COVER STORY

FUTURE
An oil chief passionate about alternative
forms of energy – cynics would argue that
this proclamation is an oxymoron. John
Hofmeister, President of Shell Oil Company
would beg to differ, however. In an exclusive
interview with O&G, he talks about Shell’s
investments in green fuels, future energy
security, and how America’s strict drilling
restrictions are creating an unnecessary
over-reliance on foreign imports.

By Julian Rogers

I
t would be fair to say that John Hofmeister is not the kind of opaque
boss you find tucked away in an ivory tower, seemingly impervious to
the critical energy issues affecting the lives of ordinary Americans
today, and tomorrow. To reinforce that view, this head of Shell Oil –
the lucrative US arm of Anglo-Dutch super-major Royal Dutch Shell –
has been out on the road for the past 15 months beating the drum
about energy security, gasoline prices, biofuels, climate change, and much
more. And the audience? Well, it’s included just about everyone from the
company’s stakeholders and government officials to environmental organi-
zations and the public. It’s a 50-city tour that has whisked Hofmeister and
some 250 Shell Oil leaders from Seattle to Miami and everywhere in between.
You get the impression that it’s been an adventure that this amiable oilman has
revelled in.
When O&G caught up with him at Shell Oil HQ in Houston, Texas, his city
count was looking like this: 46 down, just four to go. So with the tour on the
home stretch this looked like an opportune moment to tie him down to a one-
on-one interview and get a progress report. With an unexpected 20-minute void
in his diary, he obliged. Introductions out of the way, and I start by quizzing him
as to why he’s been trekking all over the country talking energy? He pauses for
a moment before revealing his motives: “Obviously we have been facing a major
dilemma over the price of petrol and the concern expressed by Americans about
it, as well as about the profits that companies are making. When we look at the

VISION
price levels and the profits in the clear light of our own business rationale it all
makes sense to us as a major oil company. However, it doesn’t make sense to
our stakeholders, so rather than having an ongoing sustained conflict over the
issue, we decided to go visit them to discuss prices, profits, supplies and de-
mand.” But these meetings were not just about education; Hofmeister and his
team were “in listening mode” too.

