Speeches

John Hofmeister's Energy Speech - Omaha

16/02/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to the Omaha Chamber of Commerce in Omaha, Nebraska.

Thank you and good morning, ladies and gentlemen.

Congratulations on a terrific year, 2006. And I do believe Chamber activities for businesspeople and communities are very important, which is why I was very pleased when the board of directors in Houston invited me to be the Chair for the 2007 year.

And, we look forward to the kind of economic prosperity and growth that you’re enjoying here.

A lot of that growth, ladies and gentlemen, and a lot of the ability to attract and retain industries comes right back to the topic of this morning – that topic is energy security. Shell has embarked on a nationwide dialogue with the American people on energy security.

This meeting this morning is part of a day-long effort here in Omaha to meet with people, discuss with people (your civic leaders, community activists and a variety of other people this evening at a Town Hall) what can a company like Shell do to provide greater energy security so that two things can come out of it?

Two things that are critical to any Chamber of Commerce or any business community or the community at large. First and foremost – affordable energy for economic growth and development. If energy is not affordable, we slow down. If it costs too much, people don’t use it.

People find ways around or they don’t do. And, secondly – lifestyle. It’s great on a morning like this morning to have hot water. It’s great to have had heat all night. It’s great that there’s fuel in the car, so you’re not riding a bicycle to get where you need to get to.

Affordable, available energy is at the heart of energy security. And for the purposes of this morning’s discussion, let’s define energy security as just that – available and affordable energy not just for today, not just for the next generation or the generation after that – but available and affordable energy for every generation that we can ever imagine (which is a very long time).

We believe that’s possible. Shell is committed to the kind of technology/research development that delivers that energy security well into the future. But, we have a problem and it’s a very serious problem.

While today in Omaha we’re enjoying the benefits of energy, economic growth, quality of life, quality of place (in the midst of winter), there are policy makers who would like to restrict access to more energy.

There are policy makers (elected in a democracy) who are looking for new ways to tax the profits of an energy company, leading to less investment in the future of energy security.

I’m not here, however, to point my finger at any policy maker who believes that energy companies should be higher taxed or who believes that access should be restricted to more energy development – not at all.

They are doing what they believe their job is and they believe they’re doing their job well if they find new tax sources and more restrictions on energy development. Who do I blame for the misguided policy that is being considered?

Frankly, ladies and gentlemen, I can only blame ourselves in the energy industry for having not communicated sufficiently with the American people about the importance of energy security, about the opportunity for available and affordable energy - and so the American people vote for the people that represent them and neither the American people nor the policy makers are sufficiently aware of what’s possible, of what can be, of what must be (in my judgment) in order to deliver energy security.

The responsibility is on our shoulders as an industry to convince the people who will elect their representatives, who will, in turn, in future deliver good policy - policy that enables energy security.

Let me tell you a story. This is how precarious things are in America today. If you turn the clock back a year and a half (not that long ago) to September/October of 2005 - Katrina (as we all know) blasted through the Gulf of Mexico, shutting down every producing platform in the Gulf of Mexico (except way out on the far west of the Gulf) for not just days but weeks and, in some cases months; for almost a year platforms did not recover from Katrina.

The country lost, for a period of time, 25 percent of its crude oil production following Katrina. But, before we could get back up and running from Katrina (even in platforms that were not damaged) along came Rita almost on the same path as Katrina, except a bit further to the west.

With 25 percent of the nation’s crude oil and gas production shut down and along the Gulf Coast, 25 percent of the refineries of the nation and chemical processing plants shut down (not only because of hurricane prevention but serious damage from those hurricanes), the worst of the moments came one week after Rita.

Now you don’t know about this because it was never publicized.

But, the Friday night a week after Rita came through East Texas and Western Louisiana, I had to call the Energy Secretary, Samuel Bodman, to say,

“Mr. Secretary, with all the effects of Katrina and now the effects of Rita; Shell’s refinery, which is in partnership with Saudi Aramco, called Motiva (Port Arthur, Texas) has the last - the last - 300,000 barrels of finished product available to push into the Plantation and the Colonial Pipelines, which feed the Southeast of the country, all the way up to Washington, D.C. Pipelines that start in Louisiana and move up all through the Southeastern states that go clearly to Washington, D.C.

