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Closing Keynote Address: U.S. Energy Production in the Global Context

 JOHN HOFMEISTER

          Senator, thank you so much. And thank you for your efforts this past week on the Energy Bill, which we know has a ways to go before it reaches the President's desk. But the nation does need an Energy Bill, no question about it. It needs an Energy Bill that actually sets the platform for a National Energy Security strategy.

Which ladies and gentlemen, is what I would like to talk about tonight. First of all, kudos to you for tackling one of the most complex subjects that the world faces. If we do not figure this out in our time, it is difficult to imagine what the world will look like years from now.

I may say a few outrageous things tonight. I am sure that the media are not invited, but I would say the same things if they were here. In the last 16 months, my leadership team and I have been in 50 United States cities, ever since the Katrina/Rita shortage of supply occurred in the fall of 2005, extending into the winter of 2006, Americans have faced the conundrum of living on the razor's edge of supply while seeing volatility and consumer prices which are very poorly understood.

So rather than spend shareholder's money, tens of millions of dollars in trying to advertise our way to being lovable, which we know is virtually impossible, we instead decided to take our lovable people who do work every day to bring energy to America, take them to the people that buy the products, that regulate the policies, that set the conditions in which we try to bring energy to the American people. So over the course of 16 months, some 400 Shell managers have joined me on An Energy Dialogue with America. Kudos to you for continuing that energy dialogue today.

Why is energy important? Well simply, it is the base of our economic prosperity. Without affordable available energy, our economic prosperity comes to a screeching halt, or goes through fits and starts as the case may be. In addition, it is the basis of our lifestyle. Mobility is wonderful, whether in a vehicle or in an airplane. We live a mobile life. And we can't imagine a life that is not mobile in this country. We can live in Houston, Texas, because of energy and air conditioning. We can live in other parts of this country, because energy enables heating. It enables the cooling. It enables the lighting. It enables virtually everything that touches our lifestyle.

The good news about energy is we do not lack future resources. We have tremendous amounts of future resources, as reflected in, I am sure you heard about it today, the National Petroleum Council's study looking forward at the natural resource basis that exists around the world.

The forms of energy and the technologies are there, but the public policy challenges that we face in order to bring that energy to people that need it is great. Please allow me to make a few outrageous statements on where we are, and how we got to where we are. And then I will come around to introduce a 12-point plan, which has been shared with tens of thousands of Americans in cities across this country, which Shell believes will bring energy security to this nation.

Let me start with the first outrageous statement: this nation has not had an energy strategy since World War II. In World War II, we had an energy strategy, which was produce everything you can, and ration it to the demand side. That was our energy strategy. We had to. We were in war. Since World War II, we have relied primarily on market economics to create the energy supply side to meet demand side. And wasn't it a wonderful market. From the late 1940s to the late 1990s, that market work beautifully, with the exception of a couple of interruptions in the '70s, in which politics entered the realm of market economics for energy, and we suffered shortages for brief periods. But then we went back to market economics.

In fact, December 8, 1998, nine years ago today, market economics were bringing Americans oil at $8.50 a barrel. Today we have a tenfold increase in the price of a barrel of oil. How much else in your life has increased ten times in nine years? Has the value of your home gone up ten times? Probably not. Has your salary gone up ten times? Probably not. Have your investments gone up ten times? Probably not.

But the price of a barrel of oil is ten times what it was nine years ago. Markets worked fine until something intervened to stop markets from working. And what intervened, ladies and gentlemen, was an insidious natural resource nationalism, which has impacted not only the oil-exporting countries, but also the oil-importing countries, except for the United States of America, which continued to keep its head in the sand, thinking that market economics would bring us future energy supplies.

What do I mean by that? Natural resource nationalism means that anybody who produces oil for export wants to manage their resources as a matter of national sovereign policy, which they have the right to do. We shouldn't complain; it is their natural resources. We believe in sovereign rights of nations. They have the right to do that. Those oil-importing nations, particularly developing economies, such as China or India, and including the United States of America, have the right to import what is available on global markets.

