The Energy Debate...Shell's Perspective
Brian Trumbore
President/Editor, StocksandNews.com

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.

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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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