Speeches

John Hofmeister's Energy Speech in Richmond, Virginia

09/05/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to the World Affairs Council of Greater Richmond in Richmond, Virginia.

Thank you, ladies and gentlemen. It is a pleasure to be here this evening and an honor to address you on a subject that touches all of us. In fact, it does more than touch us. It impacts us on a daily basis. But it doesn’t just impact us as individuals, it also impacts us as a country, as a society, as an economy.

And here’s the issue laid out plain and simple in ways in which I try to discuss it with policymakers, with customers, with stakeholders, from every walk of life: in the United States of America, energy security is fundamental to the economic model that we use and to the lifestyle that we chose and, if our energy security becomes unaffordable, it changes the economic basis on which we operate and it causes lifestyle choices which we may not wish to make.

Consequently, as we speak about energy security in the United States, we’d like to put forth a definition that energy security means available and affordable energy, not just for today and not only for tomorrow but for all of the tomorrows as far out as we can humanly imagine.

Native Americans used to use the expression, “For as long as your grandchildren’s grandchildren will remember.” And that was an expression that spoke to forever. And so the message of energy security that I’d like to build on this evening is that energy security for America means available and affordable energy forever, for as long as we can imagine.

The question is, “Is that achievable? Can we do that?”

Well, what are my credentials to address this subject? I come from an industry that currently operates at somewhere between 10 and 15 percent favorability. That means 85 to 90 percent of Americans don’t like us. I come from an industry in which the price that you pay at the pump is often directly associated to the profitability of the firm, even though I would tell you in eight months out of 12 in 2006, our retail business did not return a profit.

Our profitability was driven by high crude oil prices, rather than high retail prices - but yet people at the pump don’t know that. Six million people a day stop at Shell stations in the United States. How many of them are having a positive experience buying a product that they don’t want to see, touch, taste or smell?

The nature of our business is to constantly look for more oil, more oil, and more oil to try to supply the demand. But who wants an oil well in their backyard? [hand goes up in audience] Thank you – your address, please! And here we are as a country consuming close to 20 million barrels of oil a day, two-thirds of which comes from outside America, two-thirds of which comes from parts of the world where there is uncertainty in terms of the continuous supply of that product.

And I’m often asked the question, “How much of the price of oil is determined by speculation or geo-political tension?” I don’t actually know. But we do know this – several weeks ago, when 15 British military personnel were captured for a period of time, in 48 hours the oil price rose $7 a barrel and nothing else changed in the world in terms of supply-demand but the oil price changed $7, or roughly 10 percent over the taking of those 15 soldiers.

So there probably is some element of the price of oil that is affected by geo-political tension.

There may also be some aspect of the price that is affected by speculation. But, in any commodity trading business, there are always speculators (whether it’s coffee beans or whether it’s pork bellies). Speculators have a role to play to keep a market liquid and to make sure the products are bought and sold on a regular basis.

But what is really driving the price is the fact that 85 million barrels of oil will be produced in the world today - 20 million for the U.S. - and 85 million barrels will be sold - and those 20 million barrels in the U.S. will be consumed. What has happened is that we have largely achieved perfect equilibrium in the supply-demand relationship where, historically, there were always somewhere between 10 to 12 million barrels of spare capacity in the crude oil production and natural gas production around the world.

But, thanks to economic growth and thanks to economic prosperity and lifestyle choices, we have now achieved essential equilibrium.

In addition to that, the strength of the U.S. economy over the last 10 years – a blessing. I think we can agree that the strength of the economy has, in fact, been a blessing.

But what it has also done is it has prompted lifestyle choices including the vehicles we drive, which are consuming ever more gasoline, and our refinery system - our manufacturing system of oil products - has not been able to keep up with the increase in demand, or is just barely keeping up.

I dread the spring. Why do I dread the spring? In this current economic success cycle, we dread the spring because the demand for gasoline increases at the same time we are working on our factory turnarounds, which is shutting down a refinery in order to provide planned maintenance, in order to make upgrades in equipment, in order to repair elements that may be outdated, or in order to upgrade for fuel specification reasons.

