Total, Eni bet on new finds as rivals cut costs in oil downturn

14 Mar, 2016

As oil firms slash billions of dollars of investment to survive the market crash, France's Total and Italy's Eni are making some of the smallest cuts, gambling in the hope of big-ticket discoveries that will reward them when prices recover.
Both approaches carry risks. Intensive exploration programmes mean higher costs and lower profits in the short term, with no guarantee of finding new fields. But firms that scale back too far may damage future growth prospects, forcing them to splash out on acquisitions. Wood Mackenzie analysts expect this year's exploration spending to fall to just half of a peak of $95 billion reached in 2014. Against that background, Total's 21 percent cut is among the smallest.
The French company, which pursued a "high risk-high reward" strategy under late chief executive Christophe de Margerie, will still spend $1.5 billion on exploration this year, including off Myanmar, Argentina and Nigeria.
"Our new exploration manager will be able to explore most of the prospects he wanted to," Total Chief Financial Officer, Patrick de la Chevardiere, told journalists last month.
"We're giving him a certain budget which leaves him sufficient flexibility to explore what he wants to explore."
Eni has not published separate exploration budget numbers for 2016 but said it will keep seeking new resources in mature areas where it can use existing infrastructure and know-how to lower costs.
The Italian group became the first big oil firm last year to cut its dividend in order to navigate the market downturn.
Its bet on finding new resources was boosted last year when it made the bumper Zohr gas discovery offshore Egypt, the biggest ever in the Mediterranean and its fifth large oil and gas find in just three years, giving it the best track record in reserve replacement among majors.
With oil prices down around 70 percent since mid-2014, the temptation to cuts exploration costs is strong. But the nature of the energy business means companies must constantly add new resources as producing assets gradually run out of oil and gas.
"In a downturn, exploration is about securing access to opportunities and high quality acreage at very low cost," said Stephane Foucaud, managing director of institutional research at advisory firm First Energy.
Those with tighter pockets will have to rely on adding new resources through acquisitions further down the line, a more expensive option.
"Many (oil majors) consider that buying smaller companies would now be an investment with a higher return than if the majors were doing the frontier exploration themselves," said Eric Oudenot, a partner specialising in oil and gas at The Boston Consulting Group.

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