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Total sticks to its guns on exploration and transition

The French oil and gas major refuses to be eclipsed by shale

Total's decision to launch its boldest exploration strategy in five years, in 2019, contrasts sharply with moves by other majors to largely prioritise US shale acreage over frontier markets.

The French firm aims to drill treble the number of offshore and onshore wells drilled in the last two years, at 23 in 2019, even as the promise of more easily controllable costs and high productivity leads the likes of Chevron and ExxonMobil to ramp up Permian Basin activities.

The exploration strategy sits well within an outward-looking tradition driven by France's comparative lack of domestic hydrocarbon resources. Since its inception in 1924 as the French Petroleum Company, Total has grown to operate in 130 countries—outstripping its rivals' international reach—with exploration and production (E&P) activities in more than 30 nations.

But Total's lack of any significant shale plays is also down to timing—and missed opportunity.

"At this stage, the real issue is cost of entry. Total has not got any shale plays, and if they were to buy one now, the costs involved mean that play would not be competitive against other parts of their portfolio" says Jason Gammel, senior oil analyst at investment bank Jefferies. "Certainly, if you have a position there the economics are attractive to drill, but not if you do not."

Follow the money

Total has good reason to be sensitive about big gambles—a high risk, high reward exploration strategy pursued in the early 2010s cost the company dearly. Despite running an annual average capex of $30bn between 2010 and 2013, average annual revenue fell from $244bn in 2010-13 to $173.5bn from 2015-18. Even accounting for vacillations in the oil price, that level of upstream investment should have paid off more.

"We are a kind of Uber in the electricity market," CEO Pouyanne, Total

Total's 2019 recalibration of its exploration strategy still involves risk—no wildcat is cannot-miss—but it is geared towards more established areas where successful finds should result in lower breakeven production costs. It is also targeting likely gas-bearing fields that can contribute to its planned expansion along the full gas value chain, which in turn plays into its efforts to develop a profitable low carbon electricity business.

"We are concentrating on low break-even assets to deal with the possibility of stagnant or declining [oil] demand," CEO Patrick Pouyanne wrote in his summer 2019 message to shareholders. "We want low-carbon electricity to account for 15-20pc of Total's energy mix in 20 years' time."

Since taking over, following Christophe de Margerie's death in a plane crash in 2014, Pouyanne has continued an efficiency drive that has led to average production costs falling by over 25pc from $7.40/bl oe in 2015 to $5.50/bl oe in 2018. Operating cash flow before working-capital changes rose from $5.37bn to $6.03bn this year.

"Under Pouyanne it only directs investment to places where they see a clear upside," says Gammel. "Total has been building strong positions in Qatar and the UAE over the past few years."

Its $8.8bn acquisition of US independent Anadarko's Mozambique LNG stake, once the US firm's sale to fellow independent Occidental is complete, complements the same strategy. "It is a very good fit. Total will be the second-largest integrated oil and gas company in the world in LNG marketing volume, and so this will supplement what is already one of the world's leading [LNG] portfolios," Gammel adds.

$5.5/bl oe — Production cost in 2018

Finds in recent years reflect this strategy—for instance its Glendronach prospect in the West of Shetland, discovered in September 2018, and with an estimated recoverable resource of 1tn ft³ of gas, benefits from the UK's stable fiscal conditions and can be commercialised quickly by leveraging the existing Laggan-Tormore pipeline infrastructure.

The Brulpadda find offshore South Africa—estimated to have around 1bn bl oe in recoverable reserves—is geographically proximate to the continent's most industrialised economy, and an import-dependent, premium market, even if production costs may be higher than the global average.

Other projects that should benefit from favourable economics are projects such as Mero 2 in Brazil, Tilenga and Kingfisher in Uganda and Arctic LNG 2 in Russia. With a production capacity of 19.8mn t/yr, Arctic LNG 2 will develop over 7bn bl oe of resources in the Utrenneye onshore gas and condensate field.

Transition targets

Total has taken a practical, bottom-line focused approach to the energy transition, developing a climate strategy that approaches lower-carbon energy as a hedge against a projected decline in oil demand, rather than purely as a cynical marketing exercise.

"It only directs investment to places with a clear update," Gammel, Jefferies

In 2018, Transition Pathway Initiative (TPI), an investor-backed organisation, found Total to be one of only two of 10 large oil firms, along with Shell, that openly disclosed how their carbon emissions will decline over time.

The major has also launched a metric that shows the greenhouse gas emissions from all of its products and is developing a new natural carbon sink business that will invest $100mn/yr to preserve forests.

"Total has been very active in preparing for the energy transition, and it has been putting a lot of significant investment into zero carbon energy technologies. The company has definitely been very aggressive in building out into all kinds of aspects of the energy transition," says Gammel.

However, he notes that calculating the levels of return from those investments will be difficult.

'Uberisation' of energy

Total is planning its own internal transition to ready for the expected shift in the energy markets and has been a pioneer in concepts such as 'energy as a service' through its clean energy Total Spring utility offering. It is targeting 15pc of the French retail gas and power market by 2022, aided by its $1.7bn purchase of power supplier Direct Energie.

"We are a kind of Uber in the electricity market," Pouyanne told investors last November. But Gammel says it is unlikely the company would ever want to be seen as a utility provider.

"Total would certainly like to become a diversified energy provider, and, within that scope, power is likely to play a role. But it is highly unlikely it will invest significant capital in power generation at a 6pc rate of return and be part of a regulated pricing environment—it just would not be competitive for capital within their portfolio," he says.

Nonetheless, the maneuvering along the value chain underlines that Total is striving for balance and diversification at a time when some of its peers are pursuing a narrower strategy. And holding giant oil and gas projects from West Africa to the North Sea, and as far apart as Australia and the Arctic, could prove a strength rather a weakness amid surging volatility, and growing geopolitical uncertainty, in the global energy markets.

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