Oil and Gas:

Shell's Hofmeister urges lawmakers to mandate emissions cap, expand U.S. oil and gas drilling

With oil prices surpassing the $100 mark this week, the spotlight remains on oil companies, their record profits, and how the United States can become more energy independent. During today's E&ETV Event Coverage, Shell Oil Co. President John Hofmeister discusses Shell's "National Dialogue on Energy Security" report, which gives recommendations to policymakers on how to shape the United States' energy future. Hofmeister also reacts to the new biofuels mandate established in last year's energy law and explains why he believes the United States should expand production of non-corn biofuels.

Transcript

Cary O'Reilly: My name is Cary O'Reilly. I'm the chairman of the Newsmakers Committee this year for the National Press Club, which is celebrating its 100th anniversary of promoting excellence in journalism and providing a forum for industry and government leaders to interact with the press.

It's my privilege today to introduce John Hoffmeister, president of Shell Oil Company. He's been president for almost 3 years. And Mr. Hoffmeister was born just across the border in Prince George's County, now lives in Houston, and has been with Shell for, I believe, 25 years. Is that just about…oh, I'm sorry, 10 years. I have to check my notes, 10 years.

Mr. Hoffmeister has just completed a 50 city tour of the U.S. where he met with local officials and industry leaders to talk about what our country needs as far as a new energy policy. And he's here in Washington today to talk with us about it and I believe from here you go over to the U.S. Chamber of Commerce for an address. So, without further ado, Mr. Hoffmeister. Thank you.

John Hoffmeister: Thank you and good morning everyone. It's a pleasure to be here. Let me start, if I may, by book ending our conversation today. During the course of the day today and all day yesterday and all day tomorrow the U.S. will consume 10,000 gallons of oil a second. That equivalent is 21 million barrels a day, but that's a swimming pool full of oil every second of every minute of every hour throughout the day.

We did it yesterday, we'll do it tomorrow, we'll do it next week, the following week. In addition, we will burn 20 100-ton coal cars of coal per minute. One hundred ton coal car every three seconds throughout the day, every minute of every hour, today, yesterday, tomorrow. And those are long tons, so that's actually 120 actual tons 20 times a minute.

In addition, we will consume some 60 billion cubic feet of gas. Sixty billion cubic feet of gas, if stacked on top of each other, would be 25 round trips to the moon. So, when you put that kind of energy consumption in perspective, 10,000 gallons a second, 20 coal cars a minute, and 25 round trips to the moon of vertical stacked cubic feet of gas, when we deal with energy security in this country that's a very big deal.

And it's every day. And it's the source of our economic strength and, quite frankly, it's the basis of our lifestyle. And so when energy security is discussed at a political level or a technological level or at a commercial level, I think it's important to put some granularity around the facts of the matter, because those who espouse alternatives, including Shell, and as you can see from our booklet, Shell has been in the alternatives business for a decade, we are fully aware that alternatives, while meaningful over the longer-term, cannot displace or replace the kind of day-to-day demand for hydrocarbon energy which we see today.

So, I think we start with that premise. We move on from there to say, my goodness, what a mess we're in when it comes to national energy security. Because there are three great securities in our country, homeland security, where, quite frankly, it's my view as both a citizen and as a corporate executive, that when it comes to homeland security this country gets behind what's needed.

This country de-politicizes and approaches homeland security in a bipartisan way, where national leadership leads. And, while there may be disputes around the edges, the fact of the matter is, since our independence, homeland security has been a priority of this country.

Likewise economic security. Economic security, when we are in a growth economy and things are going well there's very little complaint about economic security. But at the moment joblessness grows, at the moment a sub-prime meltdown occurs, at the moment a bubble bursts, whether it's housing or whether it's dot coms, the government leadership is at it 24/7 to find a remedy.

The hurt that we are feeling though, ladies and gentlemen, is that energy security should exist on the same priority and the same platform with homeland security and economic security, because, quite frankly, all three are part of the same foundation of America's well-being.

Without energy security it aggravates our homeland security and our economic…or our insecurity I should say, and our economic insecurity. With energy security we can have the best of all worlds. And what do I mean by energy security?

Well, I'm not going to repeat what's written in the handout that you have, but what Shell believes will deliver energy security to this country is a comprehensive, holistic energy security strategy that has a short-term makeup, a medium-term makeup, and a long-term makeup.

Short term is defined as a zero to 10 years, medium 10 to 25 years, long-term 25 and beyond. That's, in essence, how Shell sees its own business model. While we do short, very short-term plans that would be two to three years of duration, we know having 100 years of experience that most short-term decisionmaking has long-term consequences.

And as a result, when we make a decision to invest, for example, as we did a week ago in the Chukchi Sea, and put $2.1 billion forward for leasing bids for the future, that's a short-term commitment for now, but that's a long-term play which could exist over the next 30 to 40 years, in terms of exploration, production, and helping to meet U.S. energy security requirements.