And I said, “I’m calling you on Friday night, Secretary, because we have a time scheduled on Sunday to push those barrels and if those barrels aren’t pushed, the Southeast all the way up to our capital, sir, is out of gasoline.”

I got him at his daughter’s wedding rehearsal dinner – not the greatest of moments to try to talk to the Energy Secretary about a pending shortage of gasoline. And he listened and he was patient and he said, “John, I’ll pray for you this weekend.”

What we needed to do was to hook up emergency electricity, because there was no electricity in Port Arthur, Texas. We’d been working all week to bring in emergency generators and we just had that weekend.

And I said to the Secretary, “If we don’t get the electricity on Monday morning, I’m going to have to call you back and ask you to please ask the President of the United States to declare a day of ‘National Reflection’ so nobody drives because, sir, there will be no gasoline for the Southeast of the nation.

"And if there’s no gasoline, it’s only hours until panic buying sets in. And if there’s panic buying in Mississippi and Alabama and Georgia and Florida and North and South Carolina and Virginia – what will happen to the rest of the nation when they think they too might be running out of gas?”

That’s how tight the supply/demand relationship has become in the United States in terms of the energy industry providing fuel and the consuming public demanding fuel that we are within days (at any given time) of outage due to whatever disruptions might occur.

And this is the United States of America, the land of plenty. Ladies and gentlemen, we can do better than that. We can do much better than that.

Today around the world, 85 million barrels of oil will be produced; 84 million barrels of oil will be consumed. If the projections are correct, by the year 2030, we will need somewhere between 120 and 125 million barrels a day of production in order to meet consumption of about the same amount.

Just 25 years from now – that’s a 50 percent increase from today’s level of production. The good news is the industry believes we can meet those demands. The industry believes that there is an ample available supply of resources in the ground.

During the course of this week, 2,000 energy leaders gathered in Houston at the Cambridge Energy Research Associates so-called “CERA Week” in which we discussed the future of the industry.

And, whether it was the head of Exxon, the head of Chevron, my, the head of several other oil companies, what we talked about was the available supply – of which there is plenty – sometimes more technologically demanding, sometimes more remote locations, sometimes perilous political conditions.

But the fact of the matter is the energy is there. What prevents us from getting it, ladies and gentlemen? Particularly in this country it is public policy. Where, for example, to develop more conventional oil and gas resources in America, we are limited as an industry to just 15 percent of the Outer Continental Shelf for exploration and production.

Many people don’t know that. Now we’re grateful for the 109th Congress last December granting additional access to 8 million acres in the Gulf of Mexico (an area called 181) but that was the first new access in the Gulf of Mexico in 25 years - 25 years since we got new acreage in the Gulf of Mexico.

So, we have access to 15 percent of the Outer Continental Shelf, meaning 85 percent of the Outer Continental Shelf is off-limits by public policy. Laws prevent us from exploring and producing in 85 percent.

In addition, vast tracts of federal land (particularly in the west of the United States where there are prolific reserves of oil and gas) are off limits by public policy. First and foremost, the government has a responsibility to protect our natural assets – and we respect that.

Second, the government has the right to impose upon the industry environmental and social responsibilities, which we accept. But we do believe our technology has advanced, our capabilities have advanced and we do believe based upon the fact that in 15 percent of the Outer Continental Shelf we are producing oil and gas without severe environmental impact and cleaning up whatever may occur, that we should be allowed access to more federal lands and more Outer Continental Shelf.

We estimate there’s more than 100 billion barrels of available oil and gas in this country alone to be developed, which we are prohibited from developing. But, in fact, if we were allowed to develop all of that 100 billion, is that enough to meet energy security needs of the future? The answer is no. That’s not enough; 100 billion is a lot, but it’s not enough.

What else is there? Well, in the Alberta oil sands region, there are prolific reserves of unconventional oil called oil sands. Shell Canada Limited (part of the Royal Dutch Shell Group) is currently producing about 150,000 barrels a day of oil from unconventional oil sands, with plans to move that up to 300,000 barrels a day - and it could go higher at some point in the future.

