January 22, 2017
Dr. Charles Ellinas
During the oil price decline of the last two years, the one integrated major oil and gas company that has stood out as the most resilient and best-performing has been Total SA.
Total is about to start drilling in Block 11, with hopeful indications, and has been selected with ENI during the 3rd licensing round for the award of Block 6 – clearly an important player in the development of Cyprus’ hydrocarbons. In this article I have described the company, its performance and plans, and what these mean for Cyprus.
Some vital statistics
The company was founded in France in 1924, but the name Total was adopted only in 1991, when it became a public company, with the French state holding only 1% of its shares. In 1999, it took over Belgium’s Petrofina and in 2000 it merged with Elf Acquitaine to form the company we know today.
Total is the world’s fourth-ranked major oil and gas company, with activities in three major segments, covering the entire oil and gas chain:
- Upstream exploration and production
- Refining and petrochemicals and power generation
- Marketing and services
Total is also a global leader in solar energy and a world-class natural gas operator. It also has top class expertise in two highly-specialised areas, deep offshore and LNG. Gas, deep offshore and LNG are areas of expertise that position Total well in its exploration and production offshore Cyprus.
Total employs 96,000 people and has operations in 130 countries, with over 16,000 service stations, and a current capitalisation of $127 billion.
Total’s performance
During the last two years Total has been very successful in reducing its operating costs by $4.2 billion and its capital spending by 50%. The company plans further $4billion savings and Capex reductions during the next three years.
These have contributed to Total’s resilient performance in comparison to its peers. Even though its revenue dropped by 30% since 2014 to $165billion in 2015, due to the low oil price, it managed to deliver a profit of $10.5 billion, only 18% less than in 2014.
Total has a solid production-growth profile. Its reserve replacement ratio is about 107%, with 11.6 billion barrels of oil-equivalent (boe) proved reserves in 2015. And this after increasing its production by 10% since 2014 – by the end of 2016 it was producing 2.45 million boe/day.
Total has also been investing in renewables. Last year, it was the winner of the 2016 Award for Leadership in New Energy. The award recognises a company at the forefront of the energy transition from traditional fossil-fuels to lower-carbon energy systems. Total has emerged as a leader among oil majors in adapting its business model to the climate challenge.
The company is on-track for new projects to add 350,000 b/day in 2017. The addition of several highly profitable production sources, such as the ADCO concession contract in Abu Dhabi and production from Kashagan in Kazakhstan, and new interests in Uganda and Brazil, are helping Total keep upstream earnings up, while its refining and marketing are producing improving results.
So far, Total has been making all the right moves in a very difficult market environment. The company has done an excellent job of reducing costs and increasing margins and has positioned itself very well to benefit from the rebounding oil prices in 2017.
Total’s strategy and outlook
Total’s Chairman and CEO Patrick Pouyanne presented the company’s Strategy and Outlook to 2020 in September 2016.
In the short term, in an environment where oil and gas prices have fallen significantly and remain volatile, Total is focused on being “excellent at everything it can control”:
- Increasing operational cost savings to $4 billion by 2018
- Delivering growth from 2017 onwards with Capex at $15-$17 billion/year, from $23 billion in 2015, due to further Capex and cost reductions
- Growing production by an average rate of 5% per year from 2014 through to 2020
Results for 2015 and 2016 demonstrate the strength of Total’s integrated business model and the progress it is making to reduce its break-even costs and deliver growth projects.
In the medium- to longer-term, Total is planning to manage its portfolio and is allocating investment to position itself for profitable growth with the following priorities:
- Lowering the break-even costs both upstream and downstream
- Expanding along the full gas value-chain
- Capitalising on its customer-focused culture to grow its marketing and services positions
- Positioning in low-carbon energy business
In 2017, the company expects to cover operational and Capex costs, including resource renewal, and dividend pay-out at an oil price of $55/b. Thereafter, it is budgeting to achieve a return of 10% on equity and improve profitability at $60/b.
Total’s objective to expand its gas value-chain bodes well for Cyprus, but its cost-saving drive may be a challenge in the short-term.
Impact on Cyprus
Despite its cost-cutting drive, Total is shifting emphasis to gas, and Cyprus, where it has been exploring since 2013, may provide it with good opportunities. It plans to drill in Block 11 in April and prospects look good. The major Zohr discovery was made in a carbonate formation, adjacent to Block 11.
This type of play appears to extend into Block 11, with seismic data showing good possibilities for more than one drilling target. The potential for a significant discovery is good and initial assessments show at least one Aphrodite-size reservoir. But expectations must be managed, as this will not be known until drilling is completed.
IHS, in a recent article, described Total’s exploration well in Block 11 as “one of the most critical wells to be drilled globally in 2017 for the E&P industry”, going on to say “the Zohr gas discovery in Egypt was a play-opener for the region – it has caused companies to rethink the region’s gas potential and take a closer look at the geology”.
There could also be oil potential. There is a reasonable probability that there is oil beneath the Zhor gas reservoir, extending into Block 11. ENI may drill for this later in the year.
With such high hopes in the region, Total must be ruing having let Block 10 go in 2015, which is now likely to go to ExxonMobil and QP.
But, in partnership with ENI, it expects to be awarded Block 6 soon.
A blot for Cyprus, though, is the debacle with making available port facilities to provide logistical support to offshore drilling. The Limassol Port issue has been resolved for now. A compromise was agreed that allows Total to proceed with the contracts they signed with EDT until the end of 2018. It is not clear what will happen after that. Cyprus must put in place a long-term solution.
There are high hopes from recent big gas finds in East Med, but market access in a low gas price environment is a challenge and will be crucial. This is where Total’s LNG and FLNG expertise may come in handy. So, not only may Total’s drilling in Block 11 be critical for the region, but also its FLNG expertise may open up new avenues and export markets for East Med gas.
Dr Charles Ellinas is a non-resident Senior Fellow Eurasian Energy Futures Initiative, Atlantic Council
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