The following is the text of an interview between Total CEO Patrick Pouyanné and PETROSTRATEGIES’ Pierre Terzian.
Question – To gain a good understanding of a group’s strategy, it is helpful to talk about its R&D budget. How have this strategy and its composition for Total evolved recently?
Answer – The Total Group’s global R&D budget is $1.2 billion, of which $500 million was spent by our subsidiaries Hutchinson, Sunpower and Saft. If I take oil and gas, our core sectors, it is about $600 million. Added to this are a hundred million dollars in new energies and the digital sector, a new real push paving the way for the future. Around 7 to 8% of the 2017 global R&D budget is earmarked for CO2, with a target of at least 10%. When I say CO2, I refer to various initiatives in capture, storage, transformation with a possibility of further monetization. This is an essential factor in reaching the target of a zero net world CO2 emissions in 2050, set by the Treaty of Paris. I think we will still need hydrocarbons around this time horizon: and we must take care of this issue. I don’t believe in a hydrocarbon-free world in 2050, it is difficult to find substitutes for certain hydrocarbon uses. Gas is expected to play a very important role. Its flexibility makes it an ideal complement to renewables ensuring the reliability of supply.
We are maintaining our R&D/Innovation investments, despite the drop in crude oil prices in 2014. On the contrary, they rose by an average of 5% per annum over the 2015-2017 period. And we are envisaging no investment cuts, as R&D/Innovation is essential to prepare our future. We have also decided to boost our R&D organization in order to make it more efficient, with the appointment of a real R&D Group Director, Philippe Baptiste, who coordinates the whole of “R&D métiers”, decides on priorities and budgets and steers multidisciplinary programs.
Question – How do you see the Total Group around the 2025-2030 time horizon?
Answer – Total will continue to be an oil and gas major. But we want to be a responsible major, a major with a gradually shrinking carbon footprint to comply with the 2°C global warming target set by the COP21 Conference. We have therefore integrated climate concerns into our strategy. If we want pursue this path, we must ensure that the evolution of our portfolio is more gas- than oil-heavy. Within around 20 years, we should have a portfolio of 30 to 35% oil, 45 to 50% gas and 15 to 20% renewables and low-carbon activities, so that the energy mix we offer our clients is “2°C compatible”. Today, we have a mix of approximately 50% oil, 45% gas and around 5% renewables. But it is not only a question of climate, it is also a question of taking account of the foreseeable evolution of our markets. We believe that oil will still have a role to play, but that demand will peak around the 2040, and gas, on the contrary, will have a real future with increasing market share, and that renewables, low-carbon energies and energy storage will post a strong growth, taking a share of between 10% and 20-30% in the energy mix. We therefore position ourselves on the markets that offer the growth that we are seeking. At the same time, these activities must be profitable and generate additional cash flows.
The priority is to develop the gas markets. The choice between gas and coal is a difficult one, as coal is the cheaper of the two. There must be a CO2 price so that energy prices reflect their CO2 content. We do not need a very high CO2 price for that. At $25 or $30 per ton, coal-fired power plants lean towards gas. The UK has implemented a tax over the last two years and it works. The gas markets must also be developed and to achieve this, we must do what we have managed to do in oil, where we are present throughout the whole sector, along the entire value chain. In gas, we were historically a producer and liquefier, we were less present in the downstream. We are looking to develop an integrated strategy across the gas value chain for two reasons: to create new markets we must actively seek out the client (which is what we have just done in Ivory Coast with a floating regasification terminal project that targets the potential of the regional power market); and also because, like in oil, the margin shifts along the entire value chain, there are cycles, and the best way of resisting cycles is to be present along the entire value chain.
