From Middle East to Argentina, France's Total bets on cheap resources
As the world witnesses spectacular growth in oil and gas production from the U.S. shale deposits, the boss of French energy giant Total paradoxically says this is one area where he doesn't want to expand.
Instead, chief executive Patrick Pouyanne told Reuters he can find an edge over rivals by going after cheaper reserves elsewhere, including from shale in Argentina and deepwater wells in the Gulf of Mexico, as well as through new gas technology.
"Shale oil is too expensive," said Pouyanne, who has clinched strategic deals for Total in Brazil, the United Arab Emirates, Qatar and Iran since taking over as CEO at the end of 2015.
Rapid growth in U.S. shale production has led to a sharp increase in global oil supplies that depressed prices. This year, it is forecast to increase by up to 1 million barrels per day to more than five million, or almost 10 percent of the country's total crude output.
Low production costs and relatively short development times have made shale attractive during one of the worst downturns in the oil industry's history. Companies including Exxon Mobil, Chevron and Statoil have invested billions in recent months to enter U.S. shale areas such as in the Permian basin in Texas.
The problem lies with asset prices, Pouyanne said in an interview. The cost of buying land to exploit shale deposits below the surface has rocketed, as has the purchase price of companies which already hold development rights. An acre of land in the Permian basin rose from $1,000 in 2012 to $50,000 last year, according to consultancy WoodMackenzie.
Pouyanne therefore remains reluctant to expand beyond Total's current gas fields in the Barnett and Utica shale formations in Texas and Ohio respectively.
Total has cut costs throughout the downturn, leading to a surge in first quarter adjusted net profit to $2.6 billion, up 56 percent on the same period of 2016.
Now Total, which is France's largest company, is cautiously returning to new projects. This year it gave its first go-ahead since 2014 to develop Argentina's Vaca Muerta gas project, one of very few exploited shale deposits outside North America and where land costs are significantly lower. The first phase will cost around $500 million.
In U.S. production, Pouyanne sees greater opportunities in the Gulf of Mexico, where Total along with only a handful of the world's other top oil companies have the necessary expertise in deep water drilling. "Today it is a game of only five or six players," he said.
Many smaller producers abandoned capital intensive projects in the Gulf of Mexico after an explosion on the Deepwater Horizon rig in 2010 killed 11 people and led to the largest oil spill in U.S. history. That cost BP $60 billion in clean-up costs and fines.
Deepwater production costs fell sharply in the wake of the oil price crash, as project cancellations forced service companies to cut their prices. Today companies such as Total, Royal Dutch Shell and BP can develop some fields at around $40 a barrel, on a par with the most competitive shale.
Total will raise its production by around 30 percent during this decade and has already surprised the market with better than expected growth rates in the past few quarters as projects in Angola, Russia and Brazil added new barrels.
Pouyanne's formula is to concentrate on fields that will still be competitive after global oil demand has finally peaked and begun declining.
"Let's concentrate on low cost oil. Don't tell me I need to invest in the highest technology barrels because low cost oil is the answer to volatility and peak oil," he said.
Last year, Total became the first major energy group to renew a giant long-term production concession in Abu Dhabi, one of the United Arab Emirates, which alongside OPEC leader Saudi Arabia has some of the world's lowest cost reserves.
"That's why I told Saudi Arabia: 'Don't panic, the last barrels that will be produced will come from your country'," said Pouyanne. "It is why we have taken the position in Abu Dhabi."
FOCUS ON GAS
Last month, the Organization of the Petroleum Exporting Countries and non-member producers including Russia agreed to extend production cuts until March 2018, aiming to drain a global oil glut.
Pouyanne said he thought the oil market would take another 12-18 months to rebalance supply and demand, adding that he still believed prices would be high in the long term due to the lack of new project start-ups and cuts in investment in the last three years.
Like many of his peers, Pouyanne aims to shift Total increasingly towards less polluting gas as the world seeks to reduce carbon emissions to near zero by the end of the century.
For the 53-year-old, renewable energy sources such as solar and wind will make up around 20 percent of Total's portfolio within 20 years.
However, Pouyanne says coal remains the main threat to gas and he supports a drive by some oil majors for more countries to impose punitive taxes on carbon emissions, which are much greater from burning coal than gas.
"Gas might be undercut by coal. Renewables will grow but the real fight is against coal. That is why we are advocating a carbon tax," he said.
Britain could serve as a model after its imposition of a carbon tax helped to reduce coal usage drastically. "The UK has managed to shift its power system to gas from coal in one year. The UK has demonstrated it works," he said.
Total will also prioritise using new technology to lower the cost of gas infrastructure around the world, making it affordable for more smaller economies. This includes regasification plants, where liquefied natural gas shipped in by sea is converted back into gas for fuelling power stations.
"We are building more and more infrastructure around the world. Disrupting technology for regasification is changing the world because for $200-$300 million you can build a new point of regasification. You can have a network in the world of more producers and more points to sell your gas," he said.
Dmitry Zhdannikov and Ron Bousso