by John D. Hofmeister
President, Shell Oil Company

Introduction by George Mitrovich – President, The City Club of San Diego:

It’s a great privilege to welcome our special guest today. I always think about what I’m going to say at a moment like this. Some moments are more challenging than others, but one of the things that I thought about this morning is that sadly, in our country, we have these extraordinary divides, and they’re not good for America. And at some point, we need to figure out how do we come together to advance what is in the interest of America. Not of a political party, not of a particular business or profession, but what do we do to advance the interests of America. And that seems to be one of our major dilemmas of the moment. My hope is – my prayer is – that we’ll find a way to do that.

One of the things that I have discovered in having an opportunity to visit with our guest is what a truly thoughtful man he is. He heads a major American corporation; it is a corporation that has been at the center of great controversy. Why would you deny the obvious? Nobody likes the price we’re paying for gas, but like so many things in this life, it’s infinitely more complex than it may appear. I am persuaded that if there is one person within his terribly important, critical profession that can explain that to us, this is the man. Would you welcome, please, the President of Shell Oil, Mr. John Hofmeister.

Thank you, George. And thank you to the City Club for the opportunity to come and speak about, yes, what I would agree is a complex subject and a subject that is dividing our country and if we’re not successful in putting together the component divisive parts, we could be facing an even more difficult and complex situation in the world of tomorrow.

I’m here to talk about energy security. Shell decided, in the midst of the hurricane tragedies of last fall, that we had to do something different because we saw tens of thousands of our employees literally working 24/7 through awful conditions to bring energy to the American people, only to be mocked, chastised by those who did not understand what was actually happening. The system broke last September, but it was a system that had been teetering for quite some time ahead of those hurricanes. The system I’m referring to is the supply/demand balance in the availability of energy to the people who need it. And so if I define “Who is Shell?” for the purposes of our conversation today, Shell is the supply side. We are the people – tens of thousands of us – who get out of bed in the morning or at night to go bring energy to the American people. All forms of energy, as I will try to describe.

So, we are the supply side, and that’s what we do. We aren’t always perfect. We do make mistakes, but we are motivated by what we believe is a genuine desire to enable people to live life as they choose it with energy to support it.

You are the demand side. You are critically important to us as consumers, as customers, as voters because you help decide our future by virtue of choosing our products or not, by voting for people who enable the regulatory framework in which we operate or not, and the people who ultimately will tolerate, or allow, or welcome a Shell station, refinery, re-gas terminal or another form of energy infrastructure into a community.

What I’d like to cover today is the story of the supply/demand imbalance. Let me start where we are—at the global tipping point. And, it’s not just a U.S. issue. On the back of affordable energy, the world economy has grown materially for the last 20 years, and as a consequence of that growth, two things have happened that affect us every day.

One: more people with more means to use energy are doing so in China, India, and other parts of the developing world. But not just the developing world. Also Western Europe, also the United States of America. More people on the back of affordable energy and economic well-being are using more energy: point one.

Point two: what has always been an historic phenomenon since the foundation of OPEC in the early 1970s is something called excess production capacity. OPEC for decades, in the ‘70s, ‘80s, ‘90s, always had somewhere around 10 or more million barrels of un-utilized production capacity. Since 2002, with this continuous economic growth and demand for energy, that notion – that notional excess production capacity – has disappeared. Today the world will produce 85 million barrels of oil and gas equivalent. The world will use 84-plus million barrels of oil and gas equivalent, and the oil used is not in the same location as the oil produced. So there is movement of this oil all over the world, but the point is there’s no more. That’s it, and if there is any supply disruption, if there’s any weather event or geo-political event, or any other consequential issue in the geo-politics of the Earth, that supply/demand balance can flip to where there is not enough supply to meet the demand in the short term, or over the longer term. This is a global tipping point, and we have to ask ourselves, “What are we going to do about that?” I’d like to share with you what our plans are at Shell.

In the first instance, we are a major producer of conventional oil and gas in this country. We’re in the Gulf of Mexico. We’re developing offshore assets north of Alaska in the Outer Continental Shelf. We’re in Pinedale, Wyoming, producing gas. We’re in the Barnett Shale. We’re in a number of other states producing oil and gas. We will continue to develop those kinds of conventional oil and gas resources, and we were pleased to see Chevron’s announcement last week of the find in the Gulf of Mexico. We’re on both the western and the eastern edges of that region and we have discoveries that we have reported as well. It didn’t quite get the press attention because of the size of what was described last week, and we applaud Chevron’s efforts. Having said that, we will all be working to produce oil in water that is between 7 and 10 thousand feet deep, and producing oil that is in reservoirs anywhere from four to five miles under the surface of the earth – as somebody said earlier today, “through all that rock and dirt,” under the seabed. That is a challenging technical adventure for all of us who are in that region. But, even if you consider the size of the Chevron find, as someone calculated, that’s about three years worth of oil in current demand in the United States so it’s not a full solution. When we look at all of what the oil companies are doing – and Shell included – is there enough coming from conventional oil and gas to meet the needs of today and the future? The answer is no – it is not enough. We have to do more.