In Colorado, the Colorado oil shale (well known for decades as a natural resource in this country) offers promise for the development of oil and gas from oil shale.

Shell has been in that region for the last 20 years developing new technology to try to extract that oil and gas from a different kind of production method called in-situ heating, which would enable that oil and gas molecule to escape from the shale and to be pumped out in conventional forms with liquid and gas collection devices - different than mining it; different than mining it and using a retort method to extract the oil and gas much, much cheaper than the mining and retort methodology.

Still in the research and development stage, hopefully able to make a decision in the coming half decade or so as to whether we can turn that into a commercial project.

Unconventional oil and gas represents a prolific opportunity for increased oil and gas supplies in this nation. But, if we did that, would that deliver energy security? Not yet. Because energy security as far out as we can imagine is a very long time. We move to coal.

This country has more coal than the whole rest of the world combined. But, many people when they think of coal, they think of dirty coal. What the industry has moved forward to develop is technology that is now called “clean coal.” Now, the cynics would say that that’s an oxymoron – there’s no such thing as clean coal. But, ladies and gentlemen, your company here, Tenaska, is one believer.

Shell is another believer and there are many other believers that clean coal can and will make a difference. Clean coal moves from the burning of pulverized coal, which is the most common use of coal for electricity production. Clean coal is a form of gasification of coal. Gasification is different than burning coal.

Burning coal is a fire and the fire emits lots of emissions and from that comes the heat, which heats the water, which turns into steam, which turns a turbine, which produces electricity. In the case of coal gasification, it’s a different technology altogether.

The coal is pulverized and then crushed and pulverized again to reach the consistency of talcum powder. Imagine, coal rocks turned into talcum powder, and it’s dried.

So, when the gasification process takes place, this talcum powder substance (completely dry) is entered into a gasifier at a temperature of some 2,500 degrees Fahrenheit (very hot) and pressure well over 1,000 PSI (very intense) and the molecule can’t stay together.

The molecule is disbanded. Out of the disbanding of that molecule (you could also say exploded), out of the disbanding of that molecule the elements are there to produce synthetic gas. The carbon dioxide (the CO2) can be captured because it’s all contained (not in a chimney stack but in an enclosed gasifier) and the CO2 can be managed into enhanced oil recovery or into sequestration – that’s why it’s called “clean.”

You don’t have to emit the emissions into the atmosphere; you can capture the sulfur, you can capture the mercury or other elements that come from the disbanding of those molecules.

The capital intensity is somewhat greater, but the energy efficiency is so much greater that the economics of clean coal make a lot of sense; and over the course of time, I believe we will see this nation (if we can accept some public policy changes) move towards a clean coal usage of coal, which is better for the environment and actually better for the use of molecules of coal.

So, if we have clean coal and we have conventional oil and gas, we have unconventional oil and gas, do we have energy security now? No. Not yet.

There’s something else that’s very important in our economy. Something called natural gas; but we have a problem, ladies and gentlemen.

And that is the demand for natural gas has grown so much over the last couple of decades that, based on all of the projections we’ve seen in our company, we cannot meet the demand over the next 10 years or so to keep up with the growth of natural gas simply from natural gas resources in the nation - particularly given the restrictions on access.

But there is an alternative and that alternative is called liquefied natural gas, which is the capturing of natural gas from what are called stranded gas fields off the coast of Australia, Nigeria, Russia, Malaysia, other parts of the world in which there isn’t a robust market for that gas.

That gas can be cooled to some minus 260 degrees Fahrenheit, turned into a liquid. It’s two degrees today – image 260 degrees negative temperature. That’s cold. It turns natural gas into a liquid, which can then be shipped and they could come to the shores of this country and be re-gasified, taking on the quality of natural gas.

But, we have an issue. The issue is: who on the coasts of this country want a re-gasification terminal in their community? Most of the coast is populated. If you go around the coast of this country now, people love to live along the coast, so who wants a re-gas terminal in their community?

