Future vision

John Hofmeister, President of Shell Oil Company would beg to differ, however. In an exclusive interview with O&G, he talks about Shell’s investments in green fuels, future energy security, and how America’s strict drilling restrictions are creating an unnecessary over-reliance on foreign imports.

It would be fair to say that John Hofmeister is not the kind of opaque boss you find tucked away in an ivory tower, seemingly impervious to the critical energy issues affecting the lives of ordinary Americans today, and tomorrow. To reinforce that view, this head of Shell Oil – the lucrative US arm of Anglo-Dutch super-major Royal Dutch Shell – has been out on the road for the past 15 months beating the drum about energy security, gasoline prices, biofuels, climate change, and much more. And the audience? Well, it’s included just about everyone from the company’s stakeholders and government officials to environmental organizations and the public. It’s a 50-city tour that
has whisked Hofmeister and some 250 Shell Oil leaders from Seattle to Miami and everywhere in between. You get the impression that it’s been an adventure that this amiable oilman has revelled in.

When O&G caught up with him at Shell Oil HQ in Houston, Texas, his city count was looking like this: 46 down, just four to go. So with the tour on the home stretch this looked like an opportune moment to tie him down to a one-on-one interview and get a progress report. With an unexpected 20-minute void in his diary, he obliged. Introductions out of the way, and I start by quizzing him as to why he’s been trekking all over the country talking energy? He pauses for a moment before revealing his motives: “Obviously we have been facing a major dilemma over the price of petrol and the concern expressed by Americans about it, as well as about the profits that companies are making. When we look at the price levels and the profits in the clear light of our own business rationale it all makes sense to us as a major oil company. However, it doesn’t make sense to our stakeholders, so rather than having an ongoing sustained conflict over the issue, we decided to go visit them to discuss prices, profits, supplies and demand.” But these meetings were not just about education; Hofmeister and his team were “in listening mode” too.

When it comes to supplies he has found it hard to avoid the deep sense of fear amongst the public that oil and gas reserves are going to dry up soon. He recounts an example to illustrate the point: “In one city a women came up to me and said that she was a grandmother. She said that she knew oil and gas would be there for as long as she needed it but she was worried that it would not be there for her grandchildren, resulting in a lower quality of life for them. I think this is wrong.” What Hofmeister told the anxious grandmother was what he reiterates during our conversation: Oil and gas is not going to run out in the near future. However, he concedes that we have passed the tipping point of cheap and available energy. And he fully appreciates people’s concerns when stories (some would call it scaremongering) keep cropping up in the media about how the world’s fuel gauge is lurching heavily towards the dreaded ‘E’.

One trusted authority – the International Energy Agency (IEA) – has predicted that oil production could peak as soon as 2012 and that we could need 125 million barrels per day (bpd) by 2025 – levels are currently hovering around the 85 million (bpd), just one million above worldwide consumption levels. Adding to the strain are the new economic tigers like China, India, Brazil and Russia. In fact, China and India are forecast to account for 45 percent of the increase in global energy demand by 2030. “You could look at the situation from a negative point of view but I tend to look at it positively,” Hofmeister remarks. He says the National Petroleum Council’s 442-page report into the future of global energy, published in the summer, is a “seminal piece of work” for anyone looking for a balanced view of the situation. The study was commissioned in 2005 by US Energy Secretary Samuel Bodman.

Opponents have slammed the decision to allow the NPC, chaired by former ExxonMobil CEO Lee Raymond, to oversee this important study, citing that it was akin to asking the tobacco industry to forecast lung cancer. The NPC rebuffs this criticism, pointing to the fact that the 18-month investigation involved 350 experts – many of them from outside the oil and gas industry. Whether or not the NPC was the right organisation to author the report, Hofmeister urges everyone should take time out to read it. “I think it gives a very comforting view of the world’s supply of energy. It does bring up the demand issues but it also shows the technology opportunities. Most of all, it says that the big issues of the oil and gas industry, and the energy industry of the future, will probably be above ground with geopolitical issues rather than the availability of resources.”

