Total's high friends in low places
Christopher Helman
Christophe de Margerie, the chief of French oil and gas giant Total, is late again, this time for breakfast with a reporter at Manhattan's Four Seasons Hotel. He arrives straight from his room there, without jacket, tie or apology but with a gregarious gleam in his eye. Once, after arriving two hours late to a meeting with the powerful energy minister of Qatar, De Margerie dropped to his knees in penance. (Total now operates a large LNG plant in the emirate.) It's hard to be annoyed at the guy employees call "Big Moustache." His bristle brush dominates an otherwise dough-ball face -- the face of a jovial proprietor of a prosperous brasserie.
In contrast to awkwardly laconic peers like ExxonMobil's Rex Tillerson, De Margerie is chatty and uncharacteristically blunt. He tells you straight up that he thinks the world will soon run short of oil and that as long as he's around Total will make deals with anyone (perhaps even the devil?) to keep the hydrocarbons flowing. When he signs an agreement he prefers making toasts with single-malt Scotch -- a rebuke of sorts to his patrimony: His grandfather founded Taittinger Group (as in Champagne). De Margerie could have been a king of brut. Instead, he became a prince of crude -- and an ambassador to some of the world's toughest regimes.
Strongmen and dictators, corrupt regimes, presidents and prime ministers -- they're all on his call list. In just the past year De Margerie has ventured out from Total's headquarters in La Défense, the west Paris business district, to woo Equatorial Guinea's President Teodoro Obiang Nguema; Yoweri Museveni, President of Uganda; Angola's Deputy President Fernando da Piedade Dias dos Santos; Garang Diing Akuong, the South Sudanese energy and mining minister; Yemen's president, Ali Abdullah Saleh; Gurbanguly Berdymukhammedov, Turkmenistan's president; Congo-Brazzaville President Denis Sassou Nguesso; and, most important of all, Russia's Prime Minister Vladimir Putin. Total is either doing business in these places or is vying for oil and gas projects. "It is nice to be in charge," says De Margerie in a lightly accented baritone, "to travel and meet these people."
Even if they're not such nice people? "Bloody right!" he exclaims. "Because we have not oil or gas. Where did the U.S. companies find their first oil and gas? And their reserves and their cash? It [was] here [in the U.S.], not in France. This is why the French companies are always looking for partnerships."
That and the fact that De Margerie is one of the few energy executives who believe that peak oil is just around the corner. In a few years, he argues, supplies will top out at 95 million barrels per day (up from a record 88 million bpd now) and no amount of investment or ingenuity will be sufficient to push the total higher. "There will be a lack of sufficient energy available," he says, leading to significantly higher prices and more wealth and power for state-owned national oil companies, and the bullies who lord over them, which control access to some 70 per cent of the world's remaining conventional reserves. To stave off a global energy crisis, De Margerie asks, "Do we sit and wait?" Or exploit every opportunity from every source, including coal, solar and nuclear?
Driven by the chase for supplies, the Big Moustache has led Total into virtually every corner of the Earth, first as head of exploration and production and since 2007 as chief executive. Far from the despots there are still political and financial risks. Total's $500-million drilling venture with Cobalt International Energy is in limbo, even though the Obama Administration lifted its moratorium on deepwater drilling in the Gulf of Mexico back in October. A $2.25-billion shale partnership with U.S. gas giant Chesapeake Energy in Texas (and an option in New York) has slowed because of concerns about the rock-splitting technique called hydraulic fracturing. Environmentalists are also trying to scotch the construction of pipelines that would carry oil sands crude to U.S. refineries from Canada, where the company has sunk $5-billion in recent years to acquire undeveloped acreage. In 2009 Total acquired half of American Oil Shale, which is trying to figure out how to squeeze oil out of rocks in Colorado; the Sierra Club doesn't like that either.
Perhaps De Margerie's new faith in peak oil is just an excuse for Total to carry on with business as usual. The company's own oil and gas production peaked back in 2004 at 2.75 million bpd, and sank to a nine-year low in 2009 before settling around 2.5 million bpd today. According to analyst Oswald Clint at Bernstein Research, Total spent the early part of the decade expecting too much from past successes in Nigeria and Angola -- and hoping that the international community would let it get away with new developments in Iran.
As oil prices began to soar in 2004, Total was slow to ratchet up its economic assumptions: Explorers trained to look for $30 oil were loath to drill deeper for $70 oil when they were half convinced that the cycle would revert prices to the mean. Since 2006 Total has drilled fewer net wells each year (down from 30 to 15) and been less successful in holes it has punched. Deutsche Bank figures that Total's 2010 return on capital employed was 12 per cent, trailing that of BP (13 per cent), Chevron (17 per cent) and Exxon-Mobil (20 per cent). Total's estimated 2010 net income of $11.5-billion, though up, is not much better than 2004's. Its American Depositary Receipts (a recent $55) trade for the same price they did in 2005, down 40 per cent from their 2008 high. That's not great for De Margerie's 1.2 million stock options (his total pay was a relatively modest $3-million last year).
