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Oil Fundamentals Overturn Geopolitical Risk

Oil Fundamentals Overturn Geopolitical Risk

Geopolitical risk from Iraq and…

With Oil Prices Stubbornly Low, France’s Total Will Cut Costs, But Not Jobs

With Oil Prices Stubbornly Low, France’s Total Will Cut Costs, But Not Jobs

Patrick Pouaynné, the CEO of oil giant Total, says continued low revenues mean the company has no choice but to cut capital spending, particularly investments in the North Sea and US shale operations. But jobs, he said, won’t be touched, and he predicted a return to more realistic prices eventually.

“We have to control costs,” Pouyanné told France 2 television on Jan. 21 from Davos, Switzerland, where he has been attending the annual World Economic Forum. “This won’t mean cutting jobs. Over the medium and long term, we’ll stick to our strategy.”

But in an interview with the Financial Times, he said Total will cut investment by 10 percent below the $26 billion it spent in 2014 and slash its budget for exploration even more, by 30 percent, to below $2 billion. It will also move more quickly in raising money by selling $10 billion in assets and suspend two oil sands projects in Canada.

Related: Low Oil Prices Causing Majors To Reconsider Larger, Riskier Projects

And while Total plans no layoffs, Pouyanné told the newspaper, it was considering a hiring freeze this year.

Pouyanné also addressed Total’s plans in a panel discussion at Davos, saying investment in North Sea oil and US shale are no longer as profitable as they once were as long as the global oil price remains low. For example, he said, shale was a good investment when oil cost $70 per barrel.

But with prices now around $50 per barrel, he said, shale oil isn’t profitable – at least for now – because its extraction is more expensive than conventional fuels. Yet the low prices may inspire new technologies that can reduce extraction costs and return shale oil to profitability.

“We have fields on the U.S. East Coast and my instructions have been pretty clear – we will limit investments,” Pouyanné said. “I can come back in one year when prices come back.”

And come back they will, he promised, though probably not as quickly as the oil industry may wish.

“There is a natural decline of 5 percent a year from existing fields around the world,” Pouyanné said. “That means by 2030 more than half of the existing global oil production will disappear. There is an enormous amount of money that needs to be invested to get another 50 million barrels per day of new production.”

Related: Oil Price Collapse Hurting Some More Than Others

More than anything else, Pouyanné said, the drop in oil prices is cyclical, and he warned his colleagues in the oil industry not to panic. “Five months ago nobody was saying that the price would be $50 a barrel,” he said. “What I am sure about is in Total we are a large company, so we have to adapt and not overreact.

“In 2009 [the fall in oil prices] lasted six months, in 1986 it lasted 10 years,” Pouyanné said. “But this is the basics of the oil and gas industry. … For the medium to long term we need more energy, we need more oil. The cycle will come back, and the price will come back higher again."

And despite the current investment retrenchment by Total and other energy companies, he said he expects that oil and other fossil fuels will provide 70 percent of the world’s energy in 2055.

By Andy Tully of Oilprice.com

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