking with people and listening to people.

The listening takes place in a variety of ways, and tonight we look forward to a Town Hall here in Louisville where we hope to have an engagement with quite a number of community leaders and other citizens of your city.
 
But the points I’d like to make to start with – energy security is a perception. Because the reality is we have plenty of energy. When it comes to conventional oil and gas, the United States is blessed with billions of barrels of untouched oil and gas still in the ground. Some estimate 75 billion of conventional oil and gas remains to be developed.

Some would say it’s closer to 100 or more if we look at the entire Outer Continental Shelf of the United States. If we look at the federal lands, which are restricted to production of oil and gas, the known reserves are between 75 billion and 100 billion depending on how you want to try and look at it.

In addition there are tens of billions of conventional oil and gas still in development in the Gulf of Mexico, regions that we know; areas that we have access to, which remain to be produced.  So when it comes to conventional oil and gas, there’s plenty still out there, if we can have access to it.

We’re pleased that the Congress decided in December to grant access to eight-plus million acres in the Southeast Gulf of Mexico, about 125 miles off the coast of Florida. That’s very helpful.

It’s the first new access that we’ve had in 25 years in the Gulf of Mexico, but we appreciate that that is now available to us.

We appreciate also that the President lifted a moratorium on Crystal Bay, off the Southwest coast of Alaska, this past week, which now will enable us to have access in new areas of Alaska which were previously restricted. These are important moves forward which help the energy security issue.
 
But if we develop all of that oil and gas, how long will it last? Is that enough? We don’t think so. Fortunately, this nation is also blessed with large reserves of unconventional oil in the oil shale region of Colorado, the Piscine Basin, which includes parts of Wyoming and Utah and Colorado.

There are considerable resources there and Shell is working on a research and development project in the Piscine Basin area to see if there is a technology which can extract that gas and oil, oil shale, using technology other than mining technology.

It was developed in the ‘70s but it stopped in the 1980s when the price of oil dropped. But all of the technology in those days was based on mining, which was environmentally very concerning to many of the residents of the region.

And so we’ve been staying there all these years working on a different technology, which is still being researched, to heat the oil in the ground and take it out in liquid form. And it will be some years before we conclude that but we look forward to continuing the research process.
 
But if we develop that, is that enough? We don’t think so yet. There are tremendous coal resources in this country. Currently we use those coal resources in pulverized coal burning facilities.

The technology is there and Shell has this technology in use in Europe and in Asia and projects under development in Australia called, “clean coal technology” or “integrated gas combined cycle technology,” which is another way of saying “gasified coal.” Instead of pulverizing coal, instead we crush the coal to the consistency of talcum powder.

Talcum powder is dried and it is entered into a gasifier, which is heated to some 2500 degrees, pressurized over more than a thousand PSI and that talcum powder coal explodes as molecules of the various elements of that coal, which include hydrogen and carbon monoxide, which turn into synthetic gas.

That gas can be used in a variety of applications, not the least of which is electricity generation, but also manufacture of fertilizer or manufacture of other petrochemicals because it is an energy source.

In addition, the Shell gasifier is designed in such a way that you can capture the other elements of the coal such as CO2, such as mercury, sulfur and then manage those elements in ways that are environmentally better, which is why it’s called, “clean coal.”

If we master that - and Kentucky has ample coal, Indiana has ample coal (I talked with Governor Daniels on Tuesday about Indiana’s coal) and, of course, you have a project here in Kentucky working on the gasification of coal as well - that represents a tremendous source of energy but is that enough? We think there’s more:
 
Liquefied natural gas, which is a way of capturing the energy of stranded gas where there are huge deposits of gas. For example, on the Northwest Shelf of Australia or in other parts of the world in which there is no market for that gas, such as Northern Russia.

That gas can be liquefied into cold liquid form, shipped by sea in liquid form to the East Gulf or West Coast of the country and then re-gasified.  It can augment the natural gas supply, which in this country is not able to meet the demand if we look at the demand-supply curves out over the next 10 years.

