Speeches

John Hofmeister's Energy Speech in Pittsburgh

08/02/2007

John Hofmeister's remarks to The World Affairs Council of Pittsburgh, in Pittsburgh, Pennsylvania.

Thank you for that introduction and, if you sit in the chair I sit in and you wake up this morning and you hear the radio announcer say, “It’s three degrees outside, folks,” you think, “This is a good energy day today.”

I would like to speak with you about energy and, more particularly, energy security in this country. There are also bad energy days and let me tell you about a particularly bad energy day, which happened on the first Friday of October 2005.

If you recall in August, Katrina roared through Louisiana, Mississippi, and Alabama, devastating geography about the size of the United Kingdom. All the refineries in that area—in Louisiana, Mississippi, and Alabama—were shut down from Katrina.

At the end of September, Rita came roaring through East Texas and Western Louisiana, sort of doing the whole Gulf Coast where significant refining—in fact, 25 percent of the nation’s refining—is located.

On the Friday after Rita went through East Texas, Shell’s Motiva Joint-Venture Refinery had the last 300,000 barrels of finished product that was available to push into the Colonial and Plantation Pipelines, which feed the southeastern corner of the country from Texas all the way up to Washington, D.C.

We had the last 300,000 barrels of available finished product. Remember, the other refineries had been shut down for a month.

But we had a problem. We had no electricity, thanks to Rita. We had crews working around the clock to bring in emergency generators to try to get the ability to push this product into the pipelines, so the pipeline doesn’t go dry.

Friday evening, about seven o’clock, I called Secretary Bodman at the Department of Energy. His Chief of Staff found him at his daughter’s rehearsal dinner and asked him if he would take a call from John Hofmeister from Shell.

So he did take the call and he said, “John, this better be good. I’m at my daughter’s rehearsal dinner.”

And I said, “Well, it’s not good, Mr. Secretary.

"I’m here to tell you that if over the weekend we cannot get the emergency electricity hooked up to be able to push product, I will call you back on Monday morning to tell you that we can’t and could you please call the President and ask the President to declare a ‘Day of National Reflection’ so that nobody drives on that Monday morning because by Monday morning word will get out that there’s no product going into Plantation or Colonial and about 15 states will be out of fuel within hours.

"And as soon as that message gets out there, panic buying will start. People will top off their tanks in anticipation of no more product. That will spread to the Northeast; that will spread to the Upper Midwest; that will spread to the far West by the end of the day. You could have a nation undergoing panic buying, Mr. Secretary.”

He said, “John, it’s the beginning of the weekend. I’ll pray for you.”

It worked. Divine intervention worked, ladies and gentlemen. Sunday afternoon at about five o’clock we were able to finish the connection safely and start pushing barrels out of Port Arthur Refinery into the Colonial and Plantation Pipelines and the American people never knew the difference.

Now, ladies and gentlemen, we were 12 hours from panic buying. This is the United States of America, the land of plenty. This is how secure we are. We are at the edge of a secure supply of sustained oil products, which support our country.

Now, they don’t just support our country in terms of vulnerability because when you think about—and as I asked the students at the high school this morning—how many of them live in a house with a furnace?

How many of them have lights in their rooms? How many of them drove to school that day on a bus or in a car? And how many of their parents are working at a company, which company couldn’t operate without the energy supplied to keep that company in operations?

So the point is – our economic model in this country is predicated upon available and affordable energy. Without it, we all suffer. Even a company like Microsoft, right? Everybody thinks of Microsoft as an information company.

No. The information centers that Microsoft needs for it to be successful as part of the Internet engine of the world requires a daily average of 350 megawatts of electricity. I was just there last week talking about energy.

Come to find out – that’s about a medium-sized electrical power plant, just to fuel the server networks and systems to support Microsoft’s Internet engine. That’s huge. So even in the information age, energy is critical for the kind of information age companies that have been created in the last decades.

