Oil sands key factor in global pricing, head of Total says

flovestock

NATHAN VANDERKLIPPE
Last updated Thursday, May. 19, 2011 7:31PM EDT

Canada’s oil sands are playing an increasingly important role in setting the global price of crude, the head of French energy giant Total S.A. (TOT-N57.601.041.84%) says.

Triple-digit crude prices, and the soaring gasoline costs they have helped spur, have become a subject of global contention, with much of the blame being placed on unrest in the Middle East and North Africa. But Christophe de Margerie, chief executive officer of Total, said the high expense of producing crude from Canada’s oil sands is also helping to support lofty oil prices.

The cost of crude “all depends on what is the marginal cost of reinvestment. That’s why there is a strong link with Canada and Alberta, because today the more expensive source of oil is Canada,” Mr. de Margerie said in an interview Thursday.

The issue is complex. Canada’s oil sands may be among the priciest of the global crudes, given the enormous amounts of energy and capital required to extract them. Yet Alberta’s huge reserves are also increasingly important to a world where oil is getting more and more difficult to find and extract.

“Because of the cost of the Athabasca crude, we are in a way helping the price at least stay high,” Mr. de Margerie said. “But if you don’t produce it, it’s even worse.”

Still, he argued that the current volatility in oil prices is not a result of production shortages, but of uncertainty over medium and long-term supply and demand. “There is oil today on the market,” he said, appearing to contradict the International Energy Agency, which on Thursday said there is a “clear, urgent need for additional supplies.”

But, Mr. de Margerie said, “if you deliver more oil and there is no customers, what does it bring? What is important is OPEC delivers the message that they will do everything ... to make sure that whatever happens, there will be sufficient oil to cover the demand.”

The oil sands have become an increasingly important part of Total’s global portfolio, and Mr. de Margerie is planning to spend much of this week in Calgary and the Fort McMurray area. Members of the company’s international advisory board are also travelling to Alberta “so they can not only listen but also can see and feel” the company’s investments in the oil sands, including its joint partnership with Suncor Energy Inc.

He acknowledged that Total has sustained a reputational impact from its investments in Alberta, especially as environmental groups in Europe seek to persuade companies and investors to stay away from a crude source they call “dirty.”

“In terms of image, it’s not good,” he said in a speech to the Calgary Chamber of Commerce. It’s also expensive. The company plans to spend $20-billion in the oil sands by 2020, in hopes of boosting its production to 200,000 barrels, a small number compared to its expected global output of more than 2.6-million barrels a day.

Some might say “$20-billion for 200[-thousand barrels], something is wrong with this,” Mr. de Margerie acknowledged. But, he said, the oil sands are important as a source of crude that can endure for decades to come. “It’s for the very, very long-term,” he said. “How can we be absent?”

But he called on industry to lend an ear to its critics. He argued that companies can learn from those with suggestions on how to improve the environmental performance of operations – although he said companies should not speak to opponents intent on halting oil development.

Industry is confronted “with a lot of people who think that what we are doing on unconventional development is not good for the planet, is not good for Alberta, is not good for anybody,” he said. “We cannot say they can go to hell.”

At the same time, he expressed his support for one of the most contentious projects being pursued by Canada’s oil industry, the $5.5-billion Enbridge Inc. Northern Gateway pipeline that would bring oil sands crude to the West Coast for export to Asia.

“For any country, it’s better to have more than one source of exit,” said Mr. de Margerie. And, he said, “frankly we are looking at it. And if due to our relationships with our Chinese partners it makes sense, yes we might do something with them [Gateway].”