With the rapid fall of crude oil prices, oil companies are increasingly under pressure. Many experts suspect the price plunge to be a trial of strength between OPEC, the organization of oil exporting countries that is dominated by Middle East producers, and U.S. shale oil producers.
Commentators say the Saudis are testing the pain threshold of the American industry, as fracking is comparatively expensive.
The harsh price drop is affecting all major producers, with BP even slipping into the red by late 2014 and other big players – such as Exxon Mobil, Royal Dutch Shell and Chevron – seeing their profits melt away.
Handelsblatt spoke with Arnaud Breuillac, president of exploration and production at Europe’s third-largest producer Total, about the future of the oil price and damage control in times of crisis.
Mr. Breuillac, the price for oil has collapsed by more than 40 percent in recent months. What does that mean for Total’s production targets?
We are not stopping or slowing down any projects that we have already started. It is financially painful to give up deep-sea oil projects that are already underway. In that case, we would be talking about losses of several billion dollars.
We are sticking to our path, but slowing down our investment in existing oil fields or infrastructure. This doesn’t affect the big projects.
There has been talk about cost-cutting at Total for a long time.
Our former CEO Christophe de Margerie, whose life came to a tragic end, had in September 2013 correctly said that the oil industry has a problem. Back then, the oil price was stable at prices around $100 per barrel.
But expenses rise between 7 and 8 percent per year. So even at stable prices, companies were spending more and more money. Mr. De Margerie warned that rising costs would sooner or later limit the further development of the oil industry.
What is your answer to this problem in 2015?
The current price level offers Total a great opportunity for reducing costs for the long term. We have to become much more efficient.
By how much should costs be reduced?
We want to save €2 billion ($2.3 billion) by 2017. My expectation is that this year we will be able to reduce costs by €1 billion.
Has the oil market already changed fundamentally?
Our medium- and long-term analysis hasn’t changed. With moderate growth in demand and the natural decline of existing oil fields, by 2030 we will have to open up new sources of oil with a volume of 50 million barrels per day. That’s five times as much as Saudi Arabia produces at the moment.
You can’t live with these current prices in the long run. From Total’s point of view, where should the price of oil move to?
In the medium term, we expect the price of oil to rise to a level of $80 per barrel. From our perspective, the current prices are much too low. Extraction methods such as recovering oil from tar sands can’t generate profits at a price below $80 per barrel.
And what will happen to the price of oil in the short term?
I don’t dare to make a prediction for the short term. It’s not clear how far the price of oil can still fall. We don’t know whether the low prices for oil will remain for a few more months or even much longer. We do know that several American oil companies have reduced production, but only for a few months. It is still too early to draw reliable conclusions.
Are we involved in an oil war in which Saudi Arabia wants to regain market shares at the expense of the Americans and the Russians?
I don’t want to engage in any political speculation. I see the realities of the market. In the last two to three years, we overestimated the worldwide demand for oil. And we underestimated the level of oil production in the United States. That led to a sort of bubble. The market’s equilibrium became somewhat unbalanced. In addition, the world economy has experienced weak growth.
What is your conclusion?
We continue to have faith in the market. The excess that we have slipped into can turn around in a few months when there is the sudden realization that demand is growing.
What will become of OPEC? Will the oil cartel ultimately be stronger or weaker?
To be honest, I don’t know. Saudi Arabia is sticking to its course of not reducing oil production. One thing is clear — namely that an oil company like Total needs as much price stability as possible. We are convinced that prices as they are now won’t have a long life. We are responding to the phase as a unique opportunity to significantly reduce costs, to become more efficient.
The author is Handelsblatt’s correspondent in Vienna and previously spent ten year’s on the paper’s companies and markets desk. To contact the author: firstname.lastname@example.org