Total Outpumps Exxon Mobil in Africa, New Frontier in Oil Race
Aug. 2 (Bloomberg) -- In a patch of peacock-blue, shark- filled Atlantic Ocean 93 miles off Angola, Total SA technicians turn truck-tire-size valves on a floating storage platform six stories high. The 120-person crew is preparing for a shutdown that will enable the world's fourth-largest oil company to bring a new field on line 2,500 meters below, adding four more years of 250,000-barrel-a-day production.
Behind fire doors, Jacques Saint-Jean monitors a TV screen in the control room for the Girassol field. A robotic arm is changing a chokehold on a pump 1,312 meters (4,304 feet) down, as deep as four Eiffel Towers are tall, as the light from a remote- controlled minisub illuminates the blackness. To get to oil may mean drilling another 1,200 meters through the seabed.
``I remember when we did this 30 years ago at 60 meters and we thought that was deep,'' Saint-Jean says. ``We are still at the beginning of this kind of technology. It's like the astronauts at the beginning of space travel.''
Africa is the petroleum industry's new frontier as prices top $78 a barrel and oil grows tougher to find and pump out. Companies plan to spend $20 billion in the next five years exploring off Africa, the poorest continent on the planet -- double what they spent from 2000 through 2005.
Declining Production
They have to: Output is declining in 33 of the 48 biggest- producing countries, the U.S. and U.K. among them; Iran and Russia are curbing Western access to the world's largest reserves; Venezuela is raising taxes as high as 50 percent for Western producers; and Bolivia is taking control of its gas fields and threatening to boot out foreigners.
All of that makes Angola, where 70 percent of the 12 million people live on less than $1 a day, a prime alternative even as the International Monetary Fund seeks greater disclosure of where the $10 billion in oil revenue the country took in last year is going.
Angola's deep waters are vital to a world short on energy. As much as 10 percent of the planet's petroleum reserves, or about 100 billion barrels, lies in depths exceeding 500 meters. That's enough oil to power the U.S. for the next 12 years.
``West Africa is strategically important to global oil markets and to the U.S.,'' says former U.S. Assistant Secretary of Energy David Goldwyn, who now heads his own political consulting firm in Washington.
In the past two years, 50 percent of discoveries by Irving, Texas-based Exxon Mobil Corp., the world's biggest oil company, have been in Africa. ``There is a lot of oil in this area,'' says Bill Cummings, Exxon's spokesman for Angola.
Earnings Report
Paris-based Total, which reports second-quarter earnings tomorrow, is a top contender in the global oil hunt. Created by the French government after World War I, Total gained deep-water technology from experience in the North Sea. That has made Total a leader in Africa, allowing it to beat Exxon Mobil by two years in offshore Angola. Total is the biggest oil and gas producer on the continent, with 751,000 barrels a day last year, ahead of 660,000 for Exxon.
``They're the most technologically advanced company out there,'' says Gerard Kreeft, managing director at Arnhem, Netherlands-based oil consulting firm Energywise, who was in Luanda, Angola's capital, in February for a conference on offshore oil exploration.
``Normally, when you're trying a new technology like they did in Girassol, you try it at 60 meters, where it's comfortable,'' Kreeft adds. ``They did it in 1,000 meters-plus; that's what's gutsy about them.''
Double Merger
Seven years ago, Total was a medium-size oil company, second largest on its own soil after Paris-based Elf Aquitaine SA. Total had a market value of $30 billion and produced 840,000 barrels of oil and gas a day. Exxon Corp. pumped triple that -- 2.7 million barrels -- even before its 1999 combination with Mobil Corp.
Beginning in 1998, Thierry Desmarest, 60, who had become Total's chief executive officer three years earlier, engineered a double merger. First, he spent $12.8 billion to buy Belgium's Petrofina SA. Six months later, he went after Elf. Total won its rival after raising its bid to $54 billion in Europe's biggest hostile takeover. The combinations made Total the largest refiner in Europe and added lucrative production fields in Africa and the Middle East.
``Total didn't have good acreage,'' says Jason Kenney, an analyst at ING Financial Markets, a unit of Amsterdam-based ING Groep NV. ``That's what Elf brought.''
