By Gerard Kreeft
TOTALEnergies recently announced that it has accepted an offer of $4.5Billion from Suncor Canada for its oil sands assets. Originally The French giant planned to spin-off its Canadian assets in an Initial Public Offering (IPO). According to the major’s press release the Suncor offer was “more straightforward in its execution than the planned spin-off”. Accordingly, the spin-off was terminated.
TOTALEnergies’ divestment was from two oil sands properties in northern Alberta. The oil sands were earlier called “tar sands” or “bitumen” due to the oil’s low gravity and dense composition. Production from these sands took a traditionally difficult, expensive and energy intensive route in the journey to upgrade the heavy oil into light saleable crude oil. In the past decade, technological advances improved the commerciality of the production but it remains highly carbon intensive. Indeed, President Barrak Obama and Energy Secretary John Kerry in 2015 declared that oil from the Alberta oil sands was “the dirtiest oil in the world”. The benefit of this deal to TOTALEnergies is huge. In one fell swoop, the company gained $4.5Billion and also received a significant reduction in its carbon footprint by disposing its two most emissions-intensive assets in its global portfolio. This disposition allows the company to significantly polish up its green credentials.
In the same press release TOTALEnergies stated that it will distribute to its shareholders at least 40% of the cash-flow in 2023, either through share buybacks or a special dividend distribution.
The timing of this announcement comes on the eve of the company’s AGM (Annual General Meeting) on May 26 in Paris. No doubt shareholders will cheer that more cash will be forthcoming. Yet is this a short-term gain for a long-term pain?
Clarity of Message
In the January 2018-April 2023 period the Dow Jones Industrial Index rose 35%: increasing from 25,295 to 34,098. Yet the European oil majors (with the exception of Equinor), including TOTALEnergies, have seen their share prices underperforming badly: Repsol down 18%, BP down 7%, Shell down 10%, ENI down 14%, TOTALEnergies remained the same. Only Equinor was up 26%. In the same period US oil giants Chevron and ExxonMobil have seen their share prices flourish: Chevron up 32% and ExxonMobil 36%.
Table 1: Stock market prices of majors Jan 2018- April 2023(NYSE – New York Stock Exchange)
| Year |
Repsol |
BP |
Shell |
Eni |
Total
Energies |
Chevron |
ExxonMobil |
Equinor |
| 2018 |
$17 |
$43 |
$69 |
$35 |
$58 |
$128 |
$87 |
$23 |
| 2022 |
$14 |
$40 |
$62 |
$30 |
$58 |
$169 |
$118 |
$29 |
Why is it that the share prices of Chevron and ExxonMobil have performed so well and their European counterparts have done so poorly?
The message from the investor community is the clarity of the message. Chevron and ExxonMobil have as their mainstay–the production of hydrocarbons and this is the message that is preached. New energy policies including CCS(Carbon Capture and Storage) and other new energy initiatives make up only between 15-20% of their capital budgets. In the case of Chevron some $3Billion per year based on a capital budget of $15-$17Billion; ExxonMobil’s new energy comes in at $3Billion per year based on a capex of $23- $25Billion. The message is clear and simple: we are oil companies pure and simple. Done in the good tradition of John D. Rockefeller the spiritual father of both companies.
European oil giants, have seen their dualism—wanting to maintain their green image and also profiting from the oil bonanza—fall out of favour by company shareholders. Their clarity of messaging has been found wanting. The sole exception is Equinor who have stated that the majority of their capex budget will be from renewables by 2030.
Where did it go wrong?
To understand TOTALEnergies’ 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 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.
Patrick Pouyanné, TOTALEnergies’ chairman and CEO, then stated that by 2030 the company “will grow by one third, roughly from 3Million BOED (Barrels of Oil Equivalent per Day) 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 the company’s balance sheet, keeping it afloat as it carefully chooses investments, including oil and gas projects, with a high economic return. The Suncor sale is perhaps an indication of selling oil and gas assets at a profit before they are deemed stranded assets.
Reviewing TotalEnergy’s Strategy
Counting the money
TOTALEnergies has recently announced that it will be on track, by 2050, 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.
The company’s 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 in 2023.
Could shareholders demand that by 2030 the lion’s share of the company’s capital budget is dedicated to renewables instead of hydrocarbons?
TOTALEnergies could take the Equinor precedent as an example. Equinor’s message of spending more than one-half of its capital spending on low carbon energy by 2030 in offshore wind technology has caught the fancy of its investor community.
LNG—Where did it go wrong?
TOTALEnergies’ 2022-2025 hydrocarbon budget could also be threatened by a floundering LNG market. In particular its Mozambique LNG project. IEEFA(Institute for Energy Economics and Financial Analysis) 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 64Million 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 5.8Million Tonnes Per Annum (MMTPA) 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?
TOTALEnergies’ African strategy
Much of TOTALEnergies’ 25% forecasted hydrocarbon budget, proposed for up to 2050, will be focused on African low-cost, high-value projects, squeezing more value out of various African assets to ensure a prolonged life cycle.
In Angola the company produces more than 200,000BOEPD 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?
A fly in the ointment could well be TOTALEnergies’ Mozambique LNG project, which is expected to cost $20Billion and produce up to 43Million tons per annum. IEEFA’s stinging critique of the LNG market has given this project a visible setback. Will it ever be developed? Deepwater projects are extremely expensive. Will TOTALEnergies call upon potential partners to help develop these prospects?
Then there is the matter of the East African Crude Oil Pipeline (EACOP). Public dissent is continuing. The large international banks and financial institutions are balking at financing this project. Continued delays only make the completion of this on-going saga more uncertain. Will TOTALEnergies sell its stake to avoid further reputational damage?
Turning the Tanker
TOTALEnergies should turn back the clock to 2020 when it made the bold move to utilize renewables as a strategic part of its reserve count. The duality of servicing two masters: hydrocarbons and renewable energy has only produced a murky outlook.
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 it must repair the splintered and diffused view of its subsidiary companies—TOTALEren, Sunpower, and Saft–in which it has invested:
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 + 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.
TOTALEnergies 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. 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 Jan 2018- April 2023
| Year |
Enel |
Engie |
Iberdrola |
Ørsted |
| 2018 |
$5 |
$16 |
$7 |
$49 |
| 2022 |
$7 |
$16 |
$13 |
$89 |
Enel, the Italian power company has seen its share price increase by 40%. Engie, the large French energy giant has seen its share price remain flat . Iberdrola, the Spanish power company has had an increase of 86% and Ørsted, the Danish power company, has seen its stock soar by 82%.
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 subsidiary companies—TOTALEren, Sunpower, and Saft.
Such radical measures are required if TOTALEnergies is to grow its stock market price and create real shareholder value.
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
ENI states that 90% of exploration capex is spent on near fields and proven basins. Some $11Billion in the last 10 years has been spent on its dual exploration model—near fields and proven basins. The company states that it only requires three years—from first discovery of oil to market—twice as fast as the industry average.
Nigeria is punching below its weight, running a distant third after Egypt and Algeria, even with much more abundant gas resources than either of them and more than double the population of each of these two countries.
