Shell USA President: Recovery from Strait Closure May Take Up to Six Months

PAULA NEWTON: Now, think about this, even if the Strait of Hormuz reopened today, it could still take up to six months for operations to return to normal. That’s the warning from the president of Shell U.S. who says the disruption caused by the Iran war will be felt long after any kind of peace agreement here is reached. Colette Hirstius joins Walter Isaacson to discuss how one of the world’s largest oil companies views the crisis and what she believes lies ahead for the future of America’s energy.

WALTER ISAACSON: Thank you, Paula. And Colette Hirstius, welcome to the show.

COLETTE HIRSTIUS: Great. Thank you, Walter. It’s really great to be here with you today.

ISAACSON: All sorts of things keep happening each day, involving the Strait of Hormuz. As the President of Shell U.S. and as a part of that big company, tell me your feelings about what happens if we don’t get the strait opened in the next few weeks or so.

HIRSTIUS: Thanks for the question. And I think the important aspect to understand about the situation that we’re in is the amount of volume of energy that typically flows through the strait. We’re talking about 20% of the energy, both oil products as well as natural gas in the form of LNG, that comes out of the strait to feed, you know, our global economy. So what’s happened over the past hundred days is that we have a hole of — a gap, if you will — of product that’s missing off of the market.

There have been many things that have buffered the impact of that hole. One is that we came into this environment in a healthy way. We had a buffer, if you will, because we were slightly oversupplied against the demand. And we saw an impact in prices. Prices were softening and expected to through the course of this year, which we have not seen because of the impact in the strait.

Within that, we’ve also seen some other product flows come on to the market through release of the strategic petroleum reserve through additional levers that the administration has pulled that have had a positive impact. Things like the Jones Act waiver. And that brings me to your question, which is what happens if the strait doesn’t get opened? The reality is that we will be in an environment where we have low product supplies. That will result in an increase — an expected increase from the price that we see today. So we anticipate more pressure both on crude and on products that come from that product — from that, the crude overall. And we anticipate that that will continue until prices get high enough that demand is actually destroyed. That process of demand destruction is pretty abrupt. It’s, you know, a a bit of a brutal and blunt force that we wanna —

ISAACSON: And you mean a recession happens, is what you’re saying?

HIRSTIUS: I mean, it can be much more subtle and soft than that. It can be flights that are canceled. It can be it, you know, and then of course as that progresses on, it gets more challenging and more difficult. So, I think that’s the aspect and the focus that Shell has is continuing to make sure that we’re getting our products to market and that we are able to provide the products that our customers need.

ISAACSON: And the inventories have been drawn down a whole lot, right? Doesn’t that impact things?

HIRSTIUS: It does. And, it, the position that we came into this war from was one of a pretty healthy situation. Inventories have been drawn down. And we continue to work to make sure that we’re supplying our products to market and getting those to customers in the best way that we can.

ISAACSON: Well, let me try to parse that, which is you — how long do you think it will take for us to get back to normal if indeed the strait reopens soon?

HIRSTIUS: Yeah. There are many elements of the process that need to fall into place. The first is that we need those, you know, the strait needs to be opened. There needs to be a degree of security where we can move the products out of the strait. And then we need to restart the upstream engine. That’s really — the wells flowing. There’s some, there has been some damage, although not as extensive. It was early on in the conflict. And, some of that damage will take time to fix. Then it needs to flow into new tankers that come into the strait. And then those products need to get to market.

I’d say that they, we will return to a normal cycle, but it’s not gonna be in a matter of weeks, it’ll take more like quarters to half a year to return to that normal operations.

ISAACSON: Well, you’re in Washington right now, wandering probably to the West Wing and talking to people. What are you telling them or what are you suggesting to them?

HIRSTIUS: There are a few key points to make at this point in time. One is the importance of, you know, getting the strait open. The second is that supplies have continued to diminish. And a third point is that while many of these positive options have been exercised — so the decision to release volume from the Strategic Petroleum Reserve, it’s for situations like this. And on the Jones Act, a waiver from the Jones Act, so that we can more freely move products in and out of our country, has helped. And so emphasizing that the, the options that remain, there are not many. We need to continue to support production. Domestic production is a really important part to realize that the situation had, had we been 20 years ago when we were a net importer, the impact that we would’ve felt in the U.S. would’ve been significantly different. So our natural resources that we have in our country have been utilized to provide some of the buffer and security for the environment that we’re in.

