Pouyanne Urges Patience With Energy Transition

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Patrick Pouyanne is chairman and CEO at TotalEnergies. In this interview, which took place at the recent Energy Intelligence Forum 2021, he discusses the current state of energy markets and how Total intends to be a leader in the low-carbon energy transition.

Q. How does being TotalEnergies — rather than Total — help you accomplish your strategy? Why the change?

A: Total has a long history, almost 100 years, but Total means oil to everybody. And we found a name which says everything. Of course, oil and gas is there but this goes also to hydrogen to biomass to wind and to solar. So I think it puts into concordance our name, our logo and fundamentally our strategy to adapt our company to the evolution of the energy markets. Energy markets are changing and Total is transforming itself to become a sustainable company, and our ambition is that Total could stay there as an energy major for another 100 years.

Q. Is the global stress we are seeing in gas and power markets due to transitory effects — a perfect storm of supply and demand mismatches — or is this a new normal that some are calling the energy transition premium? 

A: I think there is a short-term effect, which is the post-Covid recovery of the economy. The global system of the planet is not designed to absorb suddenly 6%-7% growth. So that is a short-term impact, and we will get out of it. We have a global supply chain that is not designed to accommodate such big growth.

The second effect is more related to energy markets. There is a strong demand for gas in Asia and China. Some of these countries are moving from coal to gas, so it’s not so bad.

It’s also I think an impact of [the] transition. You have pressure to invest less, not only because of the transition but Covid as well, in oil and gas. So all these rigs which have been stopped — we don’t have the production this year and we won’t have it tomorrow. I suspect it might continue. Companies like TotalEnergies, not only are we disciplined but we’ve shifted part of our capex to other energies, and [some] of my peers have done the same.

The second impact is we introduce into the electrical systems more and more intermittence, uncontrollable assets. Even if we introduce what people think are low marginal-cost assets, it’s a huge amount of investments, somewhere it has to be amortized and I think it is putting more instability in our energy systems.

What we are discovering as well is everything is interconnected. What happens in China on the gas will have an effect in Europe. You have carbon dioxide pricing in Europe which is pushing pricing up.

So, many factors, some are short term, some are more structural, linked to climate change and the energy transition.

Q. How do you see this impacting energy choices, including the future demand for natural gas? 

A: I think the gas, LNG price is much too high. It could [scare] some new customers [away from] LNG. We are very active in India on LNG and we know that beyond $6 per million Btu it is becoming tough to sell our LNG. I think it should engage people to look more toward long-term rent formulas than gas indexes, which are more volatile. But it is clear it is not good, globally speaking.

Having said that I think the trend of coal to gas is more fundamental. All these countries need more energies and affordable ones. To be honest, we did not envision such a scenario like we have seen this year where the demand in Asia is so high that all the US LNG is attracted to Asia by the high price. From a supplier point of view, it would be good if we could land quickly on better prices.

Again, that is the big debate between developing a long-term market and a spot market. When you have spot you can have some hiccups. And it’s better for customers to engage in longer-term formulas.

Customers were not complaining that energy prices were very low. It’s a question of finding the right balance between suppliers and customers.

Q. Total still has big growth planned in LNG but it is coming under heightened scrutiny. Will new capacity have to have a carbon capture and storage (CCS) component and/or be electrified off renewable power in the future? Will buyers pay higher costs for “green” LNG when gas prices are already high?

A: The answer is yes for the first one. I’m not convinced for the second one. I think LNG, in the energy transition, producers must strictly minimize the CO2 and the methane emissions. We must not forget about the methane point. Both are mandatory now. So we must, when we build new plants think to that either by combining with CCS as an option or by looking to technologies that can reduce the CO2 emissions.

Customers at the end of the day want affordable energy. I’m not sure they want to pay much more. But let’s be clear, the Japanese customer might be willing to pay, the Indian customer — again it’s a question of local economy.

I’m convinced that the more we invest in such technologies we will drive the cost down. That’s why for me it is becoming more of a new normal to think LNG but also low-carbon LNG.

Q. Total has increasingly been integrating hydrocarbon and renewable energy developments. What are the benefits of this approach and will this be the predominant strategy in future?

A: Iraq for me, I’m very proud that. Our teams managed to put that project together.

Total is a trusted partner and is good at oil and gas, but we can do more than that so we put this multi-energy strategy in action. I think it works because it answers to a fundamental request from most of these oil and gas countries — some of them have a lack of electricity for their people, so let’s answer to that.

The idea behind it is [we] can leverage our strong relationships with some producing countries, particularly in the Middle East and North Africa, which are blessed with oil and gas but also solar and wind in order to build our own renewable business and leverage that, because there are less competitors there.

That’s the combination I see, and I hope I will be able to demonstrate that we can have this leverage in other countries.

Q. What is different this time in Iraq? Why are you confident you can execute when so many others have failed to realize their ambitions there?

A: Of course there are some security issues, but we took the time to decide, yes, we can operate in the Basrah region. Second, there is a strong alignment with the objectives and through the contract. At the end of the day, at TotalEnergies we allocate capital where it's most profitable — a win-win situation. So I have been very clear with the Iraqi authorities. If we come, it has to be a win-win contract, and so I go and look to what they call a development and production contract.

You have cost recovery, you have some profit-sharing, you have an incentive on the price. I think also that for me it fits [much] of the strategy of the company — low-cost oil and also stopping gas flaring.

I think the contract gives me confidence that we have the right framework to invest. Of course we know that in Iraq there is some instability, but the reward we get is big enough to motivate us to engage in this new adventure and we are happy to become a strong partner for this country.

