Last week Total’s CEO Patrick Pouyanne wrote an article in LinkedIn which is worth taking a look at:
Investments by the major oil companies are being scaled back in response to falling prices, which means they will no longer be able to offset the natural decline of currently producing fields.
This is a rather frank admission coming from the CEO of one of the major oil companies which has done just that. But alas he doesn’t tell us why, if the above is true, his company nonetheless chose this path.
We already saw oil prices slump at the beginning of the century. The resulting concentration within the industry gave rise to today’s oil majors. Thanks to this consolidation, the majors are very solid. In the early 2000s, my predecessors – Thierry Desmarest and then Christophe de Margerie – built a group that now has a financial situation that allows us to weather cyclical ups and downs and stand firm when crude drops from $100 to $30 a barrel.
Perhaps, but nobody is out of the woods yet. Yes, Total still exists as a company after a few months of oil around $30 per barrel, but there have been few bankruptcies among operators in this downturn probably because there is still quite some way to go. Once the industry has indisputably swung from downturn to recovery, then perhaps claims to have weathered the storm might be warranted. Right now, they seem a bit premature.
Total also owes its resilience to its integrated model, spanning from production to refining and chemicals to marketing. This is a strength. This year, our downstream operations, which we just finished restructuring in Europe, made the strongest contribution to our consolidated results. Who would have imagined that scenario three years ago?
This is true, and he makes a very good point. ConocoPhillips split upstream from downstream in 2012 and are now paying heavily for it.
At today’s price level, we are preparing for hard days ahead in our industry. We are operating in a much more demanding environment in which the priority is no longer to increase volumes but rather to cut costs.
Again I find this admission to be rather startling: the corporate strategy seems to be dictated by the oil price. Why can oil companies not increase volumes and control costs in a sensible manner across the whole business cycle? Or if this is impossible, can they not save further costs by dispensing with the board of directors if company strategy can be set by an algorithm?
In 2015, we exceeded our cost reduction target of $1.2 billion without compromising our commitments as a responsible employer.
We’ve discussed this: you didn’t lay anyone off because for a French national champion and one of France’s largest employers it is politically unacceptable for you to do so. I simply do not believe that the directors of a company which employs 100,000 people – far more than its much larger peers – carried out a professional review of its organisation and personnel and concluded that it should be the same during a boom, bust, and recovery.
Which raises the very interesting question: if other oil companies have had to shed staff to cut costs, how has Total managed it? If it’s in efficiency gains, or improvements to how things are done, this means it was horrendously inefficient to begin with, and investors would be entitled to ask why this was allowed to happen during the boom. Why couldn’t these $1.2bn of savings been made in 2012? It can’t all be the result of renegotiated contracts taking advantage of cheaper market rates. Alternatively, if the cost reductions have been made by simply not doing as much work – cutting back on maintenance, delaying projects, stopping research programmes – then these aren’t really cost reductions, as they are likely to have severe consequences on future production. I suspect Heinz could reduce its costs by closing a baked bean factory, but its revenue would suffer thereafter. By claiming $1.2bn in savings while boasting that nobody has been laid off while everyone else is shedding staff by the tens of thousands, Pouyanne raises questions that I am surprised nobody else is asking. Of course, it might well be the case that the markets know damned well that Total can’t lay off thousands of Frenchmen and have factored that into the share price: provided the dividend is maintained, and it is, perhaps nobody cares about the underlying finances?
In 2015, Total was the most resilient major in an environment of declining oil prices.
I think Rex Tillerson might take issue with that. And he’ll not be the only one taking issue with it if it transpires that this “resilience” has come at the price of future production in order to protect French jobs.
The comments beneath the article provide entertainment, also. First up is somebody who is also unconvinced that this downturn is over:
If we’re not at the bottom of the cycle, we might really get to see how resilient Total and others are.
Next is a Nigerian employee of Total. Nobody licks arse quite like a Nigerian licking arse:
I suspect he thinks this sort of toadying behaviour gets him noticed, and hence earmarked for promotion. I also suspect that, absent local content laws, he would be inspecting hulls and subsea equipment up close with a wire brush instead of heading a department. He’s not alone, either: here’s one of his compatriots making a similar attempt to get noticed:
Sire? He’s been watching too much Game of Thrones.
A Schlumberger man steps in with some words of wisdom:
Indeed. Mass wastage followed by mass panic across the business cycle isn’t much of a strategy, is it?
This chap has drunk the Total Kool-Aid:
Let’s hope Abhijit G. hasn’t rushed out and sold his kids’ school books to buy Total stock.
This fellow probably watches out for black helicopters as he walks to work:
Which is presumably why the giant pension providers don’t include golf driving teachers in the lists they hand to headhunters. Still, he’s not quite as swivel-eyed as this next one, who believes a mysterious cartel is hoarding the world’s oil (as opposed to a quite open cartel producing most of it):
Finally, I hope I am not alone in finding Total’s rush to arse-lick Iran’s leaders less than two weeks after the nuclear sanctions were lifted somewhat distasteful. Yes, I get that France is skint and Total desperate to access new reserves and the French make a big thing of not being judgemental like those awful AngloSaxons, but it would be nice if a company like Total would at least pay lip service to the fact that, despite the lifting of the nuclear sanctions, the regime in charge of Iran is still deeply, deeply, unsavoury.