Encana’s Suttles: Keeping Sight of Energy’s Benefits

Mark Green
Posted May 12, 2015

Encana President and CEO Doug Suttles participated in the U.S. Chamber of Commerce’s CEO Leadership Series last week with a luncheon address and a Q&A session with Linda Harbert of the Institute for 21^st Century Energy. Highlights of the conversation below. Suttles joined Alberta-based Encana as president and CEO in June 2013. He has 30 years of oil and natural gas industry experience in various engineering and leadership roles. Before joining Encana, Suttles held a number of leadership posts with BP, including chief operating officer of BP Exploration & Production and BP Alaska president.  

Q: You opened your talk by saying I’m a North American energy company. … Can you shed a little light on the differences and similarities between operating in Canada and the U.S.?

Suttles: They’re not as big as many people would think. First of all, in the places we operate – Colorado, Wyoming, New Mexico, Texas, Louisiana and Mississippi, and then Alberta and British Columbia – these are all natural resource states, and they understand that and I think the people and political leaders understand the importance, too. Both countries have high environmental expectations.

Probably the biggest difference you’d really see between them is the remoteness of operations, which creates a unique challenge in Canada. Many of our operations are away from large towns and cities … But you have an environment where I think people understand the benefits of our industry. They promote the industry, they support it.

And the technologies we deploy in Canada and the U.S. are the same. In fact, one of the things we believe we can do with our portfolio is move technology across the border quite quickly. So if we learn something in British Columbia that will work in South Texas we try to move those ideas around as fast as we can. Because we do only focus on those two countries and we only do unconventional plays and we only do these shale plays.

Q: Clearly, there are different tax environments in both countries. How does that affect your decision on of where to put your next dollar north or south of the border?

Suttles: Capital doesn’t recognize borders. Capital flows to the place where it’s best remunerated. Particularly in an industry like ours, which is a global industry, what the policymakers have to understand is if they make it uncompetitive what happens is the money will just go someplace else. It will just move. In Canada we have some advantages. We pay typically local royalties, we have some additional taxes we pay up there, but I think both Alberta and British Columbia are very aware of the need to compete. …

Certainty is the critical factor. Our industry invests large amounts of money and the payout comes over many, many years. The scariest part on policy change is change, because when we look out in time, if we don’t have confidence that the tax environment we’ll be in when we’re making the money is the same as when we spent the money it creates a big risk to capital.

Q: You mentioned the rig counts and how much they’re down – a thousand rigs down in the United States and more acute in Alberta. And everybody wants to know … when do we see that amount of activity taken off the market actually starting to affect The Market?

Suttles: If I could predict oil and gas prices I wouldn’t have to work. I think if you wind the tape back to late last year and early this year, I think most people thought you wouldn’t see a production response until 2016. There are now places you can see it this month, in May. … Because you pulled so much capital and activity out, more rapidly than I’ve ever seen in 32 years – and unfortunately there have been a number of downturns – the only thing I’ve seen that’s different this time so far is how fast the industry pulled capital back.

For people who aren’t in this industry, literally overnight the price of our product dropped in half. We were an industry that was spending about 140 percent of cash flow, so you had no choice. You didn’t have a business choice but to pull spending back very rapidly … Some of the mega-projects that underpin much of the global supply are now being deferred. You won’t feel that production impact today. You’ll feel it at the end of the decade. This volatility in prices will discourage capital, which over the longer term probably makes prices higher.

Q: As you look at the pace of change in technology development … tell us a little bit about some of the technologies that you’re most excited about for the industry.

Suttles: These unconventional plays – these are shale rocks which are the rocks that sourced the oil originally, where it was cooked from dinosaurs … we always knew they held hydrocarbons, but we never believed we knew how to get them out. Those more conventional reservoirs that we’ve been developing for the last 100 years, it’s not uncommon to get 50 or 60 percent of the oil that’s in the ground out commercially. In these unconventional reservoirs today we average probably between 8 and 12 percent, so the old rule of thumb in our industry where the best place to look for oil is in an oil field is no more truer than this, and the industry is moving quickly now. If we look at wells we drilled in 2010, and if we drill a new well beside that well, we’re probably going to get between 50 and 100 percent more production from that new well than we did from the well we just drilled five years ago. That’s largely coming from improvements in the hydraulic fracturing. We continue to learn how to do this better and better and better. …

It’s incredible to think that we’ve gone from 5 million barrels (of oil) per day to 9 in such a short period of time. … Having been in this industry a long time I believe that we’re just getting started. I don’t know what the number will be, but I have a hard time believing we’re going to walk away from this and leave … (oil) in the ground. And by the way, the same thing’s happening in natural gas. … It could have happened elsewhere in the world but it happened right here. You need circumstances of having free-market access to capital, access to land and a regulatory environment that will allow you to move relatively quickly.

Q: Talk about the jobs that you need, the vacancies you have, the different skills you need, the high-paying jobs. Talk a little bit about the workforce. Do you have the labor you need, do you have the skill sets you need … talk about the “Great Crew Change” – 50 percent of industry professionals and skilled workers are eligible for retirement in the next 10 years. Are we prepared to take advantage from a workforce standpoint this great energy revolution?

Suttles: We’ve talked about this for a while, but it’s amazing how challenges are met and the technology advances. Our industry really requires key, critical skill sets, what people refer to as STEMs – science, technology, engineering and math-based professionals. In a highly skilled blue-collar workforce I think people don’t realize how many blue-collar workers, people who operate our wells, who drill our wells, who build the plants … The crew change argument seems to have always focused on just the engineering- and science-based professionals, but in many cases our industry’s access to a highly skilled blue-collar workforce is just as important. Technology is affecting that as well. … I think it will be a challenge but I think industry will meet the challenge.

Q: You focused a lot of your remarks on oil exports. … What is it going to take to get that vote (in Congress) to actually change our policy?

Suttles: A lot of people I think forgot that the export ban was even there because until we reversed the decline in production it actually didn’t have an impact. We didn’t have crude to export, so it wasn’t an issue. Secondly, helping them to understand – because it’s not necessarily intuitive to say if we export our crude, gasoline prices go down. That’s actually not a very complicated story, though. Because we export refined products, those compete against other refined products that are refined from global crude …

What we have is a refining infrastructure in the United States that was built around heavy crudes: heavy crudes from Venezuela, heavy crudes from Mexico, heavy crudes from Canada. And they’ve invested billions of dollars to do be able to do that. They don’t have the capacity to refine the production we produce today. There’s not any economic incentive for them to do that because those other crudes are less expensive and they would have to spend new money in their refineries to process this light crude. So you just need to let the market work. …

The last thing is helping people understand what happens to that $10 (per barrel) difference between the global price and the domestic price. I think the walking in assumption (among policymakers) is well, you guys get it as oil and gas companies, but actually a lot of it is coming out of your pocket. We pay a lot of revenue taxes in our industry, so those taxes are off the price of the product, so it’s directly impacting local, state and federal tax revenues. We pay royalties. It varies where you are, but up to 25 percent of the production goes to the mineral owner, whether that’s the government or an individual. … I only half-jokingly tell people our industry’s got a spending problem, so what’s left we’ll take it and spend about one and a half dollars of every dollar we get … and of course that generates jobs – and these are some of the very best jobs in this country. …

I think sometimes we lose sight of the economic benefits of reliable, low-cost energy. It touches everyone’s lives. You’re so used to flipping the switch or going to the pump and not thinking about what happens upstream. And all of the government tax revenues and all of the jobs, the schools the roads – all of the things that benefit from (oil and natural gas) production. And the questions is do those benefits go to people in South America or the Middle East, or do they go the people who live around here?