Pessimistic on Oil Supplies, Total Must Weigh its Options

(MoneyWatch)  It's not an easy year to be an oil company, with prices for the resource hovering below $40 and plenty of uncertainty over whether prices will rise. But Total, one of Europe's biggest oil companies, thinks the cost of oil will rise dramatically over the next few years.

That's based on the company's estimate that global production will peak at 89 million barrels a year, as reported by the Globe and Mail. Total's CEO Christophe de Margerie said that his industry's ability to raise production over 90 million barrels per day had already ended.

Like most of the biggest oil companies, Total is planning to maintain investment levels, even as the recession tears down its short-term business prospects. Yet it also appears to be changing its mind on some projects, and struggling to keep up with others.

The biggest piece of news on the company is that Bolivian president Evo Morales appears to be threatening to nullify the company's contracts in the country. Total is engaged in several natural gas projects in Bolivia, which has huge reserves. But there are also challenges to recovering and then moving the gas out of South America.

It may be more in Total's interest to shift its gas interests to Iran's South Pars gas field. Also this morning, Reuters is reporting that Iran says it will sign a deal with Total by March 20. However, the company stated that it was only in talks -- a reasonable reaction, as any investments are dependent on the Western world's relationship with the country.

On the oil front, Total also doesn't appear to be happy with some of its assets. Margerie recently told the WSJ that development prices needed to fall 20 percent to make Canada's oil sands viable. Like Exxon, Total may not be willing to take chances on uncertain development projects -- which could leave the company with less capacity than it wants in a few years.

It should be interesting to see where Total goes from here. Pessimism over its own industry has already led the company to diversify into nuclear energy. But if the situation with oil is as dire as Margerie thinks, investments now in even costly gas or oil projects will be well rewarded down the road. It would be surprising to see Total pass up many opportunities.