Welcome back for

our interview of this week. This week we have

the pleasure to have with us Nadine Bret-Rouzaut who is one of the faculty members
in the International Energy
Master at Sciences Po. She is also the director of the Center for Economics
and Management at the IFP School. IFP is the the French Institute of Petroleum in
renewable energies. It is a leading institution in issues related to
energies here in Paris. So Nadine is a specialist of upstream oil and
gas and oil projects, and so I am happy to have her here at
the end of this week, in which we have seen all the many things that
technology can do in order to facilitate the discovery and the production of oil
from difficult places. So my first question to Nadine all of this will cost money,
what does it mean? So when we focus on
the last project over the last 10 years, we have seen an overrun cost
of more than 60 percent, and also a lot of
delay schedule have not been. Maintained. Maintained, it's more
or less something like 60 percent of the project
have seen postponed delayed. So it's very clear today that all these costs are
rising very sharply
and for many reasons. Okay. So this must mean that the international companies
that are increasingly pushed towards the frontier
opportunities because they are excluded from having access to easy oil
which is in the hands of the national oil companies.
How can they cope? Yes, you are right. So we see now in terms
of transformation of the portfolio of
an international oil company, it's more and more now what
we call unconventional. When I say unconventional, I don't mean only what we
see in the US shale oil or shale gas it's
also deep offshore. It's also even onshore. It's deeper filled, it filled with a
more
complex geology. It's in remote areas
for example arctic. So for many different reasons, these projects are less
and less conventional. It means you need to
use new technology, new processes, new
type of management. So all these reasons can explain the increase of the cost. So
now with the oil price
that is declining and not as high as it was
in the past years, some of these projects
will be suffering and perhaps will need
to be abandoned. So it will be the case
for some of them. We can read now many, many papers on the break-evens
of the project. Even for one specific area, depending on the experts,
some say, "Well, the record is perhaps
up $60 per barrel." Some say, "No even at 40,"
and opposite some say, "No the company needs
at least $80 per barrel." So it's difficult to evaluate
really the break-even. The break-even means
it's the price you need just to cover your costs, but it's not enough
for a company. Sure. If the business of a company is. To make profit. Yes, just to
make profit. So now it's how much do you want? What is your internal
rate of return? In the past I was used
to see on average in upstream internal rate
of returns over 20 percent, now it's less than is the case. When it's 15 percent,
the company is very happy. Of course for some specific
project like the oil sands, it has always been
something below 10 percent. But for all the other projects, 15 is a minimum, and if
it is 20
because of the risks, you have the high profitability
because high risk. You can't forget also
yet that you spent a lot in exploration
without any success. So when it's a success you need to cover
the costs for your field, the field discover, but also for all the others
you have not discovered. So it's really a dollar
spent for nothing. So low oil prices will
especially affect new projects. Companies will not get
involved into new projects. They will just try to minimize the cost of
existing project, is that something
that they can do? Yes, I totally agree, and we start to see
postponed project. So for development is
really the project is not, it's just a postpone
other project. Something else we
see in exploration. In exploration now, you have
less and less exploration, or exploration on
very cold areas. In fact, not new frontier zone, areas where you have some data,
wells have been drilled before, and you will think that
the probability to find is relatively high. So you take the risk, but if it's not
the case, you prefer not to
start by exploration. So at this moment, over the past few years, there has been a
lot of talk about the Arctic, for example. I mean it's going to be an area where
there might
be even conflict in between various countries
because the limitation of frontiers in the Arctic and it's not so clear
and so on and so forth. You think this will now be perhaps pushed aside for
a for a while and left? Yes, I think we have to wait
to have high price of oil, because otherwise it's
really too risky. The only thing is when
we look at Norway. So you know the very
North part of Norway, well they have good results. So it will be an incentive
to do something. Now as you say first of all all the countries which are
concerned by this area, they have really to agree, because you don't want
to start explosion and after if you find
something production if you are not sure
of the frontiers. So you need to have
the right to do that. But for that you
need an incentive. So perhaps a first step
when it's possible. So when it's very clear
like the Norwegian sea, when it's very clear they can do exploration and they can
produce. If the results are positive, it will be an incentive for all the countries
concerned to discuss, and after see if they
start exploration. Yes, and now all of
this has started with shale oil and
oil sands in Canada, shale oil in the United States
in oil sands in Canada. What might be the impact of declining oil prices
on this production, is it something that might
seriously affect it? It's a very difficult
question and so difficult to answer,
because in fact, to go back to the break-even so the minimum price needed
to cover the cost, you have huge differences. We have to distinguish between what
we call
the sweet spot, which means the areas where
the cost is not so high. In the past year, we have seen a real decrease in the
cost. So perhaps for
this specific areas, $40 per barrel is enough. So in that case, it's
not a problem to pursue. But for some others, it's totally different, the
break-even is much higher. We have also to distinguish
between oil and gas, it's not the same problematic. So it's easier to produce, not
easy to produce, but
it's easier to sell oil. You need oil everywhere
and all the time. For gas, it's a bit more
difficult, more different. So it depends if you produce
when you have a gas field, but if at the same time
you produce oil. Yes. So you get an added value from the oil produced
at the same time. So it's okay. If it's
a pure gas field, it can be very difficult. Very difficult.