And then, as we know, the downstream margin is not always dependent on the price in the upstream. This can bee seen in the petrochemicals sector, for example, or in distribution, etc. It is more stable. We must adopt the same strategy in the renewables sector. As for the solar segment, Total is the major shareholder in Sunpower, so we are therefore first and foremost an upstream player. Yet upstream players are suffering today. Solar panel prices have fallen and their current price does not allow producers to recover their investments, covering only their operating costs, as there are huge overcapacities. In order to balance the solar chain, we must be more present in the downstream, and we must be integrated, as the right strategy is that of vertical integration. This is what Sunpower has started to do in the markets where it is well positioned, i.e. the market of limited surfaces (roofs, parking lots etc.), as its cells are more efficient than the ones of its rivals, which mainly target large solar farms, where efficiency is not the priority. As a group, Total has a vocation to be a downstream player, too, including on solar farms, even if it means not using Sunpower’s best cells. Our wish is to support the development of Sunpower, a mission to which we are bound over the long term, but also to develop alongside Sunpower, in order to accelerate this integration.
Question – But this future-oriented strategy is being deployed at a time when you have less money due to low prices. How will you tackle this problem?
Answer – We must work permanently within two space/time frameworks. In the short term, we must get the most out of our assets by fine-tuning cost discipline and also, for example, by ensuring that our plants achieve the maximum possible operating time. Our downstream results are good not only because of the profit margins we achieve, but also because our plants run to a high degree of efficiency. We have put a lot of work into improving the operating time and reliability of our plants. In the upstream, too, what we are doing, with Arnaud Breuillac (President of E&P at Total), is making our drilling rigs run not at 90% of their capacities, but at 93% or 94%. Now, 3 to 4% more when we produce 2.5 million boe/d comes to nearly 100,000 boe/d more production.
These fundamentals were rather neglected when oil was $100/b, as it was easy money at the time. The priority was to find volumes and develop, even if it required complex technologies. The priority today is cost discipline and operational excellence. But at the same time, we must prepare the future. This is why we are investing in Saft for example (energy storage). Yes, the cash flow constraint does exist. But our good results give us capacities and we are standing up to the current conditions better than our rivals. We had emerged from a period of high investments, of around $25-28 billion per year, but we knew that our investments will decline with our projects coming on stream to generate cash flow. In 2015-16, we were unable to add major new projects to our investments. But now we have room to take on future projects. And the right strategy is to decide on projects now, in order to make the most of the low costs. We have a good portfolio of projects, around 10, to sanction over the next 18 months. This is where our post-2020 growth will be. Between now and 2020, our growth is ensured by all of the projects that had been decided prior to the price fall. We will achieve +5%/annum between 2014 and 2020. Then, after 2020, we will obtain +1.5% to +2%/annum on average.
Question – What asset spread do you expect for the Group towards 2030?
Answer – Our assets represent approximately $130 billion. Today, we have around 80-85% of upstream and 15-20% of downstream and low-carbon business. In E&P, we are now going to aim to implement capex discipline. On the 2030 time horizon, we will have an asset spread of around 75% in the upstream and 25% in the downstream and low-carbon business.
Question – Let’s talk about 2017, investments and activities. What is the outlook?
Answer – As announced, our investment drive will be between $15 and $17 billion per year for the 2017-2020 period. We want to stabilize this amount, because in a commodity industry, the right investment strategy is one of permanence. Yo-yo investment patterns are not good. Ours is a sustainable and long-term drive, which will enable us to generate growing cash flows in a scenario of around $50/b.
Question – Total started to cut its costs before everyone else. How do you compare with the others today?
Answer – We got off to a quicker start than the others and we were very thorough in our approach. At the beginning of 2015, we were convinced that we had entered a low cycle and that it was not going to bounce back, while many players in the oil and services sector were hoping the market would rebound like it did in 2008/2009. We had entered a cycle of “too much supply”. It is more difficult to pull oneself out of a situation of “too much supply” than to cope with a lack of demand. I must say that the internal dynamics were very positive. At the beginning of 2015, when we set a target of $1 billion of savings, the initiative came from the top. But in 2016, when we announced that we were raising our cost-cutting plan from $3 to $4 billion, it was the fruit of plans made by all of our teams. Cost discipline is now considered to be a success at Total. It is no longer a constraint, but it is part of our goal to achieve operational excellence.
Question – In which price zone do you position yourself for oil and gas, where forecasts are concerned and as the head of the company?
Answer – I position myself in a horizon of volatile prices, which have low cycles and high cycles. We must therefore position ourselves around assets that are resilient to the cycles. This is true in the upstream and it is also true in the downstream.