Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Total has an admirably straightforward approach to dealing with the slump in oil and gas prices:

In an environment where oil and gas prices have fallen significantly and remain volatile, Total is focused on being excellent at everything it can control.

Sure, "be excellent" is an oddly retro, Bill-and-Ted-esque mantra for a French oil major. But it recognizes that, even when you're in the ranks of Big Oil, there's really damn all you can do to move the market price one way or the other. When you produce a commodity, sustainable success really comes down to getting your hands on the lowest-cost reserves and sweating those assets furiously.

Totally
Shares of French oil major Total rose as it announced a strategy shift
Intraday times are displayed in ET.

And at Thursday's strategy presentation in London, Total duly announced further cost cuts and another $2 billion or so coming out of its annual capital expenditure budget. Even so, the company says, it will increase its oil and gas production by 5 percent a year through 2020 and keep growing at 1 or 2 percent a year after that.

Investors ate it up, and a 4 percent jump in the stock took Total from being the year's worst performer in Big Oil's ranks  to third place.

Excellent as that sounds, though, there are undeniable tensions in Total's message to the market that show how hard it is for Big Oil to adapt to a world of lower energy prices.

The big clue was on slide 3:

Capture

Over on the right-hand side is Total's macro outlook for the global oil market. It boils down to this:

  • Low prices have caused investment in new supply to plummet;
  • Existing fields decline at 5 percent a year;
  • Demand will keep going up by about 1 percent a year;
  • All of which means that by 2020, the market will be short by about 5 to 10 million barrels a day.

That is a huge gap -- roughly equivalent to, at the low end, an Iraq or, at the high end, a Saudi Arabia.

Saudi Arabia! If that's true, then those 2020 Brent futures trading at around $57 a barrel are beyond ridiculously cheap. Moreover, Total (and every other major) should be out buying up every decent oil prospect, field or company they can lay their hands on and directing every spare dollar toward exploring for and developing more of the stuff.

They aren't, though. Total itself -- which would like to actually offload some high-cost reserves such as its oil sands -- says there's no real M&A market right now. The company also plans to spend roughly $500 million a year to keep building a renewable energy business, where it just paid $1.1 billion for a battery firm.

Total may be unique among its peers in plowing that much money into what is effectively a hedge against disruption to its core oil and gas business. But it isn't alone in cutting back investment even as the world is apparently only four years away from an oil-supply crunch that would make 2008's look like a mere dress rehearsal.

BP's CEO Bob Dudley plans to hold capital expenditure flat through the rest of the decade. Royal Dutch Shell has adopted a similar position. And both Chevron and Exxon Mobil have also slashed budgets. And, defying expectations, none have made a big acquisition since Shell's $64 billion takeover of BG Group, announced in April 2015.

Their reluctance may simply mean that, despite the dire warnings, they aren't sure we'll be short the equivalent of a Middle Eastern oil producer by 2020. There are any number of factors that could prevent such an outcome, ranging from Chinese economic pressures to lower decline rates than advertised to a freshly IPO'd Saudi Aramco, among others, raising production further. 

Another explanation, though, is perhaps more worrying for Big Oil: that even if a supply shortfall looms, they aren't necessarily best positioned to capitalize on it.

I wrote here about how the big five western oil majors invested $1.2 trillion over the past decade -- most of it upstream -- but were producing 1.3 million barrels a day less by the end of it. Rising costs and a lack of access to the most competitive resources sank their return on capital -- which is why investors are keeping them in the penalty box on investment now, looming supply apocalypse or no.

And while Total, similar to its peers, touts "deflation" in costs in the past couple of years, at least some of that has come from simply squeezing the oilfield services sector. That's a transference of pain rather than a cure for it -- and industry leader Schlumberger has complained already that contractors need to get paid, especially if oil prices rise.

Layered on top of this is the threat of fundamental disruption to energy markets from a combination of carbon legislation and emerging technologies such as electric vehicles -- something with which Exxon is struggling and at which Total's renewables investments are aimed. This wildcard presents an especially pernicious threat to the megaprojects in which the majors specialize, which take years to develop.

So oil majors say low investment is teeing up the price spike of the millennium, but for a variety of reasons can't fully capitalize on it. Moreover, if 2020 does herald the return of triple-digit oil, this will encourage every rival producer from the Permian basin to the Persian Gulf to go flat out and every driver to give at least a second thought to all those new, cheaper electric vehicles hitting the dealer lots.

Total's strategy of preparing for all of the above is simultaneously a reasonable one and a perfect expression of Big Oil's big conundrum.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In comparison with Exxon Mobil, Chevron, Royal Dutch Shell and BP.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net