HOUSTON—A former president for Shell Oil Co. delivered a strong message to the U.S. oil and gas industry: get some self-help; the industry is partly to blame for its dire straits.

The dose of tough love served as a reality check for an industry that has accepted the sector’s up-and-down cycles, instead of doing what it can to change the game.

The latest downturn, the result of a supply-demand imbalance, have cut into profits and prompted many oil and gas producers to produce less until market conditions improve. Hundreds of thousands of oil and gas workers have lost their jobs.

“This cyclical nature of our business is somewhat self-imposed. Shame on us,” John Hofmeister, founder and CEO of Citizens for Affordable Energy, told a roomful of oil and gas executives. “Shame on us for two reasons: We haven’t figured out yet how to give ourselves some self-help. We are very fragmented.”

Speaking during the Decision Strategies oilfield breakfast March 10, Hofmeister said the industry—particularly oil and gas companies in the U.S.—is somewhat responsible for its predicament. Geopolitical wrangling forced leading OPEC producer Saudi Arabia to “defend itself against the hegemony of the Iranians and the Russians” by not lowering oil production—its and others’ economic lifeblood. That, he said, disturbed the market-balance supply-demand relationship, sending oil prices down and leaving U.S. shale producers among others as collateral damage.

But despite its intellect, the industry does not know how to help itself, Hofmeister said.

Competition, the “I’ll take care of mine; you’ll take care of yours and we’ll meet in the marketplace” mentality, is part of the problem.

“We have been manipulated and victimized too many times through too many cycles over the last 60 years by OPEC and by our own political leaders to our regret,” Hofmeister said. “But at the same time we see things that we leave alone that could be addressed.”

Oil Imports

He is referring to the millions of barrels of oil of imported oil that still flows into the U.S. daily, despite the country’s own hydrocarbon resource abundance.

“We have an underpriced, oversupplied generous bounty of natural gas, which could substitute for those 7 million barrels a day (MMbbl/d) of imported oil, by developing our natural gas resources in the transportation industry,” he explained. “We don’t seem get our act together on that.”

He pointed to T. Boone Pickens’ plan to use America’s natural gas resources as a transportation fuel for fleets and heavy-duty trucks.

“CNG and his clean power stations are making a small difference,” Hofmeister said. “Why can’t we make a larger difference?”

His solution: convert that 7 MMbbl/d of imported oil into its Btu equivalent of 30 billion additional cubic feet of gas per day (Bcf/d) and convert natural gas into not only CNG and LNG for transportation purposes, but also ethanol, methanol and GTL.

“You put that target in front of the industry to produce another 30 Bcf/d, build the infrastructure for transportation fuels, eliminate the imported oil and you disconnect the United States from the victimization of other nation states and organizations like a cartel,” Hofmeister said. “What you have is domestic investment in domestic fuel resources with the infrastructure to support it on an ongoing basis.”

He noted that he understands the position of global oil companies, which “look out for their global interests as they should. I’m speaking to the domestic industry and part of oil companies that serve the global supply chain with respect to their U.S. subsidiaries or U.S. divisions. What matters to me is that Americans are supplied with available, affordable and sustainable energy over time.”

More Options

Hofmeister compared the situation to a convenience store with drinks of all kinds. “Why can’t your car have all of those options when it comes to its fuel?” he asked.

But that may easier said than done, as implied by the flurry of questions that followed his talk.

“We would also be reliant on the auto industry to make this work. Right?,” one person asked, pointing out that the auto industry is not known for pushing out new technology right away. “How confident are you that the auto industry would be a good solid partner in making that work?”

Hofmeister said there is a lot of work happening at technical levels in the auto industry, not managerial levels, to test the engine’s ability to handle alcohol fuels. “Agreed, they are slow,” he said, but the product has to be right. Discussions are already taking place, including with policymakers on manufacturer incentives for alternative fuel vehicles, he added.

But he acknowledged that it will ultimately come down to consumer choice.

“All right, you’ve got our attention. … Now what?” another asked.

Hofmeister’s response in short:

  • Get educated on the subject;
  • Become more politically active, which is risky, vote, educate and explain the situation with family and friends so they understand, and
  • Be patient.

He also embraces a governance model that is similar to the finance industry, which has the Federal Reserve to help fix industry-specific problems.

Four elements of the energy industry warrant governance: supply, efficiency, infrastructure and protecting the environment and operating safely, he said. But effective governance is needed, instead of the “nonsense at the local, state and national levels” present today.

“We as an industry have a choice. We can sit back, let it be and ride the cycles. … [But] what’s wrong with staying steady? What’s wrong with predictability and continuity?,” he asked. “If we have governance over supply, efficiency, infrastructure and environment to protect the nation, and focus on economic improvement and the unemployment in the nation, is that so bad?”

Velda Addison can be reached at vaddison@hartenergy.com.