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Houston Chronicle: Oil execs speak out

July 30, 2006, 12:07AM

LYNN J. COOK
Copyright 2006 Houston Chronicle

John Hofmeister:
President,
Shell Oil Co.

High prices, war in the Middle East and global warming concerns have transformed energy from a dull industry taken for granted by many Americans into a top-of-the-mind pocketbook issue for consumers.

The Chronicle posed 10 questions to several top executives of the world’s major oil companies on topics ranging from gasoline prices to U.S. energy security to hefty company profits.

Some of the CEO answers — delivered by e-mail last week as BP, Royal Dutch Shell and ConocoPhillips were reporting their second quarter financial results — might be surprising.

James Mulva, head of Houston-based ConocoPhillips, supports the idea of raising fuel efficiency standards, forcing automakers to build vehicles that get more miles to the gallon.

Robert Malone, BP’s new chairman of U.S. operations, said he wanted to buy a hybrid pickup truck but couldn’t find one that was American-made. He opted for an E-85 — ethanol-ready — truck instead.

And John Hofmeister, president of Shell Oil Co., declared “The debate is over about climate change.”

Some answers were edited for length.

Q&A: John Hofmeister, president, Shell Oil Co.

Q: What is the greatest threat to U.S energy security today?

A: There is no single threat to energy security. As global demand for energy keeps growing, supply disruptions, access to untapped oil and gas supply and energy efficiency will all be challenges that confront us.

But, I firmly believe that we can secure energy supply in the U.S. and improve the prices that we pay for it. Access, diversity of supply and managing demand will all play vital roles.

Easy oil has been tapped, at least in the U.S. Today, we’re exploring for resources in more difficult and remote frontiers. In the U.S. alone, there are more than 100 billion barrels of recoverable oil in restricted areas beneath federal lands and coastal waters. Shell is a leading advocate for responsible access to these resources.

Fossil fuels are at the heart of our energy system and will be for the foreseeable future. But we must continue to develop new technologies. Shell is investing now to tap unconventional sources like oil shale in Colorado and the oil sands in western Canada. But energy security takes the commitment and involvement of everyone — including energy companies, individuals and policymakers. A culture of conservation will help to manage demand.

Q: President Bush has said the U.S. needs to wean itself from Mideast oil. What do you think of this assertion?

A: The U.S. is not self-sufficient in energy. It imports more than 60 percent of its energy from other countries, including the Middle East, Canada, Mexico and Venezuela. And our dependence on imported energy will continue for the foreseeable future, making diversity of supply as important as abundance of supply.

Alternative and renewable resources offer promise, but they take time to develop and bring to market. Even when these sources become commercially viable and begin to play a bigger role, we’ll continue to rely on fossil fuels because of their efficiency and abundance. In my view, this reinforces the need for strong U.S. and international energy relationships — interdependence, if you will.

The business model for successful global companies is a robust economy where U.S. firms can operate around the world and non-U.S. firms can operate here.

Q: Ethanol has been talked about for decades, but with a new blessing from Congress it seems to actually be a reality now. Is ethanol here to stay? Is its promise all it’s cracked up to be?

A: Shell is one of the largest purchasers of ethanol in the world, and one of the largest marketers of ethanol-blended gasoline. We believe the fastest and most efficient way to increase the use of ethanol is to blend it into the existing gasoline grades at a ratio of 5 to 10 percent. At this ratio, the fuel can be used in existing vehicles and can be distributed with the existing infrastructure.

In contrast, E-85 is only compatible with a few existing vehicles and requires dedicated storage tanks and dispensers. But we also believe there’s a need to look beyond corn- or sugar-based ethanol to second-generation or cellulosic ethanol, which uses waste products such as wood chips or carbon fibers. We’ve joined forces with Iogen Corp. and Choren Industries — leaders in the development of biofuels — to further investigate this.

Q: Gasoline appears to be hanging around $3 a gallon in the U.S. Why is it at this level and what factors could push it higher in the next year?

A: Shell recognizes that rising fuel costs affect our customers, but very simply, supply is just keeping up with demand. And that’s what’s driving up prices.

Worldwide demand for oil has increased rapidly in recent years, led by the growth of the economies in places like China and India.

While the overall supply of crude has also increased, it has not kept pace with demand. A lot of people suggest crude prices are being elevated by geopolitical tensions and, possibly, by financial speculators. To whatever extent those factors do exist, they’re beyond our control. We must deal with the market as it is, and in this regard, supply and demand prevail.

Q: Does global warming exist? If so, does human use of fossil fuels perpetuate the problem?

A: The debate is over about climate change. Shell shares the widespread concern that the emission of greenhouse gases from human activities is leading to changes in the global climate. Oil and gas will continue to provide an important share of the world’s energy needs in this century, but we clearly recognize the challenge of meeting future energy demand while simultaneously addressing the issue of climate change.

Q: Do the major energy companies have a responsibility to seek out and develop alternative energy sources?

A: Finding environmentally and socially responsible ways to provide more oil and natural gas is an important part of our energy future. So is developing commercially viable alternatives. Shell is serious about doing both. In fact, we’ve invested $1 billion in renewables over the last five years. Shell plans to have a substantial commercial business in at least one alternative energy technology.

Q: Why do energy companies need to make these kinds of profits, and what are you doing with all that cash?

A: The energy industry is one of the world’s largest industries, so our numbers are large because our business is large. And although revenues are high, to provide consumers with the energy they need is costly. Billion-dollar projects for future energy resources can take between 10 and 15 years to develop. Shell is spending at record levels to increase oil and gas supplies. We’ve made extraordinary capital commitments this year — $19 billion. And, we’ve already promised $21 billion for next year.

We think we’re unique in that we’re investing about as much as our profits back into our business to find new oil and gas reserves, develop new and improved technologies and expand the so-called downstream assets, such as refineries, and research alternatives.

It takes a deep level of financial strength to deploy such large amounts of financial capital in risky environments and in a cyclical industry. Fragmented or financially insecure players have a much more difficult time.

Q: Should the federal government raise Corporate Average Fuel Economy standards, forcing automakers to produce more fuel-efficient vehicles?

A: Ultimately, that decision is for policymakers. However, at Shell, we do believe all industries should strive to improve energy efficiency.

We’ve found significant cost savings in our own facilities by adopting energy-efficient measures. For example, our refineries’ energy efficiency has continuously improved since 2002, and we’ve also launched a three-year capital investment program specifically aimed at boosting efficiency in refining. Those measures are saving us $60 million a year and reducing our emissions by 572,000 tons of CO2 annually.

Q: There’s been a call from some to tax gasoline further — by as much as $1 a gallon — to invest in mass transit systems and government research of alternative fuels. What do you think?

A: Changes in fiscal policy are a matter for governments. Shell will support, and of course comply, with any reasonable decisions that society at-large and policymakers may choose.

Q: What kind of car do you drive? Do you think hybrids are a good way to practice conservation?

A: We have one vehicle. It is a Volkswagen Phaeton, averaging 23 miles per gallon on the highway. Earlier this year, Shell put a married couple on the road in a standard Volkswagen Golf and sent them around the world.

Not only did they set a Guinness world record for fuel efficiency, they also were able to significantly increase the fuel efficiency of the vehicle by using our Fuel Stretch tips, such as using cruise control, maintaining the proper tire pressure and using higher gears.

The Taylors achieved 52.1 miles per gallon when the owner’s manual said their Volkswagen would get 34.4 mpg.

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