John Hofmeister's mission: educate the public about energy

OIL & GAS FINANCIAL JOURNAL: John, most people remember you from your time as president of one of the world's largest energy companies. Can you explain how you happened to take up the cause of educating the public about energy and what impact you hope to have?

JOHN HOFMEISTER: I became convinced at Shell that the American people are smart and pragmatic, but they only know what they know about energy based on what their sources of information are. If their sources of information are the energy companies themselves, they know very well that I have long been critical of the energy industry for being poor communicators with respect to what energy means and what energy does and where energy comes from. I tried to change that during my time at Shell with an extensive outreach agenda that took us coast to coast, as well as Alaska and Hawaii. We were trying to get the word out as to what's behind these ever-rising prices and what's behind the energy shortages of the future. But only a couple [of companies] in the industry followed suit, so the public is not getting the information it needs from the energy companies.

If people rely on their elected officials for information, they get a very politicized view – either a right-wing view or a left-wing view – because there's really no one speaking on behalf of the centrist view of America's energy interests. So, rather than just complain about it, I decided it's time to do something about it, and I formed Citizens for Affordable Energy as a not-for-profit organization. Our whole purpose is education; we're not a lobbying organization, and we're not promoting a particular agenda that benefits us commercially. We are non-political, non-partisan, and non-commercial. Our goal is to educate the American people on a grassroots level with understandable information about what is going on, what the future holds, and what we as citizens can do about the future. If we rely solely on the political class to determine our energy future, we're in serious trouble as a nation.

OGFJ: You say you're not a lobbying organization. How will you be able to create change then?

HOFMEISTER: We'll meet with members of Congress, the administration, and state officials to educate them about what we're educating their people on. I believe in a close, working relationship with elected and appointed officials. I've seen what lobbying is, and it's not who I am. I don't want to get into the rat race of lobbying. I respect lobbyists; they have an important job to do for their companies and their industries, and I wish them well.

OGFJ: Are you finding that the officials you've talked to so far have been receptive to your goals and what you're doing?

HOFMEISTER: I'm encouraged by the response we've had so far. They are happy that we're trying to educate their constituents about energy. However, we've also found they are very opinionated, often with their own rather thin set of facts. So we end up with a Democratic agenda or a Republican agenda. What I'm trying to create is an American agenda, something that brings out the best of both sides because there are good ideas on both sides. What we need is a holistic, comprehensive approach rather than a politically-driven approach. If we can get the politics out of energy, we can provide more energy to the American people.

OGFJ: How can we do this? Does the situation have to reach a crisis stage with brownouts and blackouts before our officials will stop being partisan?

HOFMEISTER: Let's hope not. I hope we can solve this with rational, logical, straightforward, good old education. It's that simple. But, that said, Americans seem to function at their best in a crisis, and it may take a crisis, whether that crisis is high prices or shortages of either liquid fuels or electrons, as the case may be. If we continue our current course, I can guarantee that by the end of the next decade, we will be having shortages of both liquid fuels and electrons, and the American people will think they are living in a Third World country because we're not reinvesting in our energy base. Ninety-three percent of America's energy comes from an established base that is predicated on oil, gas, coal, and nuclear – both liquid fuel and electricity. If we don't reinvest in that 93% and instead spend all our time on the 7% – and, by the way, 5 of the 7 percentage points are hydropower – then we are focusing all kinds of excitement and effort on just 2% of our total energy source.

There's nothing wrong with doubling the 2% to 4% or from 4% to 8%, but let's not forget about the 93%. So what we don't hear are mainstream political party initiatives that support the 93%. Both sides need to agree that the 93% is what made this country great and what we need to continue the economic competitiveness of our country and the lifestyles we enjoy. At the same time, I believe we can invest more in the 93% and have cleaner air and cleaner water. So we need to combine the environmental improvement with improvement in the underlying base.

OGFJ: What about coal? The US has an abundance of coal. Have we given up on coal as an energy source due to environmental considerations?