But, in the short term, the world of hurt that we are in is we're today importing more than 60 percent of the oil that we will consume. Sixty percent means that we and other oil importing countries have exported $2 trillion over the last five years to oil exporting nations. That's $2 trillion to pay for the oil that we have consumed, which is being used to develop the resources of other parts of the world, while in the U.S. that money is gone, essentially, for good.

Shell's point of view is that natural resource nationalism is a phenomenon that the world is struggling to cope with and has been for several decades. Natural resource nationalism is legitimate, because it is the right of a sovereign nation, whatever nation on earth, to define, within its geographic boundaries, its own plan with respect to its use and development of its own natural resources.

We have no complaint about natural resource nationalism as it is practiced by sovereign nations around the world, but here's where American energy security falls down. American energy security is not premised on natural resource nationalism in America. Instead, it is premised on a belief that the energy market exists and the energy marketplace will assure our energy security.

But let's be clear, the energy marketplace is not a free market. When a cartel of countries can determine production limits, which help to guide a price level, and when U.S. companies are prohibited by public law from developing U.S. natural resources, that represents constraint of a free market.

And so it is a myth to think that U.S. oil companies can just go and explore and produce where they choose in a free oil market, because that's not the case. Only 15 percent of the Outer Continental Shelf is available for exploration and production purposes. Eighty-five percent is off-limits by law.

As long as that is the case, we are contributing to, in a sense, the lack of development of our own national natural resources. And it is necessary for us then to pull upon a pool of international natural resources, which are controlled by nationally sovereign nations.

So, it's an inconsistency that has to enter the debate here about how the U.S. public policy goes forward in terms of managing U.S. natural resource nationalism for the best interests of Americans, even while the world takes care of itself.

And so Shell has a view and in a month or so we will be expressing that view as we roll out the new Shell scenarios towards the end of March, which offers a way forward on how to deal with both the combination of international demand for hydrocarbons and also deal simultaneously with the international requirements to manage greenhouse gases.

You will notice on our 12-point plan that there is a call for greenhouse-gas management in this country at a national level. Shell has been of that view for a very long time. Over the last 10 years, since the Kyoto accords were first drafted, where Shell was party to the drafting process and ever since then Shell has been an advocate of greenhouse gas management led by government, where voluntary actions, while commendable, are simply insufficient to meet the needs of the world tomorrow.

And as a member of the United States Climate Action Partnership, shorthanded as U.S. CAP, Shell believes it's time for the U.S. government to lead the way forward on the issue of greenhouse gas management for the nation.

So I'll stop on the following point. Calling for a comprehensive, integrated, short-term, medium-term, long-term energy strategy would put in place, for America, an energy strategy that has not existed over the last 50 years.

The last time America had an energy strategy, ladies and gentlemen, in terms of a coherent, integrated, short, medium, long-term approach was World War II when the strategy was simple, produce all the energy the nation can produce and ration it to consumers in order to support the war effort.

Since then we've relied upon free markets, which have consistently lost their degrees of freedom over the last 50 years.It's time now for the nation, with its national leadership, to approach energy security in a bipartisan, nationally-led model such as we do with homeland security and economic security. Thank you.

John Hoffmeister: I'd be happy to take your questions.

Cary O'Reilly: Please raise your hands and identify yourself with the question. I'd also ask you to speak into this microphone if you don't mind. First question.

Avery Palmer: Avery Palmer with CQ. Congress may soon take up, again, a tax package to give tax incentives to renewable energy and tax increases to oil companies. What would be your view of that?

John Hoffmeister: Well, I think tax incentives for new start-up technologies are not new to the country and I would not be opposed to a sunseted provisioning of incentives which help new businesses get started. This nation is famous for starting out new technology innovation. Shell would very much like to be part of that whole process, whether it's in the wind energy arena, the hydrogen, the biofuels. We currently embrace those technologies in today's portfolio. And any incentives that would be available enables us to move farther faster down the road in developing that technology. With respect to taxes on current companies, Shell never really opposes taxes per se. It's a part of doing business. In every nation we operate in tax is part of the life we lead. But we don't like and what we protest, quietly, privately to decision makers, is something called punitive taxes. A punitive tax would be a tax designed to "get a company." And in some of the provisions we've seen we see five companies targeted. That is a punitive tax when five companies across a major industry are singled out. In other words, there is a political motivation there which undermines success. And if five companies have achieved a level of success and politicians, for their own reasons, seek to undermine that success, they're really hurting the American people. Because by taxing five companies which have the wherewithal to invest in new energy security opportunity for the U.S., taking money away from them and denying the use of that money for the purposes of bringing more energy to bear, I think, is a misdirected policy. Now, if there's a tax across the board, where the entire industry is called upon to pay a particular price for the privilege of doing business in the United States, that's for the policymakers to decide. And in that regard, if it's across the board and the government says this is what we want you to do, who are we to say otherwise? That's the role of government. But it's the punitive nature of targeting selective companies that I find objectionable.

Tom Doggett: Hi, Tom Doggett with Reuters. Could you sort of go into a little bit of more detail why Shell paid so much for those leases in Alaska? And are you planning to get more oil or natural gas? What are you looking for there or expect to find?

