TOTALEnergies: The Golden Share? - Africa’s premier report on the oil, gas and energy landscape.

TOTALEnergies: The Golden Share?

By Gerard Kreeft

The French Senate’s June 2024 energy report, which called for the government to obtain a ‘golden’ share in TOTALEnergies, could have far-ranging affects for the company and the direction and scope of the global energy transition.

 

Roger KAROUTCHI

Yannick Jadot

Committee Chairman, Roger Karoutchi and key committee member, Yannick Jadot, presented a far-reaching energy transition report containing 33 recommendations to ensure:

  • TOTALEnergies become a symbol and leader of the energy transition;
  • The French state takes the necessary strategic steps to guarantee the success of the energy transition;
  • France become an international leader in the energy transition.

While the French Senate report may seem far-reaching, TOTALEnergies had already formulated a ground-breaking transition strategy in  2020. The Senate report could provide an additional ground-swell to accelerate the speed of the transition.

A key to TOTALEnergies’ strategy is its early abandonment of the Petroleum Classification System, which had at its heart RRR (Reserve Replacement Ratio), and instead took on renewables, which it viewed to be more economical and profitable.

Note:This has been discussed on these pages a number of times, but because of the ongoing discussion regarding the “Golden”share, it is important to give this a proper perspective.

Current situation: TOTALEnergies

By 2050 TOTALEnergies’ energy mix will be:

25% low carbon molecules

50% electricity and renewables

18% LNG

7% oil

How is this to be achieved?

Casting Aside the Petroleum Classification System

To understand TOTALEnergies’ strategy we must go back to 2020. Then the company took the unusual step of writing off $7Billion in impairment charges for two oil sands projects in Alberta, Canada.

Both projects were listed as proven reserves. By declaring these proven reserves as null and void, with one swoop of a pen, TOTALEnergies cast aside the petroleum classification system, which was the gold standard for measuring oil company reserves.

The company simply decided that these reserves could never be produced at a profit. Instead, TOTALEnergies has substituted renewables as reserves that can be produced profitably.

New Classification System

TOTALEnergies’ strategy was based on the two energy scenarios developed by the International Energy Agency (IEA): the Stated Policies Scenario (SPS), which is geared for the short to medium term, and the Sustainable Development Scenario (SDS), which focuses on the medium long term.

Taking the “Well Below 2 Degrees Centigrade” SDS scenario on board, TOTALEnergies has, in essence, taken on a new classification system. By embracing this strategy, the company is the only major to have seen a direct benefit from using the Paris climate agreement to enhance its renewable energy base.

While it wrote off some weak assets, it also did something else: TOTALEnergies began to sketch a blueprint for how to transition an oil company into an energy company.

This was the first time that any major energy company translated its renewable energy portfolio into barrels of oil equivalent. So, at the same time that the company has slashed proven oil and gas from its books, it has added renewable power as a new form of reserves.

Proven reserves long stood as the holy of holies for the oil industry’s finances—the key indicator of whether a company was prepared for the future. For decades, investors equated proven reserves with wealth and a harbinger of long-term profits.

Because reserves were so important, the reserve replacement ratio (RRR), the share of a company’s production that it replaced each year with new reserves, became a bellwether for oil company performance. The RRR metric was adopted by both the Society of Petroleum Engineers and the US Securities and Exchange Commission. An annual RRR of 100% became the norm.

But TOTALEnergies’ write-offs showed that even proven reserves are no sure thing and that adding reserves doesn’t necessarily mean adding value. The implications are devastating, upending the oil industry’s entire reserve classification system as well as decades of financial analysis.

How did TOTALEnergies reach the conclusion that reserves had no economic value? Simply put, reserves are only reserves if they’re profitable. The prices paid by customers must exceed the cost of production. TOTALEnergies’ financial team decided those resources could never be developed at a profit.

The company had not abandoned its oil and gas investments. However, its renewable investments were seen as additional ballast to the company’s balance sheet, keeping it afloat as it carefully chooses investments, including oil and gas projects, with a high economic return.