Q. What strategies does Total have available to maintain renewables returns as it gets more ambitious in its targets for generation capacity?

A: There are different markets for renewables. Unregulated markets in the US, Europe — fundamentally it’s a commodities market and you have a lot of competition. We’ve said that in these type of markets we start from 4% and can go up to 8%-10% because we developed a business model by leveraging our equity, but also by divesting 50% of all our projects, which I think is also a risk management not only a profitability issue. And we have executed it. But we have other markets like India where we invested at the beginning of this year $2 billion by acquiring 20% of Adani Green, the largest solar developer in India. This $2 billion today is worth $5 billion. So we can create value within renewables, but you have to be smart. You have not to go to competition. And like in Iraq, the profitability of the solar project is higher than the returns I just mentioned.

When I'm developing my portfolio in the US, if it's less profitable there are other advantages. You will invest in storage, you can begin to trade. So there is an additional value along the value chain of electricity. And the last point I would like to underline: renewables is a matter of space, access to land. When you have the land you have the scarce resource. You acquire it forever in many countries. Initially when you have a cost it’s tough. You develop the land, the connections to the grid. When you have the asset, [it] will be longer than the 10 or 15 year PPA [power purchase agreement]. So for me, we are creating very long-term assets, which will be a source of a lot of profit.

Q. What does a profitable carbon capture business model look like if you're handling third-party volumes? Do you need to find uses for the carbon for it to be profitable? Where do you see value along that carbon value chain? 

A: There are two different topics for me. You have the capture of CO2, which is the responsibility fundamentally of the industry that emits the carbon. How much does it cost for me to capture the carbon, and then what do you do with the carbon. When we speak about CCS, we mix the capture itself and the storage. In between you have the infrastructure to store [it]. What is quite expensive is not making a well or two to store the CO2, it’s all the pipelines or CO2 tankers to bring the CO2 to the wells etc. if it’s offshore. So there are two different businesses. Of course when we look to that — for example, we announced that we want to decarbonize all our hydrogen production in our refineries — it has a cost. So [can] we find ways to valorize that? In refineries, we can do it because if we have some low-carbon hydrogen we can qualify that in the European mandates … so there’s some potential valorization of decarbonizing the hydrogen in a refinery in Europe.

The other part is what do you do with this carbon? Either you combine it with hydrogen to make e-fuels but green hydrogen is not for free so this is a route that we need to develop. The more we think to sustainable aviation fuels — obviously it will be liquids because … of storage on the plane — that might be a route. Of course it's quite expensive today but decarbonization will have a cost and it’s a matter probably of scaling it up.

The other part is to transport and store your CO2. This [is a] business in which we are involved through the Northern Lights project in Norway, our new project in the Netherlands, Aramis, to convert our depleted fields into CO2 storage, another project in the UK [and] three projects in the North Sea. At $100 per ton, the infrastructure plus storage of CO2, it works. [That] does not take into account the capture. But the industry itself will also have some incentive.

Let’s be clear, this transition will be possible not only by carbon pricing, but also by supporting the innovation. From this perspective, Europe and the US are beginning to think to the framework, which will incentivize the industry, the emitters of CO2, to make that viable. I'm optimistic we can do it, the more we’ll develop mandates for sustainable aviation soon. It's a question of creating the markets for these additional fuels.

Today it’s expensive, but this transition will not be [possible] without accepting the fact that energy prices will have to reflect these huge investments that we need to decarbonize. I think people do not imagine what it means to transform the whole energy system, which is today 80% based on fossil fuels and carbon, to something with no carbon. It's an incredible task. We have a lot of patience to manage it, but of course all that will require investments and costs.

Q. There is a fundamental disagreement between those in the developed world that say new oil and gas finds need to stay in the ground, versus those in the developing world that say these resources are needed to improve standards of living. Do you have any thoughts on how the world resolves these competing needs?

A: I understand both, but I think that the strong debate behind the Paris Agreement and COP26 it’s why the planet is divided today in two parts — the developed world which thinks that it can get rid of fossil fuels, which by the way is not true.

How do you shift from something which is 80% CO2 driven to something with zero [carbon]? It will not be done in a night. The idea that we could stop investing in oil and gas fields is maybe good for the finance of bioenergy. But I can assure you that with a natural decline [rate] of 3%-4%, if we stop investing in 2020 and we leave all these resources in the ground, by 2030 the demand will still be maybe not 100 [million barrels per day] but 90 million b/d, not 70 million b/d, and then the price will rocket to the roof. And even in our developed countries, it will be a big issue.

All that is a matter of a just transition, and [it] must be together within the global framework of the sustainable development goals. It’s about the planet, but it’s also a matter of people.

In many emerging countries it's the source of wealth. So the idea that you could regulate and say to developing countries, “leave your resource in the ground,” without compensating them, I mean the offer from Western countries would be fair only if they said to these countries … you will get all the revenue. I didn’t read anybody who said that, we just want to regulate their future. It’s not a good idea because we need to find a way to make this transition, and also to continue to supply the customers on the planet, including in the Western world.

People, because of the urgency, think we can do everything urgently. But we know that this transition will take time. The question for all of us is how do we engage in a real scheme where we'll decrease the demand for oil at 1%-2% per year.

[People] have the right to access to energy, they have the right to higher living standards, and it would be absolutely unfair for one part of the world to say to these countries you have to stay in poverty, in energy poverty and in economic poverty.

Leadership Interviews, Corporate Strategy , Majors, ENERGY INTELLIGENCE FORUM 2021
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