At the Asia Pacific Economic Cooperation (APEC) meeting in Singapore last month, nineteen world leaders, including U.S. President Barack Obama, agreed there would not be enough time to reach a comprehensive agreement on climate change at the UN Summit in Copenhagen that started December 7. Although an agreement may not be imminent, the energy industry continues to speculate about the impact any agreement will have on global energy prices and consumption.
Christophe de Margerie, CEO of European oil and gas giant Total, says a global agreement on climate change is necessary to give energy companies direction on how they should invest long term, but a system based on long-term subsidization will not work. He says governments also risk creating a system focused too heavily on environmental concerns and not enough on ensuring a continuous supply of global energy. Finally, de Margerie notes that the current oversupply of gas will deter companies from investing in it because of the lower profit margins and higher security risks involved.
Oil price volatility has subsided over the past few months. What's your outlook on oil going forward, and how will that affect your investments?
In December 2008, the Brent crude oil market was at $32 per barrel. Today we are at $77, and that was coming from a price of $147. So the price of oil is stabilizing, but in very relative terms. It's difficult to see it, for the time being, going back to less than $65. Today, you invest for a minimum of seven to eight years ahead, which means that you take into consideration not the price of today but the price of the date [the investment] will start producing. At the same time, your balance sheet, your profit, your cash, are coming from existing production. So you have to find a balance between what you need to pay your investments, to pay your dividends, and your view on what is going to be the long-term value. Today, there is not so much risk of a fallback in demand, so the economy will recover. That is the reason why we don't want to reduce our investments right now.
Copenhagen is not energy against environment or environment alone; it's energy and environment. Perhaps the biggest change in thinking is that we need to cover both.
What about the price of gas? How is that affecting energy companies' strategies?
There is more gas than needed because gas is even longer looking in terms of construction phasing than oil. It takes ten to twelve years before it starts producing. You have a lot of gas coming onto the market at a time when demand has been hurt by the global economic crisis. The price of gas is very weak, and there isn't the same mechanism that there is for oil to protect the price through hedging or financial products. The market is much more oriented to a simple balance between supply and demand. The price of gas now is four times less expensive than the price of oil. For practical reasons, the gas market is fragmented and of a more regional nature than the oil market, which is global. The largest part of gas supply is implemented through gas pipes, creating a direct physical connection and therefore reciprocal dependence between a gas producer and a consuming country. Security of gas supply implies diversifying the geographical origin of gas supplies, and this does require investing in new gas fields' developments, in new gas pipe facilities, in alternative gas supplies such as LNG. Low gas prices make investment in the gas sector less attractive; if prices were to remain low in the medium term, there would be consequences for security of supply through the lack of investment.
What do you expect to come out of the Copenhagen summit?
The debate which is now starting to move forward, which is new, is how Copenhagen is not energy against environment or environment alone; it's energy and environment. Perhaps the biggest change in thinking is that we need to cover both. At least today, we start talking about how each barrel equals X amount in CO2 emissions, X number of BTUs of gas equals the same for coal, and how much of this can we accept without hurting the equilibrium of global warming. The United States is the largest emitter of greenhouse gases per capita, on par with China in absolute terms. No international agreement about climate change could be reached without a real U.S. commitment. Emerging countries will refuse to adhere to an effective global reduction effort if the United States is not on board. A proactive U.S. involvement is required, as there has to be a common understanding between the large emitters about the climate issue, the estimated level of emission reduction necessary for keeping global warming within sustainable limits, the burden sharing, and the timing of the reduction.
You've stressed the need for leaders in Copenhagen to address energy security as well as climate change. Could you elaborate on that?
Heavy industries, oil and gas especially, are fighting between two totally opposite considerations. One is, we'd like to know what will be the outcome of these discussions, because to invest on a long-term basis without knowing what's coming is hard. So there's a pressure to say, "The sooner we know the better."At the same time, we're also saying, "Well, if [the outcome of discussions] is to do something crazy, we prefer to wait." So the message we are delivering is yes, it's important to solve this quickly, but don't antagonize environment and energy, in terms of global energy access. Because this world is becoming more and more globalized, in the sense that the price of oil is the same wherever you go, and at the end of the day it's difficult to say that some countries will have access to energies and some not and that that will work.
Unlike gas, oil needs to be governed at the world level. Ninety-five percent of oil reserves are located in twenty countries, notably in the Middle East. The countries with the largest reserves [that are] the cheapest to develop give no access or a restricted one to oil companies, and many of them tend to prefer keeping their reserves available for future generations. Even if most of them have a real sense of their global responsibility, their interests do not coincide automatically with the needs of the consuming countries. This might lead to extremely tight market conditions if investment in the oil sector is kept too low, due to the restrictive attitude of producing countries. It is therefore critically important that the oil-producing countries, notably OPEC, and the consuming countries maintain a permanent and open dialogue about energy issues.
[Y]ou have to find a balance between what you need to pay your investments, to pay your dividends, and your view on what is going to be the long-term value.
You recently said you are "scared" to invest in developing alternative energies through subsidies. How so?
For a company like Total, you are not supposed to be thinking that your model will be relying on subsidies in the long term. So you have subsidies short term--OK, why not? That you receive subsidies for research projects, that's normal. But having a view that the system can only be acceptable or workable through subsidies is not only a concern for Total; it's a concern as a taxpayer, as a citizen as the world. You can subsidize poor people, but not as an economical system. Our worries are that for a prolonged period of time, if we're not making progress, we'll be in an economy which is subsidized. And then who's going to bring the added value?
What would be the energy industry's ideal climate policy?
First, your core business: to do the utmost to reduce your emissions, which means to be as efficient as possible. For a refiner to reduce the consumption of oil is common sense. You don't have to tell him every day that he has to take care of the planet. He will first take care of his business, which if he's using less crude, is more efficient and more profitable. What we learned at school was that you have to produce and sell as much as you can. At that time advertising was based on how to make people buy things they don't want, what they don't need. Nowadays it's totally different. We have to develop products which are better for the planet because that way you can reduce the consumption of your clients. The idea that you make less money that way is not true. Supporting energy efficiency and a better mastering of energy consumption is in the oil and gas companies' best interest. Meeting with the forecasted increase of global energy demand will be a real industrial challenge; keeping the growth of energy demand within reasonable limits can avoid seeing energy prices reaching very high levels, a situation that would negatively impact the global economic climate and make a smooth transition toward a more diversified set of energies more difficult. Providing more efficient products and services to their customers makes sense for oil companies, business wise.
What role do governments play in this scenario?
They play a tremendous role because they are fixing the rules, saying what we need in terms of energy and what can feasibly be produced through renewables, through less polluting energies than classical fossil fuels. But it will have a price because we'll need to subsidize some of those energies, so it's about how much we can accept to take in our charge and how much can be asked of oil and gas companies in terms of either taxes or reducing consumption. And the gain is not easy at all, but the only way is to have the two sides--what I need to develop the economy and what I can accept in CO2 emissions. And it cannot be done only at the level of Europe. Because in Europe, even if we know we have to be an example, even if we know we have technologies that can be used to reduce emissions in a more efficient way than others, if we want to be the only one to control the emissions of the world, we will be the first [ones] to disappear.