* CEO Pouyanne plans 30% cost cutting exploration *
French energy giant Total is considering abandoning its Cyprus offshore exploration plans several months before its first expected drill, which the group’s new chief executive suggested in a recent interview was part of accelerating and deepening a group-wide cost-cutting plan.
Cyprus Energy and Trade Minister Yiorgos Lakkotrypis admitted on state radio Wednesday that “the company informed us some months ago that it was finding it difficult to identify tangible structures or targets for drilling within the blocks that it has been licensed.”
“Last September, they informed us after concluding their survey report that they could not find any target to proceed with drilling,” the Minister said, adding that talks have been underway since then with the government and that an announcement is pending over the next few days that will clarify the whole matter.
Lakkotrypis is expected to brief political party leaders on the matter later on Wednesday.
After a disappointing initial test drill by the Italian-South Korean venture ENI-Kogas in Block 9 in late-2014 and below-expectation finds in Block 12 by the US-Israeli partners Noble Energy and Delek-Avner, the Cyprus government may have to reconsider its future oil and gas plans, that have already added to the tension with Turkey that wants a share of future energy output, allegedly for the Turkish Cypriot community.
Total E&P Cyprus Ltd. has yet to take a clear decision on its Cyprus offshore assets, all of which are related to falling crude prices and lower margins.
Abandoning Cyprus exploration prospects altogether is an option, with Total preferring to suffer the cost of the licensing. On the other hand, the French giant may decide to simply postpone exploration and conduct surveys other gasfields, within Blocks 10 and 11, or in Block 6 and 7 where it has a partial option for drilling.
Total was supposed to start drilling in the first half of 2015, with Total E&P Cyprus Managing Director Jean-Luc Porcheron saying last year that the company would carry out a two-dimensional seismic survey using a specific type of vessel to locate hydrocarbons in the specific blocks. The license was valid for three months, from the February 1 until May 1, and may be renewed by the government.
In an interview with the Financial Times, CEO Patrick Pouyanne said Total will “weather the storm” sweeping through the oil and gas industry by accelerating and deepening a group-wide cost-cutting plan initiated by his predecessor, the late Christophe de Margerie.
But while this plan will involve steep spending reductions, Pouyanne insists his response to a halving in crude oil prices since last June will be surgical rather than drastic. He will sell some less profitable exploration and development projects, and delay others.
Pouyanne’s central aim is to reduce Total’s “break-even” price — the minimum level at which the group can profitably produce oil — by $40 a barrel.
Total, he said, will reduce group capital spending by 10% in 2015, from $26 bln last year — a larger cut than expected. Of that reduction, the exploration budget — the easiest area where majors can save money — will be cut 30% to less than $2 bln.
Two costly oil sands developments in Canada will be put on “a long backburner” and proposals to dispose of $10 bln in assets by 2017 will be accelerated.
Downstream oil refining operations will face capacity reductions, leading to partial site closures as the sector struggles to compete with more efficient plants in the Middle East, overcapacity in Europe and falling petrol and diesel consumption.
Pouyanne is anxious, however, to avoid cutting too deep and threaten future output growth, saying oil prices will eventually rebound. He dismisses the idea that Total, the largest producer in the North Sea, could begin decommissioning fields in the region as the economics deteriorate. It will continue to invest in Angola, where last month he inaugurated the 160,000 barrels a day CLOV project, and the company is as committed to Russia as it was before de Margerie’s death in a Moscow plane crash in October.
Total is developing the $27 bln Yamal liquefied natural gas project in the far north of Russia with partners including Novatek and CNPC, but is coming under pressure because of western sanctions on Moscow related to Ukraine.
The cutbacks by Total come as thousands more job cuts were announced in the energy industry on Tuesday, with Baker Hughes, the oilfield services provider being acquired by Halliburton in a $26.8 bln deal, saying that it would lay off 7,000 employees, the FT reported.
Global crude prices have tumbled nearly 60% since June to trade at less than $49 a barrel amid weaker growth in demand and after OPEC decided against cutting output in November.
In the Financial Times interview, Pouyanne said the majors, the world’s biggest energy companies, could emerge as “the winners” from the market turmoil because they have greater flexibility to respond by using strong balance sheets to borrow more while interest rates were at historic lows.
Total, he said, would first make deeper and swifter cuts to this year’s spending. The group is also looking at imposing a group-wide hiring freeze for 2015.
ConocoPhillips has announced a 20% reduction in capital spending for 2015, while BP has taken a $1 bln restructuring charge to pay for job losses, including 200 staff directly employed in its North Sea business.
The majors have made it clear they will pass on the effects of crude’s slide to oil services companies — including groups such as Schlumberger, which last week announced plans to axe 9,000 jobs.
