The Shell Answer Man, Part I

DO YOU REMEMBER the “Shell Answer Man,” dear readers? He was part of a television advertising campaign by Shell Oil Co. back in the 1970s, in reaction to the oil shocks and gasoline shortages of that era. The Shell Answer Man was a nice-looking, pleasant-sounding fellow who would appear on the TV screen to ask and answer basic questions about driving in general and gasoline in particular.

With simple language, and in a disarming and folksy manner, the man from Shell would explain things that related to fuel usage, like how proper tire inflation was good for your gas mileage. Or he would discuss how “jackrabbit starts” wasted gasoline. Over a period of time, there were a variety of topical ads along those lines. If you were somewhat savvy about driving an automobile, there was nothing particularly new or revealing in the message. But if you were what we might characterize, with all due respect, as the “average consumer,” blissfully dwelling in energy La-La Land, then the Shell Answer Man offered some good advice. Well, it was good advice if you followed it.

John D. Hofmeister

And so today we meet John D. Hofmeister. He is a nice-looking, pleasant-sounding fellow who happens to be the president of Shell Oil Co. And he is in the midst of a 50-city lecture tour, on behalf of Shell, giving speeches with a title along the lines of “How the U.S. Can Ensure Energy Supply for the Future?” On Feb. 8, 2007, he brought the show to Pittsburgh.

First of all, Thank you, Shell Oil Co., and thank you, Mr. Hofmeister. No matter what else I say in the following two-part commentary (and frequent readers know that I will have a few things to say), I certainly appreciate that a large company like Shell would make the effort to hold what amounts to a “national energy discussion.” And it says something important that a big, publicly traded company like Shell would send no less than its president out on the road to give the pitch. I suspect that such a senior corporate officer might have a few other things to do, like run Shell Oil. But then again, educating the public about the nation’s energy supply and answering peoples’ questions on the subject might just be more important over the long term than squinting at a few more spreadsheets full of obscure data or buttering up the stock analysts.

A Well-Traveled Road

And what a road Mr. Hofmeister has traveled in the past year or s from Miami to Minneapolis, New Orleans to Irvine, Seattle to Washington, the National Press Club to Harvard Business School. The guy gets around. He calls it a “speaking tour,” of course, because he is giving speeches. But he also calls it a “listening tour,” because he takes questions and offers answers, however well rehearsed. (It’s OK, really. Shell has to be careful not to run afoul of the Securities and Exchange Commission or its many volumes of regulations. So everything has to get scrubbed by the lawyers.)

The typical gig involves a visit to some burgh where Mr. Hofmeister has a lunchtime speech scheduled before a local assembly of worthies, such as the World Affairs Council of this hamlet or that village or town. Also on the schedule, time permitting, is a morning visit to an area high school or college to meet with the young people and hold give-and-take sessions with those inquiring minds. And often as not, the indefatigable Mr. Hofmeister holds a “town meeting” later in the day, at which forum just about anybody can (and ofttimes does) show up to make caustic attacks on the oil industry, if not to bellyache about the price of gas.

In Pittsburgh, for example, one precocious high school student asked one of the most painful of all questions that any oil company executive can hear: “How much do you get paid, Mr. Hofmeister?” Ooooooh! That’s what I compare to a hot welding spark dropping down your shirt. But Mr. Hofmeister gave the nosey kid a good answer: “I get paid more than a rookie player for the Pittsburgh Steelers, but less than [Steelers quarterback] Ben Roethlisberger.” Not bad, Mr. Shell Answer Man, not bad at all.

Just by way of payroll perspective, a rookie player for the Pittsburgh Steelers makes more money than a federal judge, albeit without the lifetime tenure. And although the Steelers’ player No. 7 did steer the team to a Super Bowl championship back in 2006, Ben Roethlisberger has a disturbing habit of riding a motorcycle without wearing a helmet. How smart is that? Yet the Steelers quarterback gets paid more than the guy who runs Shell Oil Co.? Go figure.

And the man from Shell might have added that he gets paid to manage a company that produces real energy and industrial products that people buy and use, and that he makes a heck of a lot less than most of the senior guys at places like Goldman Sachs or the myriad rich guys who run those Greenwich- or London-based hedge funds. Really, dear readers, how much gasoline or engine lubricant have you ever bought from Goldman Sachs, let alone from those Greenwich and London hedge funds? But I digress.