HOFMEISTER: I've got to tell you a story. I was in a meeting recently in the nation's capital, sitting next to a person roughly my age from an electric utility in Michigan. Now, I'm 61. He said that the NEWEST coal-fired power generation plants in Michigan are ones that he worked at as a new graduate. That's over 30 years ago. So no new coal-fired plants have been built in Michigan in over three decades, and that's true all across the country.

We now have nuclear utilities that are requesting 20-year extensions on their operating licenses. The plants are 30 years old, which was their estimated lifespan when they were built. Each nuclear plant generates an enormous amount of electricity. If the extensions aren't approved, they will be shut down. We aren't building any new nuclear plants, and we don't have anything to replace them. I suspect the extensions will be approved, but that is living off a legacy of the past, and we're going to pay a price for it. Within a decade, if we don't invest in the base, we're literally out of power.

OGFJ: Isn't the electricity transmission infrastructure in pretty bad shape?

HOFMEISTER: Yes, the transmissions lines are old. There's a lot of talk about building a "smart grid," and a lot of people confuse the smart grid with transmission lines. Well, transmission lines take power from where it is generated and transport it long distances. But the smart grid is literally going right into the home and the neighborhood. It adjusts electricity use as it is taking place in the home with intelligent operating devices that shut off things when they're not needed or turn on things when they are needed. We need more transmission lines, particularly if we're going to develop renewable energy like wind and solar. There's no good in building a solar farm if you're not going to connect it to the grid. Often the best places for solar farms and wind generation is far from populated areas, so we need to build the infrastructure to bring this power to where people live.

OGFJ: Matt Simmons told us a while back that he is involved in a project to build a large offshore wind farm off the coast of Maine. What are the prospects for offshore wind?

HOFMEISTER: Offshore presents an opportunity for wind development. There are places off our coasts where the wind is fairly constant, but the cost of building anything offshore is higher than on land. Maintenance costs are higher, too, and there are uncertainties about offshore operations, especially in the northern part of the country where you have a lot of moisture. The wind turbine blades can attract moisture and ice. You can try to manage this by shutting it down or perhaps in the future by building some kind of climate control in the blades, but this is pretty expensive and it uses energy.

Matt has an interesting view on oil and gas infrastructure. He says that the normal wear and tear and deterioration warrants a $1 trillion investment to refurbish the existing oil and gas infrastructure, let alone build new. That's a trillion dollars that people haven't factored into anything, and Matt, in his typical insightful way, is calling it out and saying, look, a lot of these offshore pipelines, platforms, refining systems, storage tanks, etc. are getting up there in years and they need continued maintenance. Steel wears out, joints get tired, gaskets grow thin, all kinds of things happen. And what we don't need is the despoliation of the sea or the land because of old infrastructure. This is $1 trillion that needs to be spent in the US alone to refurbish and bring it up to standard.

OGFJ: Is it reasonable to think we can achieve energy security by exploiting the oil sands in Canada and oil shale in the United States?

HOFMEISTER: The concept of energy independence is a great sound bite but is not realistic. Why would we cut off some of our best trading partners, who happen to ship oil to us? In return, we ship all kinds of technical exports to them. We enjoy an excellent relationship with these countries, so why should we go up and punch them in the nose and say we don't want your oil? The oil independence issue is played loudly in political campaigns, but the underlying reality I would describe differently. America uses roughly 20 million barrels [of oil] a day, and we currently produce about 7 million. If we took the oil sands in Canada; the oil shale in Colorado, Utah, and Wyoming; and if we took all the offshore assets that we have, I believe, with a determined effort, we could raise our domestic production from 7 million barrels per day to 10 million barrels per day over about a decade. That is a huge endeavor and it would create hundreds of thousands of jobs, and it would say to the world at large that we are going to be less dependent on global trading systems in the future, though we will still be a player.

