Total SA Investors' Day - 2014 Mid-Year Outlook
Sep 22, 2014 AM CEST
FP.PA - Total SA
Total SA Investors' Day - 2014 Mid-Year Outlook
Sep 22, 2014 / 08:15AM GMT
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Corporate Participants
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* Christophe de Margerie
Total - Chairman and CEO
* Helle Kristoffersen
Total - SVP Strategy
* Arnaud Breuillac
Total - President Exploration & Development
* Patrick de la Chevardiere
Total - CFO
* Martin Deffontaines
Total - VP IR
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Conference Call Participants
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* Michele Della Vigna
Goldman Sachs - Analyst
* Irene Himona
Societe Generale - Analyst
* Iain Reid
Bank of Montreal - Analyst
* Oswald Clint
Sanford C. Bernstein & Company, Inc. - Analyst
* Lydia Rainforth
Barclays Capital - Analyst
* Theepan Jothilingam
Nomura International - Analyst
* Martijn Rats
Morgan Stanley - Analyst
* Jon Rigby
UBS - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Jason Kenney
Banco Santander - Analyst
* Peter Hutton
Royal Bank of Canada - Analyst
* Lucas Herrmann
Deutsche Bank - Analyst
* Alastair Syme
Citigroup - Analyst
* Christopher Kuplent
BofA Merrill Lynch - Analyst
* Guy Baber
Simmons & Company - Analyst
* Maria Drew
Goldman Sachs - Analyst
* Anish Kapadia
Tudor, Pickering, Holt & Co. Securities - Analyst
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Presentation
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Christophe de Margerie, Total - Chairman and CEO [1]
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(spoken in French) Good morning, all. Welcome. But I will not repeat what Martin said brilliantly with his still marvelous British accent. Let's don't, but that's important. No, frankly we are happy to have you here -- it's not our building. We are taking care of our costs, but we thought it was important to bring our team in charge of the relationship with analysts, which means you in London. It's more convenient, it's more efficient, and definitely it's part of the global strategy to be closer to our shareholders.
So, I would like to start this morning with a few remarks and offer what I think will be some of the key messages of our day. Most important message is en garde le cap. We are staying the course. We are on track.
In terms of our strategy to transform Total into a larger, more competitive entity, we are on track to continue transitioning from the intensive investment phase into the strong growth phase for production and cash flow.
Project delays as you know and cost overrun have affected Total and industry as a whole. As a result, after careful review, we decided to reduce our production target for 2015 and 2017 by about 10%. We'll come back on this. And this means that Total is still very well positioned to be one of the fastest growing major oil companies between now and 2017.
We also adjusted our cash flow targets taking into account the new production profile and the impact of higher costs, but the growth is still very strong because we have responded with a companywide cost-cutting program and a new $10 billion asset sale program. This means that as per our prior plan we are moving to a period of rapidly rising free cash flow from all of our operations.
So, some things have changed and not always for the better. But we are adjusting as always we do. What has not changed is that we have one of the largest and most diverse portfolios of development projects in the industry. And as they start up, this will fundamentally change our upstream. Arnaud Breuillac will come back on this.
We have here the new head of exploration and production Arnaud Breuillac -- can you -- smart, clever guy. But you will have to judge by yourself. Arnaud here today to walk through the major startups. He will also present his vision for E&P which includes some changes, I would say large changes, in the organization intended to improve the performance of E&P and improve capital efficiency. As you know, these changes include bringing a new head of exploration from outside the company, but I will leave that for Arnaud to tell you.
The downstream is continuing to restructure and rebalance its European exposure. This is working even if it takes some time but not so much. And we have to progress at the right pace for the sake of all of our stakeholders. I will go into more details in the downstream later today.
On the corporate side, I'm very pleased that we have come through the intensive investment phase and increased the dividend twice in the past two years without compromising the strength of our balance sheet. And Patrick, even if it's not all of your talent by yourself but I think you deserve for this special recognition.
The last key message -- but I hate the last one but I need to have the last one for now. Last message that I would ask you to keep in mind during this presentation is that we now have in our portfolio today essentially all the resources and captive opportunities we need to complete the transformation of Total as we launched almost four years ago. Already, four years.
And as I said, we are on track with our plan to do exactly that which is change Total into a larger more profitable, better energy company. That will be all the base of our presentation of today. We are on track.
Now, Helle, I give you the floor -- all the floor to answer into what is still the major concern of the Company, our environment. Thank you.
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Helle Kristoffersen, Total - SVP Strategy [2]
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Good morning, everybody. It's a pleasure to be here. It's a pleasure to see you all. Some of you I know pretty well now and some new faces of course, as always.
I'm going to start the day with just a couple of charts on our market environment. At face value, you will see that some of the charts look pretty similar to those of last year. And that's normal because long-term macroeconomics don't change fundamentally in just one year. And yet, our first important message here is that our industry context is evolving on a number of fronts and that our goal is to adapt to these changes.
So the first chart here is a reminder of Total's view of the world energy mix and its evolution between 2013 and 2030. The energy market as you know is a growing market. Even with a conservative growth rate for the demand, which is what we use at Total and it's different from a lot of our peers -- but even with a conservative growth rate for demand, we see energy demand increasing by around 21% between now and 2030. As you'll remember, our core belief is that we need all forms of energy to address this growing demand.
Another important topic, the world energy mix is evolving slowly away from fossil fuels. But these will still represent, as you can see on the chart, around three-quarters of the world's supply in 2030. Oil continues to be the largest source of primary energy in 2030, and we believe that gas will overtake coal is the second largest source of energy.
We know this is not what everybody says, but we see this as a logical evolution despite the current noise about the comeback of coal in certain geographies including here in Europe. Why is it a logical evolution? Because natural gas is abundant, it's much cleaner than coal, it's acceptable. And by the way, as you've noticed, we have recently sold our coal mining activities in South Africa.
Another interesting piece in this evolving energy mix is renewable energies. They will continue to grow rapidly and become increasingly important until 2030. Wind and solar which are depicted here in the top of the bar, they will represent around 5% of total demand in 2030, which is significant because it will be roughly the equivalent of 15 million barrels of oil equivalent per day, well above the current level of the production of Saudi Arabia.
And then solar, which we like, solar has a projected growth rate within this mix of solar and wind altogether -- projected growth rate of 15% roughly per annum off a small base of course. But you know that we are happy about our solar PV activities at SunPower, and we do anticipate that SunPower will experience significant growth in the years to come.
And then there are some important buzzwords in the industry. Climate change, carbon footprint, air quality, energy efficiency. All of these are major industry topics right now, and they are hugely complex matters also with lots of interdependencies and lots of interrelations.
But if I were just to leave you with one simple takeaway relating to all of these climate-change-oriented concepts, in the forecast that we use at Total and in the energy mix that is shown here in the chart, we do anticipate increasing regulation in favor of cleaner energy. We also anticipate changing consumer behaviors and all of this is absolutely embedded into the numbers that we provide to you. In this global context, we believe that being well positioned in both LNG and solar is an advantage for Total.
Zooming in now on the oil supply and demand piece of this energy mix. You know this chart, you are familiar with it -- it is not very different from the one of last year. But I still want to go over it because it is very important.
Oil demand is expected to grow by around 0.6% per annum unchanged from last year and in line with the most likely scenario from the IEA between 2013 and 2030. We continue to believe that the industry needs to put on stream about 50 million barrels per day new production by 2030 just to meet demand. This will not increase spare capacity much above current levels, so the balance between oil demand and supply will remain tight.
And adding 15 million barrels per day means that we look at replacing roughly 60% of current oil supply, or as we've said before that is roughly the equivalent of five times the current output of Saudi Arabia to be added in just 15 years.
We all know this is a challenge and that it will require massive investments. These massive investments in turn will only happen if the returns are adequate.
As you are aware also, we disagree with the notion that the role of OPEC is declining. OPEC will still be the dominant oil supplier in 2030, and it will retain its key role as a market shaper for both spare capacity and pricing inference.
That being said, no doubt about it, the US tight oil and shale oil revolution is also reshaping the market, and we do hope the US unconventionals will be a key contributor to increasing supply between now and 2030, probably the second contributor behind OPEC.
Roughly speaking, on the chart that is shown here in the blue section of the bars, the incremental production of the roughly $50 million barrels per day is comprised mainly of an additional 10 million out of OPEC countries, 8 million to 9 million barrels per day out of US tight oil and shale oil, 6 million to 7 million for deep offshore including the Gulf of Mexico in the US, and then 3 million to 4 million barrels for extra heavy oil mainly out of Canada. And that doesn't add up to 50, but those are the main contributors that we have factored into our forecasts here.
What about pricing? Well in terms of pricing, we may all think that there is less upside right now for Brent than, let's say, a couple of years ago. But the reality of course is the following. Balancing oil supply and demand requires investment in and the delivery of high-tech capital-intensive projects and that continues to provide strong support for oil prices. This is true even without factoring into forecasts the current geopolitical instabilities that are anything but reassuring. And therefore, once again we remain comfortable with $100 Brent scenario that we share with you for Total's long-term cash flow projections, unchanged.
Let's move now to gas and more specifically to LNG. We've kept our 5% CAGR for LNG between now and 2030 unchanged from last year. But it is important for all of us to bear in mind that the LNG markets are changing very fast. They are becoming much larger, much deeper, much broader, which is I would say the message from the bars on the chart here, and new players are moving into these markets.
One factor behind the growing LNG market and trade is a disconnect between gas producing countries on the one side and gas consuming countries on the other side. And in terms of demand as you know, Asia alone will represent more than half of the incremental demand in the years to come.
But then, the whole world and Europe in particular is rediscovering these days how inflexible gas pipe is, which by contrast gives a renewed momentum to LNG not really factored in here. New renewed momentum to LNG as both flexible and reliable source of gas.
The industry challenge on the chart here is that we need to more than double current LNG supply by 2030 by adding roughly 360 million tons between now and then, 360 million tons of new supply of which in dark blue on the chart here only roughly one-third has been sanctioned to date.
Yes, there are new LNG hubs coming up, and this is good news and as we said several years ago already the US is absolutely on the course to become a significant LNG exporting country. Russia is following and then somewhat later East Africa.
Long-term customer commitments with robust pricing schemes are absolutely essential for the two-thirds of required new demand, new projects to be sanctioned. This is why continue to believe that attractive pricing structures including long-term oil-indexed contracts will prevail in this market even if of course there will be molecules indexed on HH and there are spot cargoes available also.
Total is one of the top three players in the LNG industry today, and we think we are well positioned for the future as we participate in 25% of the sanctioned projects, so those that will happen.
My last chart is on costs, and I will just frame the topic since you're going to hear much more about Total's cost initiatives from both Arnaud and Patrick in just a short while. But again just to frame, the chart here shows the evolution over the last 10 years of three indexes. The first one is the Upstream Capital Cost Index in blue. The second one is UOCI, the Upstream Operating Cost Index in red. and then in orange is the index of Brent. All of these numbers have been rebased to 100 and the year 2000. So as you can see on the chart, I hope, since more volatile years of 2008 and 2010, which I carve out, but since therefore 2011 and now, the two cost indexes have been growing and continuing to rise while Brent in orange has been flat to down.