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 SHELL OIL
When it comes to supplies he has found it hard to
IN NUMBERS
avoid the deep sense of fear amongst the public that oil
and gas reserves are going to dry up soon. He recounts an
example to illustrate the point: “In one city a women came
up to me and said that she was a grandmother. She said
22,000
that she knew oil and gas would be there for as long as EMPLOYEES
she needed it but she was worried that it would not be
there for her grandchildren, resulting in a lower quality of
life for them. I think this is wrong.” What Hofmeister told OPERATIONS IN
50
the anxious grandmother was what he reiterates during
our conversation: Oil and gas is not going to run out in the
near future. However, he concedes that we have passed
the tipping point of cheap and available energy. And he
fully appreciates people’s concerns when stories (some
would call it scaremongering) keep cropping up in the
STATES
media about how the world’s fuel gauge is lurching heav-
14,000
ily towards the dreaded ‘E’.
One trusted authority – the International Energy
Agency (IEA) – has predicted that oil production could
peak as soon as 2012 and that we could need 125 mil-
GAS STATIONS
lion barrels per day (bpd) by 2025 – levels are currently
hovering around the 85 million (bpd), just one million
above worldwide consumption levels. Adding to the DRILLED ITS FIRST
strain are the new economic tigers like China, India, SOUTH TEXAS WELL IN
Brazil and Russia. In fact, China and India are forecast
to account for 45 percent of the increase in global ener-
gy demand by 2030. “You could look at the situation
from a negative point of view but I tend to look at it pos-
itively,” Hofmeister remarks. He says the National
1953
Petroleum Council’s 442-page report into the future of PROVED RESERVES OF
global energy, published in the summer, is a “seminal
piece of work” for anyone looking for a balanced view
of the situation. The study was commissioned in 2005
1.3 billion
by US Energy Secretary Samuel Bodman. BARRELS OF OIL
Opponents have slammed the decision to allow the EQUIVALENT
NPC, chaired by former ExxonMobil CEO Lee Raymond,
to oversee this important study, citing that it was akin
to asking the tobacco industry to forecast lung cancer. The NPC rebuffs this
criticism, pointing to the fact that the 18-month investigation involved 350
experts – many of them from outside the oil and gas industry. Whether or
not the NPC was the right organisation to author the report, Hofmeister
urges everyone should take time out to read it. “I think it gives a very com-
forting view of the world’s supply of energy. It does bring up the demand is-
sues but it also shows the technology opportunities. Most of all, it says that
the big issues of the oil and gas industry, and the energy industry of the fu-
ture, will probably be above ground with geopolitical issues rather than the
availability of resources.”
Hands off
At this point the conversation edges towards the vast oil and gas reserves
yet to be exploited in the US. Of course, much of the offshore supplies are off
limits, causing to us rely more and more on expensive foreign imports to feed
our thirst for the black stuff. Indeed, more that 60 percent of America’s daily oil
22 www.ngoilgas.com
consumption comes from abroad. This means that just
eight and a half of the 21 million barrels of oil consumed in
the US every day is extracted from domestic resources.
Hofmeister wastes little time in laying the finger of blame
squarely at the door of the policymakers: “We are proba-
bly the only oil-importing nation that by law and by regu-
lation prohibits the production of our own domestic energy
resources. If we were producing more domestic energy it
would alleviate some of the pressure that is currently on
the price of oil, and we would be investing in jobs and an
infrastructure in the United States instead of exporting our
oil dollars to other parts of the world.” Hofmeister also ar-
gues that if the US does not start lifting restrictions then
the price of oil is only going to rise further. “If the US con-
tinues to rely on imported products, and at the same time
other importing nations rely on those same sources, then
we are seeing a never ending escalation in the price of oil.”
One potential goldmine for oil and natural gas is
the Outer Continental Shelf, but frustratingly for the en-
ergy companies just 15 percent can be drilled due to
public policy. They are also denied access to exploring
hundreds of millions of acres of federal land. Combined,
the Outer Continental Shelf and the federal land could
be housing as much as 110 billion barrels of oil and nat-
ural gas, including colossal amounts of unconventional oil
and gas supplies that have yet to be exploited. For in-
In at the deep end
The Shell Exploration & Production Company (SEPCo) is
the largest of the Shell E&P operating units, accounting
for 15 percent of Shell’s worldwide oil and gas production.
The Gulf of Mexico is one of its key regions, as John
Hofmeister explains.
“I think the best way to describe our deepwater drilling in
the Gulf of Mexico is to look at our Perdido project (a multi-
billion dollar investment 200 miles south of Freeport that will
break several water depth records). This project is testimony
to the risks that we are willing to take in terms of the financial
bet on what could be a hugely prolific set of oil reservoirs
that we should be able to tap for many years into the future.
The technical challenge is first of all operating in more than
8000 feet of water and controlling wells drilled to more than
18,000 feet below the ocean's surface. We believe we have
the technology, and we have the where-with-all, financial and
human capital to be able to capitalize on this. But it is an
example of how far we must go these days, given that we
have limited access to easier to obtain oil, to develop these
kinds of assets.
“In addition to the technology that allows us to discover
this oil and to produce it, the technology that allows us to
safeguard the environment has changed too. We have the
ability to develop these sub-sea capabilities in
environmentally responsible ways. It’s the shut off valves and
the kind of piping and assembly processes that have moved
very far in terms of protecting the environment – which a lot
of people don’t know about. This is why some people still
worry about offshore drilling as an environmentally hazardous
thing to do. Well the fact of the matter is that the Gulf of
Mexico is proof that we can drill, produce and safeguard the
environment all at the same time.”
stance, there are more than one trillion barrels of known unconventional re-
serves in the Colorado oil shale region – equivalent to the world’s proven oil
reserves. “As the head of an American oil company I would like to see us
change our US policy so that we could develop more of the Outer Continental
Shelf, to develop more resources on federal lands which are currently off lim-
its, and develop the Arctic region around the Beaufort Sea and the Chukchi
Sea. I think there is a lot more oil and gas to be responsibly developed in this
country so we should get on and do it.”
But does Hofmeister forecast there being a U-turn in policy in the
pipeline anytime soon? “I don’t see evidence of it in the current Energy Bill
that is in Congress,” he responds with a shrug of resignation in his voice.
“If anything, I see more restrictions being placed on future access oppor-
tunities rather than a relaxation.” He adds: “While we are greatly appre-
ciative of the trading partnerships that we have around the world, it is
coming at a very high price.”
So with this stance it appears that the costly oil and gas imports will
keep flowing in the US for the time being. However, being reliant upon for-
eign oil and gas from countries – some run by despotic regimes or anti-US
governments – could leave the US vulnerable.
For instance, we have witnessed how Venezuela’s leftist President
Hugo Chávez, forced ExxonMobil and ConocoPhillips, to cede control of lu-
crative operations as part of a nationalization sweep of the oil and gas sec-
tor. A similar scenario affected Shell and BP in Russia. “I think it is clear, and
I am not the first person to say this, that we are in a period of national re-
source nationalism,” Hofmeister warns. “This is to be expected when con-
ditions between the exporting and importing nations are what they are.”
He expands: “In other words, the exporting nations are appropriately, with-
in their sovereign national borders, trying to optimize their natural re-
www.ngoilgas.com 23
 sources while the oil importing nations are trying to sustain economic
growth – so they need more energy and there is a natural tension there.”