So first of all, our economic model depends upon it. Second, our lifestyle. Our lifestyle enables us to live in a climate where we have three degree temperatures in the morning, a hot shower before going to work, a warm car drive to work, walking into a warm office building so that we can be productive throughout the day.

And in the evening, we can go to a nice, warm restaurant or a nice, warm theater and we can enjoy entertainment because the energy is there to support our lifestyle.

So why talk about energy security? Because we are at its limit as we see the future. The last 50 years have been very convenient and easy. Many of us grew up remembering gas prices well below a dollar.

I remember my Grandfather’s anger on the New York Thruway paying 24.9 cents for a gallon of gasoline, when in Pennsylvania he could have had it for 17.9 cents—totally irritated. Therefore, he bought less, so he could wait to get back to Pennsylvania to get the 17.9 cents.

Now, that’s awhile ago. But, nonetheless, the last 50 years has been the “land of energy plenty,” the “land of energy affordability,” the “land of energy expansion” to the greatest economy of the world and perhaps the greatest lifestyle that the world has known.

To the point—who would like to replicate this lifestyle and this economic engine? Much of the developing world is putting an even greater call on energy resources.

So when Shell talks about energy security, we need a definition. And that definition is available, affordable energy not just for this generation, not just for the generations that you can see and think about—your children, your grandchildren, and their grandchildren—but also for the generations that we can only imagine far out into the future.

Available, affordable energy for all of those generations to come—that’s what energy security represents to a company like ours, which has been around more than 100 years.

How do we get there? In the first case, the good news is we have a lot of energy in this country; starting with conventional oil and gas. Conventional oil and gas in this country will produce about seven to seven and a half million barrels today in this country.

That’s a lot. But, we will use more than 18 million barrels a day, meaning that more than 10 million barrels will come into this country as imports, which of course has an impact on price, which of course has an impact on security, because does that imported oil come from secure sources or insecure sources?

Well, in this country, ladies and gentlemen, we know of 100 billion-plus barrels of available, conventional oil and gas which the energy companies are denied access to, a lot of it on the Outer Continental Shelf, where about 15 percent of the Outer Continental Shelf by public policy is available for oil exploration and production.

About six percent of that available Outer Continental Shelf for the nation comes from the Gulf of Mexico.

Another nine or 10 percent is available off the Coast of Alaska; but not yet developed but in the process of being developed. But, that’s all we’re allowed to access. The other 85 percent of the Outer Continental Shelf is off-limits—verboten. We cannot access by public policy.

In addition to that, there are vast federal lands across the west of this country from which we are also not allowed to access oil and gas.

Now, we’re grateful that the Congress at the end of the 109th Congress in December did grant access to an eight-million-acre new area in the Gulf of Mexico, which represents perhaps a billion or a billion-plus new barrels of oil and gas equivalent, which will be produced at some point in the future. But, that was the first new access to the Outer Continental Shelf in 25 years.

So the point is—with conventional oil and gas, we could be producing a lot more and feel much more secure about our future if public policy did not prevent that access. But, if we did have all the access we wanted, would that be enough to deliver energy security in the future?

Frankly, we don’t think so. But, there’s some more good news. Also on this continent there are tremendous amounts of unconventional oil and gas, sometimes referred to as the “oil sands” of Alberta, where in the Province of Alberta there are large deposits of oil sands, which by Canadian federal policy and Alberta provincial policy are now available for production.

Royal Dutch Shell’s subsidiary, Shell Canada, is in the process of developing oil sands in Canada, currently producing about 150,000 barrels a day, with plans announced to go to 300,000 barrels a day.

And Shell Canada is not the only company in the oil sands. So, there’s a tremendous opportunity there in the future to develop more access, more reserves of unconventional oil and gas.

Likewise in Colorado, where there’s something called oil shale. This is immature oil that still sits within rocks, which can be produced; we know it’s there. Shell has a research project underway in Colorado where, for the last probably 20 years, we’ve been looking at a different technology by which to produce oil from oil shale.