True the rate of inflation in the industry has slowed down somewhat recently, but a first message is that today's absolute cost levels as depicted here are unsustainable, period. They are even more unsustainable these blue and red curves if you compare them to Brent precisely because we know that oil prices cannot sustainably be disconnected from costs, and this is what they are right now.
The net effect of these evolutions are well known. There's been a significant erosion in both margins and returns in our industry, and we cannot continue like this.
Total has been at the forefront of the industry response to these rising costs. First through capital discipline, meaning that we are increasingly selective on all of the new projects that we give a go-ahead for investment. Secondly, in terms of CapEx control. We were the first major to commit to you back in 2013 on a reduction of our CapEx levels. Remember when we said that 2013 would be the year of peak organic CapEx. As we communicate on our CapEx levels, we use organic CapEx, which is much more stringent than just growth investments. And the third lever on our cost discipline is that we are implementing a company-wide cost reduction program for offering costs, which you'll hear more about in just a couple of minutes.
Overall, rising costs are expecting our whole industry and we know that our peers have put in place similar programs to various degrees. This is good because it is a necessity.
One way or another there must be some industry movement to restore margins and returns to the levels required for oil and gas projects to be sanctioned in order to be able to meet growing demand.
And this concludes my remarks for today, and therefore now I pass back the floor to Christophe. Thank you.
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Christophe de Margerie, Total - Chairman and CEO [3]
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Well, I hope you are convinced because I am convinced. And you know, Total has always been a little bit in a leading position on saying what we think is going to be our future in terms of oil and gas price. And we still strongly believe as Helle brilliantly presented it that there is a strong support oil and gas even if today we are a little bit below $100. But when you say $100, you have to be sometimes below $100 even if I prefer when we are above but that's what it is.
And we continue to offer you our views on offer and demand and why we strongly believe on this scenarios to be the one to support our strategy. But by definition to cope with our targets we also need to cope with costs, which means keeping them down, under control but more than keeping them, really reducing our costs. So the price of energies are at that level, we control our costs. That is the success of the Company.
I will now go to the outlook of the Company and then presenting the downstream. For the first time we're going to present downstream before upstream. Don't think there is any message with this. We still are investing in downstream, yes, but far less than in upstream and upstream remains the priority.
But to leave Arnaud having the chance to present his strategy, we will do it this way this time, and by definition next time I hope we will just be saying upstream, downstream, and new energies. And after the presentation of Arnaud, we will have a short break.
So as usual, safety first. Safety the core value of our Company, of energy companies. That's essential for our capacity to deliver our projects. It's not anymore in terms of acceptability, it's real strong governance of the Company. And to give you an example, we were last week we were having the Board of Total taking place in Antwerp in the middle of our new what we call the platform refining petrochemicals and with the launching of the new OPTARA project. By the way it has been a tremendous, let's call it a success Total Board seeing what we are doing and to see our employees seeing the Board. That was really an important time. But they came at the time where we had the best performance in terms of security all refining and petrochemicals activities. And at the same time, we've had the best results in August on refining petrochemicals.
Of course, there is no direct link but there is. It means that even if we have security safety first, it's not only because of cash but it's also usually when you're efficient on safety you are good on delivering your capacities and production. So the focus is there. The results are good. We have been reducing our -- what we call LTIR and TRIR by almost 60% during the past six years. We will continue as part of our program, as part of definitely our commitment.
But we also have definitely also to improve our environmental performance. You have on this slide, we used two examples because it's more important than to speak on those matters. It's better to go to real points where we are working, I would say, hardily. Continuous flaring, what we will call soon routine flaring, is definitely now not at all accepted, and we have reached the target we had to reduce flaring by 50%. But I think that Arnaud will come back on this.
Discharged water, well, why are we using this more than others? Because we have a long experience in developing offshore projects and now deep offshore projects, and we need to do this in a way which is as clean as possible.
So to give you a specific example, you have on this slide on the left-hand side you have CLOV, which will come back often today as an example of success. In CLOV we have been doing among other things a lot of initial technology to be more efficient, which means in fact to reduce consumption of energy. And by definition, if you reduce energy you are improving your commitment on what we have to do within this climate change, but you also reduce your costs and you also improve the return of the project.
So, again, it's not to say that we are good to make money. But, yes, it has a link just like safety. When you are doing things better in taking more responsibility on the environment, it might have a cost to start with, but definitely at the end it's not only acceptability you get, it's better performance, it's better efficiency, and additional cash flows.
Some, of course, that was to come to cash flow, subject we've been discussing many times amongst ourselves and which has been a challenge for a lot of companies. We are pleased to say that we are really now moving from we call the intensive investments to cash flow generation.
You, we decided together to increase our investment, to increase our production, which means by definition additional start-up and means by definition to start with additional investment, which is less free cash flow. We are in 2017 definitely increasing this free cash flow by, let's say, almost $8 billion but what is more important is we come to the real increase of our cash flow between 2016/2017 to reach at least $15 billion of free cash flow by this time.
And what's important it's done in controlling our CapEx -- Patrick will come back on this -- definitely reducing our OpEx. We have a strong now not only message, strong policy within the group all branches, upstream to downstream, and to reduce by 2017 on a regular basis, so trying to be recurrent system, $2 billion per year which gives an additional $1.4 billion of cash flow.
So on the slide you see it. You have at the bottom the 2013 free cash flow, which was definitely below our expectation. With CapEx discipline, you will add more than $3 billion. With OpEx reduction, I just mentioned it, downstream restructuring $1 billion and then upstream, I'll note, almost $7 billion. Half of it coming from our upstream activities start-up. And that's how we will definitely bring this strong cash flow, which will be fueling. I like this expression fueling a competitive shareholders' return.
Between now and 2017, we will move to this $15 billion and definitely keep on our investment program at $25 billion. The peak, remember, in 2015 was $28 billion.
Profile of Total in 2017, well, you know that I've always said that 2017 or three or four years for a company like Total is very short time. And definitely, at the same time we are focusing on short/medium term. We have and we will come to it -- we still have to look at the future longer-term but today, the commitment of the Company is on 2017. And nobody will believe us on the future if we don't deliver what we have been telling you will be the 2017 results.
So, we use a short-term example by branches, by activity to tell you where we will be. In the upstream, we use the share of capital employed for the group is almost still at 80%. Today we are a little bit below so we continue to decrease the upstream part versus the rest of our activities.
Second example, production growth is more than an example, moving from today the 2.1 million barrels per day without [at co] to 2.8 million barrels in 2017. Again, Arnaud will come back to it. It's not at 3, but we have to adapt ourselves to the changes -- there have been many, but 2.8 is not only challenging, it's really changing the face and the profile of our Company.
On refining and chemicals, in fact, refining and petrochemicals we keep reducing the share of what we call our European exposure, which is definitely the place where even with the additional very selective investment and the closing the unnecessary capacities, it's still not a place where we intend to grow. But that's important to see it [by year]. We will definitely in this period of time, reduce strongly the share of this European exposure.
And for marketing and services, which is a branch we are not always raising as important part of the Company, but definitely we are growing, we will be growing, but only in growth areas. To make things simpler, growth areas -- forget Europe. It's everywhere where we develop our activities except in Europe. In Europe, it doesn't mean that we will sell all of our activities. If it is successful like in France and Germany and Benelux, definitely we will stay, but growing no chance. And where we grow, definitely Africa and Asia.
But at the end, what will be really transforming the Company -- and I'll come back to it -- is the Group cash flow. Our commitment, remember, was to increase our free cash flow to $40 billion in 2017. Well, you have here the Group cash flow one part definitely is to cover our organic CapEx $25 billion and the remaining is the $15 billion I just mentioned with the preceding slide; $25 billion plus $15 billion equal $40 billion.
And we can achieve this, we will achieve it to dynamic and disciplined strategy on costs but also on delivering, on being committed on all of our commitments. I know I repeat the word twice, but it's on purpose. What we really need in this company is to work as a Group, to work as teams, but also to have personal commitment from everybody, and today especially from Arnaud. I'm putting the pressure on you, but you love it.
Downstream -- well, for refining and chemicals, you know we told you are ready, so it's just the follow-up of the new strategy which started really with the merger between refining and petrochemicals and having marketing and services becoming independent. Well, on that slide you see the reduction of the European parts on our capital employed.
If you ask me but I will answer it before, that is without specialty chemicals activities. So it's really refining and petrochemicals. So you see the reduction with Europe becoming at the 40% versus 60%, and globally an amount of capital employed which remains stable. But to remain stable it means you invest; you invest but you depreciate. But today with our targets of profitability, we consider it is a balanced, a well-balanced position for this activity within the global capital employed for the Group.
So, we will definitely concentrate our new investment, if any, on major platforms. I was just telling you what about what's going on in Antwerp. And Antwerp today, even before OPTARA, is really today one of the best refinery in Europe, not only in Total but in all other companies being in this business.
So, we will continue to modernize our sites to face the additional requirement in terms of environment, and even sometimes we needed when possible to preempt what will come. If you can at the time you invest like in OPTARA, pre-input will be the next requirement in terms of environment. That's the best way to not only adapt yourself but to anticipate. I think our teams in refining and chemical have done already a tremendous job to change the way this branch is moving. We have things to move in E&P. We know this, but definitely refining and chemical is running now at full speed.
Now, you see this here which is delivering profitability on refining and petrochemicals. You know this slide by heart. So it does not show much change since our last presentation. The small difference again to preempt the questions, if you have good eyes, you would see that on the right part of the slide we have this 13%. This 13% was based with ERMI refining margin of a level which is not the one of today so we decided to reduce this target at $25 per ton. So if you use $25 instead of the previous one was what?
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Unidentified Company Representative [4]
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(inaudible -- microphone inaccessible)
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Christophe de Margerie, Total - Chairman and CEO [5]
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$27 was the equivalent in constant terms, okay. So it's 1% less but today that's much more our scenario. We feel better with $25. You'll see that our target for 2014 is 11.5%, so we are very close to the target we have for 2015.
But the most important thing is again this profitability comes from a new way of behaving, a new understanding on how to use all synergy between two different sectors before they were so much [disaligned] that it was really a source of considerable additional profit. It's done, but we have to continue. We know that there are other forces of synergies not only in this petrochemical refining activities but in the rest of the Group and also between the different branches of the Group. So we're on track; they continue. They all are dedicated to success of the Company.
Creating value in marketing and services, well, what's important is we need to invest; we wanted to invest in marketing and especially -- and only, not especially, in emerging countries, countries with strong growth. Like Africa, we have today really good network which is getting the benefit of its size of synergies, but we need and we can continue to invest and the only chance to be successful in marketing is never to forget the size. You cannot be profitable in reducing your share. Even if sometimes we think about this message we receive from time to time, shrink for growth. Never try to do shrink for growth in marketing. If you think that there is no message that you cannot grow, sell. But today we grow and we grow successfully.
There will be a period of additional investment, which means slight reduction in ROACE but by 2017, targets goes back to the 17% ROACE, which is absolutely in line with our investment policy, which is just invest in projects we can, meet our targets of profitability. That's true for marketing. That's true for everybody. And we see the Group moving on track to achieve this performance. It's going to be, I hope, an important part of the success of the Group [restructuration] of 2012.
So, that was the main message for downstream and the outlook. We will come back to it at the conclusion, but I wanted before we have the break to [reinsist] on what will be Total in 2017. Not a conclusion but to repeat the message of this morning.
