Having come from the world of pipelines, Alex Pourbaix wasn’t fluent in the lingo of the upstream when he became CEO of Cenovus, Canada’s third-largest oil and gas producer. “Flummoxed by all the acronyms” is how he modestly puts it. He must be a fast learner. Upon leaving his job as COO of TransCanada Corp. to join Cenovus in 2017, Pourbaix immediately began building on its strengths and eliminating its weaknesses. A merger with Husky Energy in early 2021 supercharged the company’s oil and gas production and delivered more than $1.2 billion in sustainable cost synergies. In the depths of the pandemic, with Cenovus bearing $14 billion in debt from the merger and oil’s immediate prospects looking grim, Pourbaix locked in price guarantees to protect the value of the company’s 50 million barrels in inventory. Now the debt is falling, profits are surging, the hedges are gone and Cenovus seems poised to take advantage of a turbulent world’s new appetite for oil. We spoke to Pourbaix via Zoom.
So, rising prices, war in Ukraine, climate change, ESG investing, the advance of electric vehicles—is this a good time or a bad time to be in the oil and gas business?
Well, in a world that is going to need oil and gas for many, many decades to come, being an industry that has an aspiration to drive our carbon emissions to net zero, I actually think that is a pretty good place to be. Canada is the holder of the third-largest reserves of oil on the planet. We have a commitment to open, transparent regulation, rule of law, a focus on all of the things that are important in ESG, including our work with Indigenous people, clean air, clean water. And we’ve added this focus on decarbonizing the upstream. I think we’re reasonably well positioned over the coming decades.
You recently decided to exit the oil hedges you initiated after buying Husky. It’s going to cost you about $1.4 billion. What do you gain?
I look at the market right now, and demand looks very robust. Supply looks challenged, particularly coming out of Russia, for obvious reasons. We could continue to see very volatile oil prices and not a lot of solutions to the factors driving high prices. Our investors like the exposure to the underlying commodity, and I think that’s really the right decision.
Was the idea to acquire Husky already in your mind when you joined Cenovus?
Cenovus was a great company when I joined it. Incredible upstream resources. But we lacked egress out of the province. We’re very exposed to high differentials for Canadian heavy oil. I was worried about our cost competitiveness and our balance sheet. The real rationale for putting the companies together was that it created a much stronger, more resilient company. Under pretty much any oil and gas price scenario, the combined balance sheet would improve quicker. Our costs of production were significantly reduced. And by adding Husky’s downstream refining assets, it significantly solved the egress concern that was forcing us to accept often significantly lower Canadian prices for oil.
Can you explain what you mean by egress?
Whenever production exceeds the takeaway capacity—via pipeline or use in refineries or upgraders—you create a scenario where oil is trapped in the province. As a result, it gets very significant discounts to the value. In my first couple of years at Cenovus, there were times where the differential was over $30 a barrel. That was the result of this lack of pipeline capacity.
How did the Husky merger solve that problem?
Husky owned and operated a number of refineries, both in Canada and in the U.S. The way the Enbridge pipeline system works, your ability to nominate production to put on the pipeline and take it downstream is dependent on having a home for that oil—storage terminals, refineries downstream. So, it gave us the ability to nominate volumes to move on the Enbridge system. On top of that, Husky had significant pipeline contracts, including a large-scale, long-term contract on the original TC Energy Keystone pipeline, which allowed Husky to move oil all the way to the U.S. Gulf Coast. Those were all assets that became available to us to move oil.
The price of crude, which fell to single digits in 2020, is now around US$100 a barrel. Where do you expect prices to go from here?
None of us really knows where oil prices are going. Even before the Ukraine issue with Russia, the industry had not been spending enough money to bring on new volumes. And so what I would call the surplus oil supply in the market has been eroding for a number of years as upstream companies have underinvested. Now, we’re kind of in this perfect storm. We’re getting the impact of a number of years of underinvestment in the upstream to maintain that production and spare capacity. On top of that, you now have one of the largest oil producers in the world, Russia, largely being prevented from getting some or all of its excess oil to global markets. And I don’t see anything, short of a sharp, global recession, that is going to eat into that oil demand. So, I suspect we’re going to be in for a period of quite volatile, trending toward higher, oil prices.
Is US$200-a-barrel oil possible?
If oil were to go over US$150, I think you would start seeing significant demand destruction, which would prevent oil from heading up toward US$200.
You mentioned the lack of investment in new production. Some of that, I think, comes from ESG investors steering money elsewhere. What’s your attitude toward the ESG movement?
There is no doubt that has been a bit of an issue. Some of it has been based on a view that really underestimates the challenges of moving to a completely emissions-free environment.
Cenovus is now part of the Oil Sands Pathways to Net Zero alliance, which is a mouthful.
You’re correct, it is a mouthful. We just call it Pathways.
What’s the purpose of that alliance? Is it chiefly to win over these ESG investors?
I think I’d describe it a different way. There are six members, including Cenovus. Collectively we represent about 95% of oil sands production and about 10% of Canada’s greenhouse gas emissions. We came to the conclusion that moving toward net zero in the oil sands is an incredibly challenging goal. Rather than doing this on our own, let’s collaborate, share technologies, collectively fund the infrastructure required. We thought combining all our efforts would improve our chances of getting to net zero, and allow us to do it cheaper and quicker than we otherwise would have.