Rather than mining it and putting it through a retort heating method, we would, instead, heat it in-situ, meaning in the ground where it sits, by putting heaters down into drilled holes and, over a period of years, heating that sub-surface to the point that it matures the oil molecules to where they can come out of the rock and be pumped out as liquid or gas forms in conventional pumping fashion.

It’s still years away to make a financial decision to go forward, but if we have access to the unconventional oil shale and oil sands, is that enough for us to have energy security? We don’t think we’re there yet, because we’re looking well into the future, and for oil and gas—whether it’s conventional or unconventional—we don’t think that’s enough to supply future energy needs over many, many generations.

We move to natural gas. The good news about natural gas is it is probably the cleanest hydrocarbon fuel that we can use. And, we’ve experienced plenty of growth in the natural gas marketplace over the last decades. But, here we have an issue.

Over the course of the next decade—between now and 2015—we have had such a good experience with natural gas that utility companies preferring the clean nature of natural gas have planned so many gas turbine- generated power plants that based upon current, known supplies of natural gas, the supply-demand curve inverts sometime in the next 10 years in which there will not be enough supply to meet the expected demand and that could have a severe price impact, except for the possibility of introducing liquefied natural gas into the gas supply of America.

Liquefied natural gas has been around a long time. Japan, Korea, and other parts of Asia have thrived on the importation of liquefied natural gas. Shell’s been at it for some 40 years without a single security or environmental negative effect. We’d like to bring it to America and, in fact, we are. Shell has access to re-gas terminals in Alba Island, Georgia and in Cove Point, Maryland.

They’re rather small, but it is access. But if we’re going to impact the gas supply in the future, we need to augment U.S. gas supply by about 20 percent to keep prices of natural gas from skyrocketing to the point that it’s perhaps less economic.

To build new re-gas terminals requires siting. Siting requires people to agree to have a re-gas terminal in their backyard, so to speak. And this is where the “Not in my Backyard” crowd—the NIMBY crowd, which you hear about from time to time—says, “No, thank you.”

So where do you site a new liquefied natural gas re-gasification terminal? We’re working on one in the middle on the Long Island Sound. It has run into quite a considerable amount of opposition, but we haven’t given up; we’ll keep working on it. In talking with local officials in Connecticut and in New York, they welcome new energy supply, but just not here, please.

And, if you look across the Northeast, and you look at how populated the Northeast is, well—if not here—where?

We chose the middle of the Long Island Sound because it is really nobody’s backyard. And that fact of the matter is, more than 6,000 ocean-going vessels a year are moving up and down the Long Island Sound with normal maritime traffic and the re-gas terminal simply looks like another ship sitting in the Sound.

But, nonetheless, it is viewed as industrializing the Sound and is, therefore, not welcome. We will continue to work with the political officials, with other stakeholders in that region to try and see if we can’t be successful in siting this re-gas terminal.

But the point being, it’s taking years and the more years it takes to site a re-gas terminal, the closer we come to that demand-supply curve inversion, which then makes natural gas very expensive in America, which we’re trying to avoid.

But if we get all the liquefied natural gas we could imagine, is that enough to meet our energy needs for the future? And the answer is no, once again. And here we have some more good news and that is coal—coal—of which your state has ample amounts.

But when people think of coal, they sometimes associate it with the word “dirty.” What we’d rather do is start associating the word “clean” next to “coal” and start talking about “clean coal” in this country.

Because in other parts of the world, Shell’s technology has moved us into a clean coal technological innovation called, “coal gasification” or “Integrated Gasification Combined Cycle (IGCC).”

And, we’re happy to say that Shell is working with a company here in Pennsylvania (WMPI) working toward an investment decision in which the coal slag in parts of Pennsylvania could be gasified and turned into a clean form of energy while removing these slag piles across the mid-state of Pennsylvania. That project is still under development.