Dedicated teams to deliver the targets we have announced for ourselves, for our shareholders and stakeholders as a whole. We need to deliver this additional cash flow to prepare the future and to pay additional dividends. I always say that be careful, cash flow is -- as we were receiving the message from one of our important shareholders -- don't forget that you need to invest to make money, and you cannot get cash flow without production.
But now it's time for Total to go to the start-up, to bring the cash flow, and then we'll talk about the future. But today, we need to deliver these 2017 targets on all these three branches. And I strongly believe that when you will have the presentation of Arnaud, you will understand that with the three on board including SunPower, as Helle always liked to remember, which is a small investment in comparison with the rest of our global investment, but it's successful story even if still needs to prove that in terms of long-term profitability vision.
Thank you, we have the break, and we start after the break with the young, smart, great Arnaud Breuillac. You love this. Thank you.
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Arnaud Breuillac, Total - President Exploration & Development [6]
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This movie always gives me a thrill. I guess it reminds me of those days when I was offshore and I was involved in such large projects. And I could feel after the buildup of expectation, after millions of man-hours of work done all around the world, and you get to the day of the startup, and there is nothing equivalent for me. So, well done to the CLOV team.
Good morning. I am Arnaud Breuillac. I'm not sure I need to introduce myself anymore after this morning. I met some of you today and some time ago, and I look forward to meeting the rest of you, of course.
What you should know about me is that I started in the group in 1982. I started with very much hands-on operations job involving being involved in a large project like CLOV in the UK and in the North Sea; later on in Indonesia on our major two new gas fields. And then later on in Angola, I was very much a part of the work done to launch the Dalia FPSO, which is a project on the same block as CLOV in deep offshore Angola. And then after that, I took some responsibilities managing our E&P business and operations in Continental Europe and Central Asia and later on in the Middle East, managing our operations in the Middle East.
So I know that we are on a tight schedule; this is something I'm used to. So I suggest we get started.
To put it simply, my mission is to improve the performance of upstream. I think most of you know that Total has one of the best portfolio amongst our peers, amongst the majors. We are a leader in deep offshore and LNG. We have the lowest technical cost amongst our peers, and we have a very significant list of new startups in the next three years.
But to improve our performance, my plan is to focus on three objectives. First, project execution. We need to deliver our projects in time and within budget. This is absolutely essential for the generation of cash. Second, we need to have strict capital discipline. We need to be more selective on our new investments and our new acquisitions. And third, we need to fight inflation. We need to focus on cost reduction because we want to maintain our competitive advantage to have the lowest technical cost amongst our peers. And if we achieve those three objectives, we will bring back the (inaudible), the retail and on average capital employed, above 15% for the upstream.
With regard to capital discipline, I would like to take two examples, one that I know you are quite familiar with. And this is our Kaombo project. This project illustrates quite well what we are trying to do and what we mean by capital discipline. I will not go over the story again, but you know that when we were about to sanction the project, when we got all of the offers from the tender, we saw that the project was just too expensive and was not meeting our threshold for economic results.
So we decided to first look back at our own requirements for the project. We cut back on redundant equipment. We cut back on some of the provisions we had built into the project for upsides. And without compromising on safety, we managed to reduce the CapEx by $2 billion. Then we went and worked with our contractors on how to better align ourselves and our contract and, for example, how to better manage risks associated with such large projects, taking back some risks that we were better to manage than our main contractor. This is about building alignment. And with that, we managed to cut back by $1 billion of CapEx.
And last but not least, we went back to the Angolan authorities, and we were able by discussing with them how to improve the local content to create more value in the country. Whilst maintaining a significant amount of work inside the country, we reduced by $1 billion on that project, as I'm sure you know. We still have slightly more hours at what was performed in CLOV, so still a sizable amount of local content. We reduced by $1 billion the CapEx, $4 billion -- this is 25% that was knocked down from the project. And we also managed to revise some of the fee development so that we could increase the production above the development period by 15%. And then that project met our requirement and we could launch it.
But to do that, we took a year. And clearly, our target is to do this earlier in the process. And this is how what is illustrated by (inaudible), which is a smaller project, a tieback to our Laggan development in the west of Shetland. And there, we were about to again bring to just good end of design, removing the redundancy, simplifying the design. It is much smaller, but it is said that there are no small or big projects. Every project will be scrutinized, and there are these what we call value engineering and also a good alignment with contractors and mitigating the effect of local content.
This is how we want to go about capital discipline. There is a point on the slide that mentioned the fact that our base case scenario is still $100 per barrel. But for short-term -- for short plateau, we look at creating value at $80. I see myself in that respect as a gatekeeper, making sure that our future investments will be profitable.
Now, this slide illustrates our track record on executing and delivering projects. I think that you will agree with me that we have a good performance compared to our peers. And I think the last achievement with CLOV is yet another evidence of this tight regard.
To maintain this capability to deliver project on time and within budget, we've got to continue to focus on three things. First, we need to minimize the change after the project is launched. During the project execution phase, it is too late to make changes. And late changes are generating huge costs and delays.
Second, I did mention it in my previous example, the alignment of objectives with our contractors is absolutely essential. There is good incentive schemes in our projects so that we can be sure that they will want the project to be completed in time, like we want.
And third, it's also about having the right expertise, the right people capable to follow the most sensitive part of our projects. Our projects are combining a number of risks in the execution phase. And to be able to have accountable specialists capable to spot that there is a small political/cultural activity in one of the factory that may actually hinder the whole project schedule is very important.
So I would like to think that we have a good record. But for me, it is my job to continue to maintain this record. And I believe if Christophe put me in this position, it is precisely to continue to deliver that and even more. Thank you, Christophe.
Now we need also to fight inflation. This was mentioned by Helle this morning. The trends that we are seeing both in CapEx and OpEx are just not sustainable in an environment where we see the Brent price, at best, stable.
In the E&P, we launched a major cost reduction exercise which consisted into a bottom-up exercise. We asked every budget holder to come up with suggestions, proposals. And we got 3,000 of them, which, added up over the next three years from 2015 to 2017, will provide a 15% reduction on our operated CapEx. This is actually addressing clearly structural costs -- doing more with less; making sure our organization are exactly designed and fit for purpose; making sure we optimize our maintenance strategies; going back to our main suppliers, making sure we get value for money, going up the supply chain. So we looked at every single budget line to see how and where we could improve, and we saw room for improvement there.
This program in E&P, we named it change of culture, compete on cost and deliver. I think it's a strong message about what we want to do. It's not about a one-off cost reduction exercise. It is about changing our culture and the way we spend the money. And what we would like to do, and this is where I speak to the E&P people, the E&P staff, is think that every dollar you spend is yours. This will be -- if we achieve that, I think we will have achieved the cultural change we want.
And if we do this reduction that we have now approved as a plan with a very clear list of actions from 2015 onwards, we should be able to improve our technical costs by $1 per barrel of oil equivalent in 2017.
Okay, this slide is key. If there is one slide you need to remember out of my presentation, it is this one. This is my road map. It's the key to the whole story -- the 15 projects that we have in the pipeline for the next three years, and that will contribute to $600,000 per day of new production by 2017. I think there is no equivalent in the industry today of such large portfolio of projects to come onstream. It is clearly the result of the increased investment we made, which peaked, as was mentioned by Christophe this morning, in 2013.
And we see this project now progressing. And on 10 of these 15 projects, so two-thirds of them, we are operator. What this means is that we are master of our own destiny. We control the execution of the two-thirds of these projects. Just to mention a few, Leggan was a bit delayed. We had a strong engagement plan with the main contractor, and now we have a plan, a recovery plan, to bring back this project on track. You can see one of the major other projects on this list, Icthys. Ichthys is at more than 50% progress now and will be definitely our first encore in Australia.
And then we have the stream of new departure projects, Moho Nord, Egina, and Kaombo, which was mentioned before, which will be our next wave of deep offshore project with Africa. I can tell you that I will track personally every one of these projects to ensure that they start up on time.
Now, as was mentioned by Christophe this morning, we have revised our 2015 and 2017 production forecast. We took into account some project delays like the one we had on Angola LNG, on Kashagan, and we have no production for these two projects in 2015. We also have taken into account some provision for new asset sales that were not in the previous forecast for 2015. And we have taken out any production from ADCO. So the new figure you see here for 2015 does not include any production from ADCO.
However, these productions will be in 2017. And in 2017, however, we have not included productions from ENL, from projects like Fort Hills in Canada or from Libra in Brazil. When you look at the increase of production from 2.1 million barrels per day, which is what we realized in the first half of 2014, this year, going up to 2.3 million barrels next year and going up to 2.8 million barrels by 2017, this is plus-30% production increase over the next three years. Again, there is no equivalent. None of our competitors can present such significant production increase.
The other important point about this increase of production is that we are adding production that is accretive. Most of the new barrels, one-third of them will be deep offshore. But most of these new barrels will yield $50 per BOE of cash, which is much more than the average generation of cash per barrel. So this production not only would increase significant the amount of cash altogether, but would deliver an acceleration factor by the fact that they are more accretive than our average portfolio.
So two-thirds of our projects are operated by us to contribute to this increase of production.
Just to illustrate, on this slide, two of our strong points. I think you know about them, deep offshore and LNG. Both are two fast-growing activities in the industry and they represent high-tech and high-value added projects, assets, with two different characteristics.
For deep offshore, we have either short plateau, but very high returns, whereas the LNG project usually provide average returns, but long plateau. So we consider this is a very good mix and we want to continue to grow our portfolio with this balance.
And just to use the numbers that we have today, when you add up deep offshore and LNG, we have 30% of our production and more than 50% of the contribution to the net result of the upstream.
Now exploration, I know that there is some expectations. Just to recap on that, in the last three years -- in fact, less than three years ago, we decided to change our expression strategy and to go after higher-risk, higher-reward prospects.
Frankly, so far the results have been disappointing. We have made a number of small discoveries, but we have not been able to find the elephants that we are looking for.
And this is why we have committed to review the result of our exploration activities in the last three years with a new strategy before the end of the year. And as was mentioned by Christoph, we have decided to recruit a new head of exploration. The new head of exploration of Total will come from outside its companies, a Canadian national. His name is Kevin McLachlan. Maybe some of you have heard about him.
Just before coming to us, he was with Murphy, and before that, he spent nine years with Nexen. And before that, he had been for 20 years with Mobil first and then with Exxon.
And we saw that Kevin, beside the fact that he was really looking forward to working with the exploration team of Total, had the right blend of having been confronted with very different cultural environments and yet having worked in large companies, so that he could really contribute to our exploration.
He will bring, definitely, fresh eyes. He will bring new approaches as we are about to re-look at our exploration portfolio. And we really expect him somehow to reorient our strategy. Of course, with the review by the [connex], but making sure that for the future we spent well the money that we will continue to dedicate to exploration.
This is clearly a major event for Total, to take somebody from outside the Company at that level. And we hope that it will create also some positive change inside the Company.
In that last slide of my presentation, even though I think you've got my message that we are very much focused on the next three years, I wanted to look a bit beyond 2017. And clearly, in the recent years, we've added a significant amount of new projects to our portfolio that will fuel the growth beyond 2017.
