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Wall Street History
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03/28/2008
The Energy Debate...Shell's Perspective
Shell Oil Company President John D. Hofmeister and other Shell
executives traveled to 50 cities over the past two years in what
the energy giant dubbed “A National Dialogue on Energy
Security.” In a report the company discusses “Seven Energy
Myths.”
[Editor’s Note: Some of you will view this as nothing more than
propaganda. That’s OK. Just keep an open mind as there is
some good stuff in here.]
1. The Myth: Oil prices are artificial. We found this idea
accepted among both individuals and government officials with
whom we met. There is a belief that energy companies such as
ours can set or even manipulate the price of oil at will. This
leads to either expectations that oil companies acting
independently can solve the energy problem (one participant
suggested we “ raise the price of crude to enable
unconventional sources”), or resistance to seeing the oil
companies as participants in the solution. This attitude was
reflected in one Charlotte resident’s comment that, “the energy
mix will not change – oil companies will reduce prices to keep
alternatives out.”
The Reality: Oil trades on a global market. Price is affected by
supply, demand, fears and speculation like any other trading
market. The price is very transparent. The major oil companies
(including Shell), despite being large, have relatively small
shares of global oil reserves and production. Approximately 77
percent of proven oil reserves are under the control of national
oil companies with no equity participation by foreign, major oil
companies. The major oil companies control less than 10 percent
of the world’s oil and gas resource base. These small shares
ensure that private oil companies must behave competitively in
the world oil market and cannot individually cut output and
influence world oil prices. The Organization of Petroleum
Exporting Companies (OPEC), an international cartel of oil-
producing countries, is the single most important production-
related entity. OPEC’s objective has been to manage its
members’ collective supply through individual producer quotas
in order to influence world oil prices. The 13 OPEC member
countries collectively hold more than 70 percent of proven oil
reserves and produce about 40 percent of the world’s daily
consumption of crude oil.
2. Myth: We’re running out of oil. The “peak oil” theory came
up in nearly every market. While this wasn’t necessarily
surprising, the pervasive nature of this strongly held belief was.
Similarly, in a related survey that we conducted, more than half
of the respondents said global oil production will peak within the
next 20 years. This leads people to dismiss oil and gas from
being part of the future energy portfolio. Also not surprisingly,
we found that few people were aware of the scale of untapped
domestic resources on the Outer Continental Shelf, or of the huge
undeveloped unconventional resources, such as oil shale, oil
sands and heavy oil.
The Reality: Oil resources are out there, should we choose to
develop them. When individuals think of peak oil, they tend to
think that a sudden drop in global production follows soon
thereafter. We don’t expect to see this on a global level. It is
possible, though, that we will reach a plateau in the next few
decades, followed by a gradual decline of conventional oil and
gas production.
There is no shortage of molecules of oil and gas in the ground.
However, there are multiple influences that will affect the pace at
which this can, and will, be developed.
On the demand side, we are seeing a step-change in the growth
of demand for energy, particularly as emerging economies, such
as China and India, enter more energy-intensive phases in their
economic development. It will be vital to become more efficient
in how we use energy and to develop unconventional sources of
oil and gas (such as oil sands), biofuels and vehicle
electrification to meet this surge in demand. All energy sources
added together will struggle to match demand – we will need all
of the energy we can get.
On the supply side, many existing reservoirs are facing a natural
decline in production. This means that high levels of continuous
investment are required just to maintain status quo or to invest in
enhanced oil recovery (EOR) techniques. In addition, ever-
increasing levels of investments are required as smaller fields are
developed and more complex frontier environments become the
targets for hydrocarbon exploration and production, alongside
the development of unconventional oil and gas supply. There are
also uncertainties about the pace of investment in sensitive
regions such as the Middle East and Latin America. Naturally,
major resource-holding governments seek also to develop their
sovereign reserves at a pace that matches their own economic
goals.
There are plenty of uncertainties, which is why we explore future
possibilities through scenarios. Looking at the oil picture, we
find it misleading to think in terms of concepts like peak oil or
try to put a timeframe to it. The significant economic point
comes when tensions arise between the growth of global demand
for energy and the pace of investment, production and supply.
We believe we are entering such a period and will face this
increasingly for some time to come.
3. Myth: We have to choose between energy and the
environment. There is an assumption that we can’t have
conventional energy and a clean environment. As a result, we
found that many policymakers want to block nearly all new
access to existing resources on environmental grounds. One
town hall participant shared this perspective: “We should not
increase supply. We need to help find ways to reduce demand.”
The Reality: The energy industry has made tremendous advances
in finding ways to reduce the environmental impact of oil and
gas production. Few people realize the level of energy efficiency
and environmental stewardship Shell and others have
incorporated into every facet of exploration and production.
Technology developed for offshore exploration and production
has enabled us to reduce the environmental footprint of onshore
operations. New construction techniques applied in the Gulf of
Mexico enabled us to survive the 2005 hurricane season without
a single major offshore oil spill. And improved emissions
control technology has benefited the air quality around our
refineries. New technologies such as “clean coal” can do even
more to protect the environment, if we are willing to make the
upfront investment.