ISAACSON: Well, you were actually very involved in that because you were in charge of Gulf exploration as a geologist. You also, besides being president of Shell U.S., you are senior vice president, I think, for the drilling in the Gulf. Having so much oil from the Gulf right now, does that buffer us? Does that make it in some ways as a silver lining to this, that we’re a net exporter?

HIRSTIUS: Without a doubt. So the situation in the U.S. that we are an exporter and that we — so we have security in our resource base, but that doesn’t mean that we are fully independent. And I think that’s an important aspect to realize that while we have abundance, we do import different products to create the products that we then export. And we want to continue that flow of products where we’re sending products both out to our country, but also out to our allies. And that we are receiving products that we need to continue to produce and deliver energy, you know, to our customers and to our society as a whole.

ISAACSON: Wait, what I think you’re saying, and correct me if I’m wrong, is you’re telling people in Washington, Don’t put a ban on the export of liquified natural gas and oil, which some of us might say, why are we exporting it? Why don’t we stop exports right now?

HIRSTIUS: I think that’s exactly right. So if we were to see that type of action taken, it would be very difficult for us to continue to produce at the volumes that we are — both for our country, but also for the customers that we have in our allied countries.

ISAACSON: Are you worried that in some ways people on both sides of the aisle, more of the populous flank of the Republican party and Democratic Party, are saying things like, Maybe we need price controls, maybe we need to stop exports?

HIRSTIUS: If I think about where we are, there’s an important aspect of predictability and continuity of our businesses. That’s how we can continue to invest and maximize both our production, but also our support for domestic and allied policies as a whole. So those sorts of actions, which would be very short term focus, in the long run will be quite damaging.

ISAACSON: And what about you’re gonna make probably large profits, especially for the second quarter ’cause prices have gone up. What about those who say, Okay, that — we should have a windfall profits tax, y’all don’t deserve that?

HIRSTIUS: Yeah. The question of taxes as a whole and what we need to do, or what actions exist, the most important action is to open up the strait. It’s a commoditized price. We don’t set the price, we don’t set the price at the pump. We don’t set the price of crude as individual companies or a collection of companies. And it’s a question of supply and demand. So ultimately the action that’s most helpful is making sure that those products are flowing and they’re getting to the places that they need to be.

ISAACSON: You — Shell’s the biggest driller, producer in the Gulf. With prices this high, are you gonna start drilling more or is that something that just can’t be done now?

HIRSTIUS: The cycle time of our projects are such that the plan that we have in place, the drilling and the activity set for the year, it’s difficult to turn on more work. We’re maxed out, if you will. All the wells that we have are producing to their full potential.

But there are some things that we can do, which is looking at the way that we execute maintenance, the way that we take assets offline that will ultimately take more product offline. And we have looked at all of those activities to make sure we’re limiting the impact as much as we possibly can so that we don’t take actions that are ultimately gonna hurt the way that we continue to produce and have products that flow to our customers.

ISAACSON: What are the impacts of tariffs been, especially tariffs on steel, which I assume you use a lot of?

HIRSTIUS: We do. The place that we use the most steel in our annual business is in how we drill wells. And the wells — they’re called tubulars. You know, it’s literally think about a big straw that you’re putting into the earth. The metal that we use is pretty specialized. And they’re only one or two manufacturing locations that can make those specialized tubulars. And so in that, we have to import a number of those different products that we use.

When we look at the impacts of tariffs, you can calculate what the percents are. We also have a fair amount of our cost that’s in labor. And so there are, you know, it does impact a percentage of our business. And we continue to look at different ways that we can utilize domestic options as much as possible. But it’s, you know, it’s something that we’re organizing our business and delivering in the best way that we can.