Hands off

At this point the conversation edges towards the vast oil and gas reserves yet to be exploited in the US. Of course, much of the offshore supplies are off limits, causing to us rely more and more on expensive foreign imports to feed our thirst for the black stuff. Indeed, more that 60 percent of America’s daily oil consumption comes from abroad. This means that just eight and a half of the 21 million barrels of oil consumed in the US every day is extracted from domestic resources. Hofmeister wastes little time in laying the finger of blame squarely at the door of the policymakers: “We are probably the only oil-importing nation that by law and by regulation prohibits the production of our own domestic energy resources. If we were producing more domestic energy it would alleviate some of the pressure that is currently on the price of oil, and we would be investing in jobs and an infrastructure in the United States instead of exporting our oil dollars to other parts of the world.” Hofmeister also argues that if the US does not start lifting restrictions then the price of oil is only going to rise further. “If the US continues to rely on imported products, and at the same time other importing nations rely on those same sources, then we are seeing a never ending escalation in the price of oil.”

One potential goldmine for oil and natural gas is the Outer Continental Shelf, but frustratingly for the energy companies just 15 percent can be drilled due to public policy. They are also denied access to exploring hundreds of millions of acres of federal land. Combined, the Outer Continental Shelf and the federal land could be housing as much as 110 billion barrels of oil and natural gas, including colossal amounts of unconventional oil and gas supplies that have yet to be exploited. For instance, there are more than one trillion barrels of known unconventional reserves in the Colorado oil shale region – equivalent to the world’s proven oil reserves. “As the head of an American oil company I would like to see us change our US policy so that we could develop more of the Outer Continental Shelf, to develop more resources on federal lands which are currently off limits, and develop the Arctic region around the Beaufort Sea and the Chukchi Sea. I think there is a lot more oil and gas to be responsibly developed in this country so we should get on and do it.”

But does Hofmeister forecast there being a U-turn in policy in the pipeline anytime soon? “I don’t see evidence of it in the current Energy Bill that is in Congress,” he responds with a shrug of resignation in his voice. “If anything, I see more restrictions being placed on future access opportunities rather than a relaxation.” He adds: “While we are greatly appreciative of the trading partnerships that we have around the world, it is coming at a very high price.”
So with this stance it appears that the costly oil and gas imports will keep flowing in the US for the time being. However, being reliant upon foreign oil and gas from countries – some run by despotic regimes or anti-US governments – could leave the US vulnerable.

For instance, we have witnessed how Venezuelan’s leftist President Hugo Chávez, forced ExxonMobil and ConocoPhillips, to cede control of lucrative operations as part of a nationalization sweep of the oil and gas sector. A similar scenario affected Shell and BP in Russia. “I think it is clear, and I am not the first person to say this, that we are in a period of national resource nationalism,” Hofmeister warns. “This is to be expected when conditions between the exporting and importing nations are what they are.” He expands: “In other words, the exporting nations are appropriately, within their sovereign national borders, trying to optimize their natural resources while the oil importing nations are trying to sustain economic growth – so they need more energy and there is a natural tension there.”

Where now?

All this worry with supplies, coupled with soaring prices at the pumps, begs the question as to when will we all be powering our cars and homes with renewable sources. The oil giants will tell you that they have been ploughing funds into the R&D of alternative fuels for years. Indeed, Shell has been investigating and manufacturing biofuels for the past 30 years, says Hofmeister. Altogether the company has spent around $1 billion during the last five years on research and development of renewable and alternative energy.

The company stresses that this figure is still a small fraction of the total spend because the technologies are nascent and therefore risky. And an awful lot of R&D needs to go into an alternative energy source before mass production can begin. “It is important to note that we have been at this (alternative energy) for most of a decade, in addition to our core business of oil, gas and petro-chemicals,” says Hofmeister. “As well as working on biofuels, in which we are a fairly sizeable investor, we have a number of ethanol opportunities too.” Corn and sugar-based ethanol competes with the food industry and inflates prices so Shell is producing so-called second-generation (cellulosic) ethanol. Government targets have been set so that 7.5 billion gallons of ethanol a year needs to be produced by 2012, rising to a whopping 35 billion by 2017. Therein lies a huge challenge ahead.