The Governor is aware of it and has supported it in principle, still working with the principals involved to try to make that happen. But imagine if we could expand clean coal technology across not just this state but many states; we could see a new generation of clean coal electricity production for years to come.

Now, for those of you who aren’t sure what coal gasification means, let me try to give you a political scientist’s technical description of coal gasification.

We all know about pulverized coal and coal burning and we know the emissions from coal burning of pulverized coal have been an issue in the atmosphere. The clean coal is a different methodology altogether, where the coal is simply not burned. The coal is, instead, gasified.

How does that happen? It starts by reducing the pulverized coal to the quality of talcum powder. Introduce the talcum-powder-like coal substance into a gasifier, the Shell gasifier, operating at about 2,500 degrees Fahrenheit and over 1,000 pounds per square inch; the intensity of that experience essentially explodes the molecules into their component parts – part of which is hydrogen, which can then turn into syn gas, or synthetic gas, which has the same properties as natural gas.

The syn gas can also be further developed to become liquid fuel. So gas-to-liquids, coal-to-liquids and that process delivers a clean liquid fuel (a diesel fuel), which can be used in trucks, buses, etc. or any diesel engine. This is all from coal. You say, “Why don’t we have it now?” Well, it’s new; it’s different, although it isn’t that new.

It’s been around with the Fischer-Tropsch technology for really 60 to 70 years. But, it does require a little bit higher capital investment on the front end, which utilities would somehow pay for and be rated and be reimbursed in such a way that they can absorb that extra capital cost. Public utility commissions need an understanding of that, so they could grant the rate relief for the utilities to go forward.

But, if we have the coal gasification, if we have the liquefied natural gas, if we have the unconventional coal and gas, and if we have the conventional oil and gas, is that enough to meet our energy needs for the future?

We still think not. In addition to Shell’s clean fuels coming from oil products, we’re working very hard on second-generation biofuel products—that is ethanol, coming not from grain-based sources such as corn or sugar but from non-food based cellulosic material.

And we believe that the enzyme research that’s going on today will, in time, be productive in terms of giving the ability to manufacture vast quantities of biofuels from cellulose, which could be the corn stalk instead of the corn kernel, the sugar cane stalk instead of the sugar itself out of the sugar cane.

Wood chips, wood could be gasified and turned into ethanol; municipal waste—which consists of a lot of carbon-based material such as paper, cardboard and other carbon-based materials—municipal waste, cellulosic ethanol or biomass-based, we believe, can be very productive in the future and the research is ongoing to make that happen.

In addition to biofuel, there also is work going on in Shell on solar power where recently we made a technology decision to shift away from silicone photovoltaic cells to a thin-film substrate material called copper indium diselenide, which is about 10 times more efficient than silicone based in the laboratory, which we now need to make commercial so we could see even more production of electricity from sunlight than from previous technology of silicone, moving into thin film.

In addition to that, there’s wind and if there’s one thing this country is also blessed with—in addition to coal—it’s wind. Now, you can take that in a couple of different ways, but we do have a lot of natural wind moving through this country and Shell is very active in wind farms—from Maui in Hawaii all the way to Mount Storm, West Virginia—across seven states. Shell will produce about 300 megawatts of electricity today from wind across this country.

There’s room for more. We’re limited only at the current time by the availability of land for the wind farm, where people need permits to build a wind farm, and turbines, which are in scarce demand because the world is soaking up all of the available supply of wind turbines. But that’s another great source of future electricity.

And then we get to hydrogen. Hydrogen fuel cells are an energy source of the future, which bear investment and bear watching. Whether that’s stationary hydrogen fuel cell technology, or whether that is mobile fuel cell technology, Shell’s particular interest at the moment is in fuel cell technology because we are a mobility company.

We like to support people’s mobility needs; whether that’s from oil fuels, from biofuels or from hydrogen fuels. And currently today you could go to Washington, D.C., to a Shell station on Benning Road, right next to RFK Stadium, if you had a hydrogen fuel cell vehicle, and you could re-fuel at a hydrogen pump right next to a gas pump.

