Total trickle down

Total has become the latest exponent of the ‘lower-for-longer’ mantra, today laying bare the effect of the new oil price environment on its present and future activities.

This is a big marker. Cloth is being cut accordingly across the industry, and Total has more material than many. It is a global behemoth, and the effect of the decisions it makes now will ripple out for years to come.

So while Total will reduce its capital expenditure (capex) budget to $20bn-21bn next year from $23bn-24bn in 2015, and is targeting production growth of 6-7pc/yr between 2014 and 2017, it is the firm’s later plans that should pique the interest of executives in Houston and economists in Riyadh.

Total wants to bring capex down further still, to $17bn-19bn/yr from 2017. And at this level it expects production growth to slow to 1-2pc/yr from 2019.

Since Opec gave up defending the oil price last year, many have fallen back on the old adage that the only cure for low prices is low prices, and that the same goes for high prices too. The theory is that falling US rig counts will eventually cut into production, meaning the gap between global supply and global demand will narrow and the crude price will rise. This in turn will encourage rig activity. Output will eventually rise again, pushing the crude price down and the whole thing keeps perpetuating itself. This circular effect will trap the price in what Swiss consultancy Petromatrix has called the ‘shale band’.

But Total is not a flexible shale producer; in fact, it has fairly low exposure to the US onshore. The projects it is now delaying, such as the Tempa Rossa heavy oil field in southern Italy, are more often than not the result of years of planning, and millions of dollars of spending. Cuts to capex will knock back plans yet further out. Total is the sort of company that stewards through the sort of projects that are the bedrock on which the IEA has placed its medium-term projections for supply growth.

These are projects such as Uganda’s 200,000 b/d Lake Albert basin, and Brazil’s 8bn-12bn bl deepwater Libra field, which exist in political and physical environments that pose challenges far removed from the benign basins of North Dakota and Texas.

Opec’s new policy is not for the short term. But Total’s repositioning demonstrates the dangers that may be being stored up in the long run.

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