Liquefied natural gas is a welcome supplement. But, there’s an issue. Liquefied natural gas requires a gasification plant. And, other than a couple of gasification plants on the East Coast, one that we have built in Altamira, Mexico and another one we’re partners in Baja, California, there are very few gasification plants in the U.S. to meet the future demand, which means we need to build more.

Which means people have to give us permits to build more, which is an issue with the “Not in My Backyard” crowd, which we face along the coasts. And so we need to work that issue.
 
But even if we do all of that – the conventional oil and gas; the unconventional oil and gas; the liquefied natural gas; the coal gasification; does that deliver energy security to the country? We think there’s more.
 
Biofuels is a good example.  Ethanol can be a great supplement to the motor fuel challenge that we face. But ethanol is an augmentation rather than a replacement in the way in which we see the next 10 or 20 years. The reason for that is the tremendous size of the motor fuel marketplace. America uses about 150 billion gallons of motor fuel a year.

The Energy Act of 2005 called for the use of ethanol, equivalent to 7.5 billion gallons. Seven-point-five billion gallons of ethanol against a $150 billion requirement is what, five percent?  And, we’re not there yet. We currently bank about 4 billion gallons of ethanol in this country today.

So to get to the seven-and- a-half billion gallons, we have a ways to go. We will meet that and we think we will beat the 2012 mandate that Congress called for.
 
But, we would have another issue. Where are we going to get the ethanol from?  Currently we get it from corn, primarily. The question is how much corn will we need to grow to meet the ethanol demand and the demand for food?

Shell is active in ethanol research primarily involving cellulosic ethanol, which is called second generation ethanol, using biomass (meaning the corn stalk instead of the corn kernel); using straw instead of other grain; using municipal waste; using biomass or wood chips (gasification of wood chips) to make ethanol.

We believe at Shell that the cellulosic ethanol is a more-adequate and actually a more-economic means by which we can meet ethanol requirements of the future.  And frankly, over time, you could imagine a virtually unlimited supply chain of cellulosic ethanol, which we think is beneficial to augmenting the oil requirements of the future.
 
In addition to that there are other alternate forms of energy, which can help meet energy security requirements, such as wind. And, as I say in different parts of the country, the good news about America is we have a lot of wind.

And, there’s different ways of interpreting that.  But wind energy is CO2-free electricity production, which is happening today. Shell has wind farms planned or under construction or in operation from Maui to Storm Mountain, West Virginia.

In California, in Colorado, in Texas, in Iowa we have wind farms that are currently or will be producing nearly 300 megawatts of electricity. The only issue is it’s not on a continuing basis. There are times when the wind stops. And there are times when there’s too much wind.

So for safety sake we have to turn off the turbine. But it is a good means by which electricity production can be augmented.
 
And, solar – Shell is active in a new generation of technology for solar panels. It’s called copper indium diselenide, which is different than silicon-based photovoltaic cell solar electricity generation.

We believe it will be more efficient and we believe it will be less costly in the longer term.

But, it’s still in the laboratory. We have yet to bring it into commercial production, although we’ve signed a joint venture with a French company to begin building a manufacturing plant.
 
And then there’s hydrogen. Some people say hydrogen has great promise – and always will. Those are the cynics. We happen to be working in a partnership with General Motors on hydrogen fuel cell vehicles, which is already up and running, although not yet commercial.

Our partnership with General Motors includes a hydrogen fuel service station at a regular Shell station at Benning Road in Washington, D.C. Every day, GM vans are filled with hydrogen and are moving around the city with no exhaust of CO2.

These hydrogen fuel cell vans (typical GM-looking vans) are taking members of Congress and their staff back and forth around the city to demonstrate the viability of hydrogen fuel cell vehicles.

