YWR: The Future of Power with Total's Patrick Pouyanne
Location: A sunny cafe in Aix en Provence
Erik: Deux cafe si’il vous plait. Merci.
Patrick, thank you so much for stopping by Aix to visit your YWR shareholders.
Patrick: Pas de problem. C’est un plaisir. I was on my way to Marseilles anyways to visit our bio refinery. The Total management team loves reading YWR and we appreciate that we are in the Dirty Dividends portfolio, even if we don’t think we are dirty.
But you know the company so well, what was it you wanted to talk about that we needed to meet in person? You said in your email it was something about our Integrated Power business.
Erik: Yes. It’s about Integrated Energy, but also kind of about everything. Is it OK if I ramble? I’ll tell you what I think and then you say if I’m on track?
Patrick: Qui. Allez.
Erik: OK. Back in 2017-2018 when you were investing in wind and solar projects I use to think it was annoying and you wouldn’t make any money, but figured it’s the price you have to pay for being a European energy company and in the end it’s not much money relative to the oil and gas business, so who cares.
Then in 2018 you bought the Engie LNG Terminals in France and also did two deals to acquire gas power generation in France (Direct Energie deal and KKR-Energas). And you said that was to capture the full value chain of LNG from upstream production, to the terminals to the final electricity generation. Fine. Like owning gas stations for the LNG business. And you were also building up more wind and solar capacity. It all seemed kind of disjointed, uninteresting and unimportant.
But over the last 2 years something changed with this business. And it finally clicked for me. I know I’m slow.
Am I talking too much?
Patrick: No. Continue.
Erik: OK. I think European power markets are a mess, and the US is probably going that way too. Nobody makes money. If you are solar or wind company it sucks because when you have lots of power to sell, so does everyone else and the price is negative. The problem of negative power prices got exponentially worse in 2023 and it’s starting to happen everywhere (California, Japan, Australia).
If you are a gas fired power plant life sucks for you too. Most of the time you are running at less than full capacity, and waiting on standby for the evening hours or winter when there is less renewable supply. So you don’t know when you will be need to contribute electricity to the grid, and you also don’t know what the gas or CO2 price will be when you fire up. It’s hard to hedge the gas price because you don’t when you will need it or how much.
The only people who have been making money from this volatility have been the power traders, who if they get it right, are selling power in the forward market and then buying it back when the price goes negative. Which is why all these electricity trading funds are setting up.
So it seems a rightfully deserved and expected mess for all the religious followers of solar power who never wanted to hear about the complexities of grid integration. And it confirms all the skeptics’ views that renewables are a bad allocation of capital and it’s better to stick with traditional oil and gas. Maybe it doesn’t grow much, but it makes lots of money.
But I think longer term the big oil and gas companies could be in trouble too. $2 Henry Hub could be a warning sign. Yes, I think Henry Hub is too low and goes higher in the future, but why did it happen in the first place? The surge in gas supply from US shales, yes, but then why did it stay low for years? Isn’t the other problem the growth of renewables in the US. Yes, the shale gas companies became more disciplined about capex and price over volume, but a new irrational player entered the game, the wind and solar farms. It’s just too much supply of power (gas plus renewables) for the current economic growth. And what happens if solar and wind go from 14% of power generation in the US to 25%? Do US power prices go constantly negative like in Europe? And does it squeeze out the market for gas in the US? And does this also happen in China too?
And so I worry, maybe this global surge in solar and wind production, if it continues is going could crash the LNG price globally. And maybe if EV’s keep growing, it eventually crashes the oil price. For now OPEC is supporting oil prices by cutting back volumes, but maybe longer term oil prices are going to $60 as EV’s keep getting cheaper and better, they turn into robo taxis and people start to like them more.
What if the great energy transition is in the long-term a lose-lose businesses for everyone (renewables, power generation, LNG, and oil and gas)?
But I think Total may have cracked the code and figured out how you make money from this.
Patrick: C’est tres interessant. Dit moi.
Erik: OK. I don’t know if this is was a genius strategy Total figured out years ago, or you stumbled into this by accident, but here is what I think Total figured out.