John Hofmeister, president of Shell oil, Landon Lecture text

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John Hofmeister, president of Shell oil
Landon Lecture
Sept. 8, 2006

Following is the complete text of the Landon lecture delivered Friday at Kansas State University by John Hofmeister, president of Shell oil.

President Wefald, Dr. Reagan, distinguished guests, ladies and gentlemen. It is a pleasure to be at this podium today to address you on what I believe is one of the most optimistic forecasts that we can see in the years ahead for America and the world as we approach the energy requirements of the future.

But first let me commend the Landon Lecture series for what it does to Kansas State University and the people of Kansas. I had the privilege also of meeting Gov. Landon as a student, seeing him on this stage representing points of view, some of which he agreed with, some of which he did not, but always encouraging points of view to be broadcast across this great state. I had the pleasure of meeting him privately with a group of students and discussing his views during the early 1970s when, as you recall, campuses including this campus had its own issues with the direction of the administration, and we had a wonderful exchange of views at that time -- an open-minded, receptive gentleman who I will remember all of my days.

Kansas represents a tremendous asset to the energy industry, both for its history and for its future and we will come back to that in a moment. Let me suggest to you that tempering my optimistic remarks will also be some messages of pragmatic reality, which we will have to deal with in the days, the months, and the years ahead to achieve that optimistic forecast, which I hope to share with you.

Part of the message, ladies and gentlemen, of the energy story of the future is we are not, we are not, running out of oil and gas. Contrary to the views of some who refer to peak oil as already having been reached, I would submit that that is a minority view based upon what we would consider skeptical studies and we are far more robust in looking at the oil and gas reserves of the world, and why is that important?

It is Important, ladies and gentlemen, because the entire global economy, the infrastructure of the world as we know it today, whether we like it or not is predicated on an oil and gas energy source -- whether it's mobility, whether it's power generation, whether it's heating and cooling, whether it's lighting -- whatever it is we are predicated on an oil and gas natural resource base in our economy today. Those who advocate change, and we welcome those ideas, must understand that we will continue to require massive amounts, massive reserves, of oil and gas going forward if we are to sustain economic growth into the future.

In this country there is tremendous reserve of oil and gas. Kansas as I mentioned, historically did peak in terms of its local production many years ago. The EI Dorado find was one of the most prolific finds of oil and gas this country has ever known. In one year, for example, 29 million barrels of oil were produced in the EI Dorado region -- a tremendous asset to the economic development of the state and the nation. Those days have seen a decline. Looking forward, however, Kansas as you know, and Kansas State in particular, has a role to play. The biofuels future of Kansas couldn't be more robust. We will come back to that a little later in my remarks.

But as we look across the nation when you think about the scarcity of supply and the increased demand that we have seen over recent years, there is an explanation for the high prices. We don't like the high prices any more than you do. Every employee at Shell, including myself, pays the exact same price for oil and gas that you do. We offer no discounts inside the company. We pay the same. We feel the price at the pump as you do. What can we do about that?

In this country there has been a shortage of strategic directions for a long time. The industry has been counted upon by the national leadership to find oil and gas reserves and ladies and gentlemen, we have. We can identify 112 billion barrels of known recoverable oil and gas in the outer continental shelf of this country and in the continental regions of this country, which we do not have access to, lacking a strategic direction by our national leadership.

We have been asking for access to the 112 billion barrels of producible oil and gas in order to bring more supplies to the American people to take away the pressure that imports present. Imports, which, by the way, come from regions of the, world that are not always stable, not always peaceful, in which the threat of reduction in imports is always present, which leads to a dramatic rise in the price of crude oil. By developing more national resources in this country America faces greater prosperity, greater access to oil and gas to support the economic infrastructure of the country, in a regime that is peaceful, that is I workable, that is predictable, where oil companies do their best work.

If we had access to those 112 billion barrels of oil and gas we would be in a different situation in terms of the supply-demand relationship, bringing more crude oil at possible lower prices into the nation's marketplace. But is that enough? Is that enough to satisfy the economic trends of the future and to satisfy the infrastructure of the nation? No it's not.