And, in fact, about a half a dozen GM vans will be refueled there today, because we have these experimental vans in a partnership between General Motors and Shell in order to demonstrate to our policy makers in Washington that, in fact, we can see the advances of hydrogen fuel cell technology, which can be an alternative to the internal combustion engine as time goes on.

It’s not tomorrow that it’s a commercial product, ladies and gentlemen, so I don’t want to build expectations. But, over the course of the next four or five years, we will move from dozens of hydrogen fuel cell vehicles to hundreds. By 2015, we could see thousands of hydrogen fuel cell vehicles in this country. By 2020, hundreds of thousands, by 2025, we could begin to see millions of hydrogen fuel cell vehicles as an alternative to the internal combustion engine.

These are possibilities, ladies and gentlemen, which bear working on and they are receiving work; they are receiving attention. But, if we have the hydrogen fuel cell, if we have solar, if we have wind, if we have biofuels, coal gasification, liquefied natural gas, conventional oil and gas, and unconventional oil and gas are we there yet to the nirvana if energy security? The answer is still no.

Three more areas, I believe, are critical to the success of achieving energy security in this nation. Starting with energy efficiency: the means by which we use energy today could be classified as inefficient to modestly inefficient. As technology develops, we discover more and more possibilities of achieving energy efficiency—whether it’s lighting, whether it’s heating, whether it’s construction, whether it’s mobility.

There are vast areas of improvement available to us through technology to achieve greater energy efficiency in the use of known energy molecules. And that, ladies and gentlemen, we believe should be an endeavor of the United States, where we use by policy push and market pull to find ways to achieve greater energy efficiency or conservation in our economy and in our lifestyle.

What we’re not talking about is lightening up on the pressure of the accelerator pedal, or jiggling the thermostat at the home and declaring that “conservation.” What we’re talking about is the design criteria and the regulatory requirements, as well as the market opportunities, to have more efficiencies in everything that we do in the use of energy. We believe that a combined market push and technology pull (with regulatory push as well) could actually move us well down that path.

Second, the education of our population. In a democracy, education determines the outcome of good public policy. If we don’t know anything about energy, if we don’t teach energy to our population—and particularly to our young people—we could expect non-policy or poor policy as far as we can see into the future.

Frankly, part of this outreach effort is to try to bring the message of energy information to a larger part of the population where, for decades, our industry and my company have really not done the job of educating our stakeholders about energy issues.

But by going into the schools, by going out to the population in general, in a democracy, informed people will insist upon better public policy. And so education is the second means by which we can extend our energy security future and achieve a better future.

Finally. Third. Our environment is critical to our future energy security. We need to have a climate and an atmosphere in which we sustain our economic well-being and in which we enjoy our lifestyle. Shell, therefore, has concluded that in the global warming debate we are not experts; we are, instead, a company that knows a lot about energy.

We know a lot about CO2; we know a lot about what it takes to bring energy to the market place.

And Shell calls for a government-led regulatory framework in which greenhouse gases—or CO2 in particular—can be managed by a regulatory framework in which markets would be allowed to operate so that we could begin to manage in this world in an effective and an efficient way, not just at a national level but on a global level, the CO2 issue that faces us today and certainly well into tomorrow. We’ve read the scientific reports as you have.

We’re not debating the science. Rather, we’re seeking solutions, which we believe rather than voluntary approaches—which are perhaps fine in their own degree—will not achieve the level of greenhouse gas management or CO2 management that could come from a regulatory framework wherein markets could be made to operate.

So, now we have it. Now, we have all of the conventional, unconventional, coal gasification, biofuels, hydrogen, solar, wind, and energy education, efficiency, and CO2 management. On the basis of all of the above, ladies and gentlemen, I believe that Shell can help deliver the world and the United States with energy security as far into the future as any of us could imagine.

Thank you.