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By Robert Rapier on Feb 26, 2007 with no responses

Shell’s Side of the Story

One thing that I have noted so far about living in the U.K. is that the general attitude toward oil and gas companies seems to be different than in the U.S. Despite the fact that oil and gas is crucial to modern daily life, oil companies are largely reviled in the U.S. The public simply hates us, even though they would have a tough time getting along without us. Perhaps it is because I am in the oil capital of Europe, Aberdeen, that the attitude is more accepting. Or perhaps it is because the government, not the oil companies, reap most of the benefit of high gas prices here (and that the public has lived with high prices for a long time).

Oil and gas companies have done a horrible job of dialoguing with the public to explain what it is we do, why prices go up, etc. In fact, my company regularly has opinion surveys in which employees are allowed to have their voices heard on issues affecting the company and the industry. Three years ago, I suggested that we get more involved in alternative fuels (which we have now begun to do). Last year, I suggested that we needed to go out and have some dialogue with the public, and especially with the critics. We don’t need to ignore them; we need to answer their questions and address their criticisms.

That dialogue has begun to take place. Byron King, whose writings at Whiskey and Gunpowder I enjoy very much, recently reported on Shell president John D. Hofmeister’s recent stop in Pittsburgh:

The Shell Answer Man and Peak Oil Part I

The Shell Answer Man and Peak Oil Part II

Byron opens with:

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.

Given the importance of energy in our society today, as well as the many misconceptions about this industry, I wish everyone could go to these events and have a chance to ask their questions and vent their frustrations. Sometimes, you just might get your paradigm shifted. I have interacted with enough people to understand that some are going to hate oil companies, regardless. But most people’s minds are at least somewhat open, so there is a chance of them actually listening and coming away with a better understanding of what it is that we do (even if they still hate us).

[As an aside, I do not deny that some companies (like ExxonMobil) have a history of funding global-warming deniers. I find it pretty reprehensible any time science is being funded on the basis of supporting a particular viewpoint. I am not suggesting that Global Warming science should not be challenged. Of course it should. That’s what science is all about. But scientific consensus, which this issue has, should not be taken lightly. The scientific consensus, while spectacularly wrong in some instances, is right the vast majority of the time.]

There was a particularly interesting discussion on Hofmeister’s salary, but here was the story that I thought really drove home what goes on behind the scenes:

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.

There is a lot that goes on behind the scenes to keep the corner gas station supplied with fuel. People are called out to fix equipment in the middle of the night. Weekends are interrupted with emergencies. Many people tragically lose their lives every single year on the job. (We lost one at my location just two weeks ago; he fell off a boat in the North Sea and drowned). So it is particularly bothersome to me that my industry is held in such low regard.

On the subject of oil shale, I could only smirk:

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.

Don’t say I didn’t tell you so:

“Oil Shale Development Imminent”

I just don’t believe we are ever going to see the trillion barrel reserve of oil shale contribute to our energy needs. The energy return is just too low, and barring a technological miracle, it will remain as out of reach for us as the methane lakes on Titan.

Finally, Mr. Hofmeister commented on Peak Oil:

As I mentioned in Part I of this article, Mr. Hofmeister takes questions as well as gives speeches. And so I asked him straight up about Peak Oil: “Mr. Hofmeister, does Shell Oil have a corporate policy or position on the concept of Peak Oil, which you know was pioneered by former Shell geologist M. King Hubbert?”

And here is exactly what Mr. Hofmeister said: “Among informed Shell executives, there is a rejection of the Peak Oil theory.” Peak Oil is, he stated, “based on flawed assumptions.”

I hate answers like this. Among informed Shell executives? That’s just an example of the “No True Scotsman” Fallacy. Mr. Hofmeister gave 3 reasons for rejecting Peak Oil “theory”:

1. Peak Oil deals with conventional oil and does not take into account sources of unconventional oil, such as tar sand, oil shale, and heavy oil.

2. Peak Oil assumes that technology is static, when, in reality, there have been “huge strides” in the ability to enhance oil recovery from older oil fields.

3. By diversifying energy resources, “People will switch demand to other energy sources” long before conventional oil runs out.

Mr. Hofmeister’s answer here indicates to me that he is misinformed about what Peak Oil actually is. First of all, it isn’t a theory. It is an observation. It doesn’t mean that we are running out of oil. It refers to the point where oil production has peaked and started to fall, just as it has done in the U.S. since the early 70’s. And no amount of unconventional oil, technology, or diversified energy sources has prevented the U.S. from importing increasing amounts of oil year after year, even though we have plenty of incentive to reduce imports. But when the peak is on a worldwide basis, imports can’t make up the shortfall, leaving us with a bit of a problem.

Shell should be familiar with this idea, given that they have been unable to replace their reserves in recent years (the same is true for many other oil companies). And if you can’t replace your reserves, eventually your production is going to start falling.

Furthermore, even if we don’t have a true peak in the next 2 or 3 years, the supply/demand situation is likely to remain tight. In a market with little spare capacity, increasing demand that outpaces supply (even is supply is increasing) behaves much like Peak Oil in the scenario I have dubbed Peak Lite.

Either situation, Peak Oil or Peak Lite, means we are going to have to make do with less. The sooner we implement policies to conserve our remaining supplies and adopt alternatives that make sense, the less likely we are to have a disastrous transition.

Anyway, I encourage you to check out the links to Byron’s essays. There is a lot that I didn’t cover (Shell’s involvement in cellulosic ethanol, for instance), and the essays were very informative (as his essays always are).