Shell’s working on a project in the middle of the Long Island Sound called Broadwater with a partner called Trans-Canada. We’re trying not to go into someone’s backyard; we’re trying to go in the middle of the Long Island Sound and have a floating regasification terminal, which technically is totally possible.

And we believe we can meet the security and the environmental responsibilities having a re-gas terminal 11 miles from the Connecticut coast and nine miles from the Long Island Coast, in nobody’s backyard.

But, the forces of resistance are trying to prevent this re-gas terminal from being positioned in the nation’s most-expensive energy marketplace, which has no other new source of energy from anywhere other than something like regasification of liquefied natural gas, or the construction of new pipelines of natural gas from the south of the nation, from the Gulf Coast.

But, the resistance is there, the lawsuits are being threatened. The decision has not yet been made to reject it; we’re working very hard to have policy makers accept it. But, if we meet the liquefied natural gas demand and the others, do we have energy security yet? Not yet. There are some other things that must be done in our country to deliver energy security.

One strikes close to home, called biofuels. Shell believes that biofuels are an excellent additive to the existing fuel supply. We believe that putting 10 percent ethanol into the fuel supply in the United States is very good news for consumers and very good news for producers.

Beyond 10 percent, now you need to think about a new infrastructure - new pumps in gas stations, new vehicles (because the average vehicle can’t really handle ethanol greater than 10 percent), new pipes, new storage tanks, new systems of distribution (which we’re not sure is do-able, particularly if we’re depending upon corn ethanol as the primary source of ethanol).

Corn makes great ethanol. Corn also makes great tortillas. Corn also makes great animal feed. So, the contest between the fuel tank and the food system is quite real when it comes to corn ethanol.

But, Shell nonetheless is committed to ethanol; our investments are going towards second- generation ethanol that is called cellulosic ethanol (which is different than corn ethanol).

We believe that taking the biomass – the corn stalk or the stalk of the wheat – the straw – or taking wood chips and turning that biomass into cellulosic ethanol is preferable and more plentiful over time than using corn or sugar as the basis for ethanol.

And so our investment is going in that direction and we do believe that in the years to come we can achieve a 10 percent fuel additive called ethanol and stretch our fuel supplies. Going beyond that, we’re not sure.

We don’t know. We’re willing to test. In fact, Shell is testing E85 in the Chicago market place to see if consumers want to buy it. But, the difficulty with the E85 is that is does require a new infrastructure and, in addition, it delivers about 25 percent less energy per tankful, given the nature of the product. So you get less miles per gallon for a tankful of E85 than you do from a tankful of gasoline.

In addition to biofuels, there are other alternatives that we believe are well worth investing in and testing to see if they can become a commercial business. For example, solar photovoltaic panels. Shell has been in the solar business for about 10 years.

We recently decided to shift technologies, to move away from silicone photovoltaic-based solar panels and to move towards thin-film panels, which is a different chemical substrate called copper indium diselenide, rather than silicone. We’re testing it.

We like what we see; we see a more efficient use or production of electricity with less cost and lighter weight, which we think might be promising for the future of photovoltaic panel electricity production. In addition to that, we believe wind offers a great opportunity – particularly for CO2-free production of electricity.

If you’ve ever stood at the base of one of these big wind turbines, or at a whole wind farm, you realize that this is taking nature at its best, capturing the wind and turning that wind into electricity in a very quiet and a very peaceful and a very surreal and serene atmosphere.

Shell is working on wind farms from Maui in Hawaii all the way to Storm Mountain, West Virginia. Seven states across the nation are now producing with Shell wind farms about 350 megawatts of CO2-free electricity every day. But because wind is variable, we know we need more than that.

That moves us into another alternative called hydrogen fuel cells. There are two kinds of hydrogen fuel cells, basically.

One is a stationary source of hydrogen fuel cell power production; the other is a mobile source – hydrogen fuel cell vehicles. Today in Washington, DC, you could get in a General Motors van, pull up to a Shell station on Benning Road and fill your tank with hydrogen (gaseous hydrogen) and that fuel cell vehicle could take you around Washington for about 100 miles and then you have to re-fill it.