And we generally shut our refineries down between November and April. The reason for that is most of our refineries are in the south of the U.S., where we don’t ask our employees to work outside in the tropical heat during a July or August factory shut-down.

It would just be inhumane because of the protective gear that they must wear, the heavy clothing, the safety protection that they must wear. So, we shut down between November and April for natural reasons and safety and health reasons.

Cynics refer to that as a conspiracy by the oil companies to withhold production. But, in fact, it is a natural consequence of running process equipment full time the rest of the year, because we don’t shut down our factories on weekends. We run 24 hours a day, seven days a week, when they’re up and running. But, when they need maintenance, we have to shut them down completely because it is a process business.

So, why am I here with all of these negative attributes of high prices, hardly able to meet the demand, selling a product we don’t want to touch, taste, see or smell? There’s a positive side, ladies and gentlemen, and the positive side needs more articulation. It needs broadcasting across the country because the positive side of energy is: we have the means by which this country can achieve energy security for the future. What are the means by which we do that?

Let’s start with conventional oil and gas. Conventional oil and gas is what we have come to know from the days of the Beverly Hillbillies, when Uncle Jed shot a bullet into the ground and out came bubbling crude. We had convenient, conventional oil and gas in plenty and as the nation grew through the 19-teens, the twenties, the thirties and up through the fifties and sixties and seventies, U.S. production kept up with U.S. demand.

It finally outgrew U.S. production in the 1970’s and we began importing and we began importing more and more through the ‘80s and the ‘90s and now the majority of the oil used in this country is imported. Why is that? Why have we moved to imported oil? Have we run out in the United States? The answer is, “No, we have not.”

What we have chosen, instead, is public policy that says, “Let’s not produce American crude. Let’s go get foreign crude because we really don’t want oil wells in our backyards, or we do not want to open up the Outer Continental Shelf to more oil and gas exploration. We don’t want to open up federal lands to oil and gas exploration.”

And so here we sit, ladies and gentlemen, with a known 110 billion barrels of conventional oil and gas that the oil companies are not allowed to access by public policy. That’s our choice. We’re a democracy. We chose our public policy by choosing our elected officials and by voting for them.

So, we can change public policy. We could open up the Gulf of Mexico fully, we could open up the Outer Continental Shelf fully, but it would take an act of Congress to do so. And we’ve chosen not to do that.

So, we restrict the development of conventional oil and gas to the tune of 110 billion barrels. You may say, “Well, last week the Minerals Management Service put forward a five-year plan to open up off the coast of Virginia, to open up off the coast of Alaska or in the Gulf of Mexico.”

And, frankly, we welcome that. But with that addition (if it’s not contested, if it’s fully approved by Congress and is not protested by lawsuit), that still leaves 85 percent of the Outer Continental Shelf of the United States of America off limits for gas and oil production.

So it only opens up a brief, postage-stamp-sized amount, relative to the total of oil and gas conventional opportunity, and it doesn’t address federal lands. But we could, with the shift in public policy, have access to 110 billion barrels of conventional oil and gas.

If we had that access, is that enough for the future? Well the answer is, “No.” We know that’s not enough. So are we running out? Well, not exactly. In the oil sands of Alberta (not that far away), or in the oil shale of Colorado, we have something called unconventional oil.

This is oil that is trapped in a different form than conventional oil. Conventional oil is already liquid. Nature has liquefied it. Unconventional oil is more of a solid, so in the oil shale of Colorado, the molecules are within the rock, they are not liquid. They can be turned into liquid by technology, as the oil sands in Canada can be turned into liquid by upgrading the bitumen in the soil that exists naturally.

And, how much is there? Well, we estimate that in the Alberta oil sands there is as much as a trillion barrels – a trillion barrels of unconventional oil in the oil sands of Alberta. In Colorado, Utah, Wyoming (on the western slope), another trillion barrels of oil and gas trapped in the oil shale.