And so, Shell is working in Colorado developing unconventional oil in the oil shale region of Colorado, where there are estimates of north of a trillion barrels of available oil and gas. A trillion barrels among Wyoming, Utah and Colorado, which we would develop with a different technology than mining; a technology in which we would drill holes into the oil shale about a thousand to two thousand feet deep, which for us is shallow compared to what we’re doing in the Gulf of Mexico. We would place heaters into the shafts. We would heat the oil in place until it drips out of the rock, and pump wet oil, liquid oil and natural gas out of the oil shale. We’ll make a commercial decision hopefully in 2010, but we need a regulatory framework, a royalty framework and the environmental impact requirements to make the project a go. Will that be enough? No. Not yet.

In addition, there are oil sands in Canada – some 1.3 trillion barrels of available oil in the oil sands of Canada – in which Shell Canada and also Shell Oil are working together, to try to bring hundreds of thousands of barrels per day to the marketplace of Canada, the United States and the world. Is that enough? No.

There’s liquefied natural gas not very far from here, in Baja. There is a re-gasification terminal being built. Our partner is Sempra. Shell and Sempra are working together to bring liquefied natural gas to the Mexican power production marketplace, and also to Southern California. We’re also working on re-gas terminals on the East Coast and the Gulf Coast, and I know others are working on other sites on the West Coast. Will they happen? We hope so because liquefied natural gas represents an augmentation of what is a declining natural gas supply in the United States. We have, through the 1990s, built hundreds of megawatts – thousands of megawatts I should say – of new gas-fired power generation plants, because they’re cleaner, they’re more efficient. That is taxing the natural gas supply, and we are not replacing reserves of natural gas fast enough. We need liquefied natural gas just to meet current demand, because there isn’t enough natural gas in the ground to be produced to meet current demand – let alone future demand. And, so we need these re-gas terminals, but now we have a dilemma – and we would welcome your point of view on this dilemma. The dilemma is: we know we need it, but many, many communities around the country say, “please, not here,” and that becomes the trickiest issue for us to manage locally, politically, as well as nationally in terms of where will these re-gas terminals go. Assuming we’re successful in putting these somewhere – a dozen or more re-gas terminals in the United States – is that enough to meet the energy demand of tomorrow? No. The answer is no.

We have a nation that has an abundance of coal. We believe that technology is a solution for using coal to move from what we’ve all previously termed “dirty coal” to clean coal. I grew up in Pennsylvania – I knew dirty coal in my youth, but recently I met with the Premier of Queensland, Australia, to encourage him to accept a commercial deal with Shell to produce with the utility in Queensland a 99.8 percent CO2 coal gasification power plant using Fisher-Tropes technology for producing gas from coal with Shell’s coal gasification technology. The gas would then be used to make electricity, and the CO2 would be piped to a sequestration spot under the continent of Australia where it will remain forever. He agreed to the deal and they’re off working it now. There are coal gasification power plants in China, where Shell has some 15 projects under way, in Europe and in Australia, but none in the United States. Not yet.

Coal gasification is an interesting process, but to explain it technically could take the rest of my time, so let me explain it in a non-technical fashion as a political scientist would describe it. Take coal; crush it, crush it to the consistency of talcum powder. The talcum powder is dried as you are crushing it so there’s no moisture left in it. Enter that talcum powder into a Shell gasifier with intense pressures and intense temperatures – well over 1,000 degrees Fahrenheit – and what happens? The pressure causes that talcum powder to explode into gas – the equivalent of natural gas. And, with the gasifier and certain membrane technology, enables the utility to separate the CO2, separate the nitrogen oxide, separate the sulfur, and the by-product is natural gas liquids that can be used as diesel – clean diesel with no sulfur. Very interesting technology that is available to us but, assuming we could make all of that go, is that enough to meet the energy requirements of the future? No, we think not. There is more that’s required, more that we can work on, because everything that I’ve described thus far is a pure hydrocarbon-based form of energy, and we believe that technology will take us in new directions. In Shell we have an expression, “The stone age did not end for the lack of rocks. The oil and gas era will not end for the lack of oil and gas.”

