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Midland Reporter-Telegram: Shell president uses personal touch to explain prices

EXTRACT: In an accounting scandal in 2004-2005, Shell reduced its proven oil reserves, a move that continues to drag on profits. The company reserved $500 million in its second quarter to cover shareholder class action lawsuits.


Associated Press

LITTLE ROCK — If gasoline prices continue to drop, shareholders of Royal Dutch Shell PLC can take heart.

Lower prices create more demand, which will drive the price back up and bolster the profits of the big oil companies.

The president of the No. 3 oil company’ U.S. division, John Hofmeister, made that point during a stop in Little Rock as part of a 50-city tour. Hofmeister said he has selected personal appearances over an advertising campaign as a way to explain Shell’s take on the oil business to consumers.

He acknowledged that higher gas prices, $3 or even $2 per gallon, are a burden to lower income consumers. But he said the higher profits are enabling oil companies to develop greater refining capacity, better invest in future technologies and put money in shareholders’ pockets through dividends and appreciation in share price.

In its second quarter results announced in July, Amsterdam, Netherlands-based Royal Dutch Shell saw its profit jump 40 percent, to $7.32 billion from $5.24 billion, despite production problems in the Gulf of Mexico and Nigeria. That was on overall sales that rose less than 1 percent to $83.1 billion. Profit in the division that refines oil and sells it to consumers increased 13 percent, to $3.02 billion.

“Our job is to sell gasoline,” said Hofmeister, who has been Shell Oil Co. president since March 2005. Its U.S. division is based at Houston.

Hofmeister said the industry had watched China industrialize and consequently demand more oil. But, he said, a development that came as a surprise was the disappearance of excess capacity of 8 million to 10 million barrels per day in the Middle East. By 2004, he said that cushion was gone. Worldwide consumption is 85 million barrels per day.

“We’re living hand-to-mouth in the supply chain now,” Hofmeister said.

At the moment, there is more gasoline in the supply chain because oil companies built stockpiles to prepare for hurricane season. That, plus the end of the summer driving season, has brought prices down.

Crude oil futures dropped as low as $58.68 per barrel this week, a 14-month low, but much higher than the $12 dollar a barrel level seen in the late 1990s, a time he said oil companies couldn’t afford to innovate.

Hofmeister noted that Shell’s joint operation with Motiva Enterprises LLC is planning an expansion of a refinery in Port Arthur, Texas, a move that would increase production from 275,000 to 600,000 barrels a day. But the ribbon cutting is about seven years away.

Hofmeister is using the tour, in part, to explain to civic groups and other audiences that his company wants federal regulations loosened to allow for more U.S. exploration and development. He also scheduled a visit with students at the Clinton School of Public Service.

“We have to get past what I would call a public policy deficit in this country,” he said. “We need the frameworks in which we can build facilities, access energy, work with stakeholders to do all of that in environmentally sensitive ways, and open the outer continental shelf for oil and gas exploration.”

“We’re pretty upbeat about plenty of available conventional oil and gas (in the) Gulf of Mexico, off the coast of Alaska, on the outer continental shelf,” he said.

Unconventional sources include oil from shale in Colorado and sands in Alberta, Canada, Hofmeister said.

“What has peaked, I would say, is easy, conventional oil that is readily available. That has peaked,” he said. “Unless we use new technology for enhanced oil recovery in some of the old oil fields in California, Kansas, Arkansas, Oklahoma, Texas, then we would see continued steady decline in those oil fields.”

Carbon dioxide captured at power plants can be injected deep into the ground at the old fields as a way to force the oil and stow a greenhouse gas.

“There’s still a lot of oil in the oil fields,” he said, but there is a “lack of pressure to get the oil out.”

Hofmeister said he is also using his tour to listen to the “anger” of consumers and concerns businesses, as well as giving Shell’s views.

The company is working to make a profit from wind-generated electricity, which Hofmeister said could become an important source of power during times of high demand. The company is investing in biofuels and solar technology, as well.

In an accounting scandal in 2004-2005, Shell reduced its proven oil reserves, a move that continues to drag on profits. The company reserved $500 million in its second quarter to cover shareholder class action lawsuits.

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