John Hoffmeister: Well, first of all, I think the decision for Shell to push north to Alaska is a long-term, strategic bet by the company that this may be, perhaps, the most prolific basin remaining in North America for conventional oil and gas. We've been very successful, as you know, in the Gulf of Mexico, where people seriously questioned our early investments in the Gulf of Mexico some 25, 30 years ago. And we know now that that was very wise and paid off handsomely to shareholders and, really, to American energy security. We have the same view that, for the future, Alaska represents a new heartland development for Shell within the continental United States and the Outer Continental Shelf. And we want to secure the positions that will enable us to invest heavily, not only in developing the oil and gas, because we believe it's both oil and gas, but also to demonstrate how we can protect the environment, at the same time we can develop the natural resources. This is going to be an expensive endeavor over the longer term because managing in the Arctic is different than managing in other parts of the conventional oil world. But we believe that the world needs this energy. I don't think it was an overpayment in the sense that we paid too much, because this is a value that we see on what is a future, long-term asset and the opportunity to seize a big chunk of that and to develop it as rapidly as possible once we get going, if the leases are granted to us. There still is the question of whether we receive the leases after all. But we believe we paid a competitive and fair price.

Tom Doggett: And just a follow-up on that. Is part of your exploration plan contingent on the natural gas pipeline being built to move gas down to the continental U.S.?

John Hoffmeister: That's certainly an important part of the future, whether it's a pipeline or whether it's liquefied natural gas. We're talking with partners all the time. As you may know, the proposal that TransCanada has made, it's public that we've had background discussions with TransCanada. But we believe that our resources are best applied in the exploration and development and leave it to others to make the transport possible. When it comes to whether or not there could be liquefied natural gas with some combination of pipelines moving…you know, shorter pipelines, rather than all the way through the Mackenzie Delta or wherever it would be placed, down to the lower 48, we're open-minded as to how that would play out. And I've had that discussion with both senators and with the governor that we're open-minded, as Shell, about how that works in the best interest of Alaska as well as the industry. But clearly, there will need to be a means by which we can transport the oil and/or the gas as time goes on and we'll see how that develops. But keep in mind, this is a long-term play. It's going to take quite a while for everything to get sorted out.

Dave Shepherdson: Dave Shepherdson, Detroit News. What do you see as the impact of the new fuel efficiency standards and the ethanol mandates in the energy bill on U.S. oil and gasoline use through 2020?

John Hoffmeister: Through 2020, I think, it's going to be modest in the sense that the existing fleet is gasoline based or diesel. For the next four to five years the vast majority of cars and trucks manufactured will use existing fuels. We have the ability to blend ethanol into gasoline up to about 10 percent. I think that's helpful to consumers and Shell has been in the ethanol business 30 years. We don't fear ethanol. What we do, however, is feel strongly that larger quantities of ethanol should come from biomass waste rather than from food stocks. Up to a certain point it's fine because the nation can support both food and fuel from the same products, but there comes a point where enough is enough and consumers to eat don't need to pay both the fuel price and the food price of a scarce resource. So Shell is concentrating all of its investment money in cellulosic ethanol or in biodiesel from waste products. And by that I mean the corn stalk rather than the corn kernel, the wheat ... not rather than the wheat, the straw that helps the wheat have its head, or a most recent announcement which we put forward in December is the development of an algae process that we announced out in Hawaii, which looks very, very promising in terms of carbon molecular structure within the algae, which can be very fast-growing. Also we have a project where we use wood chips, break down wood chips into liquid fuel through a Fisher-Tropes mechanism. So, we talk with the auto companies all the time about their engine mix of the future and don't rule out the hydrogen fuel cell approach or the plug-in hybrid, because all of those are energy consumptive and we'd like to play a part in. Whatever the energy technology is for the automobile, we think we'll be there playing a part in that.

Tom Doggett: But by 2020 do you see a big shift away from SUVs and a significant percentage of plug-ins or other alternatives?

John Hoffmeister: Well, during our 50 city visits that question came up in every town hall and person after person after person said, "Don't take my SUV away from me." And there may be a few people out there, people would say in the town halls, that like the idea of a smaller, modest car, but the vast majority of Americans love their big cars, and I think that the auto companies will follow the market. And I think there's a way to combine size and comfort with alternative fuels. And I think the American consumers will benefit from that kind of a competitive race. We'll be there to provide the fuels, whatever they look like. But I do think that the growing demand for oil products will continue, maybe slowly, but will continue. That's why we announced the Port Arthur expansion a few months ago. And yesterday we saw another expansion announced by TOTAL and we've seen Marathon's announcement in the past. But keep in mind, there's still a lot of old, small refineries in this country that I'm not sure how competitive they are over the long-term.

Tom Doggett: Congress is assuming that oil tax revenue from gasoline purchases will be down $2 billion by 2020 as a result of the fuel economy standards. Do you think that's a ...

