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The Dallas Morning News: Shell strategy leaves room for alternative fuels

Fuel prices are a case of ‘truly classic supply-and-demand economics,’ says Shell president John Hofmeister.

10:46 PM CDT on Friday, June 16, 2006
By ELIZABETH SOUDER /

John Hofmeister, president of Shell Oil Co., kicked off a 50-city public relations tour Friday in Dallas, the latest attempt by a big oil executive to explain that consumers aren’t getting ripped off. 

The head of Royal Dutch Shell PLC’s U.S. operations outlined a plan to ensure that the U.S. has plenty of affordable energy: Diversify U.S. fuel sources, become more energy-efficient, and allow oil companies to drill in regions of the country that are now off-limits.

“I firmly believe that we can secure energy supply in the U.S. and improve the prices that we pay for it,” Mr. Hofmeister said at a luncheon given by the Dallas Friday Club. “The optimism we feel should be felt by the American people.”

A number of big oil executives, including Mr. Hofmeister and Exxon Mobil Corp.’s Rex Tillerson, are lobbying the public these days.

They want people to understand that energy prices are high because demand for oil and gas is rising faster than supply.

If they can’t convince average Americans that is true, the industry risks getting slapped with new laws that jeopardize oil company growth and profit.

So oil executives have been taking out advertisements, holding news conferences, and granting journalists interviews, in order to defend their record profits and high gasoline prices.

Now, Mr. Hofmeister wants to address the public directly. So he’ll visit 50 cities in coming months, from Phoenix to Milwaukee to Honolulu, to tell consumers, civic leaders, politicians and Shell employees that the way to bring down prices is to boost supply.

“It’s classic, truly classic, supply-and-demand economics,” he said Friday.

Shell diverges from some of its peers on the subject of alternative fuels. One part of Mr. Hofmeister’s three-part plan to secure U.S. energy supply is to add alternative fuels, such as biofuels or wind energy.

Shell investments in alternative fuels, though unprofitable, keep the company out of the crosshairs of some environmental groups, which target Exxon Mobil Corp. instead.

Irving-based Exxon isn’t investing in alternatives to oil and natural gas because executives doubt the alternatives could be profitable without significant scientific breakthroughs.

Mr. Hofmeister also talked about his 50-city tour and his alternative energy strategy in an interview Friday with The Dallas Morning News .

Why are you visiting 50 cities to talk about energy?

We have been struck by the angst – not the anger, the angst – at the leadership level and the consumer level. … There’s a more in-depth need for knowledge than people have.

A lot of consumers and politicians say they’re frustrated with oil companies. Is that a risk to your business?

The greatest risk to the business is that, because of the angst, that there would be bad public policy. And by bad public policy, I mean something like windfall-profits taxes.

We really need to help our policymakers understand that we are not in the business of ripping off the American people. We are in the business of providing energy, affordable energy, to the American people.

We’re suffering today from the effects of global demand growth, which was unexpected. We’re also suffering from the effect of low oil price in the ’90s, which caused a curtailment of oil investment, which we’re still catching up from.

Your investments in alternative fuels are losing money. Why are alternative fuels part of your business strategy?

In the late 1990s, we came to a conclusion at Shell that, one day, technology would move the world beyond oil and gas.

Now we believe the world will be dependent on oil and gas for a long time to come, but we believe the time to start on alternatives is now, to develop the technologies that will be successful.

And we’ve chosen several to concentrate on. They may not all turn out to be winners.

We will give it a good go, give it some time, give it some investment. But you’re right: Currently, other than wind, which is profitable, the rest of it is an investment in the future.

How long do you think it will take for some of the other alternatives to become profitable?

I think the profitability will depend on the volume, ultimately, that we produce.

I think we will see increasing volumes of, for example, biofuel over the next 10 to 15 years.

Wind is coming along nicely, but wind will ultimately be a variable contributor, because the wind doesn’t blow consistently all the time.

Solar, we’ll see. We have sold recently our photovoltaic solar business because we believe silicon-based photovoltaic is probably not a commercial option.

At what point would you decide that something like photovoltaic just isn’t working?

We’ve been at photovoltaic for almost a decade. Looking ahead to the next 10 years, and seeing the dependence on silicon at the core of that business, and seeing what’s happened to the silicon industry, we just don’t see the commercial prices of solar panels affording the silicon that it takes to develop solar panels.

And there is such a shortage of silicon in the world, and that’s likely to be a sustained shortage of silicon, that we came to the conclusion, we just did not see that as a good investment for our shareholder.

So you gave it time, and you concluded that, because of some outside reason, it’s just not going to work. Is that what any investment must come to before you give it up?

Well, if we found out, for example, that the technology is too difficult.

We’re testing hydrogen right now, and we will have to come to a conclusion at some point whether hydrogen fuel cells are technically feasible.

We see promising signs; we continue to invest in it, as do our partners.

But there may come a point where we decide it doesn’t come together. We’re not there now. We’re continuing to invest heavily in hydrogen fuel.

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