That additional 3 million barrels of oil still only gets us half of what we are currently using. With biofuels, we can produce the equivalent of another 2 million barrels. With strong conservation efforts and more energy-efficient vehicles, we can save the equivalent of another 2 million barrels per day. If we do all this, we've added the equivalent of 7 million barrels per day to our domestic production. We've doubled production. That is the way we should address this issue. We will still need to import about half the oil we use regardless.

OGFJ: Boone Pickens has noted that the US has abundant reserves of natural gas, and he suggests we ought to build more natural-gas powered vehicles. What is your view of this proposal?

HOFMEISTER: Well, I think it would be very good for BP investors if national policy were to encourage the use of compressed natural gas for transportation. While I see nothing inherently wrong with using natural gas for transportation, I do have some concerns. One concern is that using new fuels like natural gas in inefficient engines is a waste of energy. The internal combustion engine, by design, is only 20% efficient. So regardless of what fuel we use – gasoline, biofuels, or CNG – the engine is still only 20% efficient. We're just finding new fuels to feed that monster. Short term, I'm okay with any kind of fuel that gets us down the road. But, longer term, it's not in our nation's best interest. Over time, hydrogen fuel cells and battery-powered vehicles offer a better alternative than the internal combustion engine.

An additional question is – how many new infrastructures can we afford to build to feed the beast? If the beast is the internal combustion engine, how many infrastructures can a retail station manage efficiently and profitably? If we start piling infrastructure on infrastructure, the volumes you sell probably won't pay for the infrastructure. If the station has several grades of gasoline, diesel, ethanol or biofuels, and then you add compressed natural gas to this, the cost becomes prohibitive. You're treating the consumer badly if you mandate these infrastructures. Do we mandate addition infrastructures for battery-operated vehicles and fuel cell vehicles? How many infrastructures can we stand?

Natural gas is such an important national resource that we ought to decide what is its most important strategic use. Personally, I don't think transportation is the best use of natural gas. Industry and processing and electricity generation are far more strategic uses of natural gas, particularly industry and processing. Frittering away our natural gas resources on transportation is a short-term approach to long-term disaster. As long as we have the internal combustion engine, we have other fuels we can use. Save the natural gas for future generations.

OGFJ: You mentioned fuel cells and battery-powered vehicles. Do you think it is the role of the government to provide financial incentives to get people to move away from the internal combustion engine?

HOFMEISTER: Over time, the government's role is to help our society improve itself. If we have the technology and the wherewithal and it's commercially viable, I see nothing wrong with innovation and technology bringing us a different form of transportation. However, we shouldn't get too enamored with it. We need to remember that batteries need to be recharged and should ask where the electricity is coming from that allows us to recharge those batteries. Are the batteries environmentally sustainable? Batteries use some pretty nasty chemicals, so when those batteries are ready to be retired or decommissioned, what do we do with them? Do they go into landfills and rivers and streams? If so, shame on us. I don't hear any environmentalists talking about what we do when the batteries need to be disposed of. Is this clean energy? I don't think there's a home run here in terms of sustainability. I think it's a mixed bag.

OGFJ: Where do you stand with regard to improving public transportation, and how would you do it?

HOFMEISTER: If we had taken the whole $800 billion economic stimulus plan and dedicated that only to mass transportation, we probably would have done the nation far more service over the longer term than the manner in which we allocated the funds across the board. Building out a superior public transportation system would have spurred economic development around the country, created huge job opportunities, and enriched the lifestyle of Americans. Can you imagine what this country would be like if we had the enormously efficient transportation system that Europe has? That said, we don't have such a system in place now. Until we do, we shouldn't punish the providers of fuel or the makers of automobiles.

OGFJ: You spoke at a Gardere event at the Houstonian recently and mentioned that there are 13 different agencies in the excutive branch of the federal government alone that regulate the energy industry in various ways and that they all work independently from one another. Then there's Congress, the judiciary, and the 50 states. How difficult is it for an energy company to deal with this bureaucratic maze, and what can be done to streamline energy regulation?

