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Houston Chronicle: Oil executive responds to outcry: Rob Routs calls on Americans to cut demand

By BRETT CLANTON
Copyright 2007 Houston Chronicle

With gasoline prices topping $3 nationwide, many U.S. drivers and some lawmakers are accusing oil companies of intentionally keeping pump prices high to increase profits.

But Rob Routs, Royal Dutch Shell’s top executive over global refining operations, said the situation the U.S. finds itself in today has been years in the making and has to do more with the country’s shortage of refining capacity than any profiteering on the part of oil companies.

Americans, too, must “back off” on their gasoline consumption or energy costs will only keep rising, said Routs, a Dutch native who lives in The Hague and was in The Woodlands on Thursday for a conference. Routs, who also serves on Shell’s board, spoke with Chronicle reporter Brett Clanton during a break.

Q: In the first quarter, the major producers of gasoline saw profits from refining operations in the U.S. and abroad grow 50 percent over last year, and the second quarter is also expected to be strong. It would be easy to look at high gas prices and those profit numbers and assume something isn’t right. Why shouldn’t people do that?

A: The country is short of refining capacity. That is a direct outflow of a business that, say, in 2003 and 2004 had an average return of 6 percent or lower.

So there has not been a lot of margin in refining over the years, and there hasn’t been a huge incentive for refiners to invest. Now, all of the sudden, you find yourself in a situation where demand has caught up with production capacity, and the pressure is on.

For a while we were able to compensate with imports from Europe, and that is still happening. But obviously we’re in a different world right now … With refineries running close to 100 percent capacity, any little thing that happens has an impact. It is a matter of enough capacity. In order to build that capacity, you need four to five years. So we’ll have to wait till that catches up.

Q: Your industry has been criticized heavily in Washington in recent weeks. One of the harshest remarks came this week from Sen. Charles Schumer, D-N.Y., at a Joint Economic Committee hearing Wednesday.

He said, “I don’t understand how an industry that makes tens of billions per year can still have rusty refining plants that constantly break down. …  And I don’t know any other industry where an equipment breakdown in one company benefits every other oil company by raising prices.”

A: It’s a horrid image, isn’t it? Why would we run our plants in the ground? It’s our profitability.

There is no player that does maintenance to create profitability for somebody else. That would be a crazy business principle. What we have to do, though, these plants have to come down for maintenance on a regular basis, sometimes by law.

You’re working with very high pressures, with very corrosive materials. If you look at those big refineries, they have to come down every three to four years. And those are periods of six to eight weeks. That’s preplanned.

Now, the issue we’re having at this point in our refining system is not that the plants are in bad shape, but we’re not able to get the right labor to complete these turnarounds in time.

The other effect that you’re seeing is that when refineries are full speed, automatically, there’s a bit more of a breakdown effect. It’s a bit like running your car at 100 mph all the time. You can count on having to go to the garage more often. So those are some of the factors that are at play right now.

But if anyone believes this is on purpose, we’re in the business to make money, not to shut our facilities down.

Q: Several oil executives, including Shell U.S. CEO John Hofmeister, have recently said that the expansion of the biofuels sector and President Bush’s goal to cut gasoline consumption by 20 percent by 2017 could reduce the incentive to expand oil refineries in the future. In your opinion, how big of a threat are biofuels to the refining industry?

A: It’s part of our economics. So we basically look at the biofuels that are coming on that we know of, and we build that into the total supply-demand equation for the next five years. And we make our decisions on that basis.

What we need, though, is a very stable regulatory environment that will tell us where we will be in four to five years from now. If we have some certainty about what will happen with biofuels supply, we can make proper decisions.

Q: Construction is already under way to double the size of the Motiva refinery in Port Arthur, which Shell partly owns. But why hasn’t Shell made a final investment decision on the project? What are you waiting on?

A: A final estimate, as simple as that. You wouldn’t believe how fast costs are going up these days. Even over the period that we’ve been studying this thing, the price has gone up. So I want to have a firm estimate in my hand before I make a decision.

Q: Is there still a chance Shell would decide to kill the project?

A: I think chances are, this thing will go ahead. But I’m not going to confront our shareholders and say, let me give you an example, “starting out it was $4 billion and the final result will be $7 billion.” That would be a disaster. You don’t want that.

So we’re managing this process the way we would manage any project in the business, and we’ll make a decision when we have all the data in hand.

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VOICES OF HOUSTON

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 johnadonovan wrote:

How much trust can we place in the words of Shell? Their track record in the USA in terms of integrity and the environment also does not inspire confidence. In 2004, we had the reserves fraud which has already cost Shell stockholders several hundred million dollars in regulatory fines and class action settlements. Add to that Shell’s sale of tainted gasoline in the USA and Canada, participation in price fixing cartels, the tragic explosion at a Shell Oil refinery in Norco in which six people lost their lives, Clean Air Act violations, repeated environmental infringements in Louisiana, a pipeline rupture in Washington State which resulted in an explosion and more deaths, repeated multimillion dollar fines for groundwater contamination, more fines for unauthorised venting and flaring of gas. Updated details can be found on Wikipedia at

http://en.wikipedia.org/wiki/Controversies_surrounding_Royal_Dutch_Shell

Posted by John Donovan, co-owner of the website: http://royaldutchshellplc.com/

5/25/2007 1:34:57 AM

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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