Speeches

John Hofmeister's '07 Speech - Tallahassee

31/05/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to the Capital Tiger Bay Club in Tallahassee, Florida.

It is a delight to be here. I thought I’d start with a little story that happened a week ago Monday. 

I was invited to be on the “Today Show” to talk about your and my favorite subject – gasoline prices. It seems like last year and this year there was an opportunity because of the changing demand-supply relationship, and so when the invitation came to be on the “Today Show,” we readily accepted.

I wasn’t sure until Monday morning who would be interviewing me.  It turned out to be Meredith Vieira, and I don’t know if you watch her, or if you know her, but she’s an amazing and social and inviting kind of an interviewer.

And so we’re in the preliminary warm-up before going live on camera (something like six million people are about to watch) and she has not interviewed an oil executive on oil prices. This is new, because she’s new to the show. I had the benefit a year ago of having gone through the experience at that time with Katie Couric. 

And so we’re sitting on our respective stools, the cameras are all adjusted, you can see the clock counting down from a minute and a half to a minute and we’re sort of not saying anything to each other. 

So I thought, well we ought to at least have some kind of pleasant conversation so I said, “Meredith, you’re about to interview your first oil executive.” She said, “Yes, I’m looking forward to this.” And I said, “What do you do next?” She said, “Well, after this I put a carrot in my mouth and go feed the giraffe outside.”  And just before the light came on and we’re live and I said, “So, which do you prefer?”
 
These are hard times for consumers. Very hard times for consumers who have less, and later in my remarks, I’ll make a comment about social justice and oil prices because I think it warrants attention. Serious attention.

But, these are hard times for consumers. In part, because we want so much – we want our lifestyle and our lifestyle is predicated, for most of us, on mobility. We want our lifestyle, which for most of us in the South means air conditioning at this time of year. 

We want our lifestyle, which is to enjoy the entertainment and the nightlife and the excitement of the things electricity brings to the quality of life that we enjoy.
 
But as consumers, we’re running up against what are new, unprecedented price thresholds, which make us all scratch our leads and say, “Why are these prices all going up?”

While we had a relaxation in the prices from last summer through the fall and winter months, here we are again in the spring season facing the summer (pre-hurricane, we might point out) and already the prices are at unprecedented levels across the country. What has gone on here?
 
Well, the reality as we see it from the producer side is that we’re having a harder and harder time satisfying the consumer-side because, frankly, we can’t keep up. We can’t keep up, as much as we try.

Over the last decade, the equivalent of 10 new refineries were built in this country by add-on capacity in existing refineries. People say, “Well, no new refineries have been built in this country for some 30 some years.” That is technically true.

No new, greenfield refinery has been built since the early 1970s. But, in between times, we have certainly in Shell added 30 percent to production capacity over the last decade, which with 10 refineries equals about three new refineries. The industry has built another seven to try to keep up with demand. Demand continues to grow.
 
And there’s nothing wrong with that, except it becomes more and more problematic for two reasons to keep up with demand.

One – access to crude oil. Fifteen percent of the nation’s Outer Continental Shelf is available to the independent oil companies to explore and produce crude oil and gas in this country – 15 percent. Sometimes, if you live along the Coast or you live along the Gulf, you think it’s all open and you trying to push back a bit to save a little space for the future. 

But the reality, ladies and gentlemen, is the oil and gas companies have access only to 15 percent of the Outer Continental Shelf for exploration and production purposes, which limits how much we can actually produce in our own country. But the demand keeps growing, so we go for imports.

And we’ve been going for more and more imports, ever since bad public policy called “excess profits tax” was introduced in the 1980s, which prompted investment to go elsewhere, rather than in this country.  Because the “excess profits tax” - until it was suspended or (de-commissioned as we say in the industry) - was preventing new investment from occurring.

But having said all that, the only way to increase domestic oil and gas exploration and production is to do one of two things, and that is either open up more Outer Continental Shelf and allow companies to explore and produce, or open up more federal lands, which are also restricted. 

Hundreds of millions of acres of federal land are restricted from oil and gas production while we go chase expensive imports from sometimes unreliable parts of the world.
 
The second public policy or reason we’re not able to keep up is how difficult it has become to build a new refinery – to add on. Here’s an example. Shell has been planning for the last couple of years to add on a major addition to a joint venture refinery in Port Arthur, Texas.

