After his 2008 retirement from the position of president at Shell Oil Co., John Hofmeister founded and has served as chief executive of Citizens for Affordable Energy. The organization’s goal is to educate Americans about energy and environmental challenges and solutions. Hofmeister spoke with E&P magazine about some of those challenges as well as crude supply initiatives aimed at fueling North America’s energy industry and consumer economy.

What is your outlook for energy affordability?

It’s my view that global demand, including US demand, is going to push oil price to triple digits this year, probably in the first half.

Is it accurate to expect US $5/gal gasoline in 2012 and $100/bbl crude in 2011? I think OPEC will be reluctant to increase production for a variety of reasons, not the least of which is that some of its members are really strapped with declining production. They need all the money they can get.

How important is the resumption of deepwater drilling to US energy markets?

With the Department of the Interior managing the richest oil basin in the US to full stop in terms of future drilling, production only declines in the Gulf of Mexico.

John Hofmeister

John Hofmeister is founder and CEO of Citizens for Affordable Energy. (Image courtesy of Citizens for Affordable Energy)

The absence of drilling will lead to production decline at a time when the world needs more oil, not less. I am projecting unscientifically up to 1 MMbbl/d short by the end of 2012.

The natural decline of production with the absence of new drilling yields roughly 1 MMboe/d out of the Gulf of Mexico by the end of 2012 into 2013. It will take years to recover that.

Will an incline in onshore unconventional oil production offset the decline in offshore production?

The Department of the Interior will quote figures of (onshore) drilling increases for 2010 versus 2009 to make it sound like drilling is increasing, not decreasing.But that’s different from (declining) production numbers from the huge reservoirs of the Gulf. Those will not be offset by the small incremental amounts of unconventional oil coming out of the shale plays.

In other words, you can drill night and day, which they do, but the amount of production is so modest relative to the big reservoirs in the Gulf. You are not discovering nor producing at the enormous quantities of the Gulf of Mexico reservoirs.

If you compare Macondo at 65,000 b/d spewing into the Gulf versus 1,000 b/d initial production, there is no comparison.

We have in the Piceance Basin in the Rockies – in Wyoming, Utah, and Colorado – about 1 Tbbl. But development has been blocked, particularly by Denver elected officials, most notably then Sen. Ken Salazar, who now happens to be secretary of the US Department of the Interior.

When you have the Department of the Interior run by an attorney general – which he was before he was senator – and a prosecutor from the Department of Justice, Michael Bromwich (now director of the Bureau of Ocean Energy Management, Regulation, and Enforcement), you get what you get.

That’s largely a mindset which says, “Stop!” so that no risk is taken, or “Stop! Or we’ll prosecute!” So we have been in a stoppage.

Juan-Jose Suarez-Coppel, CEO of Pemex, disclosed plans on CNBC to ramp crude production for internal consumption and export. Will rising Mexican production alleviate the US shortfall from offshore?

The predicted rate out of Mexico that we heard was to recover production to 3 MMbbl/d by 2015. But that did not sound unequivocal – he did not sound sure – and it was not a hard number.

If you tell the whole story of Mexico, they have mortgaged oil production in prior years for future production. They are mortgaged nine years into the future.

They were paid already for production for 2013, 2014, 2015, etc. So what they have to do is to keep mortgaging future production.

And that (forward arrangement) was mortgaged at then-current crude oil prices. Mexico faces a severe revenue problem which causes them to mortgage even more production. So the people who are buying those future contracts, they’re buying a lot of air.

The CNBC reporter after the (Pemex) report noted that when politicians run the industry, you get what you get. The same principal applies in this country when the politicians run the industry.

Right now what we are seeing is the Department of the Interior running the Gulf of Mexico right into the ground.

Canada already is the largest source of imported crude oil to the US. The TransCanada Keystone XL pipeline expansion seeks to extend that supply. Do you have any thoughts on the administration’s delaying necessary permissions?

It is an absolutely necessary part of our future infrastructure if we are going to continue to supply American consumers with the fuels that they need to live their lives and to keep our economy strong. That’s point number one.

Point number two is that the ecological issues raised by either oil sands or by pipelines of such great length crossing rivers, valleys, and lakes are fundamentally manageable.

If the American consumer is not going to be able to access the Canadian oil sands product, you can be absolutely 100% sure that Chinese consumers will.

Canada’s other major oil pipeline operator, Enbridge, recently announced an investment by China’sSinopec to study the feasibility of a westward pipeline from Alberta to Canadian West Coast export facilities. Do you have any insight on that?

The reality is the oil sands oil is going to be produced, period. It can go south, or it will go west to China. It will be consumed.

If the administration is so short-sighted and so insensitive to the affordability of fuels by the citizens of the US as to deny the pipeline’s construction, it is only a matter of time before the populace changes who is in government through an election cycle.

The president is at risk of losing a re-election contest based upon the real pocketbook issue of gasoline prices. His own Department of the Interior is directly contributing to the risk – by refusing to produce oil.

What else is in the hopper for the US E&P industry?

Two other (indicators) show the Department of the Interior is intent on stopping things from happening rather than making things happen.

The Interior secretary, of his own authority and without any congressional interactivity, has created a new concept called the “Wilderness Zone.” The secretary himself can determine areas sufficiently sensitive to disallow mining, drilling, or any other industrial use. Even worse, in my opinion, (is the development that) early in December, the secretary announced that he would postpone the next five-year plan, due in 2012, to 2017.

That is a message to the industry that, whether the president gets re-elected in 2012 or not, the Department of the Interior of the United States of America is putting on any offshore leases for the duration of how long they might be in office.

That says to the world that the US is not going to produce its own oil and is going to rely on more imports. This creates the psychology of high-priced crude.