Shelling Out

Retiring Big Oil leader shares his thoughts on his accomplishments and gas prices

HOUSTON -- As consumers face triple-digit crude-oil prices, rising gasoline and natural gas prices, and the never-ending squeeze of tight supply and growing worldwide demand, John Hofmeister will leave his post as president of Shell Oil Co. June 1. Hofmeister discussed his departure, his accomplishments and his views on the state of energy and its future with the Houston Chronicle.

Q: Why are you retiring, particularly at a time when oil companies are scrambling for talent with work forces nearing retirement age and too few skilled professionals available to replace them?

A: Shell [image-nocss] has a preference that people leave at 60 because that enables us to retain younger generation folks who can move up faster. … People in their 40s want to see their path to the top, and if we had people like me hanging around for years and years, it discourages people whose ambitions would then be an outside shot. It also assures that people don't stay too long in their role at the top.

Q: When you came into this role, you were pretty unique among your peers at your level. Having not headed an energy division before, did you have a bigger learning curve than you might have expected?

A: Well, I've spent my entire career with technical companies, ranging from GE to Nortel to Allied Signal, now Honeywell, and now Shell. So I'm very comfortable with the whole range of technology. … While I'm not trained as an engineer or a scientist, I've been around and worked with it my entire career. I expect others had a harder time seeing me in this role than me seeing me in this role.

Q: When you took the helm of Shell's U.S. operations in 2005, Royal Dutch Shell was still grappling from the reserves accounting scandal, repeated restatements, and loss of credibility. One of your primary duties would be to help repair the company's image in the U.S. and rebuild confidence. Do you think you accomplished that?

A: I came with two explicit goals. One goal was for Shell to play at its weight in the U.S., and secondly, to raise its game in the U.S. I think we made progress. I think we can see it in our market share. We can see it in brand recognition across the nation. And our public response to the post-hurricane energy shortages, high prices, high profits, was to go talk to Americans across the nation to try to get the energy story out there.

Q: You're referring to the 50-city tour that was launched in 2006 and wrapped up in December. That made you unusually accessible. What did it gain, and how were you treated?

A: We started the whole process with the deepest respect for American pragmatism. We were well received, politely engaged. The 25 governors that we met, and the 20 big-city mayors that we met, all commended us for our outreach. The townspeople in our town halls were curious, a bit suspicious at first. But as the evening wore on in each case, the dialogue got deeper and deeper. It wasn't just me, it was some 250 other Shell managers over the course of that experience, said that this is a big, big Shell endeavor. It gave us a deeper respect for our stakeholders and customers. It taught us how critical this energy security issue is at the root of every community is their source of energy.

Q: How do you get through to people who are angry about gasoline prices and blame oil companies?

A: Addressing energy security requires a comprehensive, extensive, coherent strategy that covers many different aspects of energy, not just more drilling, not just the tax policy of the nation. With respect to current policy debates, we did get a bill in '05, '06 and '07 from the Congress signed by the president, which addressed some of the specific matters which need to be addressed. But in none of them, nor do all three of them put together, constitute what will deliver energy security for the nation.

It is very, very serious today in the sense that our president and the speaker of the house have both asked OPEC to produce more oil for the U.S. when they should be passing legislation that opens more drilling in the U.S. It does no good to invite OPEC to solve our problems if we're not willing to solve our own problems with our own people, our own U.S. dollars in U.S. waters or on U.S. land, to open up natural resources that we know exist, instead of forcing Americans to ship more dollars to exporting nations. We can't stop importing, but we could import less if we produced more.

Q: Oil prices have reached unprecedented heights, natural gas prices are up, costs to find both are skyrocketing, refineries are stretched to the limit, and companies are posting record profits that generate much criticism from consumers and politicians. How do you respond?

A: I understand that. It came up at every one of our 50 cities: Why are prices so high, and what are you doing with your profits? Those are fair questions. Why are prices so high? Because demand outstrips supply, including finished product. [That] is why Shell decided with our partner, Saudi Aramco, to double the size of the Port Arthur Motiva joint venture refinery between the two of us. For Shell that's $3.5 billion. Same for Saudi Refining.

Q: That's double the cost of what you originally thought it would be.

A: That's the inflation that has hit the industry because of the high prices. We don't like these high prices because it drives inflation, which makes it more challenging to decide to spend money. But if we don't spend money, we have less supply. It's a conundrum.

Q: You often say this nation needs to adopt a culture of conservation. What do you mean?

A: The culture of conservation goes much deeper into the American fabric than lightening up on the accelerator or jiggling home thermostats. We need better technologies and approaches to help build buildings, how we build homes, how we design appliances, how we design electronic equipment. I'm talking everything from HDTV to smart homes to smart buildings to smart cars to smart everything.

Q: At what point do you think energy prices will induce real change among consumers? Such as buying a hybrid instead of a Hummer?

A: I think change should come regardless of energy price. The nation is currently perpetuating an insidious harm on lower-income people by watching the price of gasoline go ever higher and not doing something about putting more oil into our national supply side.

There are some who advocate ever higher gasoline prices in the hope that it will get rid of oil as the primary source of energy mobility. They have an unconscionable negative impact on low-income Americans. If we're going to change the future use of hydrocarbons, then let's approach the CAFE (fuel mileage) standards. Let's create incentives for alternative technologies in vehicles, such as hydrogen fuel cells, which Shell is working on. Plug-in hybrids don't work for everybody. You have to have a place to plug it in. It works for people who have a garage. People who park their car on the street don't really have an option for plug-in hybrids.

But just to use price of gasoline as a mechanism to change Americans' behavior, I think, is un-American because we can use technology and innovation. Low-income citizens are so adversely impacted today that they're getting discouraged and angry and they're blaming the wrong source of the energy price. It is not the oil companies. It is the lack of supply as determined by public policy.

Q: How do you convey that?

A: American voters are smart. They may not be fully well versed on all aspects. They are smart when presented with facts. And the oil industry has done a fairly poor job of presenting the American people with facts. Where was the industry for the last 20 years? It was busy doing its job, but it didn't see its job as communicating with its stakeholders in a sufficient manner to deal with the adversity such as we know it today. As long as Americans were getting plenty of affordable gallons of gas, nobody complained. That was an unsustainable situation when the whole world started demanding those same gallons.

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