Our partner is Saudi Refining, the company is called Motiva. We’ve been planning to add on, we hope to make a decision to move forward this year and we have every intention of moving to a decision to go forward. 

But, while we are in the process of trying to make such a decision, and we are a publicly held company and our investors care about how we spend our capital (because we are using their money as our capital), along comes the national leadership of the nation and says, “We want to reduce gasoline by 20 percent within the next 10 years.”

Now, if you’re (and I’m asking this rhetorically), if you’re an investor in a refinery and you’re being compelled on the one hand by political leadership to say, “Produce more gasoline,” but yet the same national leadership is saying, “Ten years from now we want 20 percent less gasoline in the country,” where do you put your money – in gasoline or in alternatives?
 
So, the question before a company like Shell is, “So what’s the best thing to do.” Now it is my expectation and my hope that we will make a positive decision to go forward with the Port Arthur expansion, along with our partner.

But the point is, the issue of public policy working against the best interest of consumers is something we face every day. When it comes to more exploration and production, asking for more access to the Outer Continental Shelf disturbs people in Florida, which is one reason we’re in Tallahassee.

We would like to talk to the people in Florida who are so important to the public policy of the State to try to lay our case on the table. \ Not that we’re proposing any specific policy change today, but the reality is we need an informed electorate, we need an informed leadership to make good public policy, which is in all of our best interests.
 
Now, for Shell as a company, oil and gas (while it is our core business) is not our entire business.  And so if public policy says, “No, we really want to move away from oil and gas,” we’re okay with that, because we have other competencies and capabilities, which we’ll cover in just a moment.

But then don’t put pressure on us needlessly, like threatening to break up the big oil companies, which we heard last week. Like threatening to impose price gouging legislation with criminal penalties when we’re simply trying to meet the growing demand with sometime supply shortages. 

And in the current month, last month, the month before, one of the reasons we saw prices moving up as rapidly as they did was we were at the end of our turnaround season, which is the time of year in which we close down refineries for maintenance purposes for new investment, for capital expansion and for clean air improvements. 

We do this on a regular basis. This is not a conspiracy, as we’ve been accused of. This is a normal business routine and has been going on like this for about 100 years.
 
But when those refineries are shut down, they are not producing. And when demand keeps growing, the squeeze occurs. And so, as I said a week ago Monday to Meredith Vieira, we are at a 16-year low of finished product inventory.

That’s one reason why we’ve seen such spiking in recent months. We shall recover because the turnaround season is behind us, because there have been several fires in a number of large refineries, which have been taken offline, which should be coming back online.

So, over the course of the next month or two, we would hope that we could see a recovery in the inventory of finished product, which (hopefully) will relax the pressure on demand and will enable the prices to float in the market as they always do.
 
Having said all of that, if we talk more broadly about energy security, we’re living hand-to-mouth.  We really are living hand-to-mouth. Hurricane season is upon us. We know what happened in 2005 when Katrina came roaring through Louisiana and Mississippi and Alabama.

But there is a story you probably haven’t heard, because it was never published. The story is not after Katrina but after Rita (four weeks later), which shut down the Texas refineries and the Western Louisiana refineries, which hadn’t been shut down by Katrina.

So now 25 percent of the nation’s production capacity is out of commission. Electricity in West Louisiana and East Texas – it’s just not there.  Port Arthur wasn’t yet recovered from Katrina, they got hit by Rita – no wonder they had to declare bankruptcy to stay afloat because they were simply facing natural catastrophe after natural catastrophe.
 
It was the Friday night after Rita blew through Beaumont when our same Port Arthur refinery that we’re hoping to expand had the last  - the last - 300,000 barrels of finished product inventory available for the Plantation and Colonial Pipelines, which feed Florida, Georgia, Alabama, North Carolina, South Carolina, Virginia, D.C., Baltimore.

The last 300,000 barrels of available supply and no electricity.  o, on that Friday evening when I learned it from our supply people that if we don’t get electricity by Sunday – if we don’t push those barrels into the pipeline - Monday morning that pipeline’s dry. 

If you don’t push barrels, you don’t get barrels out when it comes to a pipeline.  So I thought, “Oh my goodness. We could have an outage in the whole Southeast quadrant of the United States because there are no barrels to push.”  So I said, “I think I better call the Energy Secretary to let him know.”

So, I called him on a Friday night, turned out I got him at his daughter’s wedding rehearsal dinner.  And as you would expect he said, “John, I hope this is good.”  And I said, “Well, Secretary, it’s not good.” This is Secretary Bodman.