To name a few, we have a project in Lake Albert in Uganda. We have, of course, our entry into the Libra project, the Libra discovery in Brazil. And we have the Elk and Antelope gas discovery, major gas discovery, in Papua, New Guinea.
All of these projects, when you add them with what we have in our portfolio, will represent more than 1 million barrel of oil equivalent in the future. Even if these projects are at a different stage of maturity, this is a very sizable amount of new production that will rejuvenate our upstream portfolio in the future. And of course, having all of this in our portfolio will give us the opportunity to be more selective about new opportunities. And this is very important, coming back to the capital discipline.
So before I hand over to Patrick, I really would like you to remember the three points. First, we will have a strong focus on project execution. Second, we will look carefully at capital discipline, being more selective. And third, we want to change our culture on cost. Thank you very much.
Patrick, the floor is yours.
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Patrick de la Chevardiere, Total - CFO [7]
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Good morning, everyone. Let's talk first about CapEx control and capital efficiency. Can you move the slide, please? Thank you.
On top of delivering our project, controlling CapEx is the single most important challenge that we face at Total. You know that we are in a transition period from high CapEx intensity to a point where we will deliver cash flows. We had a peak of CapEx in 2008 -- sorry, in 2013 -- at $28 billion. And then, we will push the CapEx down to an average of $25 billion a year.
Of course, upstream will continue to represent about 80% of the CapEx program. The proportion of CapEx allocated to unsanctioned project will shrink by time to time. And we will be, as Arnaud told you, increasingly selective about our project. By reducing the level of the CapEx, by nature you have to select with better criteria, most difficult criteria for the project, to select the best project.
In addition, it is equally important to remember and to implement the lesson learned on [carambeau]. And the objective is to improve our CapEx efficiency. Arnaud told you about the good-enough concept. It's not good to spend thousand million of dollars if you don't need it. So we had this concept of good enough for our project now, and [eradu] was an example.
In addition to that, we are also de-selecting project that didn't match our investment criteria. We delayed Joslyn in Canada. We sold Shah Deniz in Azerbaijan. Those two projects didn't match our investment criteria.
Ultimately, we are enhancing our long-term cash flow growth by controlling CapEx and maintaining our strict financial discipline, discipline which is helped by the limit we put on the CapEx per annum. Of course, also, and I will come back to that later, asset sale play an important role in this strategy.
After the CapEx, the OpEx is as important. And here, you have the split year after year of our CapEx, OpEx saving program. The objective is a $2 billion operating income effect in 2017, 40% coming from upstream, 30% coming from refining and chemical, 20% from marketing and services, and 10% from corporate. Of course, certain categories, like safety, are not included in this process.
What is important also is that we will deliver $800 million savings by 2015, so tomorrow. The overall split is $800 million in 2015, $1.3 billion in 2016, and $2 billion in 2017. Coming from the operating income effect to the cash effects, you have the tax effect. So the $2 billion lead to $1.4 billion cash saving in 2017, going unwound.
It is important for us to implement this plan quickly. By 2017, we expect also the delay will be resolved -- for example, cash again. And that cost-saving plan calls for cumulative reduction of about $4 billion in aggregate for the three years.
What is important is that the $2 billion savings will continue forever. Our objective, basically, is to do more with less and to be more efficient. And this is a bottom-up exercise, so it is not a top-down exercise. So I rely very deeply on those figures.
Under the management of Christophe, we deeply reshaped the portfolio. From 2010 to today, we already sold $30 billion, 3-0, of assets. You remember that we had a program of $15 billion to $20 billion for the period 2012-2014. We already achieved $16 billion. $4 billion are under process, namely Usan and Bostik, which may be currently included in our 2014 forecast. We will see.
In addition to this 2012-2014 program, we are launching a new asset sales program for the period 2015-2017 of $10 billion, which take into account the fact that in 2012-2014 we also made $12 billion of acquisition. So the net asset sale for the period 2012-2014, as of today, is only $4 billion today, maybe $8 billion at the end of the year.
I would like to take this opportunity to list a few assets that we sold, just so that you keep them in mind. We sold CEPSA in Spain, the refining and marketing asset we had in Spain. We sold the pipeline in Colombia, in France, in Norway, in the UK. We sold the fertilizer, the coal mine, TotalGaz recently announced, and Bostik is the last one that we announced.
We are basically realigning the portfolio to make it simpler. We -- in the meantime, as I mentioned the $12 billion acquisition, we have added new core resources to our portfolio. Take one example, Libra in Brazil. And all in all, the objective is to improve the return on capital employed.
One word about the balance sheet. While we were transforming Total into a larger, more competitive company, we were prepared to give up the balance sheet, if necessary. In fact, through this intensive investment period, we have managed to keep the gearing in our target of 20% to 30%. This was due to a combination of the $100-per-barrel scenario we had on the asset sales program also and a growing equity balance.
On the right side, you see -- and that was less favorable to us -- the evolution of the nonproducing capital employed from 2007-2014. As of today, close to 40% of our capital employed are nonproducing. This is a peak. This is compatible with the fact that we had a peak of CapEx in 2013, so you have the peak in capital employed the year after.
The objective is to dramatically reduce this amount of nonproducing assets below 20% by 2017. And basically, as we staffed up the major projects that are under construction at the moment, we can put this capital to work and get the proportion of nonproducing assets.
Last slide is about shareholder return and dividend. We know -- I mean, Christophe, myself, the Board, and I think everyone within the executive committee knows that the dividend is important for our shareholders. Our [practical] that you see here shows that safeguarding and increasing the dividend is a priority for us. We more than doubled the dividend in 10 years' time.
We -- and I know that we received some critics about we have maintained a payout ratio of 50%, in average, on time. I would say -- and I don't want to be on the defensive side -- that the Total dividend is safe and that we are well positioned to continue and growth.
In any case, as production starts to grow, our cash flow will grow, and this will give us the financial strength and flexibility we need to continue to support a more competitive shareholder return for the future. So keep in mind that the dividend is safe and that we have room to continue growth of this dividend. Thank you.
And I leave the floor to Christophe for the conclusion.
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Christophe de Margerie, Total - Chairman and CEO [8]
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Well, before we go to the Q&A session, let's close with an additional few key points.
First of all, as Patrick reminded for all of us, security, safety comes first and certainly not at the expense of the cost-cutting program.
Second, looking at the environment, we continue to adapt ourselves to the shifting economic and geopolitical environment. Today, and I'm sure we will come back to it during the Q&A session, it's true that talking about Russia, talking about a lot of countries might be considered as it has always been like this in the industry. And I think Total is well fit to face those geopolitical moves. I like the way to say move.
We have a simple and very strong strategy. And we need to now prove that we can deliver. But in fact what is important is the Company is resilient in, I would say, a not good environment and our Company will be extremely profitable in a more optimistic environment. Resilient when and if geopolitics becomes harder and definitely more profitable when it comes to better days.
We need definitely, and that's why we consider our strategy the right one, we consider that the energy outlook, the energy industry outlook, is good. There is a need for oil and gas. There is a need for energy. And today, the real challenge of the industry is to deliver this energy to our customers. So being faced with a strong demand, as you know, we need to be ready to deliver this energy to our customers.
Ultimately, how do we want to create this value is, as it was said by Patrick, but I want to re-insist on this, capital discipline for everybody, not only for E&P. Cost reduction, it started already in refining and petrochemicals, but for all the branches.
And you've seen this on the presentation of Patrick, and portfolio management. Portfolio management, to insist on the presentation that Patrick made with that slide, keep in mind something. You have the $20 billion, $16 billion plus $4 billion, by the end of 2014. And we do expect to reach this, even if we never know exactly when will be the date when we receive the cash. But you have $20 billion, plus $10 billion equals $30 billion, minus $12 billion is $18 billion.
And $18 billion is exactly what was our target before we were talking about new investment. It's between $15 billion and $20 billion.
So when realizing this additional $10 billion, we will, in fact, fulfill our precedent commitment. We said it already. It needs also to cover new investment and the strategy is not selling for selling. It's selling for getting access to new assets, more [equity] being developed with a very fitted system of criteria to take the best of the class projects. But at the and, the additional $10 billion is just part of the global strategy.
Last and not the least, Total is committed to its shareholders, but remember also to our stakeholders and definitely to better energy. You know that our new signature is Total committed to better energy. Better energy means everything. It is bringing cash, being more resilient if needed, definitely bring energy to our customers, but also taking care of the environment. Otherwise, this will not be successful.
So I deeply think that the way the strategy has been adapted, not changed, but to this changing world is the one we need to make this Company in a much stronger position in the year 2017 and after.
Now we go to the Q&A, which I'm sure you have after this presentation. So if you want to join me on the stage, ladies and gentlemen, or lady and gentleman?
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Questions and Answers
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Martin Deffontaines, Total - VP IR [1]
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Thank you, Christophe. As usual, ladies and gentlemen, for the Q&A session, I will ask you when you get the microphone to stand up, to present yourself, and please stick to one question in order to give others a chance to join in. Yes, Michele?
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Michele Della Vigna, Goldman Sachs - Analyst [2]
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Hi. It's Michele Della Vigna from Goldman Sachs. I had one question on your gearing. We live in a really unique time when we can -- when companies can effectively issue bonds for 10, 20 years at a very low rate.
Isn't this a good time to actually take advantage of that? Perhaps raise your gearing and use that cash to buy back shares. Because at the moment, you are paying about 5% from the dividend, but a 20-year bond will probably cost you a little more than 2%.
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Patrick de la Chevardiere, Total - CFO [3]
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Michele, I know you and I know that you have a good memory. Do you remember 2008 and 2009, when the oil price dropped for a short period of time of one year, but we were quite happy to have our gearing in the range of 20% to 30% to go through this period?
Honestly, I don't know what Christophe mind, but I'm not very keen to gear up the Company for the only purpose of share -- of buyback. I will be ready to make it if we had good opportunity of investment, that's another story.
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Christophe de Margerie, Total - Chairman and CEO [4]
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To complete -- but it's exactly in line now. We have in front of us a strong free cash flow coming. Why should we preempt that taking risk in just raising funds for certainly hurting the gearing?
By definition, we will go above 30%, which is our target. And what do you think of these -- Woody's and others' consideration? Total is AA; we want to be AA. I'm not sure that preempting the cash flow coming and raising our gearing to buy back shares will be considered as a plus.
We know that we have to take into account our shareholders' views, but also the rating agencies. And today, they were certainly not considered in the prevailing environment that it is a sound decision. But we know you are thinking about it and don't think we will forget it in the longer term.
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Martin Deffontaines, Total - VP IR [5]
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Yes, Irene?
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Irene Himona, Societe Generale - Analyst [6]
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Thank you. Irene Himona, Societe Generale. I had a question on Russian sanctions, please. If you can talk a little bit about how you see them impacting Yamal, the project, but also Novatek, because Novatek is, I believe, one-fifth of your targeted 2017 production. Thank you.
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Christophe de Margerie, Total - Chairman and CEO [7]
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Sanctions. US and European sanctions, which is a nice mix of things which are totally different. I mean, the American section were until last Friday much more final [shore] sanctions and European were much more on the technology trading side. The two together is making a good set of sanctions to those who are under those sanctions.
I don't like to say this because I don't want to come to say you know, we don't care of sanctions. That may give ideas to certain people. But it's true that today, being at Novatek, and then I will talk about Yamal, we don't have any sanctions directly on us.
