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France's Total Tries Harder


An hour's flight from Aberdeen, the Scottish oil city, a boxy maze of yellow steel rises from the blue waters of the North Sea. It looks small from the air, but by any measure, Total's (TOT) Elgin platform is a massive structure, weighing 43,000 tons and extending 90 meters below the waves and almost as high. Essentially, it's a mini oil refinery built to house nearly 100 workers and process the hefty 250,000 barrels of oil and gas a day that roar up from wells deep in the seabed -- some of them several kilometers away.

Indoors behind the blast walls there is a noticeable esprit de corps. Scottish engineers natter away with their Gallic counterparts in fluent French. The talk is not all chitchat. Elgin began production only three years ago, and Total still hasn't figured out all the answers to a challenging environment. Extremely high reservoir pressures and temperatures close to 200C put "enormous amounts of stress" on the hardware, says David Atkin, the offshore installation manager.

The Elgin crew is coping with everything from valve failures to excessive vibration to potentially dangerous salt corrosion, yet they are still pushing the platform's capacity limits. Atkin says that hard-charging style is what separates the Paris company from rivals content to operate on cruise control. "We try to experiment, even if it doesn't work," he says over a lunch of sausage and salad in the crew's mess.

That willingness to keep trying has paid off handsomely. A decade ago, Total was a relatively small outfit, pumping a puny 634,000 bbl. per day. Now the former also-ran ranks as one of the four or five elite global majors, producing an average of 2.6 million bbl. of oil equivalent a day, roughly on a par with ChevronTexaco Corp. (CVX). Total's profit growth has also been staggering -- probably the best in the business -- and its return on capital far exceeds the industry norm. "We are now making in a fortnight what we made in one year" a decade ago, says Chief Executive Officer Thierry Desmarest in a recent interview in his spacious but austere Paris office. Deutsche Bank forecasts that net income before exceptionals will be up 16% this year, to $9.8 billion. Revenues are likely to be close to $140 billion.

SHREWD APPRAISER

Total's rise to the ranks of the oil majors has had its controversial moments. Elf Aquitaine, which Desmarest acquired in 1999 for $54 billion after a bitter fight, was a state-controlled entity embroiled in corruption scandals that took years to untangle. And Total employees still get targeted by authorities. In mid-September, French police raided Total's headquarters at La Défense in Paris as part of an investigation into questionable payments in deals with Iraq and Russia between 1996 and 2001. Investigating magistrate Philippe Courroye has filed charges against three current and former Total executives for complicity in the misuse of corporate funds, says his spokeswoman. While admitting that current and former staff have been questioned in connection with a money-laundering investigation, Total says the inquiry does not directly target the company.

The probe has not had a noticeable impact on Total stock. Investors are betting that the methodical Desmarest will continue his winning streak. Both colleagues and rivals say he is a shrewd appraiser of risk who asks all the right questions about the multibillion-dollar oil and gas projects that are the lifeblood of big oil companies. Investors also applaud Desmarest's preference for self-generated growth rather than big mergers at a time when oil prices are sky-high. They would prefer that he wait for a better moment to spend the $12 billion or so that he could raise from Total's nearly 13% stake in pharmaceutical giant Sanofi-Aventis.

The big strategic question is how far Desmarest can expand Total -- and how much further he can push the company's already-high returns. To take Total to another level of performance, he is applying equal doses of caution and boldness. In Russia's oil patch, for example, Total's name has been linked with Sibneft, one of the oligarch-controlled giants. Instead, Total pulled a big surprise on Sept. 22 by reaching a tentative agreement to buy just over a 25% share in a relatively new gas producer, Novatek, which is owned by independent businesspeople. While high, the $1 billion price tag is not a balance-sheet buster and fits with Desmarest's strategy of going slow and keeping a low profile in a high-risk region until legal and tax storms abate. Total executives say their inquiries indicate that Novatek's owners are not crooks. And Novatek's daily production of gas is equivalent to about half the daily consumption of France, says Christophe de Margerie, Total's exploration and production chief.

At the same time, Desmarest is making a bold move to boost Total's presence in the OPEC countries. In mid-September, Desmarest told an OPEC audience in Vienna that the current surge in prices was the signal for a "broader partnership" between international companies and OPEC, which has some 77% of the world's oil reserves. Trying to overcome traditional OPEC suspicion of foreign investment, Total is telling the OPEC bosses that it is willing to operate in a way that creates jobs and respects local political and societal views.