Developing the power business 

The company is replicating its integrated oil and gas business into the electricity value chain to achieve a profitability of at least 12% ROACE(return on average capital employed) for its integrated power segment, based on an equivalent of $60 per barrel.

TOTALEnergies aims to grow its power generating capacity to 100 GW by 2030: investing $4Billion per year so that by 2030 it will achieve positive cash flow.

Key Challenges

LNG—Where did it go wrong?

TOTALEnergies’ Mozambique LNG Project could be threatened by a floundering LNG market.

The Institute for Energy Economics and Financial Analysis (IEEFA), in its recent Global LNG Outlook 2023-2027, provides a somewhat sobering picture for new LNG projects: “IEEFA expects that sustained high global LNG prices; weak LNG demand growth and elevated price sensitivity in Asia; declines in gas consumption in Europe; and a multi-year string of global capital investments in cost-competitive energy alternatives will undermine global LNG demand growth over the next several years.”

According to IEEFA the global demand for LNG is slowing:

Europe although maintaining a high degree of importing LNG is also increasing  energy efficiency measures and wind and solar projects have become commonplace;

Japan and Korea, historically dependable LNG importers, are increasingly turning to nuclear, and renewables;

China, decreased its LNG imports by 20% in 2022 and is turning to pipeline gas supplied by Russia as well as domestic gas supplies;

South Asia, including India, Pakistan, and Bangladesh slashed purchases by 16% in 2022 and suppliers often defaulted on contracts to obtain higher prices elsewhere.

“After several years of weak supply growth, IEEFA anticipates that the global LNG market will see a tidal wave of new projects come online starting in mid-2025. The wave will likely crest in 2026, with the addition of 64 million metric tons of annual liquefaction capacity—the most in the history of the global LNG industry. The supply additions will boost global liquefaction capacity by roughly 13% in a single year. Liquefaction projects targeting in-service after 2026 may be entering a much smaller demand pool than bullish market forecasts anticipate. As new supply floods the market, today’s tight markets may give way to a supply glut, with lower-than-anticipated prices, smaller netbacks, tighter margins, and lower profits for LNG exporters.”

According to IEEFA’s forecast in 2023 only 5.8MMTPA of liquefaction production will be developed, and in 2024 9.1MMTPA. Total LNG production capacity is currently 456MMTPA.

The turning point will be 2025.

“IEEFA anticipates that roughly 17MMTPA of liquefaction projects are likely to come online around the world in 2025—more than in 2023 and 2024 combined. New capacity additions will crest in 2026, with an estimated 64MMTPA of capacity coming online in a single year, and continue into 2027, when 37MMTPA of new capacity is expected to begin operating”.

Much of the new production will come from Qatar, USA and Australia. If 2026 and 2027 will see a sharp upturn in LNG liquefaction production, how will this affect Mozambique’s two LNG projects which could potentially add 38.1MMTPA when fully functioning? Long term delays can only threaten project viability. And not proceeding sooner rather than later increases the chances of these projects being listed as stranded assets.

A more immediate threat is that of Eni’s Coral South project in offshore Mozambique which is already in operation. BP has contracted the entire output of Coral Sul for 20 years, having signed a free on board (FOB) contract with the project partners. In July 2022 it was reported that Eni was considering the possibility of deploying a second floating liquefied natural gas vessel in Mozambique. What does this mean for Rovuma and Mozambique LNG?

TOTALEnergie’s African strategy      

Much of TOTALEnergie’s 25% forecasted hydrocarbon  budget, proposed for up to 2050,  will be focused  on African  low-cost, high-value projects. This means, squeezing more value out of  various African assets to ensure a prolonged life cycle.

In Angola the company produces more than 200,000Barrels of oil equivalent per day (BOEPD) from its Block 17 and Block 32, and non-operated assets including AngolaLNG.

In Namibia TOTALEnergies has made a significant discovery of light oil with associated gas on the Venus prospect, located in block 2913B in the Orange Basin, offshore southern Namibia.

