By Gerard Kreeft
TOTALEnergies has recently announced that by 2050 the company will be on track to have 50% of its energy mix in renewables + 25% in “new molecules”(green fuels). The remaining 25% would be comprised of oil and gas including LNG. Guillaume de Witt, TOTALEnergies’ Hydrogen Lead Negotiator for Europe & North Africa unveiled this strategy during the Amsterdam Offshore Energy Exhibition & Conference 2022.
Guillaume de Witt, TOTALEnergies’ Hydrogen Lead Negotiator
While this is most newsworthy the question remains: how is this transition to take place? Where is its 2050 roadmap? Shareholders and energy analysts will no doubt be on a constant search for additional information. That TOTALEnergies can indeed surprise and pursue a well-thought-out strategy is certainly within the company’s DNA. If successful, this will totally transform the oil and gas sector unlike anything in the recent past. It would totally destroy the comfortable vision of the integrated oil and gas sector of the last 50 years and create new alliances.
In TOTALEnergies’ new constellation, key questions remain: can the company compete with the green energy companies–Enel, Engie, Iberdrola, and Ørsted? What will happen to its innovative deepwater exploration sector in which TOTALEnergies is a market leader? Given the resources required, will its deepwater exploration operations be spun off to possibly joint venture with other companies to ensure economies of scale? How will this affect TOTALEnergies’ African ventures, where the company has many of its assets?
Re-examining the TOTALEnergies Strategy
To understand the company’s strategy we must go back to 2020. Then TOTALEnergies 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.
TOTALEnergies’ strategy is 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.
Patrick Pouyanné, TOTALEnergies’ chairman and CEO, then stated that by 2030 the company “will grow by one third, roughly from 3Million Barrels of Oil Equivalent per Day (BOED) to 4Million BOED, half from LNG, half from electricity, mainly from renewables.” 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 its balance sheet, keeping it afloat as it carefully chooses investments, including oil and gas projects, with a high economic return.
Now apparently oil and gas are being viewed as liabilities and possible future stranded assets. The French giant is hastening the departure from fossil fuels or simply reducing its oil and gas portfolio.
Beyond the Green Challenge
Of the oil majors—BP, Chevron, ENI, ExxonMobil, and Shell—only Equinor has pledged to have more than 50% of its capital budget devoted to renewables by 2030. By signaling such a radical move, TOTALEnergies will ensure that the rest of the sector must react. This is not only a move to green itself but also a sign that it wants to become part of the Green Alliance, namely to join such companies as— Enel, Engie. Iberdrola, and Ørsted—who 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. Creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems.
How will shareholders react to these companies in 2023? To date there is good news and bad news for green energy companies.
Table 2: Stock market prices of new energy companies 2018-2022
Note: Value based on January 2018 and December 2022
Enel, the Italian power company has seen its share price remain flat. Engie, the large French energy giant has seen its share price decrease by 12.5%. Iberdrola, the Spanish power company has had an increase of 71% and Ørsted, the Danish power company, has seen its stock soar by 90%.
The Challenges Ahead
For the oil majors economic challenges lie ahead. The Dow Jones Industrial Index in the period January 2018-December 2022 rose 31%: increasing from 25,295 to 33,147. The oil majors—BP, Chevron, Eni, ExxonMobil, Equinor, Shell, Repsol, and TOTALEnergies—have shown mixed results in their stock prices between 2018 and 2022.
Table 1: Stock market prices of majors 2018-2022(NYSE)
Note: Values based on January 2018 and December 2022
Repsol down 5%
BP down 19%
Shell down 17%
Eni down 17%
TOTALEnergies up 7%
Chevron up 39%
ExxonMobil up 26%
Equinor up 57%.
Whether a company is an oil company or an energy company seems to matter little to investors. Instead, they demand clarity. That is why Chevron, which is on track making 2022 the 35th consecutive year with an increase in annual dividend payout per share, has maintained its value. And why Equinor’s message of spending more than one-half of its capital spending on low carbon energy by 2030 is a leader in offshore wind technology, has caught the fancy of its investor community.
Will TOTALEnergies’ new message resonate with shareholders? Key challenges remain.
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.
TOTALEnergies new energy strategy is also heavily dependent on a number of subsidiary companies in which the company has invested. These include:
TotalEren: an IPP(Independent Power Producer) 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 and 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.
Yet the various asset groups have failed to attract investor confidence. Why? Simply because they have created a diffused and splintered view of what TOTALEnergies is offering shareholders.
With the new strategy the investor community must be convinced that renewables are not a second-tier after-thought. Currently TotalEnergie’s capital expenditures for the period 2022-2025 is anticipated to be between $14Billion-$18Billion per year: 50% ($7Billion-$9Billion) on hydrocarbons and only 25% ($3.5Billion-$4.5Billion) on renewables. What is the vision for 2050?
This is in sharp contrast to Equinor. Equinor expects gross investments in renewables of approximately $23Billion from 2021 to 2026, and to increase the share of gross capex for renewables and low carbon solutions from around 4% in 2020 to more than 50% by 2030.
Much of the 25% forecast hydrocarbon budget, proposed for 2050, will be focused on African low-cost, high-value projects, thus squeezing more value out of various African assets to ensure a prolonged life cycle. Will TOTALEnergies’ deepwater division seek other parties to ensure that its various projects can be delivered?
A prime example is TOTALEnergies’ Mozambique LNG project, which is expected to cost $20Billion and produce up to 43Million tons per annum.
In Angola the company produces more than 200,000BOED from its Blocks 17 and 32, as well as 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 assets: Brulpadda(drilled to a final depth of more than 3,600 metres) and Luiperd, the second discovery in the Paddavissie Fairway in the southwest of the block.
Some Final Thoughts
Charles Donovan, then director of the Centre for Climate Finance and Investment at Imperial College and lead author of a recent (May 2020) study released by Imperial College and the IEA (International Energy Agency) found that renewable energy investments are delivering massively better returns than fossil fuels. The study analyzed stock market data to determine the rate of return on energy investments over a five-and ten-year period.
Renewable investments in Germany and France yielded returns of 178.2% over a five-year period, compared with -20.7% for fossil fuel investments. In the UK, also over five years, investments in green energy generated returns of 75.4% compared to just 8.8% for fossil fuels. In the US, renewables yielded 200.3% returns versus 97.2% for fossil fuels.
Green energy stocks were also less volatile across the board than fossil fuels, with such portfolios holding up well during the turmoil caused by the pandemic, while the oil and gas sector collapsed. In the US, which provided the largest data set, the average market cap in the green energy portfolio analyzed came to less than a quarter of the average market cap for the fossil fuel portfolio—$9.89Billion for hydrocarbons versus $2.42Billion for renewables.
Speaking to Forbes.com, Donovan said “The conventional wisdom says that investing in fossil fuels is more profitable than investing in renewable power. The conventional wisdom is wrong.”
Given the dominant market position that TOTALEnergies has in Africa it is in pole position to play a key role in launching renewable energy projects. A sub-market which TOTALEnergies has overlooked.
TOTALEnergies’ 2050 announcement will start a new round of mergers, joint ventures and consolidation. The energy transition has its own speed and takes no prisoners. But this we do know: 2022 started with an energy crisis involving Russia and the Ukraine, and the last apple has not fallen from the TOTALEnergies’ tree.
Note: Portions of this article have been previously published but have been included to give you the reader a more complete picture of this fast-moving drama.
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