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Total continues strategy despite not getting the big find

The French major faces a juggling act with its high-risk, high-reward growth strategy

Total's production may be on the rise, but that “big find” still eludes the French major. In the third quarter, the latest period for which results are available, Total said production rose 2% to 2.3 million barrels of oil equivalent a day (boe/d), the second consecutive quarterly rise, helped by the start-up of projects such as Ekofisk South in Norway, as well as the resumption of production from Elgin, in the North Sea, and Ibewa, offshore Nigeria. The company expects production to continue to increase in the fourth quarter.

Total said a $400m annual rise in its exploration bill contributed to a drop in third-quarter net profits, which fell 19% year-on-year to €2.72 billion ($3.7bn), below consensus forecasts. Third-quarter revenue also fell in the quarter, down 6% from the same period a year earlier, to €46.7bn. 

That hefty exploration bill is part of a “high-risk, high-reward” strategy outlined in 2012. The plan involved looking for hydrocarbons in remote, potentially risky plays would enable the company to raise production to 2.6m boe/d in 2015 and reach about 3m boe/d in 2017.

However, all this comes at a price; Total expects capital expenditure to have peaked at $28bn to $29bn in 2013. The company has been selling assets to help fund these outgoings and with the completion of two more disposals in Nigeria and Congo, the total amount of divestitures will stand at around $15bn. Another $5bn of sales is possible. 

Even so, shareholders, worried that the current cycle of high oil prices is coming to an end, are putting pressure to keep costs down and raise dividend payouts, something the company has so far resisted. For the third quarter Total announced a stable interim dividend of €0.59 a share because, chief financial officer Patrick de La Chevardière said, some of the planned disposals hadn’t materialised yet”. 

De La Chevardière told reporters following the third-quarter results that the company plans to continue its aggressive exploration efforts in 2014, adding: “We haven’t yet found the giant field we’re looking for, we have to admit.” This has led chief executive, Christophe de Margerie, to talk about a “soft landing” in capital expenditure; the company said it sees capex falling to $24bn to $25bn in the 2015-2017 period.

The poor performance of its downstream business is also stressing Total’s finances. It may have received a Christmas present in the form of the end of a two-week strike at its refineries in France, but this does little to address the fundamental problems of weak demand and overcapacity that have caused margins to drop to a near four-year low. The European Refining Margin Indicator (ERMI) which averaged just $10.6 per tonne in the quarter, compared with $51/t in the same period last year. De La Chevardière has stated the problem is “endemic”.

A company source told Bloomberg in December that the company’s crude-processing and petrochemicals business in France could have lost as much as €500m in 2013. 

The development of its mega-projects remains crucial to Total medium-term prospects. At the top of the list is the $50bn Kashagan development, offshore Kazakhstan.

Hopes that the project was back on track – after years of delays and billions in cost-overruns – have been dashed after a series of pipeline leaks. By mid-January, the North Caspian Operating Company (NCOC), the consortium developing the project in which Total has an almost 17% stake, had still given no start-up date. 

In the gas segment, Total in December gave the go-ahead to another huge, risky and technically complex project. The onshore Yamal liquefied natural gas (LNG) project in the Russian Arctic, in which Total holds a 20% stake, will develop reserves greater than 5 billion boe and consists of an LNG plant with a capacity of 16.5m tonnes per year. Novatek, the project’s operator, estimates total capex at about $27bn by the time the first LNG starts flowing in 2016. At peak production, the project plans to produce around 90,000 boe/d, of which around 70% has already been sold to Asia and Europe under long-term oil-linked price contracts. “The successful sanction of Yamal LNG strengthens Total’s global portfolio to sustain post-2017 production over the next decades and further increases our presence in a high potential region of Russia in terms of gas resources,” Yves-Louis Darricarrère, head of Total’s upstream business, said in December. 

Another project Total says will sustain production post-2017 is the 35-year production sharing agreement signed in November to develop the super-giant Libra oilfield – the largest pre-salt oil discovery to date in the prolific Santos basin, offshore Brazil. Total holds 20% of the consortium that will develop the estimated 8bn to 12bn barrels of recoverable oil resources. Peak oil production is forecast to reach 1.4m b/d.

Another recently finalised project in what Total considers to be one of its strategic sectors for future growth is the final decision in October to invest in the Fort Hills oil sands project in Alberta, Canada. This will produce up to 180,000 b/d of extra-heavy oil from 2018 for more than 50 years. Total has a 39.2% interest in the project.

Total also clearly intends to be a trailblazer in Europe’s drive to develop shale gas. In addition to its unconventional gas assets in the US, Australia and Argentina, Total acquired two shale gas exploration permits in Denmark in 2010 and then bought 40% in another two licences in the UK in January 2014.

Though the latter investment is relatively small, around $50m according to reports, it marks the first time a major has bought into the unconventional gas reserves of the UK, which is one of only a few countries in Europe whose government supports the development of such resources. Hydraulic fracturing, which is necessary to extract shale gas, is banned in France, for example. 

This ban, together with the high taxes and poor performance at its refineries, appears to make home, rather than the remoter parts of the world, a tougher place for Total to do business.

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