Courting Iran
Desmarest has courted governments that his rivals have avoided. In 1995, just months after taking the CEO post, he flew to Tehran. There, he signed the first major oil contract with Iran by a Western company since the 1979 Islamic Revolution removed Shah Mohammed Reza Pahlavi and installed an anti-U.S. theocratic government.
Also in 1995, Total started work on a natural gas pipeline in Myanmar, formerly called Burma, which was under a military dictatorship. In an April 2006 report, the U.S. State Department accused the regime of repressing ethnic minority groups and of jailing political dissidents.
In 1997, Desmarest approved a deal to develop a $2.2 billion natural gas field in the Persian Gulf off Iran, risking U.S. economic sanctions. In 2003, Total handed over the completed project to Iran.
``We were not breaking French laws,'' says Desmarest, who adds he didn't regard himself as bound by U.S. laws.
Saddam Talks
From the early 1990s until the U.S. invasion of Iraq in 2003, Total negotiated with dictator Saddam Hussein for exclusive rights to develop the Majnoon and Bin Umar oil fields. The areas may hold 20 billion barrels, as much as a quarter of Iraq's reserves. Total never signed the contracts because the Iraqis demanded that drilling work begin immediately, which would have violated a United Nations embargo.
``They focused on areas where others wouldn't go: Iran, Burma, South Africa under apartheid,'' says Paris-based Natexis Banques Populaires economist Thierry LeFrancois, who has covered Total for more than 10 years. ``It wasn't politically correct, but it was effective.''
Today, Total's market capitalization is $164 billion -- bigger than 25 of the 30 companies in the Dow Jones Industrial Average -- compared with $412 billion for Exxon Mobil. Total has stakes in 27 refineries and produces about 2.5 million barrels of oil and gas a day; Exxon produces 4.2 million. In 2005, Total made a record profit of 12 billion euros ($15.4 billion) on 124 billion euros in sales.
Shares Rise
Since its merger with Elf, Total has consistently achieved the highest cash return on capital employed among the majors in the industry, exceeding Exxon Mobil, London-based BP Plc and the Hague-based Royal Dutch Shell Plc -- the top three oil companies -- says Lucas Herrmann, an analyst at Frankfurt-based Deutsche Bank AG.
Total reported a return on equity of 35 percent last year, beating Exxon's 34 percent. Total shares gained 41 percent from Jan. 4, 2005, to July 31, outperforming the company's bigger rivals. On Aug. 1, Total shares traded at 52.65 euros.
``We are now earning every 15 days what we made in one year,'' says Desmarest, comparing last year's earnings with pre- merger days during an interview in his corner office on the 44th floor of Total headquarters in Paris's La Defense business district. The suite is spotless, the only distraction an abstract painting by Algerian artist Abdallah Benanteur.
Low Cost
Desmarest says his benchmark to determine the profitability of new projects is figuring the price of oil at $25 a barrel. For heavy oil, which can have the consistency of molasses and typically contains impurities, or liquefied natural gas, Total may lift that to $30 or $35.
``We keep a relatively conservative oil price scenario for deciding developments,'' he says.
Total's cost of finding and removing oil was about $3.07 a barrel at the end of 2005, less than half of Exxon Mobil's $7.95, according to data compiled by Bloomberg. With depreciation, depletion and amortization costs, Total's technical costs are about $8.50 a barrel.
``We had the lowest technical costs per barrel among the majors last year,'' Desmarest says.
Exploration and production chief Christophe de Margerie will inherit the job of keeping Total's costs down and its shares and profits rising when he takes over as CEO in January. Russia and Latin America will demand his immediate attention.
Russian Woes
For the past decade, Desmarest has tried to persuade the Russian government to let Total develop a massive offshore Arctic gas field known as Shtokman. The $20 billion project would pump gas from beneath the icy Barents Sea, chill it to liquefied form and ship it to the U.S. State-controlled OAO Gazprom still hasn't decided on partners from a final list of five companies that includes Total.
In 2005, Total lost out on a $1 billion agreement for a 25 percent stake in OAO Novatek, Russia's second-biggest natural gas producer. Total had begun investigating the company two years earlier and debated whether to pursue a joint venture or try to buy an equity stake.