Where now?
All this worry with supplies, coupled with soaring prices at the pumps,
begs the question as to when will we all be powering our cars and homes
with renewable sources. The oil giants will tell you that they have been
ploughing funds into the R&D of alternative fuels for years. Indeed, Shell
has been investigating and manufacturing biofuels for the past 30 years,
says Hofmeister. Altogether the company has spent around $1 billion dur-
ing the last five years on research and development of renewable and al-
ternative energy. Alongside conventional
The company stresses that this figure is still a small fraction of the total
energy sources, Shell
spend because the technologies are nascent and therefore risky. And an
is investing heavily in
renewables and
awful lot of R&D needs to go into an alternative energy source before mass
alternative fuels too
production can begin. “It is important to note that we have been at this (al-
ternative energy) for most of a decade, in addition to our core business of
oil, gas and petro-chemicals,” says Hofmeister. “As well as working on bio-
fuels, in which we are a fairly sizeable investor, we have a number of ethanol
opportunities too.” Corn and sugar-based ethanol competes with the food
industry and inflates prices so Shell is producing so-called second-gener-
ation (cellulosic) ethanol. Government targets have been set so that 7.5 bil-
lion gallons of ethanol a year needs to be produced by 2012, rising to a
whopping 35 billion by 2017. Therein lies a huge challenge.
But what else is Shell pioneering? Well, the energy giant is working on
second-generation solar technologies as well as its burgeoning wind busi-
ness. “We are moving very close to our first gigawatt of wind,” Hofmeister
enthuses. “We are working in five states with seven wind farms. We are also
building a new wind farm as we speak in West Virginia. When it comes to
other technologies we are active in partnerships with a number of auto-
motive companies on hydrogen fuel cell technology. Our role is to figure out
the supply side and logistics of distributing hydrogen across a big country
like the United States,” says Hofmeister, who is part of the Hydrogen
Technology Advisory Task Force that supports the DOE’s work on hydrogen
fuel cell vehicles. So while Shell and its rivals have started the ball rolling
on these alternative fuels, there is still a long way to go before we are all
filling up our cars on hydrogen or ethanol, especially when you consider
that motorists in the US burn around 160 billion gallons of gasoline a year.
Aside from oil and gas, there is one fossil fuel that many people over-
look – primarily because it has a bad reputation for being dirty and a high
pollutant. That fuel is coal – something that the US has more of than any-
where else in the world combined and something that Shell sees great po-
tential in for the future. And new technology is cleaning up its image too.
Coal gasification enables the efficient capture of CO2 for sequestration,
making possible the production of low-CO2 electricity or liquids. In fact,
Shell is involved in a turnkey project in Queensland, Australia, to create low-
emission electricity that combines coal gasification with carbon capture
and storage. Shell is the preferred provider of the gasification technology
and is currently providing drilling and CO2 storage expertise. Up to 420,000
tonnes of CO2 annually (around 70 percent of the demonstration plant's
CO2 emissions) could be captured and stored.
Hofmeister elaborates: “We essentially sold all our coal assets but we
held on to coal gasification technology. So now we are very active in coal

24 www.ngoilgas.com
 fectively and the system established fairly, then it is the most effective way of
driving emissions lower,” Hofmeister explains. “We believe it is a system where
markets can operate within a regulatory framework to create economic value
and at the same time reduce emissions.”