HOFMEISTER: We need fundamental reform in order to deal with energy and the environment simultaneously. Our government is huge and continues to grow, and it becomes ever more dysfunctional because of its size and its complexity and its contradictions. We need an intervention, so to speak, that treats the whole broad subject of energy and the environment in a manner that rises above the normal political process. We have learned in history that if we don't manage financial stability, it manages us. We went through the 19th century with one financial panic after another, one economic recession and depression after the other, one bank closing after another.

In my view, we need an independent organization similar to the Federal Reserve to regulate energy and the environment. The Fed has its own rules, its own funding source, it has an appointment process that is not dependent on two- and four-year election cycles. It is relatively independent of the vicissitudes of politics and what is popular at the moment. If we fail to take the politics out of energy, we are going to zig-zag our way right into Third World status, and that's where we appear to be heading at the moment. Energy is too important to leave to everyday politics. I think that creating a Fed-like energy board is the only way a modern civilization like ours will be able to not just sustain itself but to grow. For 35 or 40 years we haven't been able to decide to build a new nuclear power plant. Outside of a little patch of the Gulf of Mexico, we haven't been able to drill offshore for three decades. For Pete's sakes, we can't continue this kind of indecision. Politics is driving us right to the brink.

OGFJ: Hydraulic fracturing is a hot-button issue for certain environmental groups today. Are our current regulations for this procedure adequate?

HOFMEISTER: We have to balance our energy needs with the need to protect the environment. An energy/environmental Fed would do this as part of its charter. We need the thoughtful scientific analysis of an independent agency that has the nation's welfare as its goal. We could count on such an agency to make decisions that are rational and reasonable for the nation. My concern now is the way we are approaching the regulation of fracing. All the new tight gas formations may never get developed because the fracing regulations are so onerous, so expensive, that independent operations in particular say, "Not for me. No thank you." I, for one, don't feel we can rely on Congress for the best scientific analysis or decisions. These are political decisions they are making – not scientific or technical. If the EPA has no accountability for energy, that means there is no trade-off. The decision is one-sided. And energy/environmental Fed would combine the best of both.

OGFJ: What about the argument that decisions such as these should be made on the state or regional level?

HOFMEISTER: Well, shale formations are not isolated to single states. Geology doesn't recognize state lines. The water table and water movement don't stay within state boundaries. And the nation's energy security is more than just a state's interest, as is water quality. In my view, these decisions should be made on the regional or national level.

OGFJ: You talked about the end game at the Gardere event. What is the end game, and what does your organization plan to do?

HOFMEISTER: The end game for Citizens for Affordable Energy is nationwide education activity where people live. We hope to have chapters in all 50 states and in multiple cities across the nation. The mission of each is to provide engagement on the issues of energy and the environment for the purpose of national discussion on the facts and the realities and the solutions that are non-political, non-commercial, and non-partisan. The engagement process is very important for adults. With respect to school children, primary through secondary through post-graduate, we plan to provide interesting, factual, scientifically-sound educational materials free to school systems to adopt into their normal curriculum.

Our business model is two-fold. To get started, we're looking for contributions from philanthropic foundations, individuals, and energy-consuming companies. Over time, we plan to shift to a membership model where millions of Americans will pay a $12 membership fee to help educate other Americans across the nation where they live. It's non-threatening, non-hostile, non-political – but very, very interesting stuff.

OGFJ: Do you have a model you're following to accomplish all that?

HOFMEISTER: Yes, we have four principles that we're promoting called the "4 Mores." 1) Energy from all sources; 2) more technology and innovation for efficiency; 3) more environmental protection; and 4) more infrastructure, both legal and physical, to bring energy from where it's produced to where it's consumed. By adhering to these four principles, people can have very interesting discussions about how to solve these problems rather than fractious dysfunctional political debates over something like global warming. The issue isn't global warming; the issue is gaseous waste and pollution and what we can do about it.

OGFJ: Thanks for your time and best of luck to you.

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