The Birmingham News: Shell exec hits drilling policy

Wednesday, August 01, 2007
ROY L. WILLIAMSNews staff writer

Shell Oil Co. President John Hofmeister admits the nation’s second-largest oil producer has gotten its share of hate mail from consumers fed up with high gasoline prices.

Hofmeister said in an interview Tuesday that federal energy policy preventing oil and natural-gas companies from more drilling offshore – not oil companies boosting prices to cash in on demand – deserves the blame for the run-up that has sent crude oil to near record levels, subsequently making it more expensive to fill up at the pump.

He shared his views shortly before speaking at a town hall meeting at Birmingham Marriott on U.S. 280. His visit is part of Shell’s 50-city, yearlong tour to educate the public about energy and ways the nation can lessen dependence on foreign oil.

Hofmeister shared a similar message during an eventful day that saw him talk with city officials and speak at the Kiwanis Club of Birmingham lunch meeting.

He admits it’s a tough sell: Parent company Royal Dutch Shell reported a record second-quarter profit of $7.6 billion, up 18 percent from a year earlier and second only to the $10 billion second-quarter earnings of Exxon-Mobil. What do you hope comes out of your Tuesday messages to Birmingham citizens, business and city leaders? I hope to learn, especially in our town hall meeting, about what people in Birmingham think about energy issues and what they think are the priorities. I’m very interested in what they have to say and how it compares to the other 39 cities we’ve visited so far across the nation.

I hope to be able to share, from a Shell perspective, energy issues. I believe a national dialogue about energy security is critical to move us forward with a safe, sound, sane energy strategy that meets today and tomorrow’s demand needs and is affordable to the American people. What led to this 50-city tour and why Birmingham? The pressure we felt after Hurricanes Katrina and Rita on the cost of gasoline from customers and elected officials was extraordinary. I started talking to my leadership team during the October to December period after those two horrible storms about how this is not a sustainable situation where our customers and elected officials are angry at us when, in fact, our employees had done a heroes’ job in getting those pipelines back on line.

At the same time we were praising our employees for the great job they’d been doing, the politicians and public were chastising us for such high gas prices. We also got considerable hate mail.

What we came up with was a long-term, fact-based education effort to bring our story to more people. We piloted it last spring. It was partly to say to our employees, we care so much about you and your efforts we want to go educate the public and elected officials.

Why Birmingham? Because Birmingham is a very important city in a very important state. You’ve got a national reputation and it’s also a big Shell market. We’ve also been to Montgomery and next week we’re in Albany, N.Y., then San Francisco. What kind of reaction have you been getting during these town hall meetings from the public, especially with oil companies reporting record quarterly profits? There is no question the profit numbers are very large, but those profits are being re-invested back into helping get more energy. We’re not sitting on that money. And we’re not trying to create a mountain of cash.

It’s very expensive to build new refineries, to build new offshore platforms, to get the chemical plants up and running after a hurricane.

Over the last decade, we’ve added on to three major refineries, essentially building three new ones. In Mobile, for example, we bought a refinery 10 years ago that was running about 50,000 barrels a day. Today, it’s 100,000 barrels a day, so we’ve doubled output. And we’ve done that at other places. Explain from a Shell perspective why gasoline prices have climbed so much the last few years. It’s basically supply and demand. The demand for gasoline is unrelenting and has grown every year the last five years greater than the supply has. The reason prices have settled a bit the last few weeks is we’ve been augmenting production in our refineries with huge amounts of imported product from abroad.

American refining capacity has not kept up to growing demand, which means there will be continued pressure on our manufacturing facilities to keep producing.

These are manufacturing facilities run like a piece of fine machinery. We can’t overwork it, we have to shut it down from time to time. So it keeps that supply-and-demand situation right at a knife’s edge so if something unusual happens, like a fire or a hurricane, there is a sudden unplanned shutdown. It is unpredictable and puts the supply chain in a precarious state.

Our (national) public policy denying access to more production is in effect creating a social injustice by not bringing more supply into the marketplace.

Only 15 percent of the continental coastline is open to exploration and production of gas and oil. Every effort to expand that is held back by public policy. Crude oil has been trading near record highs in the $77 to $78 range over the last week. Could $100 a barrel oil be possible? We don’t speculate on prices. If we look backwards, just nine years ago, oil was $10 a barrel. If you asked me in 1998 would we have $77 a barrel oil in seven to nine years I would have said it was hard to imagine.

Oil was in the $20s and $30s up to about 2001-2002. What has happened is continuous demand increase, not just in the U.S., but around the world and the inability of the industry to catch up, which has led to higher prices.

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