Houston Chronicle: Shell’s Hofmeister reflects on tenure at the top

March 17, 2008, 9:36AMBy KRISTEN HAYS
Copyright 2008 Houston Chronicle

As consumers face see triple-digit 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 as per a company policy that essentially requires top executives to retire at 60. Hofmeister reached that age in January.

The company named Marvin Odum, 49, now Shell’s executive vice president of U.S. exploration and production, to step into Hofmeister’s top role.

When Hofmeister was elevated to his current role more than three years ago, he was an industry frontman like no other. He’s not an engineer, nor did he start out as a geologist or run a refinery. He earned degrees in political science at Kansas State University, and then spent years in top human resources roles with General Electric, Northern Telecom and Allied Signal — now Honeywell International — before he joined Royal Dutch Shell in that capacity at its Netherlands headquarters 11 years ago.

Shell installed him at the helm of its U.S. arm In January 2005 with a mandate to buff up its image tarnished by a reserves accounting scandal that emerged the prior year. In August and September, Hurricanes Katrina and Rita savaged the Gulf Coast, severely damaging oil and gas production infrastructure in the Gulf of Mexico and downing much of the U.S. refining and processing infrastructure concentrated on the coasts of Texas, Louisiana and Mississippi.

Oil and natural gas prices spiked — though crude had a long way before reaching today’s three-digit levels — and Hofmeister realized it was time to get up, get out and talk energy in cities across the country. Shell determined that the industry, always an easy target in times of high prices and bountiful profits, needed to engage consumers about supply, demand, energy efficiency, and public policy.

He aims to maintain a voice in energy policy once he leaves Shell, but as an author and speaker, not a lobbyist.

Hofmeister, who also is a member of the Greater Houston Partnership and served as its chairman last year, sat down with Kristen Hays to discuss his departure, his accomplishments, and his views on the state of energy and its future.

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

A: Shell has a preference that people leave at 60 because that enables us to retain younger generation folks who can move up faster because we leave early. This happens around the world with Shell, and it only applies to seniormost executives. 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, whether it’s aerospace, telecom, energy and GE’s equipment businesses. 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 criticial this energy security issue is at the root of every community is their source of energy.

Q: In this election year, the candidates don’t seem to be talking about energy very much. Last month’s presidential summit in Houston run by the Greater Houston Partnership attracted only one candidate, Hillary Clinton. Why is this?

A: Keep in mind that we’re still in the primary season. I think that in the primary season, candidates can build on their strengths for the purpose of attracting the people of their parties to choose them for the presidential nomination. I can’t imagine the nominees of either party not taking energy as a serious issue in the national campaign. It is a must-succeed issue for America.

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

A: Addressing energy security requres 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 witih your profits? Those are fair questions. Why are prices so high? Because demand outstrips supply, including finished product. Which 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. The more money we spend, the more it erodes with the current inflation. But if we didn’t spend money, the inflation would be even greater.

Just in the last six months, Shell in the U.S. has committed $7 billion. In addition to Port Arthur, we’ve committed money to Gulf of Mexico lease sales, offshore Alaska lease sales, and to our normal capital improvements. If the Congress decides to tax us further, that’s their prerogative, but it simply means that $7 billion in the last six months would have been something less because of the higher taxes. If we do this going forward, whatever we get taxes will go to the government, it won’t go into increasing supply.

Q: On the subject of Motiva, less than a year ago you expressed concern about increasing refinery capacity in the U.S. after President Bush unveiled a goal to reduce gasoline use by 20 percent by 2017 be increasing production of ethanol. Why did you move forward with the project?

A: I never suggested we would back off Motiva. My statement was more general. When investors in refining see public policy changing with such a huge increment of biofuel out there in the future, it might cause some to question the value of further refining investment. I said some, I didn’t say Shell. Shell views the needs of the refining marketplace as warranting this major investment, including the biofuels increment in the future.

Q: You have embraced the science of climate change and Shell has invested billions of dollars in alternative sources of energy. You have repeatedly touted the importance of energy diversity, or a mix of fossil fuels as well as solar, wind, biofuels, and technologies that would unlock other sources. But energy forecasts consistently say that fossil fuels will make up more than 80 percent of the energy mix for the next 40 years or so. What would it take to change that?