So in 2010 De Margerie set out a new strategy. Total sold $4-billion in over-the-hill or noncore areas -- like mature fields in the Gulf of Mexico, Cameroon and Norway -- and laid out $6-billion in politically and geologically trickier "frontier" plays that could pay off one day. It's a very iffy proposition. De Margerie admits that some pet projects won't generate profits unless oil settles above $100 a barrel.
His favorite pet? Russia, where his relationship with Putin and Deputy Prime Minister Igor Sechin is "of the highest importance." In 2007 Total beat out rivals to become Gazprom's primary partner in developing the Shtokman field. Locked in Russia's iceberg-strewn Barents Sea, Shtokman is thought to hold more than 25 trillion cubic feet of gas. (Total has a 25 per cent stake in the project; Norway's Arctic-experienced Statoil got 24 per cent.) The first phase of development will cost at least $15-billion and involve devising floating production platforms that can be quickly detached to dodge ice floes, as well as subsea pipelines extending 250 miles to a proposed LNG plant near Murmansk.
Tricky stuff -- particularly if Gazprom decides in March not to approve the project. Some oil analysts bet that Russia will decide first to develop gas on the Arctic's Yamal Peninsula. Technically easier but far from market, Yamal (with an estimated 4 billion barrels of oil and 300 trillion cubic feet of gas) will cost more than $100-billion to build out -- with plenty of potential work for Total. To ensure that outcome De Margerie met with Putin in Moscow last June. (Total has a deal with Russia's largest independent gas producer, Novatek, to invest $1-billion in Yamal -- but the prime minister must bless it.) When Putin expressed support for Total's investments in Russia, De Margerie kowtowed before the tape recorders. "Our policy in your country, Mr. Prime Minister, is crystal clear," he said. "We have many partners and only one chief. Only one chief, and not two."
De Margerie's other major focus: Angola. Total gets a third of its daily output from Africa, more than any other supermajor. While Nigeria is the single largest contributor, it's a security nightmare; at least three Total workers were kidnapped (later released) in 2010. In addition to being safer, Angola's new deepwater projects could increase Total's take from 200,000 bpd today to a possible 300,000 bpd in five years.
Gaining entrée into Angola's riches was costly. Discoveries made there by Elf Aquitaine were a primary driver for Total's $54-billion takeover of the company in 1999. Elf's $4-billion development of the Girassol field pioneered the deepwater in West Africa. Yet as Girassol was coming online, crude wasn't the only dirty stuff bubbling up. Until 1997 French companies could write off under-the-table payments to foreign officials; only in 2000 was bribery made illegal. Some guys didn't get the memo: In 2003 three Elf executives were convicted of funneling $16-million a year to heads of state in Gabon, Cameroon, Congo and Angola. Elf's former chairman Loïk Le Floch-Prigent was given five years in jail for facilitating $300-million in payments in the 1980s and 1990s.
Ancient history, as far as Total is concerned. Its Pazflor development in Angola will start producing 220,000 bpd of oil (40 per cent net to Total) later this year from fields under 4,000 feet of water. In a technical feat, it is installing three 1,500-ton machines and massive pumping units on the seafloor to separate oil from gas before sending it up to a 120,000-ton floating production and storage unit. Two years down the sea-road comes the even more ambitious Clov development, while Total has recently made discoveries farther out in 9,000 feet of water that will take most of the next decade to develop. Angola, says analyst Iain Reid of Jefferies & Co., is "the jewel in Total's crown."
Iraq and Iran, by contrast, are its crown of thorns. In the 1990s both Total and Elf negotiated with Saddam Hussein's henchmen for rights to develop the Majnoon and Nahr bin Umar megafields. At the time De Margerie was head of Total's upstream division and the point man for talks. Saddam was eager to get the French to sign a deal that would violate the sanctions against his regime. De Margerie stepped right up to the line but didn't cross it out of concern for triggering international outrage. Total did, however, transport and market a lot of Iraqi crude during the U.N.'s oil-for-food program. In 2006 French authorities held De Margerie for questioning over payments allegedly connected to Saddam's siphoning of cash during that time. All that coziness to the regime didn't pay off. Last year, in what De Margerie calls "a semi-success or a semi-disappointment," Total won a 19 per cent stake in the 4-billion-barrel Halfaya field to PetroChina's 81 per cent but may not be able to turn a profit. French investigations continue.