John Hoffmeister: It's conceivable, but it may not. I mean there are a lot of assumptions and 2020 as a longtime from now. The piece that is really unknown, and we had a lot of feedback during our 50 city tour on this, is how well consumers would embrace E85. I've had person after person at town halls say they tried E85 with their flex-fuel engine and they were very disturbed by the poor miles per gallon that they obtained. We have a pilot under way in Chicago where a number of Shell stations are selling E85 under the canopy, where we converted the pumps and so forth. The sales are very disappointing and the return purchase is very small. So, E85 is a different model of fuel use and we'll see what consumers think about it.

Gerald Cary: Gerald Cary with Platts. Just as an aside, I drive a Prius, so I don't miss not having an SUV. And it's comfortable. It's OK. On the ethanol, cellulosic ethanol situation, I understand that mandates can drive technology, but you have a 36 billion gallon mandate by 2022, I think, that Congress just signed into law. Is there a concern that the mandate will exceed the technology and somewhere down the line you will just not have the cellulosic ethanol fuel to use?

John Hoffmeister: We argued vociferously in the debates over the crafting of the legislation, including the proposals from the White House, that the technology was uncertain and that for all of our investment dollars we have yet to land on a particular enzymatic approach that we know will deliver vast quantities. That's why I started the conversation today with the 10,000 gallons a second. That really does bookend what's necessary if we're going to get into material quantities of fuel. We also argued vociferously for an offramp so that we would not be breaking the law if, in fact, technically we couldn't manufacture enough of the product to supply the market as the legislation required. Thirdly, which I think is a critical issue, once we get the enzymatic process right, then we have to learn how to manufacture in quantity and quality. Manufacturers go through what's called alpha, beta, and then large-scale manufacturing. Alpha is pilot. Beta is moving the pilot to a sizable increase from the pilot to determine what are the technical consequences or technological requirements to produce at huge volumes. Keep in mind, our Port Arthur refinery, when it's completed in 2010, will be producing 625,000 barrels of finished product a day, which we know how to do. To have some kind of a 20 percent displacement of that kind of fuel, with high-quality ethanol, that is repeatable day in and day out every day of the week, 24/7, we just don't know how to do that yet. We'll learn. I hope we'll learn, but that's why the offramp is so critical, that if we can't do it, it's not because we're not trying to do it, it's not because we're not investing in it, it's because it just can't be done.

Tom Doggett: There is an offramp.

John Hoffmeister: There is an offramp, yes.

Tom Doggett: And what does that say?

John Hoffmeister: I'd have to check the technical language on it, but the secretary of energy can determine that the energy industry has tried and they're just unsuccessful and then give us the break that we would need to take more time to get it done.

Peter Robe: Hi, Peter Robe with Kipinger. There's another component to the energy bill. You now have an overlay of lifecycle greenhouse gases for the various renewable fuels. What's your impression on that? Can you give us your thoughts on it?

John Hoffmeister: Well, we're pretty interested in the whole low-carbon fuel standard evolution. We think that there's a lot that can be done with biofuel, with the refining process, with chemical additives. And because Shell is a strong advocate of greenhouse gas caps on society, we're motivated to try to find the best ways forward on low-carbon fuel standards. So we're very much part of the conversation, trying to find ways that are both reasonable and commercial and also material in the reduction of greenhouse gases. But let's keep in mind that it's not just the fuel that we look at, it's all so miles driven. We can have the lowest carbon fuel that science will allow us to have, but if miles driven increases or if engine technology isn't changed we don't necessarily lower greenhouse gases. There's another dimension to this too, and that public policy. To what extent will government at municipal or regional or state or national level embrace mass transport that enables miles to be traveled, not necessarily through individual automobiles, which each spew their own emissions. So, it's a combination of many things. Of course, our strength will be in the low-carbon fuel area.

Cary O'Reilly: Questions?

Question: How soon does Shell intend to produce commercial quantities of cellulosic biofuels and what are your production targets over the next few decades?

John Hoffmeister: Currently we are investing in four different endeavors, where actually third parties are taking our money in order to develop the technologies. So, that's Iogen and CODECSYS and the recent algae and CHOREN over in Germany. So those four efforts are underway. Shell has never ruled out the prospect of getting into the manufacturing business of cellulosic ethanol or biodiesel. But at this point we haven't made a decision to manufacture it. Let's see what the entrepreneurs and the innovators can do. Our strength at Shell is always size and massive scale. And at this pilot experimentation stage we believe we're better to put it in the hands of those who manage small and technologically advanced pilot manufacturing the opportunity to see what they can do. Then we can bring it into our laboratories and into our Shell Global Solutions organization and figure out how to scale it up. And then we would be in a position, perhaps at some future point, to make an investment decision to make it ourselves. But we haven't made that decision yet, to make it ourselves.

Dave Alvanovich: Dave Alvanovich, Houston Chronicle. What do you expect the slowing down of the U.S. economy to do to gasoline consumption this year? Just a couple of days ago the EIA was still saying that motorists should expect $3.40 a gallon for gas come springtime. First of all, I guess, do you agree with that estimate? And secondly, do you think that slowing down the economy might dampen prices somewhat?