But what else is Shell pioneering? Well, the energy giant is working on second-generation solar technologies as well as its burgeoning wind business. “We are moving very close to our first gigawatt of wind,” Hofmeister enthuses. “We are working in five states with seven wind farms. We are also building a new wind farm as we speak in West Virginia. When it comes to other technologies we are active in partnerships with a number of automotive companies on hydrogen fuel cell technology. Our role is to figure out the supply side and logistics of distributing hydrogen across a big country like the United States,” says Hofmeister, who is part of the Hydrogen Technology Advisory Task Force that supports the DOE’s work on hydrogen fuel cell vehicles. So while Shell and it’s rivals have started the ball rolling on these alternative fuels, there is still a long way to go before we are all filling up our cars on hydrogen or ethanol, especially when you consider that motorists in the US burn around 160 billion gallons of gasoline a year.

Aside from oil and gas, there is one fossil fuel that many people overlook – primarily because it has a bad reputation for being dirty and a high pollutant. That fuel is coal – something that the US has more of than anywhere else in the world combined and something that Shell sees great potential in for the future. And new technology is cleaning up its image too. Coal gasification enables the efficient capture of CO2 for sequestration, making possible the production of low-CO2 electricity or liquids. In fact, Shell is involved in a turnkey project in Queensland, Australia, to create low-emission electricity that combines coal gasification with carbon capture and storage. Shell is the preferred provider of the gasification technology and is currently providing drilling and CO2 storage expertise. Up to 420,000 tonnes of CO2 annually (around 70 percent of the demonstration plant's CO2 emissions) could be captured and stored.

Hofmeister elaborates: “We essentially sold all our coal assets but we held on to coal gasification technology. So now we are very active in coal gasification and we have some major projects underway in China. Also, we have just signed our first US contract to provide our technology to a major gas-to-liquids project in the state of Ohio.” All of these initiatives go some way to the curbing of greenhouse gas emissions – an issue that is on the minds of business leaders today – especially those running the multinational corporations.

While the US was previously the largest producer of CO2, the chief greenhouse gas, China has now overtaken this unenviable record. Hofmeister argues that emissions and climate change is important to Americans, despite the doubts that other nations may harbor. “Having been in 46 US cities and spoken to thousands and thousands of people, I can tell you that the American people are anxious about climate change and they are ready for national leadership to take us in a direction as a nation towards greenhouse gas management. I think this is in perfect alignment with Shell.”

He says dialogue is key if we are to move forward on this: “We have been talking about the need for national leadership on greenhouse management for quite some time. Ultimately, this leadership will be global but it has to begin somewhere. It can begin in the nations that have the best opportunity to manage greenhouse gases – and I would put the US in that category because of our economic and technological success – but we need national leadership to come together on what the policy framework will look like.” Shell is a strong proponent to a cap and trade system to aid in the battle. “If the cap is set effectively and the system established fairly, then it is the most effective way of driving emissions lower,” Hofmeister explains. “We believe it is a system where markets can operate within a regulatory framework to create economic value and at the same time reduce emissions.”

Black gold

While investing in alternative fuels and capping emissions is high on the list of priorities, the simple fact is that for the majority of the population the cost of gasoline is their number one concern. For sometime now motorists have been feeling the pinch at the pumps, as the price of a barrel of oil hits record highs. What the consumer finds hard to fathom is how the oil majors keep announcing record profits but the price of gasoline keeps rising. Royal Dutch Shell recently announced third quarter profits of UK£6.4 billion – the sort of dizzying figures that leads the public to perceive that the industry is being greedy and that they are being ripped off. Hofmeister has been at pains to point out to his audiences that contrary to popular belief, the oil majors don’t like high oil prices as it causes inflation in the supply chain. He also says that almost all of its profits are ploughed back into the business.