4. The Myth: Importing energy is better than dirtying our own
backyards. In meeting after meeting, we heard resistance to new
infrastructure from both community members and government
officials. Especially in the Northeast, we heard complaints about
high supply prices, and in the next breath a refusal to consider
new infrastructure that would alleviate the supply bottleneck.
The same infrastructure phobia has been applied to accessing
domestic oil and gas resources. In several town halls as well as
government meetings, we heard comments like this one: “Use
foreign oil, and save ours for as long as possible.”
The Reality: Environmental issues, especially issues of
greenhouse gases and climate change, are global issues. By
using foreign supplies, we reduce our ability to manage and
control the environmental impact. As one participant said, we
need to “get rid of the ‘not in my backyard’ syndrome with
regard to infrastructure and facilities.” The United States is the
only country in the world that restricts the use of its own energy
resources while transferring trillions of dollars of wealth to other
countries in order to import energy. In doing so, we demonstrate
a narrow view of environmental protection. People we spoke
with were shocked to discover the perverse nature of our public
policy in this regard. For example, while the United States bans
drilling within 125 miles off the coastline, Cuba is able to drill
within 45 miles off the coast of Florida. We agree with the many
people we spoke with who urged us to move forward with “safe
and environmentally friendly methods of tapping into the U.S. oil
supply.”
5. The Myth: Alternative fuels are a “magic bullet.” As noted
above, the belief that alternative fuels can be widely available in
the next decade presents a serious challenge to finding realistic
short-term solutions. More than two-thirds of people we
surveyed in a recent poll said that increasing the use of
alternative fuels was the best way to ensure adequate supply
while keeping the economy going. Biofuels are viewed as an
immediate possibility, hampered only by resistance from “Big
Oil.” At presentations and town halls, we heard John F.
Kennedy’s challenge to put a man on the moon quoted more
times than we could count. We also heard recommendations
from “ put a solar panel on every roof” – to achieve – “ 100
percent energy use from solar and wind and wave” – and to
“ take the money that is currently being used to search for oil
and use it to develop better alternatives to oil.”
The Reality: We believe in alternative fuels – but not in magic.
The International Energy Agency estimates that under a
“business-as-usual” scenario, alternative energy will account for
8 percent of U.S. energy use in five years. It concludes that
aggressive policies promoting alternative energy use could raise
the percentage to 9.5 percent in the near term – well below what
many respondents projected .
Alternative fuels also require corresponding technology changes.
Historically, it has taken 15 to 20 years for new automotive
technology to move from concept to widespread commercial
production.
Plug-in electric cars or hydrogen fuel could play an increasingly
important role in diversifying fuel choices in the transportation
sector. Today, however, they only represent a small
experimental place in the market. And in the meantime, many of
the cars and trucks on the road today, and those that will be built
in the next five to 10 years, will still be in use a decade from now
or longer and will still rely on conventional fuels.
6. The Myth: We can conserve our way to energy security.
Many people cited conservation as the most important strategy.
As one Pittsburgh resident saw the answer: “Penalties and
sanctions for those who waste incentives for those who
conserve.” Solutions ranged from adjusting thermostats and
encouraging mass transit to “draining the last drop of oil from an
oil can.”
The Reality: In our discussions, we have advocated a “culture of
conservation” that relies on energy-efficient technologies, but
that cannot be the full solution. Even to hold gasoline
consumption at 2005 levels by 2020, assuming implementation
of the new CAF standards, will require the average American
driver to reduce fuel consumption by about 20 percent – for
example, by taking mass transit once a week. That does not
reduce our dependence on oil – it just maintains the line. And
yet, as one Cincinnati town hall participant asked: “Who among
us is willing to lay down their car keys and take mass transit?”
Few hands went up when we asked for volunteers.
7. The Myth: Oil and gas companies make huge profits and are
sitting on mountains of cash. Oil and gas company profits are
routinely front-page news after quarterly earnings
announcements are published, leading to questions about what
happens to all of that money and why energy prices are so high.
The Reality: Oil industry profits are in line with other major
manufacturing industries. In the U.S., for example, data
compiled by the American Petroleum Institute (API) for the third
quarter of 2007 shows the oil and natural gas industry earned 7.6
cents for every dollar of sales, compared to other industries such
as beverage and tobacco products (21.6 cents earned for every
dollar of sales) and pharmaceuticals and medicines (18.8 cents
earned for every dollar of sales). Additionally, over the course of
the year Shell invested nearly as much as it earned in important
new projects around the world to secure a sound energy future.
---
2007 Est. World Supply: 85 million barrels/day
OPEC – 31
U.S. – 8.5
Non-Opec – 33.5
Russia – 12
2007 Est. World Demand: 84.5 million barrels/day
China – 7
Japan – 5.5
Asia – 8.5
Europe – 16
U.S. – 21
Russia – 4.5
Rest of World – 22
Sources: Energy Information Administration;
usenergysecurity.shell.com
Wall Street History will return next week.
Brian Trumbore
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