Novatek is sanctioned in a way because they are considered as one company, which is not able to raise financing in dollars for a period of more than 90 days. But in dollars, not another currencies.
That the first point. Second, the system is in Russia for those companies with cash working well and on the top. You maybe have heard that the President Putin was thinking of increasing the price of gas, which is, I think, good news for Novatek.
Now we have Yamal LNG. And then the concern we have today is not the concern of technology, because they are not part of the sanctions. The sanctions are on Arctic, on oil, but not on gas like the Yamal project. So the Yamal project is not sanctioned by any mean.
But yes, we have a concern in the financing of this project, because even if we can do it in other currencies, it's true that the market today is looking at any project in Russia as can we do it and even if the sanctions today are for dollars-related loans, aren't we going to see some equivalent move on other currencies?
So it's true that the banks are extremely, I would say, cautious on what they will do or not do. To be totally precise, you know that in the European sanction, [coffers and sache] namely have been said and not being sanctioned.
By the way, it's delivering a strange message. On some slides you cannot, but then when you talk about exporting product, which is the case when we buy equipment for project Yamal LNG -- I mean [Kofax and Sashes], two companies in the European system, are allowed to provide banks or financiers with guarantees, which is good news for the project.
So today, what are we doing? We're looking at what we can do to reduce the unnecessary exposure, which means reducing the capital expenditures without hurting the project, including its capacity to deliver on time. So we don't want to do to impact, as Arnaud said, so we start to update off Yamal LNG.
Now there are a lot of things behind this, as you know. We have the Chinese. We are not the only one. The Chinese offered to finance 60% of the project and in what currency still to be discussed.
So we have in front of us Patrick and his team, a strong, I would say, challenge is to read the financing. But Total has sufficient money to do its part. CMPC, by definition too, and Novatek, with the system we have today of taking our shares of cost and they have not the full share, because we carried part of theirs. They don't have any problem for financing their share.
Now is it an easy situation? No. Do we consider that we can say that Total, Novatek, and CMPC are totally not touched by the sanction? It will be a little bit too arrogant and we try not to be arrogant, but pragmatic.
So we have to do it in our way, reducing the unnecessary cost, but definitely we cannot stop this project, which has been started smartly under project budgets and with no delays. Cross fingers.
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Martin Deffontaines, Total - VP IR [8]
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Yes, Iain?
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Iain Reid, Bank of Montreal - Analyst [9]
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Hi, Iain Reid from Bank of Montreal. Just a quick question on your 2017 production forecast. You said you're going to put ADCO back in in terms of volumes in terms of volumes.
Can you just confirm what those volumes are? I presume the Abu Dhabi government is about -- is almost ready to re-award that, so this obviously displays a level of confidence you're going to be re-awarded that contract. If you could confirm that.
And the second thing is on disposals. I presume this time, you've included some impact of that in your 2017 production targets. Just wondering what number that would be. Sorry for the detailed --
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Christophe de Margerie, Total - Chairman and CEO [10]
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Answer -- it's important, especially -- I mean, when you move from 2.6 Mboe, with ADCO to 2.3 Mboe -- without ADCO, we need to give the explanation. So it's part of our commitment, especially short term, I believe.
I'll know before the second part, which is the impact of asset disposals on production, but for the one of ADCO -- well, as you know, the Abu Dhabian authorities are very sensitive on what we say about ADCO. And I see if we can sit -- I know they just decided to ask us to postpone the date to keep our offer valid.
You know, because it's public information that it was -- until October 22 and now they are asking us to give more time for them to take a decision, which is by the year end.
Now why have we not taken ADCO into 2015? It's because of this -- it's difficult to predict when if we start. So the 2.3 Mboe is result ADCO. Then the 2.8 Mboe are with ADCO. Why? Because it is in 2017.
So we have been taking 5% in our assumptions and not 10%. You know today, there are two options -- 5% and 10%. So we took 5%. 5%, it's 80,000 barrels per day. So that's not in 2015, it is in the 2018 mark. 2017 mark, thank you.
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Arnaud Breuillac, Total - President Exploration & Development [11]
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Yes, to give a precise answer to a precise question, what we've taken into account in terms of asset sales are something in the range of 50,000 to 100,000 barrels per day, both in 2015 and in 2017. And one of the asset sale that was not in your previous forecast, for example, in 2015 is [Chardoniez], so this is just totally straight my answer.
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Martin Deffontaines, Total - VP IR [12]
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Yes, Oswald?
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Oswald Clint, Sanford C. Bernstein & Company, Inc. - Analyst [13]
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Yes, thank you very much. Oswald Clint at Sanford Bernstein. Can I ask a question on the OpEx? The absolute number looks quite material. In the upstream a little bit perhaps less material on a per barrel basis. The $1 per barrel.
Just curious to know how would that leave you benchmarked against the global industry in your various assets and is that a conservative number? Is there more you could actually do there to that $1 -- to that number? Thank you.
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Christophe de Margerie, Total - Chairman and CEO [14]
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I will leave Arnaud to answer, but one comment first. We said priority to safety and taking care of the environment. So I mean, especially E&P is a priority. So you say it's small, but it's not so small.
But it's true that we cannot say things we would not do, because we know that there will be still additional requests for additional safety, additional environment concerns, and criteria to be respected.
So we can only say something on which we trust, but seeing more -- I had the same thing as you and Patrick, too, when we said come on, guys. With no size on what you are doing, you should do more. You were at the end, look at the corporate, which is yielding -- we are doing already 10%.
But at the end, no. We need to deliver growth, we need to get our project under control, and we talked about, OpEx, but also CapEx. And in fact, a large part of the job of E&P will be to control their capital expenditures. I will leave Arnaud to answer on the benchmark with our competitors.
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Arnaud Breuillac, Total - President Exploration & Development [15]
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You may consider that $1 per BOE is not much, but you have to remember that in 2013, our OpEx per barrel leverage was [$8.9 million] and they are -- and this is actually the lowest technical cost again against our peers, so to reduce this by $1 is quite an achievement.
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Martin Deffontaines, Total - VP IR [16]
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Lydia.
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Lydia Rainforth, Barclays Capital - Analyst [17]
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Thank you. It's Lydia Rainforth from Barclays here. Christophe, you talked about the transformation of Total being nearly complete. And with it -- we are only sort of two, three years away from that. What are the priorities for Total beyond that?
And I suspect it's a different way of asking Michele's question of what do you do with the free cash flow beyond that? Is it something that you want to go out and reinvest from there? Is it a free cash flow level you want to keep the same and just sort of what your priorities are beyond that.
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Christophe de Margerie, Total - Chairman and CEO [18]
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Well, it's true that 2017, it's now almost to borrow. Even if they are still a few challenges, especially for E&P, but for the others, too. But I mean yes, we have to think about the future.
We talked of what would be or could be our production target for after 2017. And we said between 1% and 2%. It is probably more on the 1% side in this range. And don't forget, it's starting from 2.8 Mboe and not anymore from 2.1 Mboe or 2.3 Mboe.
So 1% means already a challenge in terms of additional growth, which means new project, profitable projects, and we need definitely to have a long-term view on keeping the strategy of delivering growth, but with a strong priority to cash flow, which means dividend, discipline, and better energy.
All of this is part that will not change. So the after 2017, in the continuity of what we are putting in place today. We cannot just suddenly say in 2017, we changed. The benefit of this new strategy, which we prefer to call adapted strategy, is today the business of what we want to deliver with definitely lower pace of growth after 2017.
But it would be the same for refining and chemicals, still being more profitable on huge platform, bigger platform, marketing and services, and E&P.
Now definitely with the world changing today so quickly, we are trying to adapt our sales and what is important. And we are doing with Patrick is to really take a strong priority on our balance sheet.
We consider that balance sheet of Total has always been, even during difficult days, the flagship of the Company. Surprising to hear this from me, but it's true. Because it's good to deliver, etc., but you need a solid base.
And that's why -- I mean, I am always supporting all efforts of the finance division and Patrick to tell us always be careful. That is a priority. Not totally, because it is safety. But then that's the best way to see how the future will be.
Because Russia -- we discussed about Russia. Novatek, okay. I can tell you -- today, the price of the shares of Novatek have dropped. We decided to stop all shares acquisitions.
Why? It would have been probably considered as a little bit audacious, which is more than bold, of doing this in this environment, which is uncertain. But at the same time, the price of the shares is far lower. So without anticipating whether it would been us or written by some of you, are you going to stop making any new acquisitions? No.
If it comes as being really in line with our strategy of finding projects which are totally fulfilling our criteria of being disciplined. But Libra, if there is another one, I don't know. Why not?
But today, the $10 billion additional asset sales is to really respect our global commitment to not only make our portfolio moving -- assets portfolio, but also respecting our gearing and bringing free cash flow to the Company to move on to the next step.
Now I know that I didn't answer to your question, which is how are we going to return the cash to our shareholders, through dividend or through buy back shares? Today you know that I have a preference, but at the end, it should be yours, because it's our shareholders.
Between buyback and dividend, we prefer -- I prefer dividend. As a shareholder, I prefer dividend, but we will think about it later on, and we will definitely discuss this, but Patrick, you want to add something?
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Patrick de la Chevardiere, Total - CFO [19]
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Yes, it's a nice question to have. We will see by 2017, how much of the, let's say, $8 billion available we will allocate to acquisition, gearing reduction, or share buyback, but it's a very nice question have.
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Martin Deffontaines, Total - VP IR [20]
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Yes, Theepan?
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Theepan Jothilingam, Nomura International - Analyst [21]
------------------------------
Thank you. Good morning. Theepan Jothilingam from Nomura. Just one point of clarification and then a second question on project execution, please. I think you talked about the impact of disposals on production. I just wanted to clarify the impact of disposals on your revised or free cash flow targets, both through 2015 and 2017.
Then secondly, more on execution actually, maybe for Arnaud. Laggan-Tormore, I think you mentioned a brief delay, but it's a key project for 2015. So could you just give us an update in terms of where we are on the onshore gas processing plant?
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Patrick de la Chevardiere, Total - CFO [22]
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Yes, I will answer on the impact of the asset sales on cash flow. It's about $2 billion in 2015 and in 2017. So Arnaud?
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Arnaud Breuillac, Total - President Exploration & Development [23]
------------------------------
Yes, quick update on Laggan. What we had on this project is we have recently completed all of the offshore plant part of the project. I just remind you that this is a subsea tieback of the gas and condensate field west of the Shetland Islands, so all of the -- I would say critical activities regarding the offshore parts have now been completed, including the pipeline to shore to the Shetlands.
And we expect some delays in the construction activities on the Shetland Islands themselves. That's partly due to quite a severe winter last year, which delayed the work and also some problem with the unions.
So we could see that the progress was not going to get us to start production before the end of the year, as we had originally planned. And we worked with the main contractor, Petrofac recovery plan to trying to mobilize extra personnel, extra workers on site. They mobilized the extra floaters, because in the Shetlands, you need to have beds, otherwise you can't mobilize people.
So all of this was put in place earlier this year and now we are getting a good level of productivity on the worksite. And therefore, what we expect is to have mechanical completion of the work by the end of the year and start up in the new year.