We need more than simply conventional oil and gas. We believe we should have access as well to unconventional oil and gas. Unconventional oil and gas is that oil and gas which is not pumped in the traditional way. It is, for example, the oil sands of Alberta. It is, for example, the oil shale of Colorado, Utah, Wyoming where two weeks ago I had the pleasure with one of the distinguished senators from the U.S. Congress, to walk around, ladies and gentlemen, on one trillion barrels of oil and gas in the state of Colorado and extending into Wyoming and Utah. One trillion barrels in this country represents five times the known reserves of the entire Saudi Arabia reserve store -- five times.

We have technology, which we are testing today, to get access to that oil and gas. We believe it is recoverable. We believe it is recoverable in a range of the price of crude oil between $30 and $40 a barrel. We are testing it and hope to make a financial decision within Shell by the year 2010.

Working with the Bureau of Land Management, working with the U.S. Congress, we need to create the political infrastructure which will support a royalty regime that will enable the technology to be applied and successful to develop that natural resource. Will that be enough? No.

We don't believe that will be enough either for the future and so we are working in other areas, for example, liquefied natural gas. We know in this country that the reserves of natural gas are in decline. While we are temporarily at a period of great storage of natural gas the long term outlook for natural gas is not good for the country as a whole.

We can augment that supply through liquefied natural gas coming from abroad in which gas is cooled, shipped, and then re-gassed in terminals along the coasts but we have a problem ladies and gentlemen. The problem is building re-gasification terminals where no one seems to want a re-gasification terminal, in their back yard. The supply is there, the market is there, but in order to move liquefied natural gas into this country we need to build re-gas terminals and pipelines to move that gas from the coasts to the interior instead of the current methodology of taking gas from the interior to the coasts. Some of those same pipelines can obviously be used but we believe we will need more. Is that enough? No it's not.

This is a country that is naturally endowed with bountiful reserves of coal. Coal has been around for a long time and we know coal has a dirty side to it. Ladies and gentlemen, technology has moved on. Technology exists to turn that coal into carbon free electricity-produced energy. Carbon free is a major step forward in the reduction of CO2 pollution, a greenhouse gas, and still gain the benefit of electricity.

What is that technology? That technology is integrated gas combined-cycle technology simply called coal gasification. How does it work? Smash the coal into powder, the consistency of talcum powder. Enter that powder, dry powder, into a gasifier under extreme temperatures, extreme pressures, the molecules of the powder explode yielding the components of the coal itself which is natural gas -- natural gas liquids, carbon dioxide, nitrous oxide, sulfur. The last three being nasty things to deal with. But with the use of technical membranes we can separate the CO2 and manage it through sequestration or other productive uses. We can separate the sulfur and capture it, we can separate the nitrous oxide and manage it, and the consequence of that is essentially clean energy from coal.

Is it happening in the world today? Yes, in China, in Australia, in Europe, such technology is underway. Not in this country. Why? The capital cost is greater than the cost of building conventional coal-fired plants. Public utility commissions need to be better understanding of this technology so that in their wisdom they can grant rate relief to utilities to be able to install such technology at the front end of building a conventional coal plant rather than after the fact. It does require rate relief because the capital cost is more expensive. Is coal gasification enough to meet our energy requirements of the future? No, we think not as we look ahead.

We have an expression in Shell which we like to use and that is, just as the stone age did not end for the lack of rocks, the oil and gas age will not end for the lack of oil and gas, but rather, technology will move us forward.

The technology we refer to is best captured in the term alternative energies. Alternative energies represent a small today, but growing, opportunity for more energy for the world tomorrow. Such forms of energy include biofuels, where Shell happens to be one of the world's largest distributors of biofuels and believes there is a long run ahead of us in terms of biofuel development, biofuel production, and biofuel use in particular for transport mobility purposes.

Shell decided a long time ago rather than being in the gasoline business, we are in the mobility business, and so it is our objective to bring fuels to the American people, not just gasoline. Fuels from biomass represent a good alternative provided the engines are designed to accept this new form of biofuel, namely ethanol, which is a form of basically alcohol. The production of such biofuels represents some future choices to be made.

At Shell we prefer not to invest our money in first generation ethanol, which is basically corn-based or sugar-based ethanol, which is also part of the food chain. I have to smile as the head of an oil company facing the concerns that citizens have about the high prices of gasoline. I don't think I can take much more pressure if we're also being blamed for the high price of food in the future if the corn and the sugarcane is all being used for fuel instead of corn chips, doritos and high fructose syrup for coca-cola and pepsi-cola. Therefore, we prefer to invest our resources and develop technology on what we consider to be second and third generation ethanol.