John Hoffmeister: It's always possible. We watch, obviously, consumption closely because if you don't have your product consumed then you ought not to make it, because there's only so much storage available in a country. And we've seen some increases in the amount of inventory of finished product in recent weeks. But it could be seasonal. We don't know that it's a definite economic slowdown, a sign of a slowdown at this stage. We see that manufacturing margins across the Gulf Coast and on the West Coast, while they're in the lower range of where they were previously, they're not at rock-bottom levels, which says there's still some demand out there that's taking the product. We watch it very closely. I just checked before I came to town, as you might expect, to check what is the production rate of our refineries across the country? And we're pretty much running at full tilt. We've had a few blips, unexpected blips in certain refineries where we've had to decrease some production for a short period of time. But we're pretty much running normally. And, thus far, we haven't had an inventory problem, but we're watching it closely. To your larger point, an economic slowdown, I think, would result in excess supply that could ultimately, and I say could, not would, but could ultimately affect consumer prices. But what we don't know is what will be the price of crude and the price of crude of course, ultimately, does flow through to the price of finished product. And what we saw in the last couple of days is crude prices still fluctuating in the lower 90s. Today it's 94 and change. And that says that world demand is still up there and that's partly because world supply is not outpacing demand.

Question: Yeah, I'd like a little more information about your concept of mass transport in terms of what's going on.

John Hoffmeister: Well, mass transport is not really our business, but I think if we're looking at a total greenhouse gas management plan, and as we have had conversations at U.S. CAP, which is an organization of some 35 companies and NGOs who are interested in a national solution to greenhouse gases, it seems impossible to manage down transportation related greenhouse gas emissions if there is not a correlated increase in mass transit. But mass transit is the role, primarily, of government or regional authorities that would have to look at their options and decide what's in their community's best interest. I live in Houston and Metro is very aggressive in developing its mass transit plan over a long period of time to try to bring more mass transit to Houston. And if you've ever been to Houston you'll know that that would be very useful in terms of unblocking the freeway parking lots that we have. And we support that, because it helps with the overall reduction of greenhouse gases over time. And keep in mind, from a Shell point of view, if you're an investor in Shell, our business is not only transport fuels, our business is energy production for all kinds of uses, not the least of which is the production of electricity. Like use of natural gas or use of coal gasification technology for production of electricity. So from a Shell investor standpoint, the change in the mix of liquid fuels doesn't necessarily mean decline in business, because there are other forms of business. If, for example, the plug-in hybrid becomes popular on a massive scale, that represents a huge opportunity for Shell's other energy producing part of its portfolio to make a huge difference. Or liquefied natural gas. I've spent much of the last 10 days in and around Long Island, New York City, and Albany, New York, trying to help promote the idea of the Broadwater LNG facility, which would be located 9 miles off the coast of Long Island. It's in its last 60 day review period before the State of New York would determine whether Broadwater meets the Coastal Zone Management plan of the State of New York. And we've been strongly advocating for an undersupplied natural gas market place like the New York metropolitan area that there is almost no other alternative insight to meet the natural gas needs of that large community other than LNG. And the Broadwater Project is ideally situated and ideally timely to try to bring new natural gas to New York metropolitan area. There is some controversy around it in terms of where it's proposed to be sited. That's not unusual. Most sitings of any energy infrastructure tend to be controversial, but that's also part of our 12-point plan, which is how do we, as a nation, embrace energy infrastructure in an energy marketplace that continues to grow? If we resist infrastructure we just condemn ourselves to ever higher prices and scarcer availability. But by putting new infrastructure in, like liquefied natural gas in the Long Island Sound, that represents huge economic upside, $20 billion of economic value creation. Not Shell's estimate, but the Long Island Power Authority estimated $20 billion in just 10 years using that liquefied natural gas. So, these are opportunities that I think we have for economic development in an area that could use it.

Question: Have your economists made any forecasts as to relatively how high the price of crude has to rise before it will really have a strong impact on the guzzlers, on the consumer demand for gasoline and so forth?