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Christophe de Margerie, Total - Chairman and CEO [24]
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Arnaud will not like my additional comment. Now you understand why Laggan is not part of the deep, deep offshore. Because it's not a deep, deep offshore. But we are definitely sometimes better in those huge projects than in project like Laggan.
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Martin Deffontaines, Total - VP IR [25]
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Yes, Martijn.
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Martijn Rats, Morgan Stanley - Analyst [26]
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Hi, hello. It's Martijn Rats from Morgan Stanley. I wanted to ask you two things. First of all, I'm not so sure how easy it will be just to answer this question, but it's now about a year ago that you first indicated CapEx has broadly peaked.
And since then, I'm sure you've done many things to actually get it lower. And I was wondering about your experience trying to push that through the organization. Would you say on the whole now, look, frankly we haven't done this for many years. This is going very well; it's very easy.
There is more -- it's much more to do now that we've started, or has the last year been an experience of, geez, actually, frankly, the upward pressure on CapEx is so large, this is really swimming against the tide.
It's actually quite difficult to realize even what we're indicating we're going to do. And the reason why I'm sort of asking is that a little while ago, you were still talking about CapEx in the $24 billion to $25 billion range. Frankly it's a very small -- it's a small amount. But now, I only hear you talking about $25 billion as a new level.
The second thing I wanted to ask you is about refining in the sense that the refining margin indicates as you are now using is $25 billion rather than $27 billion, it seems a relatively small adjustment, given how low these margins have been in the first half of the year. Is there really something that you can see in the future that will actually get us back to that $25 a ton level?
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Christophe de Margerie, Total - Chairman and CEO [27]
------------------------------
Yes, thanks for those nice, easy questions. But not so difficult. Well, we always considered that we decided to move through an intensive period of CapEx. And when we decided to move to 2.8 Mboe -- at the time, it was even 3 Mboe -- it was definitely knowing that we will have to go through, in comparison with others, more than what people would have liked to see.
At the same time, you cannot have the cake and eat it. You cannot have access to new cash flow without production. And I have sometimes even to say this -- my Board will decide. Can't we increase the cash flow without new production? No. It needs to come from what we deliver.
So what happened with the $28 was foreseen, except it was more because of inflation on cost. It was nothing to do with our strategy. Our strategy was to bring those all new 15 project into production. And without investment, no chance.
Now as far as we say it already at the time, a year ago, that that is now not anymore a sustainable growth range. And we never intended to make an additional move with 4%, 5% per year, because that will be insane. I'm using this word on purpose. So by definition, it can only be a peak, because otherwise, what is this investment going into? Nothing.
So by definition, we add, but we used it. It's true that the peak word was used to not please you, but to send the message internally and outside that it was the end of this period of intensive investment. Now we are back to a more sustainable growth. 1%? We will see.
Can we do this today at less than $25 billion customer? As Patrick explained, no. Will it be little bit more, little bit less? We've set to this (inaudible) 2015, because there is a kind of soft landing. But as you see, moving from $26 billion, to $25 billion, just like you, I was a little bit embarrassed with this slide. Because to give $26 billion and then $25 billion, only $1 billion difference, you're right.
We are incapable in 2, 3, 4 years time, capable to predict if it will be plus or minus $1 billion. But at least the $25 billion is a signal. $26 billion is a target; $25 billion is not more. And if more -- we explain, as we say now France, comply or explain.
But today there is no reason to explain that we did more than $25 billion, so let's focus on this $25 billion, which is a round figure and not $25.5 billion. But I agree with you; it's not to be just $25 billion.
But definitely, if we come back with $28 billion by that time without giving good reasons, I have the feeling that they would have -- I would not have done my job properly.
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Patrick de la Chevardiere, Total - CFO [28]
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Answering your question about the refining margin. If you in detail have a look on page 24 of your booklet, you will see that the $27 reference we made was 2010 dollars. So $27 in 2010 means about $30 per ton today. So it's a $5 difference between the $25 per ton. So now here we have today then the $27 in 2010.
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Martin Deffontaines, Total - VP IR [29]
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Yes, Jon?
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Jon Rigby, UBS - Analyst [30]
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Yes, Jon Rigby from UBS. A question about CapEx and upstream spending. It seems to me is the $20 billion, I think, which is implied for the upstream on a business of 2.8 million barrels a day seems like an incredibly ambitious CapEx number on the low side.
So can you talk a little bit about what the -- or what the delta is on the reinvestment rate per unit of flowing barrels or so on between maybe two years ago and where you expect to get to and what's moving that.
And related to that, Arnaud talked about being the new gatekeeper, which I assume means that you intervene preproject arriving at the Board for FID and a lot earlier on. So maybe could you just broaden a little bit that remark and talk a little more about the processes you have now introduced to control the planning and project definition stage of your upstream projects? Thanks.
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Christophe de Margerie, Total - Chairman and CEO [31]
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I think, Arnaud, this question is for you. And by the way, Arnaud is joining the executive committee on October 1. So he will be definitely in charge of us to take the decisions.
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Arnaud Breuillac, Total - President Exploration & Development [32]
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Yes, I start with the second part of your question regarding the gatekeeper role. What you should know is that in our internal process, we have a series of validation steps before a project gets presented to the executive committee for a sanction.
And what we have done -- and this is, of course, in the process of being strengthened -- is already to have more accountability with regard to internal clients. Making sure that the owner of the project, which in our organization is going to be the entity responsible for the P&L and this will be the affiliates that is owning the project right from the beginning, right from the discovery through the appraisal phase, going into preproject phase.
We will have strengthened the role of the client in our processes so that they can challenge early the basis of design, the -- clearly, for example, what provisions are meant for upside, the amount of technologies that will come into play.
So we are really trying to have something that is much more, I would say, focused on value-added through our own internal process, going to our sanction. As we mentioned -- as I mentioned this morning on Kaombo, we did that quite far in the process.
We would have done much better if we have been able to start that earlier. Value engineering is now a keyword in our processes. It's not just Total. We know it's also being done by our competitors, but it is very important.
And my role as head of E&P is to ensure that all of these steps are really followed. And of course, when they come to my desk for validation before going to the [Comex], I do ensure that this process was flowed through.
For the first part of the question, if I understand your question was to say that you extrapolated, I believe, the number by being about $20 billion on average spent on CapEx, to maintain $2.10 million project and you said that this is on the low range.
This is the figure we have from our long-term plan projection, which do provide for the -- I would say maintenance of the existing limitation of the decline, if you prefer, on maintenance of the existing field, but also some provision to bridge the gap between the decline in new production and to have something that will be in the range of 1% of growth beyond 2017.
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Christophe de Margerie, Total - Chairman and CEO [33]
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It's true, as I said many times, to meet this target, which means keep our CapEx under control, we need to pursue this policy. We have now really put in place on Kaombo -- what we call the Kaombo style.
It's important that we continue to find solution with our contractors to reach these kind of figures. Otherwise, we will have the inflation we faced in the past, which is totally unacceptable. I also wanted to say that the risk committee, which is taking place before any executive committee, is chaired by Helle.
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Martin Deffontaines, Total - VP IR [34]
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No, sorry.
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Patrick de la Chevardiere, Total - CFO [35]
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One point to add, which explains somehow also maybe what you consider to be a relatively lower amount of CapEx is that you must understand that thanks to the significant increase of production, thanks to our new project in the next 3 years, adding $600,000 per day of new production coming from this project by 2017.
This younger production necessitates to be less investment. Afterwards, I will be joining the -- I would say the use period of this project. They will need more in the future, so this explains also this level.
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Martin Deffontaines, Total - VP IR [36]
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Yes, Peter. Thomas, sorry.
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Thomas Adolff, Credit Suisse - Analyst [37]
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Hi, Thomas Adolff from Credit Suisse. Two things, please. Last year you talked about $40 billion in operating cash flow in 2017. This year you also talk about $40 billion in operating cash flow. Last year you talked about an organic figure. This year you talk about an inorganic figure, because it includes disposals. So if you do it in like-for-like, and take out OpEx savings as well, there's a $5 billion cut to operating cash flow. And if you can run through why it is a big cut, because it can't be purely explained by 200 KBD of upstream production being lower versus the prior guidance; slightly lower refining margins. And let me know if my math is wrong.
In the second question is, in light of your upstream portfolio, are inorganic deals discretionary or mandatory? Thank you.
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Christophe de Margerie, Total - Chairman and CEO [38]
------------------------------
Well, we don't want to hide anything, and I said in my opening speech that there were not only good news. And part of the good news have been delays in definitely the startup of project being operated mainly not by Total, but also Total. And this money is not here. So it's true that the organic part has been reduced, but what is important is what we call the free cash flow. And I've always insisted, if you remember, even if I have -- and I still accept to go through those organic/non-organic to answer to your questions. I strongly believe that the Company, and especially I and the Board of Director -- I mean, frankly, they talk about free cash flow.
When I tried to explain about organic, et cetera, they are not interested. They say, okay, we are businessmen; we are decision-makers; and you decide if it is organic or not. But as far as you keep the value of the Company, it's coming from this or from that, at the end is what is the cash I have to prepare my future strategy and increase the return to shareholders. So, what you find this year is definitely the impact of delays and startup and additional cost. We cannot reinvent this.
At the same time, what is important is to deliver the message that the free cash flow is [descendible] and our capacity to deliver value through dividends to our shareholders, is not impacted. And that's my duty. For the rest, you know it, and I can just say, it's true.
On the second part, which is --?
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Thomas Adolff, Credit Suisse - Analyst [39]
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Inorganic deals, discretionary or mandatory?
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Arnaud Breuillac, Total - President Exploration & Development [40]
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Okay. As I'm sure you've seen in the last few hours, we made a number of, in fact, acquisitions, and now we are in the situation where we've got about 24 years of reserves, which is in excess of our target of 20 years. And this is why we are saying that we can be more selective in the future. Because we've got some, I would say, margin; and we will apply more, I would say, control on our investment.
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Martin Deffontaines, Total - VP IR [41]
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Yes, Jason?
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Jason Kenney, Banco Santander - Analyst [42]
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Thanks. It's Jason Kenney from Santander. Just following on the free cash flow theme. Sorry, just following on the free cash flow theme. Hi, everybody (laughter). There is that difference in the refining margin, $30 to $25. I think we discussed it with Martin, and Thomas as well. Can you tell me the difference incrementally for your free cash flow generation of just that change?
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Patrick de la Chevardiere, Total - CFO [43]
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So, well, in last year our forecast, we used $35 per ton scenario. This year we used $25 per ton scenario. The sensitivity for $10 per ton is $500 million for cash flow per year.
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Christophe de Margerie, Total - Chairman and CEO [44]
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The thing is true. It was a little bit of a surprise, because we say we move from $27 to $25. In fact, the real decision has been for our long-term forecast -- and also the specific slide, which was using the 2010 year as the basis of comparison. But the move is certainly for us to move from $35 to $25. And that has, by definition, a much important impact.
But we saw that in the prevailing environment, even if today the margin are much higher than this, but surprise, surprise. We had a first quarter which was very bad, a second quarter a bit better, and this quarter is totally above expectations. Because today we are much more on the $30-plus level.
But $25 today for us is much more aligned with our perception of what could be the refining margin with a barrel at $100. Today one reason of the margin to be above our expectation is a barrel is at $97 and not $100, and especially not at $105. And that has brought a direct impact on the refining margins.
