The head of one of the world's largest oil companies has a stark warning for Alberta's fledgling NDP government: An increase in taxes in what is already a high-cost oil sands sector will have a dramatic impact on future investment.
Total SA – the fifth-largest Western oil company – is a major investor in two leading oil sands projects now under construction: The Fort Hills mine, being led by Suncor Energy Inc., and phase two of ConocoPhillips Company's Surmont steam operation. Last year, Total shelved its proposed $11-billion Joslyn mine, citing high costs.
Total chief executive officer Patrick Pouyanné warned Tuesday that oil sands producers must cut costs or they will be uncompetitive in the global chase for investment. He said the sector now ranks near the bottom in terms of return on capital among global oil and gas plays.
Higher taxes – now being contemplated by New Democratic Party Premier Rachel Notley – would be moving in the wrong direction, he said in an exclusive interview during an international economic conference in Montreal.
"There is a new government – they have their ideas, but they have to understand the industry," Mr. Pouyanné said. "Obviously, if today you put more burden on the industry in Alberta, you just accelerate the freezing of projects. And I would not be inclined to invest more there."
He said Alberta's oil sands are facing several challenges: high costs, the need for new pipelines to reach markets, environmental issues and competition from U.S. shale oil. "So, there is an enormous amount of resources – but they could stay in the ground if we cannot develop them profitably," he said.
Mr. Pouyanné was appointed CEO last fall, following the death of his predecessor, Christophe de Margerie, in a plane crash in Moscow. He took over just as global oil prices plummeted following Saudi Arabia's decision not to cut production to prop up the market. The downturn "gave us an opportunity to give some new direction to the company, particularly on controlling costs and spending," he said. "We took this as an opportunity to come back to a cost-control culture, which is important."
The Total CEO said the rise of crude oil to $100 (U.S.) a barrel by 2008 sparked a stampede of investment that drove supplier inflation. Return on capital at $100 a barrel last year was essentially the same as it was in 2000, when prices were $20 a barrel.
Now, industry austerity may be setting the stage for an upward spike in prices in three or four years, as new projects remain on the shelf, even as demand grows by 1 per cent a year and production from existing wells declines by 4 per cent annually. Even with no demand growth, the industry would have to develop about 50 million barrels a day of new production over the next 10 years, just to offset the decline rate.
"If we don't have the right level of returns, we cannot do it," Mr. Pouyanné said.
The CEO said Total is also confronting the challenge of climate change; the Paris-based company was one of six European oil firms that recently issued a call for global carbon pricing and pledged to continue lobbying governments for a more aggressive approach to reducing greenhouse-gas emissions.
He applauded the Group of Seven leaders' commitment announced this week to pursue "deep decarbonization" of their economies, and phase out fossil fuels by 2100.
Total believes the world will shift from coal to natural gas for electricity. A decade ago, Total's production was nearly two-thirds oil and one-third natural gas, while currently it is 50-50 with gas production – notably liquefied natural gas – growing.
Mr. Pouyanné remains confident that the world will continue to consume plenty of crude oil for the foreseeable future.
The International Energy Agency (IEA) has produced a scenario under which the world would keep greenhouse gases in the atmosphere below 450 parts per million (ppm) – the level considered consistent with keeping temperatures from rising more than two degrees above preindustrial levels. The IEA scenario projects crude demand would be more than 87 million barrels a day in 2040.
"There will still be demand for oil and gas, even under a 450 ppm scenario," he said "And decline rates will mean ongoing investment requirements."
This story corrects an earlier version that incorrectly stated Total is a partner with Cenovus on Surmount.