But here is another outrageous statement: the American people are one of the few peoples in the world that pay the full price of energy. Do the billions of people in developing countries like China and India pay the full price of energy? Absolutely not. As a matter of natural resource nationalism, oil-importing countries are subsidizing the price of energy, because the interests of economic development take precedence over the actual cost of a barrel of oil. And that is likely to continue.

So the United States, in its head in the sand approach, continues to import ever more oil, passing the full cost of that energy on to the American people, while we compete internationally with countries that subsidize the cost of energy in the manufacturing of products, the development of their economies, which they have the right to do. How about a little United States natural resource nationalism, so that the 65 percent of imported oil that we rely upon every day could somehow start going down in terms of percentage of what is needed?

Domestic production, which is now some 35 percent, somebody my age, when they were a child, the nation was importing 10 percent of its oil. Today, we import 65 percent, about 21 million barrels a day. Which means that about 14 million barrels a day are coming in from elsewhere, while we continue to leave hundreds of billions of barrels in the ground in our own country. A company like Shell has access to 15 percent of the Outer Continental Shelf. Eighty-five percent of the Outer Continental Shelf is off limits to oil exploration and production.

Senator Cornyn helped lead the way in the Energy Act of 2005, which for the first time in 25 years allowed new access in the eastern Gulf of Mexico, an area called Lease 181. The first time in 25 years new access was granted. Natural resource nationalism in this country means keep it in the ground. Don't let people go get it. While we rely upon that diminishing pool of exports which the rest of the world is competing with, and which drives this tenfold increase in oil price.

What is interesting about the dilemma we face with energy security is the contrast with how well this country deals with other insecurities. There are three fundamental insecurities in this country that Americans don't like. First is homeland insecurity. We don't like homeland insecurity. It is what caused us as a nation to become a nation in the first place. We didn't like other countries owning or controlling something in this country. And over the last several hundred years, our federal government has worked extremely well in bipartisan fashion to deal with the bipartisan insecurity problem of homeland security. Not just since 9-11, but for hundreds of years. We have protected our homeland.

I remember as a kid in the 1950s, getting ready to go to bed at night. Seemed like every night, there was this black and white commercial on TV saying to the youth of America, sleep well tonight. Your National Guard is awake. Many of you may remember that commercial. We have been looking at national security for a long time. And we do a good job of it in bipartisan fashion.

The second insecurity we deal with is financial insecurity. Americans don't like financial insecurity. We look at the unemployment numbers every month. The Federal Reserve Board looks at interest rates on a continuing basis, and we watch like hawks; what are they doing to raise or lower interest rates on a periodic basis.

When there are issues, when the dotcom industry melted down, what happened? We got Sarbanes-Oxley, which is a good step forward in terms of controlling corporate governance, which was out of control. Now that we have the subprime mortgage issue, Congress and the White House are working together to try to find solutions to the abuse and the greed of people who make money from poverty in this country. And we will find a response to that.

But when it comes to energy security, it is a bipartisan problem for all Americans, we are faced with such partisanship, that we can't find a solution. And we are suffering the consequences of that, created by this partisanship, an insidious social injustice, which in a country that favors equality, creates further inequality for the haves and the have nots by having too expensive energy.

Those who can least afford it are now making choices of food over fuel, of medicine over fuel, of other life choices, because of the high price of fuel. Drive-offs at our gas stations are at record highs, and have been for the last two years, because people can't afford it. And it doesn't have to be that way, because we know the resources are there.

An additional point, in large measure, and this is an outrageous statement, I blame my own industry for the partisan predicament we have on energy security. For too many years, my own industry, oil and gas, has made its positions known in a partisan fashion, rather than a bipartisan fashion. For too many decades, my own industry has failed to communicate the issues, the uncertainties and the problems it faces with the American people, with the Americans who judge us.