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Patrick de la Chevardiere, Total - CFO [45]
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Just one point to add is that this so-called negative impact on the refining margin is partially compensated by the cost reduction plan and the restructuring within the refining and chemical.
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Martin Deffontaines, Total - VP IR [46]
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Yes, Peter?
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Peter Hutton, Royal Bank of Canada - Analyst [47]
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Peter Hutton from RBC. Just a clarification on the plan last year on the production. When you were very specific, that included very limited disruptions around the world, including Nigeria and Libya and places. Is that still the basis of the targets that you are giving today when you put those together?
And I'm asking not so much to get too fixated on volume numbers, which are different, but to try and get a sense as to the risk components associated with the targets the Total puts through. Because I think a lot of investors, to receive a number which is based on very few contingencies, it's not very helpful when you say that you've got less exposure to geopolitical risk that some of your peers.
And it leads onto a second question relating to the target on the cost reductions. Which when we go through a little bit of introductory detail on that, appears to be based on a bottom-up process where there are lots and lots of good ideas -- I think you mentioned 3000 of these -- which the implication was in Total provided 15% of savings. Was that a cumulative total? What's the element that you put together on counting these bottom-up, where normally experience suggests that the cumulative total, in reality, that you experience is actually less than the sum of every single individual project?
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Christophe de Margerie, Total - Chairman and CEO [48]
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In fact, the amount coming back from the bottom, to use your words, is higher than two. So, yes, we are using contingencies, but I will not give you the figure. Otherwise I don't have any more contingencies. (laughter) And that's true for all of our projects. There are always contingencies. Second, it started from the bottom up, but today it's up to bottom. So the ideas came from the bottom, thanks God. That's normal, and we are not clever enough to do their job.
But now it's taken -- as the executive committee, as our commitment, so they have to deliver. So we cannot talk any more of bottom-up. Now it's up to bottom, and sometimes people are a little bit mixed up with now the process to find the figure is bottom-up, and now it's up to bottom. And we will ask all the executive committee members of each branches and (inaudible) to really commit on their cost cutting.
So, do I consider it's achievable? No, I don't consider; it's a must. So they have no right to say yes or no. And just like some other things, you can say, do it. It's not like Laggan, or will you say it could have been a strong winter than forecasted. That's true. And you cannot have your project based on a strong winter. You have to make it as the average winter. But we are totally disagree on the problem with trade unions, because that should have been known. So there are always problems with trade unions in the UK, the same way it exists in France. But it's more known about France than about UK, but we know it, so we can reduce this as an excuse for being delayed.
Strong weather, yes. So, what we do in doing our prediction on production -- yes, we have contingencies, and more on 2017 than on 2015. Why? Because in 2017, it's true that there are a lot of things we don't know. Today, what kind of contingencies can you have on 2015? Because you have Libya; Libya is going to be plus or minus. I don't know. Today it's more than predicted, but still with totally uncomfortable situation on geopolitical side. So we prefer to have -- yes, we have a global contingency for our production; but then, we don't give it country per country.
But I just wanted to react on your statement, to say that we are more at stake than others in the different countries where we operate. I'm -- not totally agree, not to say I disagree. We are in more countries, so by definition in more countries with risk. But at the end, we have a kind of self insurance, where there are definitely more countries which are safe than others. So the difference between certain of our peers and Total is much more on the number of countries in which we operate, which by definition bring sometimes more. But at the end, no.
And we've checked this; and we can make it with the [Martin] teams, it would show you that at the end -- for instance, we take Chevron, with their percentage in Angola LNG. Well, they take more risk than us. So, instead of thinking just in terms of country where you are, it's important that you take the percentage of interests, and you look at what is the potential impact on Total production versus the one of Chevron, of Exxon. Well, it's true that Exxon is probably less exposed; but, okay. I don't want to say anything. But there is a nice country in the Middle East where they are [issuing] present. Today it's working well; good, but there is something. They are more exposed.
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Martin Deffontaines, Total - VP IR [49]
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Lucas?
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Lucas Herrmann, Deutsche Bank - Analyst [50]
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Thanks very much. It's Lucas Herrmann at Deutsche Bank. Forgive the very nasal sound. I just wanted to come back to operating costs, and just some granularity, perhaps, in definition.
In terms of the savings you are looking for, what are you assuming in terms of cost reduction from your operating cost base? And what are you assuming from the operating cost base of others, whether you could just get some definition there?
In terms of mix, I guess I'm slightly surprised that for $2 billion of savings, you're talking $1.4 billion of cash flow, not least given your average tax rate is 50% plus. And if I start working through the average tax rate across the various divisions, the $600 million or so reduction, which I presume is tax, seems relatively modest.
And thirdly, just the refining savings that you're indicating of broadly $600 million seem, I'd say, very impressive, but particularly in light of the level of costs that you've already taken out. And again, it just leads one to question whether $600 million -- it feels like a very aggressive number for an organization that's been under intense cost pressure anyway since [Pouyanne] took over and started pushing through change. So perhaps you could comment on those observations.
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Patrick de la Chevardiere, Total - CFO [51]
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Okay, let's start with the operated/non-operated assets [plead] for the upstream. Basically, for the upstream you have $800 million by 2017 of operating income effect of the cost saving program. Among those $800 million, you have a little bit more than $600 million from operated assets, and a little bit less than $200 million for nonoperated assets.
The tax impact: if you will remember, we only -- I would say, only have 40% of the operating cost saving program coming from upstream, where we have a high tax rate. The rest of it is coming from refining and chemical, marketing and services, and the head office. This is why the overall tax impact of the cost savings, which basically brings the operating income effect from $2 billion to a net operating income effect of $1.4 billion, $1.5 billion, is a tax effect -- is average, I would say.
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Christophe de Margerie, Total - Chairman and CEO [52]
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On the point about refining and petrochemicals, while it's true that part of the $2 billion were already part of the 2015 -- so the target you have for 2015 already includes the refining and chemical part. Which means -- we couldn't ask them, because they started it to say you -- on the top of what you are doing, you will do even more. So there is one part to 2017 which is already in the target of the 13% or 12% at 25. So it covers your point for the 2017 years.
For after, they will have to continue to deliver this cost reduction program the same way than if they had been able to deliver before. And to a certain extent, I would say, at the opposite, maybe. The fact they have been already capable to deliver this cost-cutting program prove it works.
And on the top it's why, also, because it's offered in countries where you don't have taxes, that you have a direct impact on the cash flow. But it doesn't mean at the end that the project are actually profitable. If you reduce your costs on a refinery which is losing money, it's part of the $2 billion.
But it's true that that's why you don't pay taxes -- it will not have an impact on taxes. But I strongly believe that refining and chemical will continue on the 2015 basis. And then it's really the part you will achieve in 2017.
But starting before, that's something the executive committee decided, that we cannot ask them to add something on what they have been already achieving. Then I would agree with you, it would have been a little bit too much of pressure. But today they have been extremely good in delivering those cost-cutting.
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Lucas Herrmann, Deutsche Bank - Analyst [53]
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So, Christophe, is there an increment in refining between 2015 and 2017 that you can disclose?
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Christophe de Margerie, Total - Chairman and CEO [54]
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Yes, yes.
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Lucas Herrmann, Deutsche Bank - Analyst [55]
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That you can disclose, or you care to disclose?
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Christophe de Margerie, Total - Chairman and CEO [56]
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I don't have the figures, frankly. We will give it to, but yes, it's doable. But I don't remember what was a part in 2015 which is now in the 2015 and will be 2017. But with larger platforms, there will be source of additional cost-cutting.
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Martin Deffontaines, Total - VP IR [57]
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Alistair.
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Alastair Syme, Citigroup - Analyst [58]
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Alastair Syme from Citigroup. Can I ask what the exploration budget is going to be set at through this period, relating to the $25 billion CapEx? And do you think it's right -- last year you talked about long-term growth of 1% to 2%. Now you're saying 1%. Is the change that the exploration program has been quite disappointing in terms of delivering low-cost opportunities? And can you maybe also discuss what options are on the table in terms of rejigging that exploration program going forward?
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Christophe de Margerie, Total - Chairman and CEO [59]
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No, the reserves -- the ratio on 2P reserves and the ratio on resources versus production, which is more than 40 years, that has not changed, and is not impacted by the -- on success of the exploration program. It's impacting the capacity to find; and definitely we suffer it, because it will be in our bottom line. Because when you don't discover, you have to use the expenses as losses. So it's part of the explanation why we don't have this E&P result at the level of expectation.
Part is linked with the bad result of exploration, but it's not hurting at all this capacity we have to increase our production after 2018. The impact is too small. But we'll be definitely, as part of our new strategy is that we keep the same amount of exploration, the same budget, or are we going to decrease it.
Most probably -- sorry, I know -- but most probably starting by a reduction just to send the message of that there is no free lunch. And we know that exploration is a difficult task. But you cannot just always say you can keep it, and next time it will be better.
We talked about this new guy joining the Company. Yes, it's to bring some kind of positive shock, but a shock. But at the same time, it's not this person who, by himself, will bring the additional barrels. So when we will present to you next February the strategy of E&P, especially in exploration, there would be still the same presentation on what is coming from [DRO], which is acquisition of resources undeveloped and unproved, versus exploration.
But today, no, we cannot make a link between 2% versus 1% and the $25 billion. It's really to be seen at the level of exploration.
Is it clear?
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Alastair Syme, Citigroup - Analyst [60]
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(inaudible - microphone inaccessible)
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Christophe de Margerie, Total - Chairman and CEO [61]
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Well, that's in the budget today, is not yet defined. The budget is not yet approved. And, definitely, it's part of what Arnaud told you: we need to have a complete reassessment of what happened. All the [credits] we have been acquiring, because we have been talking here of drillings, but we didn't insist on the fact that we have been acquiring a lot of new acreage with additional potential which was not part of the 2014 targets, but which were part of 2015, 2016, and 2017.
And that is a part we need to have a strong look at it, so we don't face another disappointment, to use a word of Arnaud, which is a little bit more than a disappointment. But we promise to deliver the message on what is the result of this campaign, and definitely what are the next step for the years to come.
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Martin Deffontaines, Total - VP IR [62]
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Yes?
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Christopher Kuplent, BofA Merrill Lynch - Analyst [63]
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Thank you. Christopher Kuplent from Bank of America Merrill Lynch. Just wanted to come back on your comments earlier about using the free cash flow and the disposal proceeds to reduce gearing. As that free cash flow is coming through into 2015, 2016, 2017, does that mean there is now a period for the next, let's say, two years where acquisitions are going to take a little bit of a back seat? Considering that you're keen on improving your free cash flow first, before you consider larger acquisitions. Thanks.
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Christophe de Margerie, Total - Chairman and CEO [64]
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The last precision, it forced me to answer. Priority to cash flow to important acquisition. Yes, no doubt.
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Martin Deffontaines, Total - VP IR [65]
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Yes, Guy? A microphone for Guy, please.
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Guy Baber, Simmons & Company - Analyst [66]
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Thank you. Guy Baber, Simmons & Company. I thought the slide that you presented on the pre-productive capital was quite compelling, moving from 40% to 20%, or around there, by 2017. Is that 20% -- is that going to be more representative of a new normal, or more of a trough? When has it been that low in the past? Can you grow with pre-productive capital that low?