Such ethanol comes from biomass but it comes from the waste of the corn not the corn kernels themselves. It comes from the corn stover, the corn stalk. It comes from, not the germ of wheat which we eat, but it comes from the stalk of wheat we call straw. The cellulosic makeup of those plants, broken down by enzyme reaction within a distillery, produces alcohol in the same manner ultimately as corn. There's a whole lot of wasted biomass out there for us to utilize to turn into fuel. And in addition, third generation ethanol is taking wet biomass and gasifying that wet biomass which could be wood chips, branches, trees, leaves, grasses, you name it, into a gasifier.

Shell is involved currently today in both technologies. investing in a company called Iogen for straw ethanol, a company called Choren for wet biomass ethanol and there are other technologies under development as well. Kansas State and the state of Kansas offer great opportunity for biomass development in the future. Is that enough? No, there's more.

We know the sun is full of energy. Photovoltaic creation of electricity from photovoltaic cells creates electricity, solar electricity, for use in homes, offices, factories, etcetera. Now Shell has moved on from silicon based photovoltaic cells to a chemical compound-based photovoltaic cell called copper indium disulfide. Silicon itself is a highly energy intensive product which basically comes about as you know from melting of sand. To melt that sand requires huge amounts of energy. To make the copper indium disulfide film takes very little energy and actually yields more electricity from sunlight and so we're investing in that technology. Is that enough? No, there's wind.

Kansas has a lot of wind, so does Colorado, so does California, so does Idaho, so does Iowa. We have a map, ladies and gentlemen, of the windiest sections of the United States and the Flint Hills is not one of them. So those of you who care about the Flint Hills, this is not likely to be a land of wind turbines. There are other parts of Kansas that will absorb great amounts of wind and wind turbines. Shell is very actively involved in the creation of wind farms. Recently I had the pleasure of standing on the island of Maui announcing a new wind farm on Maui which with 25 wind turbines will replace the need on the island of Maui to build a new coal-fired generating plant.

Then there's hydrogen-hydrogen represents, we believe, the best chance for a technological game-changer which could change energy forever as we have known it in the past. Hydrogen as the enabler of electricity generation through I fuel cell technology represents, for both stationary power stations or mobile power stations such as automobiles, trucks, buses, a tremendous opportunity in the future to have hydrogen fuel cell vehicles as our vehicle of choice. It exists today. In Washington, DC, three miles from Capitol Hill at a Shell retail station, we have a hydrogen pump. The President himself was there to have a ride in a General Motors fuel cell vehicle and to see the tank filled, with hydrogen at the Shell Station just a little over a year ago. ' When I spoke to the President recently I said we need more hydrogen stations. He said we will, we will see to it that it happens. We're working on a hydrogen highway ladies and gentlemen between Washington and New York, between Los Angeles and San Francisco. There are some technological breakthroughs that we still need particularly in the storage and distribution area, but also in the vehicle itself. The last thing you want to do is park your hydrogen fuel cell vehicle at an airport, come back three days later and the hydrogen has evaporated. It doesn't get you home very quickly. So we have some work to do in order to find the solutions and we will. Is that enough? No.

The final comment I would make on energy future is, ladies and gentlemen, we need to affect the hearts, the minds, the values, and the behaviors of Americans throughout our society and move toward what we would call in Shell, a culture of conservation. A culture of conservation which at the values level, at the values Ievel, changes how we see energy. I was quoted recently in a newspaper having visited a city recently in which the hotel I stayed in during this summer had a fireplace going in an air-conditioned lobby. The temperature outside was in the 8Q's -- not exactly the most efficient use of energy. That is an example of counter-culture in the abuse of energy.

What we need is a culture of conservation in which the minds of our technologists and our engineers are shifted towards the design of homes, the design of vehicles, the design of buildings and factories in which energy is used differently because it can be and it should be and we simply need to apply it. And then in the behaviors that we use around energy which are at a micro level not that easy to produce because we all like our life styles as we have known them in an era of cheaper more affordable abundant energy. But absent a culture of conservation, all the alternatives that I have described will not be enough for the security of energy for our children, our grandchildren, and their grandchildren.