That’s not good enough, yet, for the average consumer. The average consumer (according to Detroit) likes 300 miles per tankful, on average. That’s about the point at which people will tolerate refilling their tank.

So, we have some technical work to do both in the fuel cell itself to get the cost down (GM is working on that) and in the hydrogen storage in the vehicle (GM is working on that) but, perhaps most importantly, where are you going to get your hydrogen? Shell is working on that – getting hydrogen in gas stations, so that you can actually have a fuel-refilling source.

Now do you say, “Will this happen in my lifetime? Is this the vehicle of great promise that will always have promise (as the cynics might say)?”

Shell believes—and I’m part of a Hydrogen Task Force in the Department of Energy, where other companies like mine and other auto companies believe – that by 2010 there will be hundreds of hydrogen fuel cell vehicles on America’s highways, by 2015 thousands, by 2020 tens of thousands, and by 2025 or 2030 millions of hydrogen fuel cell vehicles on America’s highway as an alternative to the internal combustion engine vehicle – affordable, commercial and available.

So there we have it, right? Hydrogen fuel cell vehicles, wind, solar, liquefied natural gas, coal gasification, unconventional oil and gas, conventional oil and gas—do we now have energy security in America? Not quite yet. Shell believes there are three more requirements to deliver on that energy security in America – starting with efficiency.

The opportunity to approach the use of energy differently is huge. Huge in terms of how we design our vehicles, how we design our homes, how we design our offices, our factories, all of the uses of energy. The opportunity to change the way in which we think about energy and design how we think about energy into energy conservation – the conservation of those molecules, we believe is huge.

For example, a statistic that was given to me by one of our own lab scientists: Europe uses diesel engines in their cars at a much greater rate than in the United States.

If the United States had the same penetration of high-performance diesel engines in this country as Europe experiences, we could use between two and three million barrels a day less of crude oil because of the efficiency of the diesel engine and the production efficiency of making diesel versus gasoline.

Two to three million barrels a day less if we had a different technology in our automobiles. That’s huge, but that’s just a beginning. You could imagine lighting and the efficiency of lighting around our country.

So, in other words, we call for a culture of conservation in which we think about efficiency as a design criteria and conservation is not about jiggling thermostats or lightening up on accelerator pedals; it’s about changing the nature of the use of energy in everything that uses energy. Point one.

Point two – education. We’ve done some research and we’ve been looking for school systems that teach energy to their students. We can’t find them. Here it is one of the basics of the economic life engine of this country and the lifestyle that we choose and we teach very little (if anything) about it in our schools.

Where does it come from? How does it work? How do we get it? Will we always have it? What must it take to bring energy to the market place? That’s not taught. We believe that by teaching about energy, people will better appreciate energy. And Shell is not just talking about it, but is doing something about it.

Shell created a teaching curriculum not to sell Shell but to provide teachers across America with free curricula to teach energy at the middle school and the high school level.

It’s available for free on a Shell website called “Energize Your Future” in which teachers can download and students can access the teaching materials and can learn a whole semester’s worth of energy education put together by academics who know about teaching.

So, education of our young people, but also education of the public at large, in terms of teaching people about what it is about energy that is so challenging but also so satisfying. So education is point two.

Point three – we care deeply about the world we live in, the air that we breathe and the effect of greenhouse gases on the environment in which we live.

Shell, therefore, has been quite public in calling for an end to the debate over global warming and the launch of initiatives to address global warming or climate change through regulatory frameworks established by government, in which markets are allowed to operate, such as a cap-and-trade system, or where technology and innovation can be rewarded for bringing less environmental gases into the atmosphere.

Shell believes that it’s time to address greenhouse gas management and government has a responsibility to set the stage and companies can then operate in markets to try to deliver on that governmental framework.

So with all of that, ladies and gentlemen, the unconventional oil and gas, the conventional oil and gas, coal gasification, liquefied natural gas, the biofuels, the hydrogen, the solar, the wind, the efficiency, the education and greenhouse gas management – on the basis of that platform Shell believes we can enjoy energy security not just for this generation but for every generation that we can imagine.

Thank you very much.