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Q&A: Total’s CEO bets on a decline in the world’s oil supply

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The oil industry’s deep spending cuts, analysts say, could crimp global crude production and cause oil prices to spike toward the end of the decade.

Patrick Pouyanné is counting on it. The chairman and CEO of France’s Total doesn’t want the Western world’s fifth-largest oil and gas company to have to play catch-up when $300 billion in oil company cuts finally take effect.

“We could face, in three years, a lack of supply,” Pouyanné said in an interview last week.

Reclined in a downtown hotel suite and breezily running through the politics and future of the world’s energy resources, Pouyanné said that if the costs to drill and produce oil keep dropping, Total would start the multiyear process of launching new oil projects as early as the end of 2016, hoping to bring them online in time for the spike in oil prices he expects.

Oil analysts say the industry’s investment cuts could delay the arrival of millions of barrels of daily oil production over the next few years, eventually turning the global oil glut into an undersupply. These days, energy executives don’t talk much about pouring cash into new oil projects, and while Pouyanné says the oil industry is just now reining in costs that grew rapidly in the years of $100 oil, Total would try to be an early mover in a recovery.

“Everybody today is very cautious about committing to new projects, and this of course (is setting up) a difficult future, at least for supply,” said Pouyanné, who became Total’s CEO in late 2014 after the death of his predecessor, Christophe de Margerie. “The best strategy for an oil and gas company is to invest in a counter-cyclical way. We invest when the price is low because the costs are low. Then, we will benefit when these projects come onstream to higher prices.”

Pouyanné, who visited Total’s local employees while he was in town, discussed several aspects of the oil industry’s future in an interview with the Chronicle. Edited excerpts follow:

Q: International sanctions against Iran were recently lifted. What’s Total stance on making oil production investments in Iran?

A: Until January 2016, Total has done nothing in Iran. Not a single thing. Since then there is obviously a new market which is open. It’s a new area of opportunity. Iran is one of the three major gas countries. Iran is one of the five major oil countries. So we can’t ignore it. But at the same time, it’s premature to answer the question. I’m not looking for volumes. I’m looking for profits. The key question will be for us, what will be the profits that we can get for Iranian contracts? There’s a lot of gas and ethane in Iran. At this stage, we’re just beginning to discuss.

Q: Is it too costly to buy a U.S. oil company at this point?

A: I think they are very expensive. When I look at the value of these companies on the stock market, they are very high – I’m surprised. There are very few companies, to be honest, that have been really successful in the U.S. shale business. Some were the early movers. It’s an industry where the returns can’t be as high as in conventional oil and gas because it’s a very different business model. It’s a manufacturing business, where you need to inject capital almost permanently.

Q: Total this year has chosen not to cut jobs except through attrition and reduced hiring, unlike many of your peers. Can you talk about why Total is doing that?

A: When you ask your teams to be very serious putting cost-saving programs in place, and then you tell them, ‘By the way, once you have finished the program, you yourself will be at stake,’ I can tell you that will not work. It’s a question of trust between top management and the teams. We will need the staff when prices come back.

Q: What do you expect to come from the announced meeting between OPEC members and other oil-producing nations including Russia next month?

A: What has happened last month is an important event. It was important for Russia to join OPEC because Russia has never participated in history with any freeze or any production cut. It gives the market hope that maybe a cut could come one day, even if they don’t speak of a cut. It gives the feeling to the market that these countries are willing to come back into the picture and get control again. At the OPEC summit in Vienna in November 2014, what was the reason for the oil-price crisis? Nobody was expecting any cuts from Vienna. The price went down to $28 the OPEC countries, especially Saudi Arabia and Iran, said: ‘We don’t control the market anymore. We don’t want to control it.’

Q: Can you talk about the Total’s future energy mix?

A: Sixty-two percent of CO2 emissions come from the energy industry. If you speak about energy, you speak about the development of emerging countries. Oil and gas companies cannot ignore that. Some people want to accuse us as being irresponsible. I prefer to be more proactive on that. It’s an opportunity for us. We know the world of energy, we have the financial capacity and the technical capability, so we must answer. Let’s focus on low-cost oil assets. ‘Twill not be stranded, as people say. Gas will grow. So let’s have an offensive strategy on gas. Total is a 50/50 company oil and gas, but this is a growing market. The energy mix will have more renewables. Total has decided three years ago to enter into the solar business through a U.S. subsidiary. And we intend to cultivate that.

Q: While you’ve been here in Houston, have you learned anything about where U.S. production is headed from local companies?

A: For the time being, everybody agrees that U.S. production is declining and will decline probably by 500,000 to 600,000 barrels a day this year. If the oil price stays at this level, we could have another year like this, but if the oil price goes up again, the decline will be lower. One key question is how much money will flow again to the U.S. industry. I suspect some banks will be more cautious, but you have quite a lot of private equity funds which are willing to continue to invest.

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