Total vows to maintain investment levels

Total, the French energy group, yesterday became the latest of the world’s leading oil companies to insist it would maintain its capital expenditure programme even though declining oil prices had taken a deep bite out of its profits.

Total will maintain its capital expenditure at more than $18bn, with three quarters of the budget going towards exploring and producing oil and natural gas, even though its profits fell to €2.9bn ($3.7bn) in the last quarter of 2008, down 7.7 per cent from the year before.

Total’s profits beat analysts’ expectations by quite a margin and also suffered less than those at closest rivals BP and Royal Dutch Shell.

ExxonMobil

Royal Dutch Shell, and BP have all reported a 24-33 per cent drop in fourth quarter net profits, while Chevron reported a small increase. All of the companies, which are the world’s five largest non-state controlled oil companies by market capitalisation, said they would resist slashing their capital expenditure programmes, which range in size from $20bn to $32bn.

All the companies suffered from the fall in oil prices, which hit a record of $147 a barrel in mid-July and yesterday traded at just under $35 a barrel.

Christophe de Margerie, Total’s chief executive, has been the most vocal of his peers in arguing oil companies needed to invest in projects now that would yield oil when the world economy recovered and its need for oil rose once again.

He said: “We are committed to maintain our investments . . . It would be not only a mistake but also a serious error not to.”

If oil stays at $35 per barrel, only ExxonMobil of the US and Total of France out of the leading international oil companies would be able to cover their investment programmes from their cash flow. BP and Royal Dutch Shell, Europe’s biggest oil company, would have to borrow to cover capital spending, and then need more to pay dividends, according to analysts at Sanford Bernstein.

But even Mr de Margerie acknowledged that things might have to change if oil prices remained less than $40 a barrel for an extended period of time. The real test for Total and the other big oil companies will be whether they manage to maintain their current level of investment in 2010, analysts say, arguing that for 2009 much of what an oil company will spend had already been firmly committed in projects that cannot easily be delayed.

Maintaining spending, especially in exploration and production is critical if the world is to escape suffering another supply crunch, several oil company executives and government agencies have warned.

Unfortunately, the world’s biggest oil companies by market capitalisation control only a small fraction of its oil, with most of it in the hands of national oil companies and smaller companies that have already announced budget cuts. PDVSA, Venezuela’s state oil company, this week said it aimed to cut its operating budget by 30-40 per cent.