The Edge of Secure Supply

The public speaking coaches will tell you that it is often good to begin your speech with a story to gain the attention of the audience, and Mr. Hofmeister began his lunchtime talk with one heck of a tale. In the aftermath of hurricanes Katrina and Rita in 2005, almost all of the U.S. Gulf Coast refineries were down due to flooding and other storm damage. Shell had 300,000 barrels of refined product in storage at its Baytown, Texas, refinery, which was essentially the only supply available to the entire Southeast region, but there was no electricity with which to run the pumps. Whoops!

Shell employees and contractors were working feverishly to rig up electric generators at the Texas facility, but it was a race against time, over a 48-hour period, until the Plantation and Colonial pipelines — the major trunk carriers for refined product between Texas and the Southeastern U.S. — went dry. If word escaped of the predicament, Shell executives believed that many members of the consuming public would have panicked. Then “panic-buying” would have immediately kicked in and rapidly drained whatever fuel was left in the supply system. The entire U.S. Southeast, home to about 60 million souls, could have been caught in a situation in which there would be no fuel available anywhere. It fell to Shell’s Mr. Hofmeister to call the U.S. Secretary of Energy and deliver the bad news.

But like the cavalry arriving near the end of a John Ford Western, Shell’s hardworking people hooked up the Texas facility with electric power, with all of about 12 hours to spare. Shell started pumping gas into the pipeline system. There were, you may recall, spot shortages of fuel in the U.S. Southeast, but no regional lack of product. Still, as Mr. Hofmeister put it, it was a close call and the U.S. was and remains “on the edge of secure supply.”

Shell’s View of the World

In his comments in Pittsburgh, and in his talks to other groups across the U.S., Mr. Hofmeister has noted that he is “president of a company that creates a product that consumers don’t want to see, touch, taste or smell, even though they buy it by the gallon day after day.” At the same time, he notes, the mission of Shell is to “renew the American industrial energy base in order to grow energy supplies in this country — which are ample.” Mr. Hofmeister continues: “We are deeply, deeply invested in the hydrocarbon economy and there is no short-term exit from the hydrocarbon economy, unless we want to suspend economic growth and development.”

Mr. Hofmeister, in the course of his tour, has on numerous occasions amplified these comments. His talks identify to listeners a key dilemma of our time, that “we are the beneficiaries of an industrial age, having given way to a post-industrial age, having given way to an information age, in which the world is ever more seeing the role of information and the manipulation of information as part of the business model upon which we will build wealth creation.” But the Shell man has noted, “Sustained growth of the post-industrial information era can only occur predicated upon continued development, and in some cases redevelopment, of the industrial infrastructure which many people think we have moved beyond.”

Redeveloping Industrial Infrastructure

In the course of his talk in Pittsburgh, as in his other speeches in many other cities, Mr. Hofmeister addressed the litany of present and future potential energy resources. He spoke at length, as you might expect, about oil and natural gas.

Considering that the focus of the man from Shell was on explaining the need and urgency of developing and redeveloping energy and energy-related industrial infrastructure, it was odd, certainly to this correspondent, that he did not address the concept of depletion. Most people tend not ever to have heard of depletion, let alone to understand it. In fact, I have met many people who think that oil wells just gush away, forever and ever, world without end, amen. They say things like, “If only those damn oil companies would uncap those wells they have shut in down in Texas, we’d have plenty of oil.” Oh please, dear readers, can you feel my pain? But then you explain to these misguided souls how depletion works. Then, unless they are total idiots or utter ideologues (and believe me, dear readers, there are some total idiots and utter ideologues out there), they understand why it is necessary to go out and drill new wells to replace the ones that have declined. So memo from King to Hofmeister: Discuss depletion, even if there are idiots and ideologues who just won’t get it.

Mr. Hofmeister’s emphasis was on the political fact that about 85% of the U.S. Outer Continental Shelf (OCS) is off-limits to oil and gas exploration, as are large areas of federal- and state-owned lands in the U.S. These areas have significant potential to become productive areas for oil and gas, but the environmental opposition is such that the political will is lacking to lease any blocks and spud any wells. And even if, let’s say tomorrow morning, the political will magically appeared for OCS development, it would take much time and investment for any productive potential to come to fruition. Considering that it takes between 10-15 years to begin to develop an offshore province, the decision to open or not to open up the U.S. OCS will impact the energy destiny of the country in 2020 and afterward. In my view, people in the future will look back and think rather unkind thoughts about us for our current inaction, but that is another subject for another time.