And then also could you just give a comment on returns, and the expectation for upstream returns in light of that reduction, in light of the cost cutting program that you all have identified. It seems like we should see a pretty big uplift, maybe even perhaps upside to maybe some of the numbers that you've quoted in the past, if all of that comes to fruition.
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Patrick de la Chevardiere, Total - CFO [67]
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Yes, we -- and this is one of the main objectives to enhance the return on capital employed, is to reduce a non-producing asset at the moment, which are at 39%, and that we will push down to 20%. It's a more normal level of non-producing asset, I would say, between 25% and 20%. It's a normal level of non-producing asset for somebody maintaining its production and increasing it by 1% to 2%.
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Christophe de Margerie, Total - Chairman and CEO [68]
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In fact, we have the bad thing and a good thing. I think a lot of non-producing assets, it's good, because it proved that it would come into production. Because those are the projects which have to be start up in the years to come, months to come. But today, it's true. It's linked with this decision we've had to invest above what we used to do, to move that Company from this 2.3 million barrels per day we had to 2.8 million.
So the same way that a price -- investment, it has a price in non-productive capital employed, but they will be back to normal. I strongly believe that, if you look at our long-term plan -- which you will not, but I do -- you'll see that the number they had for non-productive assets was so low that we could not believe it.
So we decided to push it back a little bit, I would say, higher. Because it was not thinkable that we could move from 39%, which is an historical level, to below 20%. So, the, I would say, average range of 20%, 25% is much more in line with our strategy, and cope with this 1% additional production.
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Guy Baber, Simmons & Company - Analyst [69]
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Is mid-teens still the upstream returns target? (multiple speakers)
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Arnaud Breuillac, Total - President Exploration & Development [70]
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Yes, what I said is above 15%.
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Martin Deffontaines, Total - VP IR [71]
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Yes? No, go ahead. Maria.
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Maria Drew, Goldman Sachs - Analyst [72]
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Hi, Maria Drew, Goldman Sachs Asset Management. We've talked a lot about OpEx reduction and cutting costs. But you've said very little about the cooling oilfield service environment. So I was wondering what you are views on that are. So do your OpEx reductions include falling prices from the service companies? Or would that be just an additional tailwind?
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Christophe de Margerie, Total - Chairman and CEO [73]
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At first, on purpose even it's true, we didn't highlighted our dedication to a cleaner environment, and everything we are doing today has committed to better energy, but we are.
For instance, there is a -- during the UN annual General Assembly, there is one day, organized by both the World Bank and the United Nations, for the climate change. And I was supposed to be at this special day, but I considered that my priority was to be with you and to have, although we are choosing this date, than in being at this special occasion -- priorities.
But Total is behind this initiative, which will be announced, so please don't disclose it. But there will be an announcement on what Total is doing to fight again the climate change. And what it means in terms of -- I know it's not exactly your question, (laughter) but it's part of it. Which is, no, we don't forget that we need to do things and to take care of the environment as a cost. And this cost is taken into account in what we are presenting to you. The answer is yes.
That by definition, as I said, priority: safety, environment. And our purpose, I also added at this time on purpose, security. And this time, for those who knows me well, I was in the past making a mistake because I was thinking about safety and seeing security. No. Now we have to add security, safety, and environment. Why? Because, yes, we are in countries like Yemen, like Nigeria, when this concern about security is first priority. Safety, security is the same. It means our people first, and we cannot just do things without taking into account the environment, including geopolitical.
So that was covered when I said, yes, Total has to really be committed on all of those matters. That's why I had to the shareholders, the stakeholders, but I could have said first our employees. And definitely, yes, it has a cost; yes, Yemen has been quite a difficult subject to tackle. But it's our duty, and we have a code of conduct.
This code of conduct tell us that there is, under certain circumstances, where we have to think of -- can we stay or not? For the time being, cross fingers; didn't happen. But we will continue to be very careful. That's why it's all part of what I called at the end the committed to better energy. We cannot just first -- don't deliver on security, safety, and environment.
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Arnaud Breuillac, Total - President Exploration & Development [74]
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You want me to say a word on --? Yes. So, in terms of the question regarding what is happening with the oilfield services -- what we took into our plan of action is currently some [high priorities] regarding renegotiation of contract. But it's essentially cutting back maybe on the requirement and actions that we could do with our main suppliers. We took into account a certain inflation, which is when we -- that is forecasted today on oil services. If we were to get lower inflation, this would come as a benefit. I think this was the question.
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Christophe de Margerie, Total - Chairman and CEO [75]
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The question is, as I said -- sorry. It's very important that we don't reenter -- I said this many time -- in a fight with the contractors. Don't choose our words -- not saying you -- but globally, as to say, okay, with this it means that the contractors will suffer, and then it's a reason to have additional. We hold up our problems; but definitely we don't want to face the situation of 2000, 2005. And in turn, as Arnaud told you, with [Campbell] and others, is to work in a different way with contractors.
But if it is at the expense of the contractors, they cannot pay for $3 billion. No chance. So if you think it's this, but if it [gen] cannot work. So it needs to be done in a way where we use contractors and subcontractors in different way. And now we have really learned from the experience, and we really know how we can save money and putting pressure on contractors, yes, and then forcing them to do the same cost-cutting program that we are doing.
Because for the time being, it's true that there was a lot of -- okay, Total, Exxon, Chevron -- they can pay because they have the money. Today it's clear: 100, yes. Is it viable? Yes. We can increase our profitability. Yes, if we keep our cost under control.
So that is the message for the contractors. They knew it, but not as an expense. Because if the [die] -- I said it before -- we'd have no more contractors, and then even [Petrofac] will know.
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Martin Deffontaines, Total - VP IR [76]
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We have time for one more question. Anish?
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Anish Kapadia, Tudor, Pickering, Holt & Co. Securities - Analyst [77]
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Hi. Anish Kapadia from Tudor, Pickering, Holt. When I look at slide 25, and look through the projects post-2017, it seems like only a very small proportion of those projects come from Total's organic discoveries. And just thinking about that, when you look forward, post-2017 for those discoveries, is it right to suggest that they're going to have significantly lower, on average, than the $50 per barrel of operating cash flow?
Also, is it right to suggest that they will be probably at the lower end of your upstream return on capital?
And just related to that, also, how much of an impact do you see as being that you are not present in the leading area for non-OPEC growth, the US unconventional plays over the next few years? Thank you.
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Arnaud Breuillac, Total - President Exploration & Development [78]
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Okay, well, in my presentation I tried to illustrate a number of recent acquisitions that we made, which clearly will fuel the growth beyond 2017. And they fit very well with our strategy by being a combination of deep offshore projects, if you take Libra in Brazil, or LNG, if you take Elk and Antelope in Papua New Guinea. We are actually quite confident that we will get high returns from those projects because of the way we are going to apply more stringent criteria on, again, our design philosophies, on the way we plan and develop those assets. There are others, as you mentioned, that may yield longer plateau, but maybe a bit less return. But our objective is clearly, all together, to maintain this good balance, this good mix in our portfolio.
When it comes to your second part of your question regarding the -- okay, so I'll leave it to you, Christophe.
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Christophe de Margerie, Total - Chairman and CEO [79]
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On the US, well, we cannot be everywhere. I've said this many times. I remember, you were telling me, why aren't you in Brazil? Now we are in Brazil. I hope it's a good decision. And we are not doing it just because you are asking us. I mean, why aren't you, because it's good to hear you, but we have to have our own strategy.
Today, to be in the US on the side of what we have, is just not doable if we want to respect our criteria. We cannot say we want to be profitable; we want to go to 15% royalty, and make even a small acquisition. That's not in line with our profit targets. It's too expensive.
So if one day there is an option, why not? We are not against. As you put it, we are already in Utica; we are still in Tahiti; and we have a lot of other activities in the US which are not upstream, but which are downstream. So, in fact, we are an important player in downstream, and much more than you think. But when you talk about the US, we always talk about E&P, but we also have other activities, and especially refining and chemicals.
Now, I'm interested to understand that when it's exploration it's organic; and when it's not exploration, it's not organic, I have to have this in my small mind. But I don't think doing Libra is not organic, and making a discovery is organic.
Now, I will leave the final word on this to Patrick, who will tell you why, at the end, what is important is how -- much do you pay for a new barrel to be developed?
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Patrick de la Chevardiere, Total - CFO [80]
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There are two ways for us, and this is completely included in our strategies. There are two ways for us to add new resources in the portfolio. One way is exploration; the other way is to acquire resources discovered by others. And when you compare the price and the cost of those resources discovered by others, there is not a big difference between the cost of those resources and the cost of resources discovered by us. So, all in all, the profitability depends on the quality of the project; and whatever it is, either discovered by us or not, it's the same.
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Martin Deffontaines, Total - VP IR [81]
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Well, ladies and gentlemen, thank you. Thank you to all our speakers.
Christophe, you want to say a final word before we meet all together and continue our talks around the (inaudible). I'm sorry for the guys who are following us on the Web.
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Christophe de Margerie, Total - Chairman and CEO [82]
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Well, as usual, thank you for your contribution, and especially by definition, during the Q&A session. I know you need still more from us, and we will be happy with the [Martin] teams to give you more details.
What I want to say is, and we insist, the strategy we presented to you today -- it one we presented last year. It's not a new one. We have included in this some new elements, like the new culture on cost, but it's not really new. But it was important to emphasize the importance of this program due to the traditional inflation we faced. And the fact that today a barrel at $100 seems normal, but to think that, as in the past, it will automatically move to $120, $140, is not possible. So, yes, this culture on cost, which is not new, which happened before, needs to be implemented. And now up to bottom, even if it started the inverse way.
Second, we are getting closer of our commitments to deliver gross and production, which is the same, on a profitable basis. Believe me, this is on the way. What we call the transition period is not -- beginning as I've seen in one of your paper, [Martin] -- it's now moving and being delivered, starting in 2015, with less organic cash, but still the same free cash flow. And we will definitely enter into 2017 with more organic growth, less disposal of assets.
Even if it's important, we continue to have an asset disposal program. Are we going to continue to say it will be $10 billion? Probably no. I don't think it's a good idea; because then we have this debate on what is free cash flow, and why are they making disposal. We should, and we should agree on what is the acceptable level of investment for a company the size of Total to go to better return, better profitability, and more definitely a return to our shareholders. That's underway; that's our commitment. And I think with this culture we've had recently to emphasize the necessity to give more momentum to E&P with Arnaud, is definitely part of what we wanted to present to you today.
It's nothing more than no E&P is not going to go through a revolution. It needs to be a good system; but, at the same time, more reactive and more committed. So, that is our target. New ones upstream; cost-cutting; and definitely delivering. And we will deliver -- even if it's true, you've noticed it; but we've said before -- yes, we have been suffering delays. And definitely it's part of what has to be stopped. Because that cannot be forever.
But no question came on cash again. I'm interested -- I'm sure it will come back. But it would have been interesting to understand this, to explain the 2.3 million barrels per day and 2.8 million. And it's something that was not mentioned. Be careful when there is delays on startup; there is also a delay on ramp-up. And it's part of the same problem. It's not a new one, and that is something we might have maybe to explain in a more clear way.
And last point, but not the least, the balance sheet of Total is of extreme importance. And we will keep this as the best way to protect the Company, its shareholders, and our future. Thank you.
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