Technology, we believe, will move us in a new direction. Such technology includes bio-fuels. Now when it comes to ethanol and biofuels, Shell prefers second, third generation ethanol over first generation ethanol. First generation ethanol is that ethanol that comes from corn or from sugarcane. The reason we prefer cellulosic ethanol – or ethanol from municipal waste or wood chips or dry biomass such as straw, grasses or cornstalks – is that is doesn’t take away from the food chain. The food chain of America is as in balance with Americans’ diet as the energy is in balance with energy’s demand for gasoline and other energy. And, if something upsets that balance, ladies and gentlemen, guess what? As we’ve seen with gasoline where the price goes up when the demand goes up, if the fuel companies are also buying up all of the ethanol from corn, who pays for the feedstocks for chickens and the eggs that they lay or the hogs and the bacon they produce or the cows and the hamburger they produce? The American people will look at the oil companies and say you’re not only charging us high prices for gas– now our eggs, bacon and hamburgers cost more, too, thanks to you people. We’d rather not see that happen. We’d rather see cellulosic ethanol come into the marketplace. But, are bio-fuels enough? We think not. We think there are other technical forms of innovation and energy called wind, called solar, called hydrogen fuel cells that can make a material difference as well.

In the case of wind, thank goodness America has a lot of wind. There are many ways to interpret that. Wind farms do make a difference. At the right locations, wind farms can produce electricity some 60 percent of the time, which is quite efficient, and the wind farm produces no CO2.

Solar also represents opportunity for electricity from the sun. Now, Shell has moved past the silicon-based photovoltaic cell. We have instead adopted a new technology based upon a thin film chemical substrate that looks about the consistency of cling wrap or Saran Wrap, which is actually more efficient than silicon in producing electricity from the sun. It’s also ultimately, we believe, less expensive and less energy-intensive, because, let’s face it, silicon comes from sand. It takes a lot of energy to turn sand into silicon and then it takes a long time to produce that silicon-based photovoltaic cell to bring more energy back from the sun. So, we believe that CIS, copper indium diselenide thin film substrate, is a preferred alternative for solar power – and that’s why we’re investing.

And then there’s the hydrogen fuel cell. It is possible, not in the next five years, maybe not even in the next 10 or 15 years, but perhaps by 2030 to 2040, to see mass-produced, comfortable, efficient hydrogen fuel cell-powered vehicles as a vehicle of choice in this country. But there is no time like the present to try to move in that direction, because, ladies and gentlemen, if you think back to how long it took for the oil and gas infrastructure of this country to come along and to be developed to its efficiency level today – it is a hundred-year story And so for hydrogen fuel cell technology to somehow be an efficient, effective replacement at some future point, it could well take a hundred years. But there’s no time like the present to begin. Is that enough? Conventional oil and gas, unconventional oil and gas, clean coal, liquefied natural gas, alternative fuels, wind, solar, hydrogen? No.

There is one more element that Shell believes is critical for the energy balance of the future to keep supply and demand correlated. The last item is the most difficult, and that is to change hearts, minds and behaviors in this country with respect to energy usage. And what we call for is a “culture of conservation” where in our hearts, our minds, and our behaviors we as consumers select more efficient products by choice rather than by regulation: more efficient vehicles for transport, more efficient homes, more efficient school buildings; where communities around the country put more pressure on local officials for housing code requirements that drive more efficiency in the use of materials and in the manner in which construction happens and in the final product. If the designers and the technical innovation that is possible through engineering and design can drive in our buildings, our vehicles, and our lifestyle a better use of energy, we do believe that the combination of all of the above – all of the forms of hydrocarbons, all of the non-hydrocarbon forms of energy, and a culture of conservation – will deliver energy security for this country and, frankly, the world, as far into the future as our grandchildren’s grandchildren could imagine.

We believe it will take that, and we believe the time is now for an effort to try and achieve all of the above through national leadership, through industry leadership, and through consumer appreciation and understanding. Because if we don’t work together, we will see continuous unresolved issues that put the tension on the supply/demand relationship as far as we can see into the future where “those that have, get, and those that haven’t, don’t.” And that, to us, is not an answer for the future of energy security.

So, I hope it’s an optimistic message because it’s all there, and the technologies are evolving rapidly, many of which are available now. I hope you will join Shell in the effort to achieve energy security through energy diversity. Thank you.

15 September 2006