In South Africa the company is focused on its two South African assets: Brulpadda and Luiperd, the second discovery in the Paddavissie Fairway in the southwest of the block.

Will TOTALEnergies deepwater  division seek other parties to ensure that its various projects can be delivered?

Looking Ahead

 TOTALEnergies’ capital expenditures for the period 2022-2025 is anticipated to be between $14Billion-$18Billion per year: “a third will be in low-carbon energies, about 30% will be dedicated to the development of new oil and gas projects, and the remainder devoted to maintenance of the hydrocarbon portfolio. ”In other words the hydrocarbon budget will be approximately $8Billion-$11Billion and the renewable budget will be $5Billion.

Could shareholders demand that by 2030 the lion’s share of the company’s capital budget is  dedicated to renewables instead of hydrocarbons?

On the renewables front TotalEnergies has confirmed it will have a 100GW capacity by 2030.

A key to TotalEnergies success is its ability to step into projects at an early stage, some examples:

  • A 50% share of Adani Green Energy Ltd., India installed solar activities.
  • A 51% stake in the Seagreen Offshore Wind project in the United Kingdom.
  • Major positions in floating wind farm projects in South Korea and France.

Yet the company must take a number of radical steps:

First the company must repair the splintered and diffused view of  its subsidiary companies—TotalEren, Sunpower, and Saft–in which TotalEnergies has invested. These include:

 TotalEren: an Independent Power Producer (IPP) developer involved in all phases of project development and implementation with a generating capacity of 3.7GW and 4GW under construction.  According to Africa Oil + Gas Report, the company could become a candidate for a top-ten list of Africa’s leading  renewable developers.

Sunpower: has 6 GW of photovoltaic power installed globally.

Saft: a leading battery producer, whose lithium-ion batteries can store large amounts of electricity in a small amount of space.

The company should look at becoming part of the Green Alliance. Enel, Engie, Iberdrola, and Ørsted have pole position in determining the direction  and scope of the global renewables market:

 Enel: committed to achieving CO2 neutrality by 2040 instead of 2050, achieving 75% of electricity from renewables and 80% digitalization of its customers on the grid  by 2025. and having an installed generating capacity of 75GW by 2050.

Engie: pledged to reduce to CO2 neutrality by 2045, 45% of investments is focused on renewables and by 2030 will have 80GW of installed generating capacity.

Iberdrola: in the period 2023-2025 the company will invest $50Billion and achieve net zero for Scope 1, 2 and 3 before 2040. By 2030 the company will have installed capacity of 100GW, valued at $70Billion.

Note: Essentially, scope 1 and 2 are those emissions that are owned or controlled by a company, whereas scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by it.

 Ørsted: the Danish wind energy pioneer, continues to set new records. Ørsted share price in December 2022 was $93; five years earlier in 10 June 2016 it was $37. By 2030 the company’s goal is to have an installed capacity of 50GW. Ørsted is also involved with the building of two energy islands– Bornholm and North Sea– which will deliver 10GW of power.

What has set these companies apart is that they have created a huge competitive advantage which will be hard to challenge for newcomers. Moreover, they have moved well beyond simply dabbling in green energy.

These companies have become specialists and now moving on to the next level: creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems.

Essentially borrowing a chapter from Uber, which does not own taxis or Booking, which does not own hotels.

Yet green companies have taken a hit. The S+P Global Clean Energy Index has in the period July 2023-June 2024 been reduced by 20%: from 1177 to 937.

Final Recommendations

Plan A : Make 2030, instead of 2050, the new deadline when renewables will command the lion’s share of its capital budget;

Plan B: If Plan A is not working then…Split the company up so that the renewables and hydrocarbon divisions(deepwater and LNG) can pursue their own strategies and directions;

Repair the splintered and diffused view of  its subsidiary companies—TotalEren, Sunpower, and Saft.

Such radical measures are required if TOTALEnergies is to avoid a confrontation involving the threat of a “Golden”share. While this may spook investors it could help provide an additional  stimulus for the Energy Transition.

Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Kreeft has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and is a guest contributor to IEEFA(Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition

 

 

 

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