ISAACSON: You’ve been around for at least 25 years in the energy sector. Tell me about the transformation of the U.S. energy sector during that period, especially, I guess deep water is your big expertise in the Gulf.

HIRSTIUS: If I reflect over that time period — and again, it’s this reality that we have gone from being a country that’s a net importer to where we are now, where we’re a net exporter, and that has come from technology and innovation, coupled with geology, of course, and the natural resources that exist in our country. We have a regulatory environment that has oversight of how those, how that energy is produced. And that’s a great benefit that we derive many aspects from. One is just, you know, predictable, reliable energy to grow our economy. It’s also employment and jobs and independence, energy independence. So there are many aspects that have changed and materialized. And the U.S. last year was the largest producer with just over 13 million barrels of oil produced a day in our country, which is remarkable given that 20 years prior we were not the first producer in the world and we were a net importer versus exporter. So it’s been quite remarkable. And again, very much spurred by technology and innovation. And it has been able to be a red thread, kind of predictable energy for our country and for our economy.

ISAACSON: But what has happened to the transition? — even at Shell — a way to a new energy future, one that was less harmful to the climate, but also relied less on petrochemicals.

HIRSTIUS: Yeah. So I think that we are in a transition. And what the pace of that transition looks like has to do with customers. It has to do with the type of products that customers are willing to buy, and it has a big piece of affordability. What can customers afford? We need to exist in the energy system that is the reality of today and not one that we’re kind of hopeful for tomorrow within that —

ISAACSON: Wait, wait, why not? I mean, why aren’t we pushing ourselves to the more hopeful future?

HIRSTIUS: Well, I think our customers aren’t willing to pay many of the prices that come with that. But that doesn’t mean that we don’t invest today. So as — at Shell, we have invested somewhere between $1 and $3 billion a year to make sure that we are continuing to progress with low carbon solutions and what that can be in the future. And it’s very important that that work continues to progress and that we figure out, again, given that we, Shell in the U.S., has been producing for 120 years and providing energy, we know that the next 120 years will look different than it looks like today. And we wanna be on the front edge and continuing to provide energy to consumers in every way possible.

ISAACSON: Well, one of the new investments that you had been doing was the Atlantic Shore’s Offshore Wind Project. And Shell was very involved, and then President Trump comes along. And I think he said something like, “hopefully the project is dead and gone.” This is something he put out on social media. How has the advent of the Trump administration affected your push towards alternative energy? And is that why you pulled back from things like wind?

HIRSTIUS: It’s, it isn’t why we pulled back from that project. That, at the end of the day, we invest in ways that we think will deliver value and return products to our customers as well as a return to the shareholders. And so we look across our portfolio and figure out the best way to allocate our capital based on that.

One of the important aspects that we look at in our core business is where are the areas that we can invest that are lowest carbon intensity? And the production that we have in the offshore U.S. Gulf is the lowest carbon intensity barrels that exist in the world. And that’s an important piece of our decisionmaking. Ultimately, projects that we invest in across the spectrum need to rank on a number of different priorities. It, the return that they deliver is one of those aspects, but also the intensity of the — carbon intensity of the barrels or the molecule or the electron that we produce, is equally a part of that decisionmaking.

ISAACSON: You’re in the Washington office of Shell now. You’re from Louisiana. So I don’t need to really tell you this, but politics can swing back and forth. They can be very, it can be really variable. How are you preparing for the possibility that the politics swings back towards being more antagonistic to carbon-based fuels?

HIRSTIUS: At Shell, we don’t have a political position. We advocate for the policies that we think are the best for ultimately the business that we’re trying to deliver, both for products and customers as well as for the investment that our shareholders have within Shell. And what that means is that we need, we do need to focus on the here and now, but we also need to focus on the medium term and the long term. And we know with that, what that means is that we need to advocate across all spectrum of lawmakers and legislatures here in D.C. — as well as at the state level. As you well know in our state, we have similar politics and situations. And it’s important that we aren’t caught up in the politics of the moment. And really think about the long term and how we invest for continuity and delivery.

ISAACSON: Colette Hirstius, thank you so much for joining us.

HIRSTIUS: Thank you, Walter. Great to be here with you today.