IEEFA: Is oil giant Total an emerging leader of the energy transition?
Last summer, French oil and gas giant Total SE announced a $7 billion impairment charge for two Canadian oil sands projects. This might have seemed like an innocuous move, merely an acknowledgement that the projects hadn’t worked out as planned.
Yet it opened a Pandora’s box that could change the way the industry thinks about its core business model—and point the way towards a new path to financial success in the energy sector.
While it wrote off some weak assets, it did something else: Total began to sketch a blueprint for how to transition an oil company into an energy company.
A major has translated its renewable energy portfolio into barrels of oil equivalent
Patrick Pouyanné, Total’s chairman and chief executive, now says that by 2030 the company “will grow by one-third, roughly from 3 million BOE/D (Barrels of Oil Equivalent per Day) to 4 million BOE/D, half from LNG, half from electricity, mainly from renewables.” This is the first time that any major energy company has translated its renewable energy portolio into barrels of oil equivalent. So, at the same time that the company has slashed “proved” oil and gas from its books, it has added renewable power as a new form of reserves.
Writing off reserves
Each of the oil and gas majors spilled red ink last year, and most took significant write-downs. But Total’s tar sands impairments were different. The company wrote off “proved reserves,” or oil and gas that the company had previously deemed all-but-certain to be produced.
Proved 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 proved reserves with wealth and a harbinger of long-term profits.
Because reserves were so important, the Reserve Replacement Ratio, or 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 U.S. Securities and Exchange Commission. An annual RRR of 100% became the norm.
Adding reserves doesn’t necessarily mean adding value
But Total’s write-off showed that even “proved” 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 Total reach the conclusion that “proved” 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. Given current forecasts that prices would remain lower for longer, Total’s financial team decided those resources could never be developed at a profit.
Adding renewable assets as reserves
On the renewables front, Total has confirmed that it will have a 35 gigawatt (GW) capacity by 2025, and hopes to add 10GW per year after 2025. That could mean an additional 250GW by 2050.
A key to Total’s success is its willingness to devote capital to projects at an early stage. Its renewable investments include:
- 50% portfolio of installed solar activities from Adani Green Energy Ltd., India;
- 51% Seagreen Offshore Wind project in the United Kingdom;
- Major positions in floating wind farm projects in South Korea and France.
Total’s renewable investments will add ballast, keeping it afloat
The company hasn’t abandoned oil and gas, and its hydrocarbon investments may prove problematic over the long term. But its renewable investments will add ballast to the company’s balance sheets, keeping it afloat as it carefully chooses investments, including oil and gas projects, with a high economic return.
Meanwhile, its competitors that stick to the old oil industry business model will have no choice but to continue to develop hydrocarbons—even if their “proved” reserves ultimately prove to be financial duds.
Gerard Kreeft, BA (Calvin University) and MA (Carleton University, Ottawa, Ontario, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil+Gas Report.
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