So now we have this pejorative that floats all over the country called Big Oil. You hear the phrase Big Oil and what does that conjure up? It doesn't conjure up pleasant thoughts. Yet Big Oil only produces 15 percent of the daily supply to the world. The top six international oil companies added together produce about 15 percent of the world's daily supply. That is not big at all.

When I think of Big Oil, I think of the tens of thousands of Shell people that face risk every day. Tonight, they are in the Gulf of Mexico. Tonight, they are on the North Slope. Tonight, they are in the jungles of Nigeria, bringing energy to the American people. The Big Oil I know are these tens of thousands of people who take these risks.

The industry has done it to itself, but in a recent Gallup Poll published this fall, the oil and gas industry has a favorability rating of 25 out of 25 industries. We are 25th in favorability out of the top 25 industries in America. What kind of public policy does that invite? It invites vilification by reputation, and it invites punishment by public policy. Guess who is in 24th place? The federal government of the United States.

It is in its own self-interest not to allow it to fall to 25th place. What the nation needs, ladies and gentlemen and you know it full well, is a coherent, comprehensive, integrated energy security strategy to offset the consequences of natural resource nationalism. We are not running out of energy. Absolutely not. There is plenty of energy in the ground. Plenty of what we can do across a wide range. But we must do something, and we must do something now. We need a short term energy security strategy, a medium term energy security strategy, and a long term energy security strategy, if we are to satisfy not just our needs, but the needs, as the Native Americans would say, of our grandchildren’s grandchildren, which is time indefinite.

What we need to address is a short term energy strategy which brings more gas and oil to the American people. Gas and oil is not particularly popular, as I can attest from the humbling experiences of hearing that from tens of thousands of Americans firsthand. And that is fine in principal when we get to the medium and the long term energy strategy, but today and tomorrow, next month, next year, for the next decade at least we need oil and gas. America uses 21 million barrels a day of oil, which represents 10,000 gallons a second. You don't replace 10,000 gallons a second overnight.

I have 14,000 Shell stations in this country that need refilling every day, so people can go to work, so police cars can do their patrols. The fleet of America is predicated on oil. And it is not going to change over night. It takes 20 years to change America's fleet. So for the next ten years at least, we need more oil and gas. Because at 10,000 gallons a second keeps rising, as it should in a growing economy.

Shell has developed a 12-point strategy for the future, a comprehensive energy strategy that addresses the supply demand, the technology, the political, social, economic and human resource issues of the future. It starts with more conventional oil and gas.

The hundred plus billion barrels in the Outer Continental Shelf on the millions of acres of federal land can be developed. Public policy could help that be developed by granting more access. It is unrealistic, we know, politically, to ask for 100 percent of the Outer Continental Shelf. But must we limit ourselves to 15 percent? What about 20, 25, 30 percent of the Outer Continental Shelf, while preserving the coasts of California or the West Coast or other sacred parts that are not yet ready politically to be developed? What about the rest of the Gulf of Mexico? What about off the coasts of Alaska? What about gas exploration off the East Coast? More conventional oil and gas is necessary.

Secondly, we must develop unconventional oil and gas such as the tar sands of Canada and the oil shale of Colorado. Let's give credit to our Canadian neighbors. More than 10 years ago, as a national energy strategy, the Canadians opened up the development of the oil sands of Alberta. Today, a million barrels a day are being produced. Shell is heavily involved. We are at 150,000 barrels a day with investment to go to 300,000 barrels a day. Others are also investing heavily. A nation that decides to do something can get it done.

We know that there are a trillion barrels, a trillion not a billion, a trillion barrels of oil and gas locked in the Piceance Basin of Colorado, Wyoming and Utah. It has been a struggle to even do the research work that Shell is doing out there to try to use new technology, not mining technology, but NC2 technology to try to make it possible to develop those reserves. We have a sequential plan that is unfolding.