Coming back to the price of oil. Why is it so high? I do not believe we are in a permanent state of high oil price. We are suffering the effects of two dynamics at the moment in the energy world we live in. One, in the late 1990's less than a decade ago ladies and gentlemen, the price of crude was $l0 a barrel. At $10 a barrel the kinds of investments necessary to produce future oil were not being made. We couldn't see a return on investment at $10 oil and decisions were deferred. In the oil business it takes seven to ten years for decisions to be recognized because of the time span that it takes to move projects forward and we can't go any faster than that because of the risks, the complexities, and the difficulties of what we do. But seven to ten years ago we were in the midst of a $10 oil cycle in which we deferred decisions so we are suffering the shortage of not having made decisions seven years ago which are being felt today. Second dynamic, which is also impacting us, is that for generations we had been used to a production overhang in the OPEC countries where they were never producing all that they could produce.

Through the 70's, the 80's, the 90's, there were always eight to 10 to 12 million barrels of surplus capacity not being used but were available if needed. Between 2001 and 2004 that surplus disappeared. Where did it go? It went to China, it went to India, it went to developing countries around the world. It also went to Europe, .it also came to the United States because our economies have been growing, thank goodness during this entire period.

Why we are suffering the high oil price today is the world produces 85 million barrels a day and it uses more than 84 million barrels a day and there's no surplus capacity anywhere. As a Consequence we face the extreme imbalance of supply equaling demand, demand on the verge of exceeding supply and as a result of that any tension in the system, any disruption of supply causes the world trade community, who are bartering barrels of oil 24 hours a day, seven days a week, causes them to be nervous and it moves the price up. The nervousness is aggravated by geopolitical tensions. The geopolitical tensions we see in the Middle East today are driving the price of oil higher.

There are significant risks still out there and while today you may be seeing a slight reduction in the pump price because of the end of the driving season and the change in behavior patterns associated with some high price oil and gas during the summer, we are still at the precarious edge of the demand-supply balance moving the other way. If tragically something were to happen in the world that somehow reduces supply, we could see a return to much higher cost oil very quickly because the demand is out there.

The demand is actually good because it represents economic growth but what the oil companies need and what Shell is arguing for on Capitol Hill, trying to use some of the prairie pragmatism that I learned at this school, is to take the message of practical reality to our leadership in the nation's capitol. To say, please -- senator, congressman, chairman, director, vice-president, president -- please give us more access. More access will yield more oil sooner to meet the economic growth demands of the future and take some of the tension and the pressure off the demand side by increasing the supply side. Those of you who took Econ 101, and I did 30-some years ago, I'm sure the lesson is still taught today, supply and demand are the economic drivers which change prices. That's what we should be working on, is an increase of supply to offset the increase in demand to yield better prices in the energy marketplace.

When it comes to the Middle East, ladies and gentlemen, we watch it closely. Shell has been in the Middle East 100 years. We've been very successful working in every country in the Middle East over these years. In some cases we've been nationalized and told to leave. In some cases we've been invited back. We're currently working in the Empty Quarter of Saudi Arabia with Total trying to find gas in Saudi Arabia. We're ready to work in Iraq as soon as security and as soon as rule of law and as soon as the invite invitation to work there comes, but we need all three. But ladies and gentlemen the Middle East needs attention. The Middle East needs resolution.

When I was a student here 30-some years ago the question of the Middle East was, what will happen in the next generation or in future generations if the problems are not solved? That was the discussion on campus in 1970. That is still the discussion today. What will happen if these problems aren't solved? The reason for Shell's success in the Middle East over 100 years is we talk to everybody. Everybody has a point of view, everybody deserves to be listened to, everybody deserves to be in the dialogue. We believe that would be a good step forward to bring more regional peace and harmony to try to move issues forward. Shell does not enter the politics of nations -- not the U.S., not Israel, not Lebanon, not Iran, not Iraq. Shell is there as a citizen to offer its view and our view is we should all be talking to each other.

Ladies and gentlemen, thank you for your attention. I hope you agree with me that we can be optimistic about the future. The energy is there, we simply need to go get it. Thank you.