John Hoffmeister: Not really. It's hard to project. Because of natural resource nationalism it's not just oil exporting nations that are part of that process, but oil importing nations are as well. So developing countries, for example, choose to subsidize to the consumer the energy cost which the consumer is using. And that has almost a perverse effect on increases in the crude oil price at the same time consumers in certain countries get the benefit of low-cost energy. But it's done for the purpose of economic development. When you apply it to the U.S., I think the U.S. has a particular love affair with its lifestyle. And we have not seen a large embracing of mass transit systems literally in the last 50 years. And people continue to choose a lifestyle where commuting is a big part of that lifestyle, but also the freedom to go anywhere anytime is a part of our lifestyle as well. And so as long as people have the opportunity to be mobile we've seen almost an inflexible relationship to the current price of gas. In other words, who would have thought in December of 1998, when the price of crude was $8.50 and the price at the pump was somewhere around $1.30 or $1.40, who would have thought, nine years later, at 90 plus dollars for crude, at three plus dollars at the retail pump, we would see continued demand increase? Impossible to conceive 10 years ago, but here we are. Now, perhaps the slowing of the economy has some effect on future demand, if that's in fact happening, but people have embraced the $3, they haven't embraced the oil companies. I can assure you that. Our 50 city visit reinforced the fact that we have a long way to go, as an industry, to be not just liked, but respected. We are basically disrespected, through our own fault. I don't blame anybody but ourselves for the disrespect that the industry receives, whether from elected officials or from consumers or from the attorneys general who like to consider whether we're price gouging or not, because we've done a poor job of our communicating our messages, of explaining ourselves or in justifying our actions. And in a democracy, like we live in, we're vulnerable if we're not transparent. And so Shell's effort here in the last couple of years has been to bring transparency to a new high, to try to put out there who we are as people, put a face on who we are. Because it wasn't just me who visited 50 cities, it was 250 other Shell managers who went with me, so that people across the nation could see we're people, just like everybody else. And we've got tens of thousands of hard-working employees who want to bring energy to the American people. But Americans love mobility and that, I think, creates an inflexibility with price. But, to be blunt, we would like to see lower prices because these sky-high prices for oil are unkind and unfair ultimately to society. There is an inflation that's going on in our supply chain that's unsustainable. There is a precarious balance in decisionmaking as to future investments, future projects, because inflation is eating up potential gains of future investments. And if we slow down the investment profile, what happens? The price of energy goes even higher. So, we really have a mess on our hands, which is why our 12-point plan calls for more energy from a whole range of sources.

Question: Could you talk about your plans for oil shale developments and how is the congressional moratorium on oil shale regulations affecting those plans?

John Hoffmeister: We announced about this time last year that given two things, the importance of our investment profile in the oil sands, that we wanted to pursue a stronger, more vigorous oil sand development profile, reflected also in our buyout of the shares of Shell Canada, Limited at the time. And we also announced that because of the challenges of the oil shale technologies which we are developing, we've decided to move the oil shale project forward sequentially rather than holistically. What that means is we went through a phase in the early part of this decade where we tested the technology of heating the oil shale in situ. That was very successful and we were able to demonstrate that the heating methodology works. We produced some 1200 barrels of product, oil shale product in liquid form and in gaseous form from that process. But we knew that to get to the next step we needed to perfect freeze wall technology. So today, if you went to the peon space into the Shell research site you would see a massive freeze wall experiment underway. That will take probably to the end, not of this year, but the end of next year to determine its success or failure or what lessons have we learned. And once we have determined what are the issues and implications of freeze wall technology, which freezes the earth under the surface down to about a thousand feet to a width of about nine feet, to determine how we can maintain the heating within the freeze wall and keep water out from moving through the underground, which would then cool what we've just heated. We have to determine the efficacy of that freeze wall technology. Then we'll take the next step and the next step. So in the short term, the fact that there are moratoria or what have you in the language that might be out there, that doesn't affect the research process that we're going through. It would be at that stage that we would like to commercialize the development of oil shale that such language would be hurtful. But it's keep in mind, under our 12-point plan we do call for unconventional development. And if there are moratoria by not putting money or resources into the development of a royalty scheme, it's not the oil companies that are hurt. It is the American consumer that has hurt by misguided efforts to keep energy from coming to the marketplace. We think that's wrong for America.

Question: I have a couple. One is a follow-up to the U.S. CAP that Shell belongs to. Shell, U.S. CAP, the climate action, Shell, BP, and Conoco Phillips are the only oil companies that are members. Without naming any names, that leaves out a fair number of major U.S. companies. Is that disheartening to you and do you sense any change in their position? And secondly, in the media advisory it said it would discuss what you found frightening on your 50 city tour. So, what scared you?

John Hoffmeister: Well, I think U.S. CAP is a membership only group of companies and we froze membership at 35. So, if other companies wanted to join we would have to relax the membership guidelines. And so I think Shell and BP and Conoco were first to the mark and then the membership was frozen and so others will just have to wait and see what happens. With respect to what was frightening, you'll see it written up in the myths that are documented in our report. For example, what was frightening is a fundamental belief across America that we're running out of oil. That's frightening, because we're not. The reality is, if you look at the, sorry, let's start with conventional. If you look at the conventional resources in America the more than hundred billion barrels which API catalogs, which are available on federal lands of the Outer Continental Shelf, that's a lot of oil, a hundred billion barrels. If you then think about the trillion barrels in the oil shale region of Colorado, Utah, Wyoming, if you add to that the trillion barrels in the Canadian oil sands, add to that the trillion barrels in the Orinoco Basin, heavy oil in Venezuela, we're far from running out of oil. In fact, Shell said for a long time, the oil age will not end for the lack of oil. Technology will move us on. What's also frightening is the downright dislike of oil companies, because what that says to an oil executive like me is in a democracy people can run on a platform of anti-oil company legislation, anti-energy development, for the purpose of spiting the oil companies because we are disliked so intensively. Shame on us for allowing that to have developed, but it did. Now we've got to deal with it. So bad public policy for the interest of spiking the oil companies is not in the interests of America. That's very frightening indeed. And this punitive tax proposal is a manifestation of that, where five individual companies who report significant profit, average in the manufacturing industry, but significant dollars because of volumes, is really a point that's very frightening. Other frightening would be the myth that biofuels is the silver bullet. Biofuels, I think, is additive, but it's not a silver bullet. And so there's a lot of misunderstanding and misperception, which is very frightening.

