Total aims to cut assets by $10bn by 2017
Almost a year in the job, Total’s new CEO has made cost-cutting and disposals his priorities as oil prices give little encouragement
Total is having to make the best of a bad job: like its peers it is heavily invested in projects that rely on high oil prices, backed up by strong demand growth. So the French major is facing tough decisions about which projects to sell, which to retain, and which sectors to get out of altogether. So far this year it has sold $3.3bn of assets and hopes to bring this figure to $10bn by 2017. The consequences for its future growth are serious.
Total has had problems with shale gas licenses in Denmark, where it was the only foreign investor to win a license; and in Poland. But there remain hopes for its activities upstream in the UK where it won licenses in the 14th onshore round last month and it expects to be the biggest producer in the country’s offshore as its string of fields come on stream in the coming years. It has Laggan due onstream in the next few months, Tormore next year, Edradour in 2017 and Glenlivet in 2018.
The determination of its previous chief executive, Christophe de Margerie, to make a commercial go of Russia in spite the political difficulties between the West and the Kremlin backfired. Sanctions made it difficult to raise western finance for Novatek’s Yamal LNG project, meaning relying on Chinese partners (see separate report); and also to import the technology to produce oil from the Bazhenov shale. Chief executive Patrick Pouyanné has therefore put that plan on hold for the foreseeable future. Other problems it has recently faced, such as the Yemen LNG shut-ins, were typical of oil producers across the board.
De Margerie’s decision to quit coal takes Total in a direction Pouyanné has endorsed. After joining other European majors in writing to the heads of governments worldwide to introduce carbon price reform, he publicly pledged that Total would halt all coal operations. It has now done this, with the sale of mine operator Total Coal South Africa which produced 3.3m t/year, and the pledge to quit coal marketing by the end of next year.
Pouyanné says: “It was a matter of both consistent strategy and our credibility. Faced with the issue of climate change, Total is committed to promoting the use of natural gas, the cleanest fossil fuel, especially compared to coal…. We cannot claim to be providing solutions to climate change while continuing to produce or market coal.”
Total’s agreement to sell the affiliate to a local company Exxaro has now been approved by the South African government, with the divestment taking effect on 20 August. But since summer 2014 when the price was agreed the value of coal has fallen, so Total will receive a fifth less than it hoped: a cash payment of $262m followed by five annual payments totalling $120m as long as the market price of coal does not average less than $60/ton.
It has also sold its fuel business in Turkey. Philippe Boisseau, president of Total Marketing & Services said that after operating in Turkey for several years,“we conducted an in-depth review of our position and the competitive environment. We concluded that it would be difficult to attain a large enough retail market share to achieve the level of profitability expected for our operations worldwide.”
Total will, however, maintain a petroleum product marketing presence in Turkey through its lubricant activities, including a blending plant in Menemen and odourless LPG operations. The two businesses will be transferred to a separate company before completing the sale.
Tar sands remain On the agenda
However, there are limits to the company’s commitment to the environment. It sold only a small (10%) stake in Fort Hills, a Canadian oil sands play 90km north of Fort McMurray to co-venturer Suncor, retaining 29.1% in the project with an expected capacity of 180,000 b/d; and it is active in the Surmont oil sands field with a 50% stake, some 60km from Fort McMurray. The first phase came on stream in late 2007.
A week after announcing its plan to quit coal, Total announced the 1 September start-up of production from Surmont 2.
As a result of the technology that will be implemented, production will ramp up through 2016 and 2017, adding 118,000 b/d of gross capacity. Total gross capacity for Surmont 1 and 2 is expected to reach 150,000 b/d.
“This is Total’s fifth startup since the beginning of the year, and it contributes to our upstream growth,” said E&P president Arnaud Breuillac. “Surmont will produce substantial reserves, with a long plateau that will generate cash flow for decades to come.”
Phase three is under review and is expected to increase production to 283,000 b/d in three successive stages of 45,000 b/d each, according to Total’s website.
Total is aiming to increase the percentage of gas in the energy mix, from last year’s 52% of production, or 62.7bn cm, when it overtook oil for the first time in the company’s history. Much of its planned growth though is LNG and this is looking less attractive for now, especially given the question-mark hanging over the previously expected sink for all LNG producers: China. However, as recently as August it had, in partnership with InterOil, found enough gas in the Elk-Antelope field onshore Papua New Guinea to allow it to start talking about a two-train solution to monetise the country’s other stranded reserves.
Total aims to have more than 20m mt/year of liquefaction capacity by 2020. Last year it sold 12.2m mt of equity LNG; while it has 12.6m mt/y of reserved regasification capacity, spread across five terminals globally.