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Total Boss warns that governments risk selling the energy transition wrong

by SuperiorInvest

The veteran chief executive of France's TotalEnergies has warned that governments are underselling the energy transition if they do not recognize that the shift to a cleaner system will lead to higher energy costs.

“We believe that, fundamentally, this energy transition will mean an increase in the price of energy,” said Patrick Pouyanné in a wide-ranging interview, in which he defended his group's dual strategy of investing in renewable energy, while continuing to look for new sources of energy. oil and gas. projects denounced by climate activists, even in unexploited countries like Namibia.

Policymakers and activists were naïve, he argued, to think that it will be possible to reduce oil and gas production before enough renewable energy is available to take its place, given the continued growth in global energy demand.

“The pace of the transition will not be the same everywhere,” he said. “We cannot ask African countries to simply avoid developing resources because we have developed their resources for our own convenience for 20 years.”

Since rising to the top of TotalEnergies in 2014, Pouyanné's strategy and messaging have been among the most consistent in the industry.

While European rivals BP and Shell have wavered over how to invest in the energy transition and how quickly to withdraw from oil and gas, Pouyanné has remained steadfast in his commitment to fossil fuel production, although he continues to outspend his competitors. in renewable energy projects in more recent years.

    An oil drilling platform in Walvis Bay, Namibia
An oil drilling platform in Walvis Bay, Namibia © Anders Boesen/Alamy

The result is a comparatively simple strategy based on three pillars (oil, gas and integrated energy) to which investors have generally responded positively. TotalEnergies' shareholder returns have outpaced its rivals since Pouyanné took over nearly a decade ago.

“I need to remain strong in oil and gas. . . People first buy their stocks for that reason,” he said.

Of the $16.8 billion of capital spending in 2023, about two-thirds were spent on oil and gas and one-third on the group's “low-carbon” integrated energy business. That level of investment is now stagnating from year to year and instead of increasing, climate activists say.

However, Pouyanné also insisted that he will not invest in wind and solar projects just to reduce the company's emissions. Unlike some in the oil and gas industry, he sees energy as an increasingly profitable opportunity, particularly as he expects the energy transition to result in permanently high electricity prices.

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“I know there's a theory that says renewable energy is cheaper, so it will have a lower price,” he said. “We don't believe it because a system in which [have] Greater renewable intermittency is less efficient. . . That's why we believe it is an interesting field to invest in.”

It expects the integrated energy division to be cash flow positive in 2028, when it will generate around $4 billion, with a return on average capital employed of 12 percent. That's equivalent to the returns from the company's oil business when crude oil is trading at $60 a barrel, the company says.

The integrated energy business will continue to grow organically or through specific deals at the project level, rather than through a large acquisition, Pouyanné said, adding that he thought most renewable energy companies were still overvalued, despite a liquidation in the last 12 months.

“I don't need Ørsted. What do you bring me? he said, referring to the world's largest offshore wind developer whose share price has fallen more than 70 percent since peaking in 2021, at the height of the investor frenzy for environmentally friendly stocks. “This question could have been asked three years ago, but we have developed our own portfolio.”

TotalEnergies employees work during the construction of a well within the Murchison Falls National Park in western Uganda.
TotalEnergies employees work during the construction of a well within the Murchison Falls National Park in western Uganda. © Badru Katumba/AFP/Getty Images

The integrated power strategy has not been without setbacks. Last year he suspended a $4 billion investment in green hydrogen with India's Adani after a short-seller report accused the conglomerate of accounting fraud and stock market manipulation, which it strongly denied.

Pouyanné said he now considered the Adani case “over” and that he was doubling down on his renewable energy projects with the group, although the hydrogen project remained on the back burner as demand in this market was still tentative.

TotalEnergies' traditional fossil fuel business will be vital to finance the growth of its electricity assets and maintain profitability in the meantime, Pouyanné argued.

“If you start saying 'because I'm investing in the transition, I need to reduce my returns,' this won't work,” he said. TotalEnergies returned $16.5 billion to shareholders last year in dividends and share buybacks, representing 46 percent of cash flow from operations.

The company plans to increase oil and gas production by a combined 2-3 percent annually through 2030, a strategy that has alienated some investors but won over others. The number of shareholders in the U.S.-based company has increased from less than 40 percent to 47 percent in the past two years, Pouyanné said.

BP, by contrast, has pledged to cut oil and gas production by 25 percent by 2030, compared with 2019 levels, although that is down from a previous target of 40 percent after it reduced production. ambition last year.

Much of TotalEnergies' additional oil and gas production will come from new projects in Uganda, Mozambique, Iraq, Papua and Brazil. This has made the group a lightning rod for criticism from climate activists and a target of political criticism at home.

Pouyanné and the group face an investigation this year launched by Green politicians in the French Senate into their record on environmental goals.

But while many European and North American producers have withdrawn from border markets, Pouyanné sees the ability to continue operating in those places as an advantage. The company, founded in Iraq in 1924, has a long history in the Middle East and merged with Africa-focused Elf in 2000.

Basra Oil Company CEO Bassem Abdul Karim and French energy group TotalEnergies CEO Patrick Pouyanne sign the Integrated Gas Growth Project agreement during a ceremony in Baghdad on July 10, 2023.
Basra Oil Company CEO Bassem Abdul Karim, right, and French energy group TotalEnergies CEO Patrick Pouyanné, left, sign the Integrated Gas Growth Project agreement during a ceremony in Baghdad on 10 July 2023. © Ahmad Al-Rubaye/AFP/Getty Images

“My friends and my main competitors don't like to take risks, so we do it,” Pouyanné said. “It's about balancing risk and reward. The condition for us to enter these countries. . . is to have better returns.”

In Namibia, for example, where there is no oil and gas industry, TotalEnergies has found promising offshore hydrocarbon deposits.

“We are perfectly aware that any new oil and gas development could become a problem, but the question for me is more what does Namibia want?” -Asked Pouyanné. “I don't think Western NGOs should decide the future of Namibia.”

Pouyanné is an unabashed proponent of what he presents as a pragmatic worldview, arguing that oil demand may peak before the end of this decade, but will decline rather slowly after new production is required.

“There is a kind of divide today between the global south and the global north in this perspective, which we have also observed in Dubai, in the way the debate developed,” Pouyanné said, referring to the COP 28 climate talks. from December.

In Iraq, where TotalEnergies is involved in a series of gas, oil and solar projects worth $27 billion, the government's main concern is developing gas for domestic power generation and increased oil production will be used to pay for it. , said.

“If we don't engage with the global south where the emissions will come from (China, India, Brazil, South Africa) if we don't engage with them by providing them with energy, there is no way to find a solution. solution to the climate.”

In Europe, having significantly reduced dependence on Russian gas (some of which still comes from Total's participation in the Yamal liquefied natural gas project led by Russia's Novatek), leaders needed to continue diversifying sources of supply, warned Pouyanné.

In particular, they should try to protect long-term imports of LNG from the United States, which is now their largest supplier, he argued.

Last month, President Joe Biden imposed a temporary pause on new licenses to export LNG to countries without a free trade agreement with Washington, which includes the EU.

“The United States says they can help Europe with its security of supply,” he said. “Let's negotiate that agreement.”

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