But every time we turn around, we face the same negative impact of public policy in terms of getting permits. In the current energy legislation, there is language that would prohibit the setting or the payment of resources to establish a royalty system for the development of oil shale. Without a royalty system, we can't develop the oil shale of Colorado. An example of public policy getting in the way of natural resource development.

Thirdly, we need to bring liquefied natural gas into this country in major quantities. There are a couple of re-gas terminals in existence in this country. Some are thirty years old; Cove Point, Maryland; Elba Island, Georgia; Boston Municipal. So there are some regasification terminals. But if you look at the supply demand curve of the future, and the fact that utilities love natural gas to make clean electricity, as they should, and they developed turbine technology to come off of natural gas, the IGCC technology, Integrated Gas Combined Cycle turbine, this kind of technology brings clean energy to America. But there isn't enough natural gas to meet the demand of the next ten years, unless we build regasification terminals.

Building a regasification terminal takes you right into the NIMBY issue. Where Shell has been working very hard to bring natural gas, liquefied natural gas, let's say, to New England, through a regasification terminal called Broadwater, with a partner, TransCanada in the Long Island Sound. Not in anybody's backyard, it is in the water.

It is ten miles, eleven miles off the Connecticut coast, nine miles off the New York coast, in Long Island Sound. Seven thousand ships a year go up and down, traversing the Long Island Sound. It is being resisted by people saying they don't want to commercialize the Long Island Sound. And instead of being in nobody's backyard, it happens to be in everybody's back yard, everyone who lives in Long Island and in Connecticut.

We have been told by the Attorney General of one of the states, “If you get a permit to do this, we will do everything we legally can to make sure you do not build this project, which is the wrong project at the wrong time in the wrong place. Take it to Maine.” That is what he told me. What do you do against those circumstances? You keep going, is what you do.

Fourth, and I know you talked about this today, we need to develop our coal resources using gasification processes instead of burning pulverized coal. We can gasify coal molecules and we believe the technology exists to capture the carbon and to sequester it in the ground. Public policy could enable pilot experimentation and testing of carbon capture and sequestration.

The Future Gen project funded by Senator Cornyn in his efforts offers that opportunity, but just for one isolated example called Future Gen, and in only one geology. There are multiple geologies around the nation which need experimentation and testing to see if carbon capture really can work. We believe that should move forward.

Let's move on and talk about biofuels. Biofuels are a necessary part of our future liquid energy supply. Shell has been in biofuels for 30 years. We are not afraid of biofuels. We will be making an announcement this week on a big biofuel project. But we have partners that are working with us in the development of cellulosic ethanol, and biodiesel, looking at what are those crops in nature, mainly waste crops, not food crops. Shell draws the line. We don't invest in ethanol from food crops. But we will invest in ethanol from waste crops such as straw or cornstover or switchgrass or sawdust or wood chips, all of which provide cellulosic material for biofuels in the future.

We believe that there is opportunity there to blend biofuels with gasoline, and stretch the gasoline supply by 10 percent. And then in the future, when we can produce even more biofuels, the flex fuel vehicles will make a difference in the American fleet at E85, although E85 has yet to be well accepted by consumers, because for basically the same price, you get 25 percent fewer miles. And we will see how consumers like E85. We are testing it in Chicago. We sell about two tankfuls a day per station. That is not going to keep the station going very long.

Additionally, wind makes a difference. We announced in August the potential of the world's largest wind farm in Briscoe County, Texas, working with TXU. Briscoe County, Texas, is way out there. It has a lot of wind, and it has very few people and very few birds migrate through there. But Briscoe County itself isn't a market. Dallas-Fort Worth is the market. San Antonio is the market. So how do you move wind electricity that great distance from Briscoe County all the way to Dallas or to San Antonio to feed the grid? This would be a three gigawatt wind farm. That is big. We need transmission lines. Public Utility Commission needs to grant access and an opportunity to recoup the costs through utility rates. It is a struggle to get a transmission line built in this state, as you well know. But we will continue to work wind. Shell today has seven wind farms in five states. And we will continue to grow that business.