Black gold
While investing in alternative fuels and capping emissions is high on the
list of priorities, the simple fact is that for the majority of the population the cost
of gasoline is their number one concern. For sometime now motorists have
been feeling the pinch at the pumps, as the price of a barrel of oil hits record
highs. What the consumer finds hard to fathom is how the oil majors keep an-
nouncing record profits but the price of gasoline keeps rising. Royal Dutch Shell
recently announced third quarter profits of UK£6.4 billion – the sort of dizzying
figures that leads the public to perceive that the industry is being greedy and
that they are being ripped off. Hofmeister has been at pains to point out to his
audiences that contrary to popular belief, the oil majors don’t like high oil prices
as it causes inflation in the supply chain. He also says that almost all of its profits
are ploughed back into the business.
“We are trying to change the conversation about prices and profits and
whether that is a good or bad thing. In the conversations that we have had
across the country the focus has changed significantly, particularly when
we talk about the investments that need to be made in bringing more energy
into the world in the future.” He slows his speech
to emphasise the money involved: “When they
find out that the Perdido project [see ‘in at the
deep end’ on page 23] in the Gulf of Mexico is a
John Hofmeister “We are probably billon-dollar investment, or that the oil sands in
the only oil- Alberta, Canada, represents a multi-billion dollar
gasification and we have some major projects under- investment, the expansion of our refinery in Port
way in China. Also, we have just signed our first US
importing nation Arthur involves some $7 billion dollars, they re-
contract to provide our technology to a major gas-to- that by law and alize that this is big money. And if you don’t make
liquids project in the state of Ohio.” All of these ini- by regulation a lot of profit you don’t have the money to invest
tiatives go some way to the curbing of greenhouse in future energy supplies. So by talking about the
gas emissions – an issue that is on the minds of busi-
prohibits the investment side to meet the demand side it real-
ness leaders today – especially those running the production of our ly does change the nature of the conversation –
multinational corporations. own domestic from one of hostility to one of understanding.”
While the US was previously the largest producer of And that’s the point: a look at the bigger
energy resources”
CO2, the chief greenhouse gas, China has now overtaken picture is needed to get a grasp of what this in-
this unenviable record. Hofmeister argues that emissions dustry is all about in terms of investments. And
and climate change is important to Americans, despite when it comes to costly investments in key up-
the doubts that other nations may harbor. “Having been stream projects, Hofmeister sees a bright fu-
in 46 US cities and spoken to thousands and thousands of people, I can tell ture ahead for Shell Oil. “We will continue to invest in the Gulf of Mexico
you that the American people are anxious about climate change and they are where Shell has just had a very successful bid round to acquire new leas-
ready for national leadership to take us in a direction as a nation towards es to explore over the next decade. In the longer term we are still research-
greenhouse gas management. I think this is in perfect alignment with Shell.” ing the opportunity for oil shale in Colorado while there is many, many
He says dialogue is key if we are to move forward on this: “We have been decades of opportunity to develop oil and gas offshore of Alaska.” Then
talking about the need for national leadership on greenhouse management there is of course the downstream refinery expansion being planned as well
for quite some time. Ultimately, this leadership will be global but it has to begin as Shell’s efforts in renewable energy and biofuels – something that I found
somewhere. It can begin in the nations that have the best opportunity to man- Hofemiester is extremely passionate about during our discussion. For the
age greenhouse gases – and I would put the US in that category because of immediate future oil is still king, although there are new pretenders vying
our economic and technological success – but we need national leadership to for this crown. By using technology to develop these new energy resources
come together on what the policy framework will look like.” Shell is a strong Hofmeister says that America will eventually conquer its addiction to the
proponent to a cap and trade system to aid in the battle. “If the cap is set ef- black stuff.

26 www.ngoilgas.com