I said, “Secretary, (I explained the situation) and we’ll be working 24 hours a day as we have been since the hurricane went through to get electricity hooked up (that is, temporary electricity from a generator).” And I said, “If we don’t get it hooked up, we’ve got no barrels to push on Monday.”

He said, “And then what?” I said, “And then I will call you Monday and ask you to please ask the President to declare a “Day of National Reflection.” He said, “What for?” I said, “So we don’t drive because there won’t be any gasoline and once that news gets out and panic buying sets in, we will surely drain the last of what’s available as quickly as you can say, ‘Day of Reflection.’” 

He said, “I’ll pray for you.”  Divine intervention worked. We got the electricity hooked up from a generator about four o’clock on Sunday afternoon. We started pushing barrels through the night. We were able to keep Colonial and Plantation full and then more refineries came back up and they were able to push more barrels.
 
Talk about hand-to-mouth. This is the United States of America. The land of plenty. But we are hand-to-mouth. What do we do about it? I do believe (Shell believes) that we can have energy security in this country, defined as available and affordable energy not just for now - not just for now - but for generations to come as far into the future as we can imagine those generations. 

That’s a very long time. Some people say our grandchildren’s grandchildren.  Well, let’s add their grandchildren and their grandchildren on to that. We can have energy security in this country - if we allow ourselves to do it. And that requires public policy enablers, not public policy distractions or public policy prevention.
 
So, for example, why shouldn’t we open up 10 or 15 or 20 percent more of the Outer Continental Shelf?  Why shouldn’t we open up more federal lands to exploration and production?

Why shouldn’t we enable public policy to go out and commercially produce the oil shale that sits in Colorado with technology and environmental protections built into the plan to do that, where more than a trillion (not a billion, a trillion) barrels of immature oil and gas sit in solid form in oil shale? 

Or, as Canada has done by public policy, opening up the oil sands of Alberta where another trillion barrels of oil sits in solid form in the oil sands of Alberta, where Canada has by public policy enablers made it possible for companies like Shell to go up and start producing oil to bring into the markets of North America.

So, from a conventional oil and gas standpoint, there is plenty out there – more than 110 billion barrels of known conventional oil and gas, another couple of trillion barrels of unconventional oil in Alberta and in Colorado.

But, public policy doesn’t enable it; it works against the ability to develop those resources. And instead of calling for the breakup of the big oil companies, why not promote the ideas to enable those companies which know what they’re doing and can be held accountable for social and environmental responsibility to go do what they know how to do?
 
In addition, let’s have public policy enablers from a technology standpoint. Technology such as clean coal technology – IGCC – where clean coal – or I should say gasified coal, instead of pulverized, burned coal – can actually produce more efficient electricity more cleanly and if coupled with carbon capture and sequestration could actually provide nearly CO2-free electricity from coal.

Is that do-able? Yes, it is. Is it being done today? Yes, it is, but hardly at all in the United States. Most clean coal, most coal gasification projects are outside the United States because we let the public policy make it very expensive because it’s not enabled.

So, for example, public utility commissions need to understand that the somewhat higher capital investment on the front-end of an IGCC plant needs to be recouped from the consumers, hopefully before the electricity is produced, because these are publicly-held companies that have shareholder returns to make.

But, with a pulverized coal plant, it’s cheaper and it’s quicker and so people chose pulverized coal instead of clean coal because there is no public policy enabler to use the better technology.
 
Or liquefied natural gas – we are using a lot of natural gas in this country because it’s clean.  Today, the demand equals the supply. Five to seven years from now as we look ahead at the increased number of natural gas turbine-fired power plants, the supply will not keep up with the demand because the demand continues to grow.
 
We could help ourselves with liquefied natural gas terminals – re-gas terminals they’re called in the industry - where gas that’s in stranded markets like the Northwest Shelf of Australia, or off the Coast of Nigeria, or in other parts of the world where there is no market, that natural gas can be cooled to minus 260 degrees Fahrenheit, and can be transported in liquid form, brought to our coasts and turned into liquefied natural gas, which has the same properties as natural gas from the Earth, because it came from the Earth.

But putting a re-gas terminal in somebody’s port or in somebody’s coastline is resisted by virtually every state in the nation that has a coastline. So, we prevent ourselves a secure supply of natural gas by preventing through public policy re-gasification terminals, which could help us in the future.
 