There are solar opportunities as well. Shell recently sold our silicon-based solar photovoltaic business, because we don't believe silicon is the future of solar production. We believe future nanotechnologies will be far superior to the density and the low efficiency of silicon as a base for producing electricity. So we are investing now in thin film technology. For those of you who are chemists, it is called copper indium diselenide. It is a light substrate that sits on glass that is much more efficient in the production of electricity from the sun. But we believe there are even more technologies to be developed.

And then there is hydrogen and hydrogen fuel cell vehicles. Friday a week ago, I happened to be at the test track in Dearborn, Michigan, at Ford Motor Company as part of my membership in the nation's Hydrogen Technology Advisory Committee with the Assistant Secretary of Energy, along with the three American manufacturers, GM, Ford and Chrysler. We all drove six hydrogen fuel cell vehicles, two from each of the manufacturers. And ladies and gentlemen, if you have driven a hydrogen fuel cell vehicle, you would say to yourself, “I want this car.” This exceeds the mobility and driving capability of the internal combustion engine. I will come to the internal combustion engine in a moment.

So we have hydrogen, solar, wind, biofuels, conventional oil and gas, unconventional oil and gas, coal gasification and liquefied natural gas, all as sources that could make up an energy security strategy. But we are not done yet, there are still more. There are four more points to be made. We must come to grips with greenhouse gas management as part of that strategy.

It is Shell's view that the debate is over on climate change. We do not believe that there is any more value in debating the subject, when most of the world's leaders want to deal with it. Let's deal with it. Let's get down to solutions. That is why Shell has joined the United States Climate Action Partnership with several other energy companies and utility companies and NGOs. That is why we are saying to the Senators today that the Lieberman-Warner bill, while not perfect, should not be automatically killed. Because it is the foundation for conversation about a cap and trade system that could actually do benefit to this country. So let's use it as a basis to talk about it.

The current bill is probably not where it needs to be, but we believe it is time for the federal government to lead on this issue. It is not helpful for a company that works in 50 states to deal with greenhouse gas policies state by state, because the wind doesn't stop at the state's border. In addition, it is time for federal leadership on the efficient use of energy. We believe that a framework that drives efficiency in the use of energy can also be helpful, as we have seen in certain states. California has reduced its energy per capita by regulations which require more efficient use of energy.

It is time, ladies and gentlemen, to recognize that free market economics don’t work when it comes to energy. It requires natural resource nationalism aficionados to help drive public policy that can help in the long term saving of energy. The energy molecule not used is preserved for future generations.

It is time to deal with incandescent lights, which use 3 percent of the energy to produce light and 97 percent of the energy to heat the room. It is time to deal with the internal combustion engines, which use 20 percent of the energy to give you mobility, 80 percent wasted as heat. It is time to deal with aircraft where 8 percent of the energy gives you push, 92 percent of the energy is wasted as heat. These are examples of why we are using 21 million barrels a day; because of the inefficient technology. Thomas Edison invented the light bulb, for Pete's sake. More than 120 years ago, the technology is basically the same. There are alternatives. We can move on from there.

The hydrogen fuel cell vehicle with a push from the federal government can go a long way towards helping those auto companies. Shell is ready to start building a hydrogen infrastructure, but we can only do it when there are cars available to buy the product.

Two more items. Education; the human resource understanding of energy economics and energy reality in this country is poor. That is an understatement, not an outrageous statement. We don't teach energy, the base of our economic capabilities and prosperity, the base of our lifestyle choices. We don't teach it in our schools. Not until you get to college, do you begin to learn, if you are dedicating yourself to a science or a geology or a geophysics career, do you learn about energy. Energy is the end of a light switch. Energy is the gas pump. That is what most Americans think about energy.