How involved are you in the alliance?
I’m extraordinarily involved. For the better part of a year and a half, we—the six CEOs—have been meeting every Friday at 7 a.m. We have engaged a huge, multidisciplinary team of employees. We’re hiring. There is a huge amount of work going on, on what we call our foundational project, to capture CO2 at our oil sands facilities and move it by a large-scale pipeline to depleted oil and gas reservoirs in the Cold Lake area, where we have the capability to store decades of emissions from the oil sands. Right now we’re doing the engineering and environmental work on that. We’re planning for the regulatory application, and this is all with a view to having that in service by about 2030.
In the recent budget, the federal government set an emissions reduction target for oil and gas companies of 42% of emissions by 2030. Pathways pegs the current CO2 emissions for its oil sands operations at 68 megatonnes. And it has set a goal of reducing those emissions by 22 Mt by 2030. That’s a 32% reduction. Why aren’t you aiming for that higher number?
We based our Pathways targets on what we believe the industry can realistically do. One thing a lot of people don’t appreciate is there is no “low-carbon” and “high-carbon” setting in a processing plant or production facility. Pretty much everything we’re going to do to reduce our emissions involves very large-scale capital projects. Some of these are multibillion-dollar construction projects. I would argue that the emissions reduction proposed by Pathways is a very, very aggressive target.
The Pembina Institute, a clean-energy think tank, says emissions from Canada’s oil and gas industry need to be reduced by 54% by 2030.
I can only speak for the oil sands, but I would be amazed if the industry could meet that target without shutting in significant production. This industry probably represents 8% to 10% of Canadian GDP. It is a massive contributor to the economy. I think people need to be very thoughtful about what can be done and what the impact would be on the Canadian economy of taking some of those positions.
You’ve launched three new carbon-capture projects that will roll out over the next five years, costing as much as $3 billion. Do those projects depend on federal CCUS tax credits?
It’s really important to remember that almost all of these investments are purely added costs for the industry. They tend not to come with a revenue element. So it’s really important that we’re focused on competitiveness and that we’re not taking steps that other oil-producing countries are not taking. I mean, we’re gonna contribute tens of billions of dollars as an industry. That investment tax credit is very important to help the industry make these investments.
Your Bay du Nord offshore project will produce carbon emissions of eight kilograms a barrel, compared to oil sands emissions that are almost nine times higher. What’s the future of the oil sands if offshore oil is so much cleaner?
These offshore projects are incredibly low in terms of emissions, but they are extraordinarily expensive. You’re building exploration and production platforms in very deep water, in incredibly challenging weather conditions. In the oil sands, we have 170 billion barrels of producible oil that sit either dozens or several hundred metres under the surface. We have no exploration risk. At Cenovus, our sustaining capital—the amount you need to spend every year to keep your production flat—is between $4 and $6 a barrel. And our operating costs are now below $10 a barrel. Compare that to the significant costs and risks in these deep offshore projects, and it’s really easy to understand why the oil sands remain such an important resource.
Does everything then hinge on carbon capture?
Carbon capture is really important in the initial phases, like the first 10 years or so of this decarbonization quest we’re on. As we get past 2030, other technologies will start to be more meaningful—things like replacing steam in SAGD, in-situ projects with solvents. As you get into 2040, small modular nuclear reactors in the oil sands would be another obvious way to hugely reduce emissions. I think we’ll see increasingly innovative technologies as we head to 2050.
On a different topic, compensation for oil patch execs has gotten some attention recently. Everyone, including you, got big raises this year. What’s your take on how oil executives are paid?
For the five years I’ve been in this industry, there has been a huge difference between the compensation opportunity, which is I think what you’re referring to, versus actual compensation. I look at my compensation—about 90% of it is not guaranteed. I have to deliver very specific performance and share price outcomes. Long before I get paid, our shareholders get paid.
Although, among the major Canadian oil and gas producers, Cenovus pays the lowest dividend by far. Why do you return so little money to shareholders?
When oil went down to US$10 a barrel, with the balance sheet as strained as it was, Cenovus really had no choice but to reduce its dividend. Just a few months ago, we doubled it. As we continue to pay down our debt, our plan is to continue to improve and increase shareholder returns. We’ve also announced a significant share buy-back program that we continue to execute on.
You have projects underway in China, Indonesia, and Newfoundland and Labrador. Which has the most potential?
The Asian projects are all highly attractive projects because gas prices are very high in Asia. But they’re of relatively modest scale. We produce about 800,000 barrels of oil a day, so scale is important. On the east coast of Canada, we have a very important decision ahead of us, and that is whether to proceed with the West White Rose project. We’re probably a few months away.
The Friday mornings with your Pathways partners—what’s the mood of those meetings?
It has been a real eye-opener to see how we’ve been able to collaborate. My peers are looking at this as sort of the moonshot challenge of our age, for this industry. I would say there’s a great energy in the meetings. I actually really enjoy them.
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