One trillion barrels is more than the Middle East. Two trillion barrels is double more than the Middle East. And so when we think about natural resource capability, this continent has a lot. And there’s another trillion barrels of what’s called “heavy oil” in the Roanoke Basin of Venezuela.

So, in this hemisphere, we’re looking at huge, vast, untapped quantities of oil and gas that require a different technology, a different extraction method if we are to successfully develop those oil resources.

But, if we have conventional oil and gas and we have unconventional oil and gas, is that going to take care of our energy needs for the future? Well, there’s more, happily. There is coal. The United States has more coal deposits than the whole rest of the world combined. But you say, “But coal is dirty. Coal is unclean. We’ve had enough of coal.”

But, again, technology enters the frame. Bring technology to bear and, instead of coal pulverization and the burning of pulverized coal as a means of power production, what about coal gasification? The difference is the burning of pea-sized gravel coal, in which the emissions enter the atmosphere and the heat is used to heat water, which makes steam, which turns turbines.

Gasified goal is a different technology altogether. The gasification of coal – think of reducing coal to the quality of talcum powder, not pulverized pea gravel but talcum powder. Think about introducing that talcum-powder-like substance into a gasifier, which is over 1,000 pounds per square inch of pressure at temperatures well over 1,000 degrees centigrade and you see a gasification of the coal molecules, rather than a burning of the molecules.

And with the gasification technology comes the ability to capture the CO2, to then manage the CO2, for example, with sequestration. And so when people use the term “clean coal,” what they’re talking about is gasifying coal and capturing the emissions in such a way that they don’t enter the atmosphere.

And with the amount of coal we have in this country, we could use coal gasification not only to produce the synthetic gas, which can then be burned in turbines (clean gas turbines), but we can also produce a liquid – a “coal-to-liquid,” which can be used as a transport fuel - a clean, sulfur-free, transport fuel from coal liquefaction.

So, the combination of conventional, unconventional oil, coal gasification - have we now achieved energy security in this country? Well, there’s more. Around the world there are huge, vast stranded fields of natural gas. Technology has taught us how we can turn that natural gas into liquid.

We can transport the liquid to the coasts of the country – a product called liquefied natural gas. We can then re-gasify that liquid into natural gas and use it in our furnaces, our barbecues or in our power plants as real natural gas coming from Australia, or coming from off the coast of Nigeria, or wherever it may come from - vast quantities.

It’s not that we would ever entirely substitute the United States natural gas marketplace with liquefied natural gas, but here’s a real issue. If you look at the demand-supply curves going forward over the next 10 years, somewhere in the second part of that 10-year period we cannot produce enough natural gas in this country to meet the demand.

What happens when that occurs? Price of natural gas goes up. Who are the biggest users of natural gas in this country? Manufacturers. What happens to manufacturers when their natural gas price is too high? They go somewhere else. They go to India or they go to China or they go somewhere else where natural gas is much less expensive. That’s a very serious competitive threat.

Where liquefied natural gas comes in, we can augment the natural gas supply by perhaps as much as 20 percent, bringing price security and bringing supply security to a market that will otherwise be over-stressed in the not-too-distant future.

So there we have liquefied natural gas, coal gasification, conventional, unconventional oil – are we done yet? Do we now have energy security? No. There’s more. In the portfolio of my company, we’ve been working at biofuels for 30 years.

We’ve been part of the Brazil experience for the last three decades. We’re actively involved in investments in cellulosic ethanol. Our company actually prefers not to invest in corn-based or sugar-based ethanol, because we’d rather not be part of the debate about food prices.

We have enough trouble with gas prices; we don’t need food prices on top of gas prices as a dissatisfier to our customer base.

So, all of our research and development activity is moving in the direction of second-generation ethanol, even while we are one of the world’s greatest, largest distributors of first-generation ethanol. We just don’t make it. We buy it. We distribute it.

We mix it with our gasoline in this country, but we don’t make it. But in terms of cellulosic ethanol, we think there’s great promise in increasing the supply of biofuel, which is using the waste product rather than the food product: using the corn stalk instead of the corn kernel; using the straw of the wheat plant rather than the wheat; using wood chips – gasifying wood chips, for example - in the same Fischer-Tropsch technology that we would use to gasify coal or liquefy coal.