“We are trying to change the conversation about prices and profits and whether that is a good or bad thing. In the conversations that we have had across the country the focus has changed significantly, particularly when we talk about the investments that need to be made in bringing more energy into the world in the future.” He slows his speech to emphasise the money involved: “When they find out that the Perdido project [see in at the deep end on page??] in the Gulf of Mexico is a billon-dollar investment, or that the oil sands in Alberta, Canada, represents a multi-billion dollar investment, the expansion of our refinery in Port Arthur involves some $7 billion dollars, they realise that this is big money. And if you don’t make a lot of profit you don’t have the money to invest in future energy supplies. So by talking about the investment side to meet the demand side it really does change the nature of the conversation – from one of hostility to one of understanding.”

And that’s the point: looking at the bigger picture is needed to get a grasp of what this industry is all about in terms of investments. And when it comes to costly investments in key upstream projects, Hofmeister sees a bright future ahead for Shell Oil. “We will continue to invest in the Gulf of Mexico where Shell has just had a very successful bid round to acquire new leases to explore over the next decade. In the longer term we are still researching the opportunity for oil shale in Colorado while there is many, many decades of opportunity to develop oil and gas offshore of Alaska.” Then there is of course the downstream refinery expansion being planned as well as Shell’s efforts in renewable energy and biofuels – something that I found Hofemiester is extremely passionate about during our discussion. For the immediate future oil and is still king, although there are new pretenders vying for this crown. By using technology to develop these new energy resources Hofmeister says that America will eventually conquer its addiction to the black stuff.

A snapshot of the key points John Hofmeister told audiences on Shell Oil’s energy challenge tour:

“Lack of access is a root cause of the current supply situation, and in a free market, limited supply and increased demand lead to higher prices.”

“Fossil fuels are at the heart of our energy system – and will be for the foreseeable future.”

“There are no perfect solutions or easy alternatives for a secure energy future. Access, diversity of supply, managing demand, managing green house gas emissions and education will all play vital roles in meeting energy needs for the future.”

“Perhaps in 25 to 40 years, we believe hydrogen fuel cell power sources can be used for both stationery power production and mobile power production.”

“For the short-term, we must have responsible access to more domestic resources, and we must have streamlined regulatory requirements that will allow us to deliver new projects much faster.”

In at the deep end

The Shell Exploration & Production Company (SEPCo) is the largest of the Shell E&P operating units, accounting for 15 percent of Shell’s worldwide oil and gas production. The Gulf of Mexico is one of its key regions, as John Hofmeister explains.

“I think the best way to describe our deepwater drilling in the Gulf of Mexico is to look at our Perdido project (a multi-billion dollar investment 200 miles south of Freeport that will break several water depth records). This project is testimony to the risks that we are willing to take in terms of the financial bet on what could be a hugely prolific set of oil reservoirs that we should be able to tap for many years into the future. The technical challenge is first of all operating in more than 8,000 feet of water and controlling wells drilled to more than 18,000 feet below the ocean's surface. We believe we have the technology, and we have the where-with-all, financial and human capital to be able to capitalize on this. But it is an example of how far we must go these days, given that we have limited access to easier to obtain oil, to develop these kinds of assets.

“In addition to the technology that allows us to discover this oil and to produce it, the technology which allows us to safeguard the environment has changed too. We have the ability to develop these sub-sea capabilities in environmentally responsible ways. It’s the shut off valves and the kind of piping and assembly processes that have moved very far in terms of protecting the environment – which a lot of people don’t know about. This is why some people still worry about offshore drilling as an environmentally hazardous thing to do. Well the fact of the matter is that the Gulf of Mexico is proof that we can drill, produce and safeguard the environment all at the same time.”

Shell Oil in numbers

• 22,000 employees
• Operations in 50 states
• 14,000 gas stations
  
• Drilled its first South Texas well in 1953
  
• Proved reserves of 1.3 billion barrels of oil equivalent