And Shell and GM are not the only companies working on hydrogen fuel cell vehicles, others are as well. This could be a great complement in the next 10, 15 to 25 years for the internal combustion engine reliance on oil products. 

Shell would like to be in the hydrogen distribution and retail sales business; just as GM would like to be in the hydrogen fuel cell car making business.
 
All of these added up together, ladies and gentlemen, do they yield the energy security that our nation needs, not just for this generation but generations to come? We think we’re not done yet.
 
There are three other areas of major importance to the development of energy security in the future. The first I mentioned earlier: energy efficiency. We cannot continue, in our judgment, to not take energy efficiency more seriously.

We have benefited over the last 50 years from what we can say is, “cheap, convenient, affordable, easy-to-find, easy-to-produce traditional oil and gas.” Through the ‘40s, ‘50s, ‘60s, ‘70s, ‘80s – cheap, affordable, easy-to-find oil and gas.

What’s different about the future is that period has come nearly to an end. The future will be more challenging because the oil and gas, which we’ve described is in more difficult geologies, more difficult basins, in deeper water, in more hazardous conditions and that will make it more expensive. So the cheap, easy oil has peaked.

We’re moving into the next generation of conventional, but more difficult conventional. So, energy efficiency becomes critical to us.

And the alternative, some of which I’ve described, the economic models for those alternatives are greater, more expensive than the model of the ‘50s and the ‘60s. So, we have to be ready for that. Therefore, energy efficiency needs to enter into our culture – a culture of conservation, predicated on the design efficiency of how energy gets used.
 
Second point – energy is not taught in our schools. We teach virtually everything else people need to know in life – language, mathematics, science, history, social science – we teach everything that children need to know about for the future. What about energy?

Energy as we described is the source of our way of life and the source of our economic strength. But we don’t teach about it – where it comes from, how it’s used, how it can be managed socially responsibly. Shell’s created a curriculum, which we invite school systems to embrace.

It’s a web-based free curriculum on energy. What people need to know about energy, targeted at the middle school and the high school level. We actually brought brochures with us, which you’re welcome to pick up as you leave today.

It’s a free website where teachers in middle school and high school could download a semester’s worth of energy education information, which can be incorporated into curriculum around the country.
 
Finally, and very importantly to our collective future, is the issue of management of greenhouse gases. Shell believes that a hydrocarbon-based economy is with us for a long time to come.

Therefore, the management of the emissions of those hydrocarbons becomes, in our view, an important public policy requirement for society. Shell believes it’s the role of government to take on the public policy issue in which citizens, corporate or private, and other interested parties have a point of view and can express that point of view, but government must decide how we proceed.

It’s Shell’s view that it’s time for government to take on that challenge, if it has not already. We work around the world; we experience a variety of governmental regimes. We find that where there is a level playing field and the supply side issues and the demand side issues are dealt with through public policy we can all work together to do what needs to be done.

Currently in the United States, there are eight states that have either passed or are considering passing climate change regulatory language in their state laws. California passed and the Governor signed AB-32 last year, which regulates the amount of greenhouse gas emissions, which will be tolerated in the state of California.

And you can imagine it is a reduction from the current rate, a significant reduction by 2020. Now, every state can do its own thing, or the nation could do something. Shell’s preference, as a citizen of 50 states, operating across the nation, is that we would welcome a national solution rather than a state-by-state solution. That, however, is for policymakers to decide.

It’s our view. It’s our advice (and I’ve talked with both sides of Congress and talked with the White House) that absent a regulatory framework, voluntary efforts will not get us where we need to get to.

And absent a regulatory framework, we will not benefit from a level playing field where both the supply side and the demand side are held equally accountable for responsible greenhouse gas management on the way forward.
 
So it’s our view, ladies and gentlemen, that all of the above is necessary for an energy security future in this country, where this generation, our grandchildren’s generation and their grandchildren’s generation have secure, ample energy supplies for our way of life and for our economic prosperity in the decades ahead.
 
Thank you.