To his credit, Mr. Hofmeister acknowledged that drilling the OCS will not “solve” the U.S. energy dilemma. As an oilman, of course, he painted a favorable scenario for future hydrocarbon production from the OCS. But the guy clearly is smart enough to understand (and honest enough to say) that drilling up the OCS is not the answer to the nation’s energy problems going forward. The take-away point was the geologically correct observation that future oil and gas production from the OCS has to be a part of any overall U.S. energy strategy. It will be, of course. It is just a question of time, and how desperate the U.S. becomes for oil and gas as in the future as imports inevitably decline from other parts of the world. It’s that depletion thing.

Mr. Hofmeister spoke about Shell’s efforts in developing other forms of hydrocarbon fuels, as well. These include the “Alberta oil sands” (even though we all know that the correct description is “tar sands”). He discussed the future of liquefied natural gas (LNG) and the importance for the U.S. of having the facilities in place to import LNG from overseas. He discussed the use of domestic coal, noting that “The word ‘coal’ is usually associated with the word ‘dirty.’” The point was not lost on an audience in Pittsburgh, most of whom above a certain age could tell you a few things about dirty old coal. But Shell is focusing quite a bit of investment on a coal-related concept called integrated gasification coal conversion (IGCC), which allows for much cleaner combustion or conversion of the black rock, with the opportunity to capture and sequester the carbon dioxide byproduct. Shell has 15 IGCC projects ongoing in China. And among the other coal-related processes that the company president mentioned were coal-to-liquid (CTL), with which Shell is also well along in China. I have written at length about these energy resources, including Shell’s methanol projects in China.

Other areas of interest and investment by Shell include Colorado oil shale, in which Shell has pursued a 20-year research project. But any major investment in oil shale is, according to Mr. Hofmeister, “still many years away” for Shell. Mr. Hofmeister did not say it in so many words, but the tone of his voice seemed to emphasize the quantity of “many.” So don’t hold your breath. Oil shale has been the “fuel of the future” for a long time, and still is. And Shell is also investing in technology to upgrade heavy oil, of which there are voluminous amounts in the crust of the Earth. Again, this will be a technological stretch that plays out over many years.

According to Mr. Hofmeister, Shell is a major player in what he calls “second-generation biofuels,” meaning ethanol-derived “from nonfood-based cellulose material.” This includes plant stalks, wood chips, and even municipal waste. Why no enthusiasm for corn-based ethanol? Mr. Hofmeister has, on other occasions, explained it thus:

“I got 48 letters from attorneys general (in 2006) accusing us of price gouging during the course of the last 12 months. It’s not fun to get accused by attorneys general in 48 states of price gouging when in fact we’re working very hard on bringing supplies. So the biofuel, we believe, stretches the gas supply, but the cellulosic avoids the cost of food going up. What I really don’t want to see is 48 letters from attorneys general accusing us of raising the price of food in addition to the price of gasoline because of the extensive use of corn and sugar.”

Shell is also investing in producing energy from solar films and fuel cells, and the company even produces in excess of 300 megawatts per day of electricity from windmill farms in seven states. So Shell has quite an energy aperture.

Energy Conservation

But simply focusing on future energy supplies is not enough, states Mr. Hofmeister on behalf of Shell. Shell believes in promoting a “culture of conservation”:

“We need a culture of conservation. Conservation does not come from turning the thermostat up a bit in the summer and down a bit in the winter. Conservation comes from the minds and the hearts of our engineers and our designers who can rationalize energy efficiency and who can design vehicles, homes, buildings, and appliances in ways in which energy efficiency is increased on an ever-constant-improvement basis. A culture of conservation drives energy efficiency forward for generations to come. We believe that a culture of conservation has to start with education, as does this whole backdrop of energy efficiency and energy education. Shell supports the notion of working with public policy leaders on a rational framework across the whole spectrum of energy development, but, in addition to that, supports the development of a school-based curriculum to educate our young people for generations to come about how important energy is to our life, to our economy, and to our standard of living,”

So in summary, according to its president, Shell Oil Co. is looking at and investing in production of traditional hydrocarbon sources of energy as well as developing novel means of producing energy supplies from alternate forms of carbon. And Shell is working on innovative energy alternatives, and supports conservation efforts. The company’s top executive is out on the road putting a human face on its corporate vision and interests, and giving good speeches about important topics.

In Part II, We Question the Shell Answer Man

So far, so good. And in Part II of this article, we will take things a few steps further and pose some questions to the Shell Answer Man.

Until we meet again….
Byron W. King

February 22, 2007