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.