The gasification of wood chips is one form of cellulosic research we’re doing.

In addition, we’re doing the enzymatic breakdown of cellulose with research in enzyme production with a company called Iogen, which has been granted a loan guarantee by the Department of Energy to pursue its technology in the coming years. We believe cellulosic ethanol (whether it’s from waste of vegetation, whether it’s from waste of biomass or whether it’s municipal waste) – think about the paper and the cardboard that we simply otherwise throw away as waste.

That is all cellulosic material, which could also be turned into ethanol with proper enzyme breakdown. We believe there’s a huge market out there, and a huge opportunity for biofuels to help with the transport fuels of the future.

And there’s more. The largest energy source in the world, as we know it, is really the sun. We have yet to figure out how best to capture that energy and to deploy it into the electrical grid. There are photovoltaic panels out there today primarily made of silicone.

Shell has been in the silicone photovoltaic business up until a year ago. A year ago, we decided silicone is really not the technology of choice and we’ve moved into a thin-film technology. Those of you who are chemists by background will know copper indium diselenide.

Copper indium diselenide is a substrate on glass that is actually 100 times more efficient than silicone. And so we’re building a factory currently to make copper indium diselenide thin-film photovoltaic panels.

Again, technology enters the frame to displace silicone over time, because we believe silicone is both too energy intensive to make, not energy productive enough, compared to other substrates and frankly, too thick and too heavy to be welcomed in the commercial markets of tomorrow.

So, we sold that business (it’s still in operation) but we’re moving into a new technology. We believe the sun offers great opportunity that we should pursue.

In addition, there’s wind. This nation has a lot of wind and there’s many ways to interpret that. But in the many parts of this geography where we have changes in altitude, we have huge paths of great wind.

It’s all mapped. We know where the wind blows the hardest, where it blows the most continuously and where it doesn’t blow. And to put wind turbines in place, Shell now has wind farms in seven states – from Hawaii to West Virginia. In West

Virginia, we’re constructing a 300-turbine wind farm on Mt. Storm. Not up and running yet. In fact, some of our stakeholders are suing us in the West Virginia State Supreme Court, trying to stop the wind farm from going into place. We think we will win the case and we will be able to build it, but it represents some of the challenge that wind has.

Some people don’t want wind turbines in their backyard, just as only one of our visitors here tonight wants an oil derrick in his backyard. But, wind offers a whole other opportunity of a variable, but still-reliable energy source and we don’t take it lightly. We take it seriously. Wind can be an augmentation of CO2-free electricity, and I’ll come on to that in a moment.

But then there’s hydrogen as another power source. We’re actively involved in hydrogen as a fuel source for the future – both stationery fuel source and also a mobility fuel source. Today in Washington, D.C., on Benning Road, in the shadow of RFK Stadium, is a Shell station in which if you had a hydrogen fuel cell vehicle, you could pull up and refill your storage tank with hydrogen (not gasoline, not diesel but hydrogen).

We’ve been working with General Motors in a partnership to build, design and put on the road hydrogen fuel cell vehicles, which are electric cars where the electricity is produced by hydrogen. And those cars are silent, they are clean, there is no emission other than a little warm, moist air out the tailpipe and that is a possibility for the future.

Not tomorrow, not next year, but over the next 10 to 15 years, ladies and gentlemen, we do believe that the commercial viability of hydrogen fuel cell vehicles will be demonstrated to the satisfaction of American purchasers. We would like to be the hydrogen provider of choice when that time comes. General Motors has the technology to make the fuel cell.

We would have the technology to distribute the hydrogen and to make sure it’s available for customers. We’re also putting hydrogen stations on the West Coast this year. We do believe that this infrastructure will be necessary; therefore, we’re putting money into it.

So there we have it, right? We have hydrogen fuel cells, we have solar, we have wind, we have biofuels, all of the other fossil fuels I mentioned of conventional, unconventional oil, coal, liquefied natural gas – do we now have national energy security in this country? Not yet.