A: I think Shell is extraordinarily committed to greenhouse gas emissions management. Not just because it’s politically correct. We’ve been at this for over a decade. Because hydrocarbons will be a part of the future, we have got to create a capping system and the incentive system, known as the trading system, to incentivize companies and those technologies, which will make more efficient use of hydrocarbons. (A cap-and-trade system would limit the amount of greenhouse gases companies could emit, but allow those producing more to purchase credits from those producing less.)

I put great stake in the potential of coal gasfication with carbon capture and storage (or capturing carbon emissions and injecting them underground). But it needs a political framework, a governmental framework, in order for it to move forward because it needs infrastructure. It needs carbon to be priced at some reasonable level. But it has to be paid for. Very few appointed or elected officials like to talk about cost increases of something as basic as energy or climate action. If we’re going to continue to build an economy on an energy source that includes hydrocarbons, and there really is no alternative to that, it’s going to be a combined effort of government, companies, communities to understand what’s at stake here.

When I’m no longer at Shell, I intend to continue to speak on this subject, and to be actively involved in public policy debate. I will not lobby, but I will involve myself in the public policy debate that moves this nation to a better set of solutions than it currently has.

Q: So cheap gasoline and electricity is not a guarantee?

A: I think energy can continue to be affordable. The cost increment I’m talking about is that which would support climate change solutions, greenhouse gas management solutions, and just let us go get the energy we know is out there. Stop prohibiting us by public policy from producing what we know is there. People blame the oil companies for high prices. I blame public policy and misunderstanding by elected officials for high gasoline prices. (Last week) the Senate once again voted 51-47 to deny access off the coast of Virginia as part of an amendment to a budget bill. Once again, our national leadership says no drilling. In the 85 percent of the outer continental shelf of the Lower 48, they’ve reinforced, “We don’t want you to drill there.” And now they want me to come in an testify in the House on April 1 or 2 as to why prices are so high.

Q: What other choice do you have? More than 80 percent of the world’s reserves are controlled by other countries. Some have taken control of foreign-run operations, like Russia and Venezuela. Shell got a big taste of that in December 2006 when Gazprom, Russia’s government-owned natural gas company, took control of the Sakhalin-2 natural gas project in December 2006 and reduced Shell’s stake by half.

A: The world is an uncertain place.

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. HDTVs, certain models, use 50 percent more energy than analog televisions. Once people see an HDTV compared to an analog visual, everybody wants an HDTV. We want to see our candidates debate on HDTV. We can count the wrinkles. Or not.

I’m being facetious, but everything we do tends to warrant the use of more electricity. If we do not adopt a culture of conservation which drives efficiency of design, efficiency of use, efficiency of purpose, then we’re missing what I think is one of the great changes our society can embrace as part of energy security strategy.

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.

Q: You said you want to continue to be part of this dialogue. What is next for you?

A: Well, we (Hofmeister and his wife, Karen) have started a little company, JKH Group LLC. It will be the basis on which we can put our voice out there. By writing, speaking, engaging in the public debate we hope to continue to draw attention to the issues that the industry faces. In additon, I’ve had 35 years of large company corporate experience, senior leadership positions in the last 20. If I can assist others with their leadership challenges, their communications challenges, I’m happy to do that. Karen and I have two books we’ve been working on, and we’ll now have more time to move from work in progress to completed product. They’re about two different ways about approaching leadership challenges.

Q: What kind of advice are you offering your successor?

A: The good news is that Marvin and I have worked together almost my entire 11 years at Shell. I first met him when he came over to Europe to run one of the gas and power regions. He came here to the U.S. just a few months after I did to run his current E&P upstream job. So we’ve worked very closely together over these last three years, whether it’s the hurricane recovery, the messaging that we’ve been trying to get out there on energy security, whether it’s the Perdido project, the other Gulf of Mexico projects, the development of the unconventional oil shale in Colorado, the Chukchi/Beaufort Sea leases. I think the advice that I would offer him is more of the same.

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