Desmarest has ideas, including "self-adjusting contracts" that would give the Middle Eastern states plenty of profit if prices remain high. He's telling the OPEC countries that however attractive today's prices may seem, a long-term oil crisis is not in their interests, and that OPEC members would be better off developing their fields in cooperation with the majors, which would help assure long-term markets for their oil and gas. "We have plenty of discussions under way," he says. "The real problem is [making] people understand there is some urgency."

Getting the OPEC states to open up to investors like Total will undoubtedly be slow. But no one thought Desmarest could build Total to its current size, either. A former civil servant who began his career operating mines in New Caledonia, Desmarest, 58, joined Total in 1981 and quickly rose to become chief executive in 1995. Those who know him say he is professional, single-minded, and extremely determined. "You are always free to say what you want to say, but once [the issue] is decided you support it or you quit," says exploration boss de Margerie. Desmarest is also very much a member of the French Establishment, with a strong sense of rivalry with the U.S.

Desmarest has shown guts more than once, striking deals with Iran and Libya in the mid-1990s despite the risk of U.S. displeasure. Taking on the radioactive remnants of Elf was also a big risk, but it has paid off more than was anticipated. Elf, bogged down by scandal, had good prospects but was slow to develop them. Total has quickly gone to work on those properties, whether deep-water fields off Angola, now Total's hottest assets, or discoveries like Elgin in the North Sea.

As a result, Total has consistently added more reserves than it has depleted in recent years, unlike, say, Royal Dutch/Shell Group (RD), which has been in deficit. Total, rivals say, also probably has the youngest portfolio of properties and so the least worries about production levels crashing in the medium term. Total also has fewer than 1 million bbl. per day of its output in mature regions such as the North Sea and the U.S., whereas BP PLC (BP) and Exxon Mobil Corp. (XOM) still have most of their production in these declining areas.

Total expects to boost production by an average of a 4% per year from 2003-2008, a big number considering that means offsetting declines of a few percent each year in fields that are past peak. "They should see some pretty good growth for the next three years," says Robert Plummer, an analyst at energy consultants Wood Mackenzie Ltd. in Edinburgh.

Expecting higher prices, Total is increasing capital spending by around 5% per year, to $10 billion. Big bucks will go into developing recent finds in Nigeria, Libya, and Congo as well as liquefied natural gas projects in Qatar, Abu Dhabi, Nigeria, and, possibly, Iran. Total ranks with ExxonMobil as the second-largest seller of LNG, whose use is growing by about 8% a year -- far faster than oil.

SIZE COUNTS

Desmarest says Total's strong position means he doesn't need another big merger. "You have to keep in mind that half are failures," he says, adding: "We don't think we have any problem of size." Despite such bravado, size is an issue. Lacking the scale of ExxonMobil, BP, and Shell, whose output is in the range of 4 million bbl. per day, Total tends to get a lower price-earnings ratio from the stock market. Desmarest counters that what mainly separates Total from its rivals is its tiny production presence in the U.S., which suits him fine. The U.S. production industry is "in a period of decline."

Being mostly absent from the world's largest energy market is a mixed blessing. So is being an organization where French is needed for advancement, in an industry where the predominant language is English. Executives say that Total's French culture can be an obstacle to recruiting top talent.

Undaunted, Desmarest hopes to use Total's Frenchness to the company's advantage. Oil is the most political of businesses, and in a tense geopolitical climate, where U.S. actions such as the invasion of Iraq are increasingly controversial, not being an American company can be an asset. "Sometimes it helps to be French," observes de Margerie, the exploration and production chief. "An independent oil company -- that is how we present ourselves."

Total already enjoys entrée to many OPEC countries, including Abu Dhabi, Iran, and Venezuela. Last year, Total joined Shell in the first exploration project awarded by Saudi Arabia since the Saudis nationalized the industry in the last century. The deal is limited to gas, which doesn't excite the same nationalistic emotions as oil. Nonetheless, it's a foothold in the world's richest oil patch.

Total's bet on Iraq may not have the same payoff. The company is itching to get back into the war-torn country, where during the Saddam Hussein years it all but signed deals to develop two enormous fields -- Majnoon, which has an estimated 10 billion to 30 billion bbl. of reserves, and Nahr bin Umar, which has 6 billion. If they come to fruition, these multibillion-dollar projects would add enormously to Total's production base at a low cost per barrel.

Rivals, however, say the new Iraqi government will be reluctant to deal with Total, given its ties to the former regime and France's stance opposing the 2003 invasion. Yet Total keeps trying. The company is said to have approached American companies, including ExxonMobil, offering to marry its extensive knowledge of Iraq with their political clout. Neither company will comment, but it fits Desmarest's philosophy: Never give up -- but do what it takes to improve your odds. For Total, the odds look pretty good.

By Stanley Reed in Aberdeen


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