We believe there are three additional public policy areas that must be addressed to achieve energy security in America, starting with greenhouse gas management.

With the description I offered of the tremendous availability of fossil fuels and the ability of fossil fuels to meet our needs affordably, to meet our lifestyle requirements of heating, ventilating and air conditioning (we could use a little of that tonight), the opportunity to use more fossil fuels - in Shell’s view - must be managed in such a way that we simultaneously cope with the CO2 emissions, the greenhouse gas emissions that come from the destruction of those carbon molecules.

And so Shell did join the United States Climate Action Partnership. Shell has been active for a decade with the Kyoto Accords, asking governments around the world to provide public policy leadership, public policy leadership to set a cap, to set a cap on emissions and to enable a trading system, so that people are motivated by markets to bring down emission levels.

As a company, Shell committed itself in 1997 to reduce its own carbon footprint in the world by 2010 to five percent below 1990 levels. We’re on track to achieve that. Over the last 10 years, we’ve been able to reduce our carbon footprint and grow our business by changing how we do business, by looking at how we do flaring, by looking at the efficiency of our refineries.

And by working our own system, we are now below 1990 carbon emission levels and we’ll continue to be so at least through 2010 and we will see what new targets we should set as we meet that objective.

So greenhouse gas emissions, we believe, must be managed by society, by nation and by global regulatory frameworks. We believe that leadership on this issue will bring other countries along. Other countries that don’t yet have a commitment to greenhouse gas management, we believe will not follow unless there are leaders that have proven the way.

And we believe the U.S. is well-positioned for that, which is the main reason we joined USCAP, because they are committed as a voluntary association of U.S. companies, committed to capping emissions, promoting trading systems to incentivize the reduction of emissions through a cap and trade system and, of course, other activities in a regulated framework.

Second, energy efficiency is probably the most effective means by which we can assure energy security - by making better use of energy molecules, by, in fact, not using some energy molecules, because we have more efficient engines in our cars, we have more efficient homes in terms of use of energy, we have more efficient lights, we have more efficient appliances.

Energy efficiency, in our view, offers the best opportunity for conservation. Shell believes in a culture of conservation where we go to the hearts and the minds of our population to promote energy efficiency, not by jiggling thermostats, not by lightening up on the gas pedal – those are behavioral choices that we can all make any time - but the efficiency we’re talking about comes from the heart, comes from the mind that says, “Let’s buy more efficient lights. Let’s buy more efficient appliances.”

And if there is a market for that efficiency, the products will come. We believe that efficiency goes a long way toward preserving molecules that are not needed in the marketplace of today.

And then third, we don’t really educate ourselves. We don’t spend the time in our schools with our young people. We don’t spend the time with our society, with our citizens, talking about energy, talking about the importance of energy in our lifestyle, in our economic model, talking about how we can use energy differently, use energy more cleanly, not use energy at all in some cases.

And by educating our young people, by educating the future generations of consumers, we believe we can work the energy efficiency issue; we can have national policies on greenhouse gas management because we understand it so much better.

Rather than just talk about this, Shell decided to do something about it. So, we created an education website for school teachers across America to access a semester’s worth of education, a semester’s worth of teaching materials or students can access it to have a semester’s worth of reading, a semester’s worth of game playing.

Yes, electronic games on the Internet offered not by Shell (we’re not selling products on this website), we’ve actually asked Scholastic to put together the curriculum and paid Scholastic to provide the reading materials, the pictures, the other kinds of lessons that can be learned. It’s a website called “Energize your Future ” and you can access it at shell.com/us/energizeyourfuture. It’s free and it teaches energy education.

Ladies and gentlemen, it’s our view at Shell that energy efficiency, education, greenhouse gas management coupled with conventional oil and gas, unconventional oil and gas, liquefied natural gas, gasified coal, biofuels, solar, wind and hydrogen represent not just energy security for today but energy security for our grandchildren’s grandchildren.

Thank you very much.