Cary O'Reilly: Question here in front.

Question: Hi, I was wondering if you can help me understand a little bit more about the U.S. CAP process. I mean it's consensus and how do you go beyond the call-to-action document, which I understand members are trying to do? I mean you froze membership, so is it because it's hard enough to get consensus from 35? And you work with utilities, so they have different interests across the country.

John Hoffmeister: A good example, not to be cute about it, would be taking all of the media in the room here and trying to reach a consensus view on how what we're saying this morning should be reported. That could be very difficult. And so too when you have U.S. CAP made out of stationary power producers such as power utilities, power producing equipment manufacturers, transportation companies, environmental NGOs. We're a very diverse group who all embrace the whole concept of greenhouse gas management, so there is a consensus view around the need for a national approach to the solution. But the how-to is a very difficult discussion, particularly when the issue that comes to fore is a trading marketplace for emission credits and how do those credits get into the marketplace? Is it by auction? Is it by allowance? What are the formulas that government may choose to put those credits into the marketplace? And while there may be value in certain approaches that apply to the stationary power producers, those same principles may not apply, for example, to the fuel providers. And the ENGOs have an entirely different perspective that may not be based on a business model, but based on the good of society. So, I would say that we have made enormous progress as a diverse coalition, but the fine points are the sticking points. And so I think there's a lot of good staff work going on that's trying to move this forward, but in the principles that formed as U.S. CAP, unanimous agreement on every point is not necessary to move forward. There can be divergent views that can be represented as divergent views. Our main purpose is to lobby Congress on getting a national plan moved forward. And it may take several years for that to occur. And it may be that the first iteration is incomplete. And so we're quite satisfied that if we can make progress that's material we've done our job. Does that mean unanimity? Probably not. But that's OK, we'll keep moving forward.

Cary O'Reilly: Probably time for two or three more questions starting up here.

Question: This problem Exxon is having with Venezuela, I mean I know you can't speak for Exxon directly obviously, but based on you're head of a big company, oil company, based on your knowledge of the industry, other suppliers out there, how the market works, how the business works, do you think Exxon will have any problem at all replacing the supplies that were cut off from it and avoiding a potential rise in prices here in the U.S. at the retail level? I mean are there other suppliers out there? Other suppliers out there that they'll be able to use and replace what Venezuela has taken away from them?

John Hoffmeister: I think what's important for global oil production is that everybody who has crude produces as much as they can. How they go about doing it in the case of Pedavesa, what partners they choose to work with, that's really a decision for Pedavesa, but the world needs Venezuelan oil. Whether that oil is directed in one part of the world or another part of the world doesn't necessarily matter over the longer term because oil is traded globally, it moves globally. And for oil to be directed one way or another by arbitrary decree of a nation doesn't necessarily change the amount of oil available in the total marketplace. So in that sense, frankly, I'm not too worried about it, other than what might be seen as short-term disruption, which traders could take advantage of, which is normal in a commodity marketplace. You know, if there is a drought in the Midwest corn trading prices spike, so traders take advantage of commodity speculation. That may occur in this case, but the real issue is getting more crude into the global marketplace and whatever Pedavesa can do and Shell is there to try to help. We have production every day in Venezuela. Our job is to see how we can help Pedavesa succeed as a partner of Pedavesa in Venezuela.

Question: So, in the short term, Shell shouldn't have any problem or any company, this could happen to them, finding replacement supplies?

John Hoffmeister: Not if enough crude is going into the global marketplace. Not if sufficient crude is going into the global marketplace.

Question: But is sufficient going in now?

John Hoffmeister: Well, currently I think the OPEC countries are running almost flat out and we are certainly running as flat out as we can. We do see declines that are reported in the fourth quarter results of most of the independent oil companies, not all, but most. So we have a problem keeping up with the demand and so, as a supplier company, we want to do everything we can to keep supplies moving. Question: Well, that leads to the oil shale question and can it be done without destroying the beauty of the landscape in which the oil shale is?

John Hoffmeister: That's certainly why Shell has developed 20 years of technical research, to protect and preserve the landscape of the Western slope by use of the in situ method. The in situ method does not require mining or quarrying. This is a very different approach where we drill a hole through the surface down to the subsurface. We insert a heater. We drill many holes, but those holes are drilled at the top of the earth as we would drill anywhere. And with proper land management and mitigation for recovery purposes we believe that over a period of years where we have drilled, once that drilled area is exhausted in terms of its oil supply that we can restore what we disrupted. And so the land surface remains largely the same overtime.

Cary O'Reilly: Question in back over here from someone who hasn't asked one yet.

Alca Chana: Al Pachung from the Iraqi embassy. Do you have any plans to invest in the Iraqi oil sector? Thank you.