Energy education is necessary. Shell is not just talking about it. We work with Scholastic to develop a website accessible to every middle school teacher and every high school teacher in the country to teach a semester's worth of energy education. Not selling Shell, but really talking about energy concepts and STEM education (Science, Technology, Engineering, and Mathematics) which this nation needs more of.

And then finally, respect for other sources of energy, because there is no silver bullet. Shell doesn't have all the answers. Nuclear, geothermal, hydropower, wave energy; these are other sources of energy which have yet to be fully developed. But Shell is not resisting, because we know we need more energy.

So there we have it, ladies and gentlemen, twelve simple steps to energy security. All it takes is the bipartisan leadership of our nation's leadership to enable it to happen. Thank you very much. I know I am keeping you from your dinner, but if there is a question or two, I would be happy to try to answer them.

DISCUSSION:

AUDIENCE: To what degree is Shell involved in coal reserves?

MR. HOFMEISTER: To what degree is Shell involved in coal reserves is the question. We actually sold all of our coal reserves over the last decade. The last transaction took place in about the year 2000. But we retained the technology for coal gasification. So we are heavily involved in coal gasification projects in China. Believe it or not, we are involved in 15 coal gasification projects in China. All of which are helping to better use the molecules. We are involved in coal gasification projects in Australia. Now the good news is, we announced our first coal gasification involvement in the United States with Baird Energy in Ohio. That is a long way from production, but it is a step in the right direction.

AUDIENCE: I wanted to address your point about why we pass along the total costs to our consumers. First of all, in Europe, I don't think they pass along the total costs. I think we heard this afternoon, they charge $7.00 a gallon for gas. And they take that tax money, and use it for social programs. We don't do it in the United States. It will take a federal government that is not spending itself ridiculously into debt in order to have the wherewithal to not have to pass the costs of energy on to the consumers.

Last year, do you remember being in Dallas, when we had the head of the Federal Reserve Bank in Dallas talking about our economic situation? I have just heard Jamie Galbraith in Austin talking about the severe crisis of our international debt indebtedness. The head of the Federal Reserve Bank in Dallas said our role in the world economy is to consume without any indication of where the end game is.

So my question to you is how does our government, given the outrageous debt we are now in, embark upon a policy of not passing the cost of oil on without taking on enormous additional debt?

MR. HOFMEISTER: Well, it is worse than you described. Let me tell you how it is worse than you described. If you add up the sums in the last four years, we have put $2 trillion of cash on a barge and pulled it over to the Middle East. We have put $2 trillion of cash into the Middle East to develop oil and gas reserves in the Middle East. That $2 trillion could have been put into this country. Consumers paid the money. They paid the money to import the oil, instead of putting the money into this country to develop the infrastructure, the jobs and the natural resource development projects; we pushed it over to the Middle East, and contributed to the weakness of the dollar in the meanwhile.

I avoid the issue of war. I am sorry; I am not a policy maker or a politician. I am an oil company executive. But on the issue of natural resource development, we are weakening our own economic base by not investing in this country.

Europe has done a bold step. Europe has indeed not just passed on the full cost of energy, but has added a tax on the full cost of energy to affect public policy such as mass transportation and greenhouse gas management, which the consumers of Europe pay for. That takes willpower. And the Parliamentary systems of Europe came together through the EU to make that happen some years ago.

It is even worse. Here is another example. The EU also came together in its sovereign nations, and agreed to a dieselation of Europe. Meaning that today, 50 percent of the European fleet has diesel engines in their cars.

We have looked at it. And our technologist have said that if we had the same percentage of diesel engines in this country that Europe has in Europe, we would use 3 million barrels a day less oil full stop. It’s because those cars are getting 40 plus miles to the gallon. Our cars are getting 20 miles to the gallon, and so we are not getting the benefit of a simple technology called diesel engine.

And these are not the diesel engines that your grandfather used to drive; these are diesel engines that are efficient with less emissions than today's internal combustion engines, ladies and gentlemen. But again, it takes a national leadership policy to make something like that happen. Thank you all very much. Enjoy your dinner.