So, there we have conventional oil and gas aplenty, unconventional oil aplenty, clean coal technology available, liquefied natural gas available – all of which can contribute to our energy security - and there’s more. There’s biofuels.  Shell’s been in the biofuels business for 30 years. 

Meredith asked me Monday a week ago, “Why is Shell resisting biofuels?” And I said, “But Meredith, we’re not.

We’ve been in the business for 30 years. We’re one of the world’s largest distributors of biofuels; we could do with more. But, we need to choose which type of biofuel we want more of.” If we want more corn ethanol, the cost of sugar goes up, the cost of fructose syrup goes up, the cost of anything made with corn goes up, such as chicken feed, or hog feed and we all like bacon and eggs.

So, if we’re going to have biofuels, let’s go for second-generation biofuels, which is made from the corn stalk rather than the corn kernel, which is made from straw, made from woodchips, where we can use cellulosic ethanol technology which is not quite ready for prime time yet, I must say, but the research and development is moving at pace.

We can produce vast amounts of ethanol from biomass without touching the food chain. We’re not against corn ethanol or sugar ethanol, but at some point the fuel consumption in this country is so large that we can’t both produce food and produce fuel from the same source and we’re getting close to the limit now, as you can see corn going to four dollars a bushel.

Getting close to the limit of what we can do both of – both feed ourselves and feed our fuel tanks and at some point we need to make that transition to cellulosic ethanol and we’re ready to go.
 
In addition to that, Shell’s been involved for 10 years in solar electricity generation, photovoltaic panels which produce electricity from the sun. Now, the technology is still immature.

It’s Shell’s view that silicone technology, which is the primary choice of today, is ultimately too expensive and too inefficient for the long term. So, Shell essentially sold out of its silicone business and is now investing in thin-film technology, which is showing great promise.

Whether it will ever show sufficient promise, we have yet to determine. But we do believe that the sun is an ultimate huge energy source and so let’s work on the technology to see how we capture that.
 
In addition, there’s wind. Shell currently is involved in wind in at least seven states from Hawaii to West Virginia, where wind is an ample resource of CO2-free electricity.

In addition, there are hydrogen fuel cell vehicles, where hydrogen and the hydrogen economy may in 20 to 30 years make a material difference in both our mobility and our stationary power requirements (mobility meaning our cars). We could actually, in 20 or 30 years, be driving hydrogen fuel cell vehicles as an alternative to internal combustion.
 
But there are three more elements, ladies and gentlemen, to deliver energy security to this country that I believe are necessary, starting with greenhouse gas management.

Fossil fuel puts carbon into the atmosphere when it is burned. There’s no question about that, it’s been going on for 100 years or longer. It’s Shell’s belief that it is time for government to take a leadership position, a leadership role in creating a regulatory framework in which markets such as cap-and-trade can operate to begin to get a handle, to get a grip on the ever-increasing amount of CO2 going into the atmosphere.

We believe that is doable, we believe it’s possible. In fact, it’s happening in Europe today. We believe it’s time. Voluntary efforts are interesting, voluntary efforts are fun to talk about, but voluntary efforts will not solve the problem that we have in this country.
 
Second, we must come to grips with economy or efficiency in the use of energy. Your vehicle, my vehicle, my home, your home, all of our buildings, our offices, our factories, waste – waste – lots of energy. Efficiency, technology can help that. More fuel-efficient cars, more fuel-efficient buildings, more fuel-efficient lighting – all of these technologies can help us to use less energy and continue to enjoy our lifestyle.
 
Finally – education. Education of ourselves, education of our young people, education of our next generations of leaders to understand what energy is all about, where it comes from, why does it cost so much, how can we get more of it, how can we use it more wisely?

We really do not educate ourselves on energy. Shell doesn’t believe in just talking about it; we believe in doing something about it.

We’ve created a website for middle school and high school teachers where they can teach for free an entire semester curriculum on energy education developed by Scholastic, not by Shell but by Scholastic, called “Energize your Future.”  “Energize your Future” is a website where teachers can draw down for free a teaching curriculum on energy. We believe that’s necessary.
 
All the above – education, efficiency, greenhouse gas management, alternative energies such as hydrogen, wind, solar, biofuels, more conventional energies such as conventional oil and gas, unconventional oil and gas, liquefied natural gas and clean coal – all the above we believe can take us to a more efficient, effective, affordable energy security future.
 
Thank you very much.