Nick Cunningham

The French oil company Total released a downward revision to its production forecast, lowering its target from 2.8 million barrels per day (mb/d) in 2017, to 2.6 mb/d, a sign that low oil prices continue to cut into long-term oil production for even the largest companies.

Total’s CEO said part of the reason for the more modest target was spending cuts, amid falling oil prices. Lower investment will lead to lower output in the future. The other part of the problem is delays to projects that the company already has in the works.

It is no secret that low oil prices are eating into the resources that major oil companies have to use at their disposal. Less revenue from lower oil prices leaves less capital to invest. But, the oil majors do have choices, and for now they are choosing to find savings in their capital spending budgets in order to protect their dividend policies. Dividends are seen as sacred, something that cannot be touched for fear of losing their sterling reputation with major investors. That means that even profitable oil projects get the axe in order to protect payouts to shareholders.

There are few exceptions to this approach, save for Italian oil giant Eni, which became the first oil major to slash its dividend in March of this year. “We are building a much more robust Eni capable of facing a period of lower oil prices,” CEO Claudio Descalzi said at the time, explaining the company’s decision to trim its dividend. Eni’s share price plummeted in the days following the news, but has not performed noticeably worse than its peers in the intervening months.

Total’s latest announcement shows that it still prefers to protect its dividend. The French company said that due to its spending cuts – about $3 billion slashed off of 2016’s spending plan, followed by billions more in subsequent years – it will be fully capable of paying its dividend for the next several years, even if oil prices stay at $60 per barrel. The company will also need to sell about $10 billion worth of assets over the next two years. Two days earlier, the company announced plans to sell a 10 percent stake in Canada’s oil sands to Suncor Energy. And in August Total announced a decision to shed more than $900 million worth of pipeline assets in the North Sea.

However, the cost to this approach is lower oil production, as we see with its downward revision. And with a reduced exploration budget, Total will pullback from the riskiest frontiers. “We overestimated the chances of success of our high-risk frontier zones,” said Kevin McLachlan, the company’s head of exploration, according to Reuters.

Total’s CEO assured investors that this was a prudent approach. “We are not driven by volume at any cost,” CEO Patrick de la Chevardière said. “We are preparing the group for a low oil price for a long time,” he added. Total is aiming to be able to break even at $45 per barrel in 2019, as opposed to the $70 to $80 per barrel threshold that the company needs currently.

Meanwhile, Total has other problems that it needs to deal with. While VW is splashed across newspaper headlines for its wide-ranging emissions scandal, Total is facing government scrutiny as well. The Federal Energy Regulatory Commission (FERC), which regulates pipelines, electric transmission, and interstate gas flows, charges that Total’s trading arm rigged prices for natural gas in the U.S. southwest. The allegation is that Total made loss-making purchases of natural gas in order to affect prices that would allow it to make a lot more money on other positions. Total denies the allegation and for now it is unclear what the next steps are or how extensive the penalties might be.

In short, Total faces the same dilemma that the other oil majors are confronting: Their businesses won’t breakeven given today’s oil prices, so where is the best place to find savings? Cut spending and/or sell assets, and run the risk of lower production? Or cut payouts to shareholders, and get punished in the financial markets? For now, most oil majors are choosing the former.

By Nick Cunningham of Oilprice.com