Total SA (FP), Europe’s third-largest oil company, called on peers to revise projects that require tens of billions of dollars of investment as costs escalate.
“Costs are becoming too high,” Christophe de Margerie, chief executive officer of the Paris-based company, said today in a Bloomberg Television interview from Davos, Switzerland. “Projects of $50 billion leave one thinking ‘Isn’t it crazy?’”
Total has vowed to lower capital spending even as it starts projects from Norway to Angola to increase output. Royal Dutch Shell Plc (RDSA), Europe’s largest oil producer, also has pledged to rein in costs after this month issuing its first profit warning in a decade. The companies have seen expenses climb as they search for crude and gas in more remote and complex areas.
“We have to redefine how we can develop some fields without spending as much money,” De Margerie said today. “It probably means reinventing, going back to the architecture of projects” to reduce cost inflation.
Expenses also have been driven up by rising construction bills and currency changes. In Australia, such costs have hurt companies including Chevron Corp., whose A$52 billion ($45 billion) Gorgon project is among seven liquefied natural gas ventures being built there at a cost of more than $180 billion.
The pressure on producers has a knock-on effect for oil-service companies that help them find and pump crude and gas. Ayman Asfari, CEO of London-based oil engineer Petrofac Ltd. (PFC), said yesterday that the company and its peers will feel the impact of belt-tightening among their clients.
“Our industry is facing a huge amount of cost pressure,” he said. “More is being spent to produce less. Our clients are seeing the rate of return on capital dropping and they’re being challenged by investors who want them to be more disciplined.”
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