Iran has a fresher odor of scandal. In March 2007, a month after taking over as CEO, De Margerie was hauled in by French authorities for 36 hours of interrogation over a $2-billion deal with Iran in 1997 to develop its massive Persian Gulf gas field. In a 2007 interview with Petroleum Intelligence, De Margerie confirmed that he authorized payments of $40-million (for consulting and lobbying efforts) to middlemen -- allegedly associates of former Iranian president Ali Akbar Rafsanjani and his son.
Begrudgingly, Total stopped shipping gasoline into Iran last June. A spokeswoman says the company has given up its equity in the natural gas project and today is only getting insignificant payments from Iran to recover the costs of earlier investments. Having helped train hundreds of Iranian engineers, Total still hopes to be first in line to build a $10-billion LNG export terminal someday. "If we cannot do it, we don't do it," says Philippe Boisseau, current head of Total's gas and power division. "But one day there will be the need to develop those reserves."
The company is already doing so with rogue regimes like Burma and Venezuela. Since cutting a deal in the mid-1990s, Total has been developing and piping natural gas to Thailand, earning profits estimated at more than $200-million over the last decade and helping to prop up Burma's junta with an estimated $4-billion in revenues. De Margerie told a reporter that he was proud of helping Bangkok switch from dirty fuel oil to cleaner gas and that when he spoke to Burmese dissident Aung San Suu Kyi, "she never asked me to leave Myanmar."
Total has stuck it out in Venezuela--in the face of President Hugo Chavez's nationalizing a swath of oil assets held by the majors. While ExxonMobil and Conoco have taken their $10-billion-plus claims against Venezuela to international arbitration, De Margerie decided to roll over and accept the seizure in exchange for some $800-million worth of oil. "The advantage is that you're still there and there's still a lot of resources to develop," says Wayne Wilson, a consultant at UHY Advisors who worked with Yukos after its expropriation by the Kremlin. Last year Total bid on a piece of Venezuela's Orinoco tar sands--losing out to state-owned PetroChina, which has even less compunction about its petro bedmates.
Peak oil apostles must go where the oil is, whatever the complications. Total has recently spent $5-billion, including $1-billion for UTS Energy last year, to acquire undeveloped oil sands projects in Canada and Madagascar -- even though bringing production up to a potential 250,000 bpd would take a decade and $20-billion. Credit Suisse figures Total's virgin developments will require oil prices in excess of $85 per barrel to break even. Still, there's no exploration risk; they know where the stuff is, and there's enough of it to last for decades.
It's a different story in the Gulf of Mexico, where Total had endured years of disappointing drilling. Whereas De Margerie jokes that in most of its territory Total is "the best," in the Gulf, "we are the best at not being present." So in mid-2009 Total handed over 80 deepwater prospects in the Gulf of Mexico, plus $300-million to fund a drilling campaign, to Cobalt International Energy, a pipsqueak with revenues of zilch. Cobalt had cobbled together 120 deepwater prospects of its own, which it combined with Total's. The fifth-biggest oil company in the world took 40 per cent of the venture to Cobalt's 60 per cent. Why? Because Total had little faith in its ability to hit pay goo. Not that Cobalt has done much better. In the early months of 2010 it drilled the third in a string of disappointing dry holes. Still, it looked like a good fit: Cobalt was backed by private equity shops First Reserve and Carlyle Group and led by Joseph Bryant, who ran Unocal before Chevron acquired it. On the strength of its team and the Total deal, Cobalt raised $850-million in a December 2009 IPO.
Then came the Deepwater Horizon catastrophe. In its wake the Gulf has changed from one of the most predictable and open places to look for oil and gas to one of the most complicated. Before BP's blowout, deepwater operators were working under the assumption that the limit of their liability in the event of a spill would be $75-million, as stipulated by the 1990 Oil Pollution Act, adopted after the Exxon Valdez disaster. Now it's a question of whether drilling can continue at all. In January the new Bureau of Ocean Energy Management told 13 companies, including Cobalt, that they may soon be allowed to drill wells permitted before the spill. Likely conditions: that they recalculate worst-case scenarios and conduct months of extra environmental assessments.
If Total proceeds, it may need to take control of its partnership. Rumors of a buyout of Cobalt emerged during the summer, while BP's spill was still gushing uncontrollably and Cobalt's market cap plunged from $3-billion to $900-million. Asked whether he should take charge of the joint venture, De Margerie says, "It's true. But the priority is, when we start can we do it the same way? We wanted to get a company independent of Total to bring new ideas." Ideas like how to use seismic imaging to drill 30,000 feet down to pry loose oil and gas from thick layers of salt. Total now says it has no plans to alter its Cobalt venture. What about buying BP's interests? The Big Moustache shakes his head. "If you buy a company with declining reserves," he says, "you're not helping anything in the long term. It doesn't fill the gap."
http://www.ctv.ca/generic/generated/static/business/article1884921.html