John Hoffmeister: A couple of things are happening between Shell and Iraq. One is we have, for quite some time now, been helping Iraqi students study the sciences of petroleum engineering, geophysics and so forth at universities around the world. So, through a Shell scholars program we are helping to educate the next generation of Iraqis. We have been working with the Iraqi government on a gas plan, at the invitation of the Iraqi government given our international gas experience. We have been working as advisers and consultants to the oil ministry on a nationwide gas plan that isn't quite finished yet, but one day it will be. We've certainly expressed our interest in future developments once the security is at a level where we could operate and once the oil laws are in place and, of course, we have to be invited in. There's no opportunity to be there unless we're invited in. We do believe that Iraq offers the world tremendous natural resource development opportunity. Shell would very much like to play its part in how that might evolve. But at this point, we are not in a production phase. We're not in a specific contract other than the advising that I talked about.

Katie Tyler: Katie Tyler with SNL Energy Daily Gas Report. I want to go back to two ideas that you mentioned. One is that prices should be lower and consumers will benefit from that. And then also your idea of reducing greenhouse gas emissions, I mean those two are, I mean if prices are lower for consumers they're not going to conserve. I guess I want to see how you thought those two could be reconciled.

John Hoffmeister: I think there are a couple of ways of reconciling it. One is the low-carbon fuel standard enables the fuel that's being used to be more environmentally acceptable under a lower greenhouse gas emission mandate. And number two, working with the automotive manufacturers on models of vehicles that make more efficient use of the molecules. For example, as we went around the country and we heard people's preferences for vehicles we heard many preferences expressed for different technology altogether, such as a hydrogen fuel cell. We know from working with General Motors and other manufacturers that hydrogen fuel cell vehicles are a possibility in the future. Hydrogen fuel cell vehicles are actually on the road today in an experimental fashion. You can go down to Benning Road here in Washington right by RFK Stadium and purchase hydrogen for a hydrogen fuel cell vehicle. Now, there are only a few experimental vehicles on the road, but it demonstrates that you can have a lower emitting technology, particularly if hydrogen ultimately would come from a non-CO2 source of power, such as hydropower or nuclear power. If you got hydrogen from water, broken down by nuclear energy or hydropower or coal gasification with carbon storage, carbon capture and storage, you could end up producing hydrogen as the fuel with no CO2. And hydrogen itself is not a CO2 emitter. And so you can actually have much lower CO2 mobility and we'd like to be a part of how that chain would develop. If we stay with today's technology and just you had lower prices with today's fuel we won't reduce greenhouse gases. That's why we need to change how we go forward.

Question: You mentioned disappointing results from your E85 stations in Chicago. If E85 doesn't appear the way to go how are you going to soak up 36 billion gallons of mostly ethanol; and even in the near term, you know, 9 billion this year, and 11.1 billion next year? Where is it going to go if there's really not a viable E85 market?

John Hoffmeister: In the old days we would've called that the $64,000 question. $64,000 isn't what it used to be, so it would be some new dimension today. You've hit the nail on the head. This is where legislative mandates without consumer support or without technical support could create serious issues in the future. But we're not the policymakers. We simply advise on what we think is doable or achievable. And in this case, the do-ability of what's on the mandate is in question. And we've been clear in that even before the law was written. But, here's an opportunity, if the auto manufacturers can find a way to absorb E20 into their fleet, E20 will suck up 36 billion gallons and I think there's a little magic there in the sense that the 36 billion gallons represents 20 percent of today's liquid fuel demand. So, getting to an E20 would achieve what the legislation is intended, but it will take some engine technology to adapt E20 into today's engines as well as future engines.

Question: So you're talking about existing fleet engines?

John Hoffmeister: Yeah, because the existing fleet is not going away between now and 2020, because a lot of it is going to be out there. What the auto manufacturers, and we've discussed it with them, are concerned about, and in our own labs as we test fuels, it's not certain E20 will work in today's engines without complications. And this, if you're the warrantor of the engines, which Shell is not, the car companies are the warrantors of the engines, they're going to be very concerned about what consumers put into the engine. So, we have to find a formula where E20 works in existing fleet engines. The flex-fuel engine will take E20, so that's not a problem going forward. But it's in today's engines that we have to find the right formula. And maybe with additives, with the right chemical engineering we can find that formula where engine manufacturers are willing to continue to warrant their engines with E20. But that's for them -- for all of us to figure out.

Question: What kind of problems are you finding in the labs?

John Hoffmeister: Well, the burn, the carbon, the engine parts. Alcohol, which is ethanol, alcohol has a different consequence when it burns and when it touches different kinds of metal surfaces. At E10 that's hardly noticeable, so the petroleum overweight in the E10 enables the engines to pretty much operate as designed. When you get to E20, that's a higher concentration of alcohol, which over time could have a degrading effect on the kinds of metals and the kinds of burn properties that are in the fuel. And that's what has to be better understood before the manufacturers would endorse E20.

Cary O'Reilly: I have to thank Mr. Hoffmeister for his time. Let's end it here. Appreciate you taking time to talk with us today and thank you all for coming. If you forgot to sign up please do so on your way out and thank you again for coming.

John Hoffmeister: Thank you ladies and gentlemen.

[End of Audio]

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