When Total decided on taking a stake, Russia's Federal Antimonopoly Service delayed the deal's approval for a year. Then, in a snub, Novatek sold shares on the London Stock Exchange, forcing Total to lower its growth estimates. The episode taught the French company the risk of moving too slowly, says de Margerie, 55, a grandson of champagne maker Pierre Tattinger.
`Go Quickly'
``We learned that if you have a good idea, go quickly,'' he says. ``If we had done it in two to three months, the government would not have changed its mind.''
De Margerie will also have to deal with growing nationalism in Latin America, which contributes 6 percent of Total's output. In April 2005, the government of Venezuelan President Hugo Chavez said Total owed as much as $1 billion in back taxes and delayed a second phase of Total's Sincor project.
``We were caught by surprise,'' de Margerie says. ``We heard through the newspapers. We had no chance to understand what changed and why.''
De Margerie denies owing back taxes, though he says Total has paid $100 million since the government action. ``It's possible to pay under protest,'' he says.
Venezuela's move threatened the 200,000 barrels of oil a day that Total had been pumping from its Sincor joint venture with Norway's Statoil ASA and Petroleos de Venezuela SA, the state- owned oil company. Then, in March, Venezuela introduced new rules to make PDVSA the majority shareholder in all joint ventures with Western companies.
Hot Under the Collar
Exxon Mobil, Total and Rome-based Eni SpA, Europe's fourth- biggest oil company, refused to sign. In retaliation, Venezuela took over two oil fields operated by Total and Eni. In May, Venezuela's congress raised royalties that foreign oil companies pay to 33.3 percent from 16.7 percent.
In another blow, on May 1, the government of Bolivian President Evo Morales took over that country's natural gas industry and threatened to evict foreign employees. Total lost its 15 percent stake in two production fields.
De Margerie is still hot under the collar two days after the nationalization decree when he greets visitors at Total headquarters. He questions how the military can operate the fields if foreign companies are expelled. He shows a newspaper picture of Morales flanked by armed soldiers at the San Alberto natural gas field.
`Are Those Slide Rules?'
``Are these men engineers?'' he asks sarcastically, pointing to the automatic weapon-carrying soldiers. ``Are those slide rules they're holding?''
Compared with Desmarest's orderly executive suite, every available space in de Margerie's large office is brimming over. Files are bursting with reports, charts and diagrams. A Russian military hat and a carved ivory tusk from Sudan are on display. A 2-foot-high stack bound by an industrial-strength rubber band is labeled simply Afrique.
Given the setbacks in Russia and Latin America, Africa is becoming even more important for Total. By the end of the decade, the continent will supply more than 40 percent of the company's oil and gas, predicts Stewart Williams, senior analyst at Edinburgh, Scotland-based Wood Mackenzie Ltd., an oil industry consulting firm.
Angola's government is helping with generous contracts. Portugal colonized Angola in the 16th century and held control until independence movements sprang up in the 1950s. With the Portuguese departure, Angola formally declared independence in 1975.
Civil war broke out the same year. The Popular Movement for the Liberation of Angola, or MPLA, fought the National Union for the Total Independence of Angola, or Unita, for 27 years, until the death of Unita leader Jonas Savimbi in 2002.
International Investment
During the war, the MPLA welcomed foreign investment in Angola's oil fields to help fund its military campaign. Unlike the Middle East or Mexico, Angola under the MPLA allowed Western companies to take equity interests in the oil fields they discovered. When the war ended with the MPLA in control, Total had a head start.
``Growth in Africa has been extraordinary for Total,'' Williams says. ``Total had the foresight to get in early.''
Tremendous challenges remain. Africa is vulnerable to poverty and disease, with 64 percent of the estimated 38.6 million people who have contracted AIDS living in sub-Saharan Africa, according to United Nations statistics. Corruption is rampant, former U.S. energy official Goldwyn says.
Open Sewers, Dirt Roads
In Nigeria, the top producer in sub-Saharan Africa, Eni and Shell have cut more than 500,000 barrels a day from their production since February. They scaled back after militant groups that wanted a greater share of the oil revenue kidnapped foreign workers from Britain, Egypt, Thailand and the U.S. and blew up pipelines in the Niger Delta.
On the streets of Luanda, far removed from the French pastries and cheeses that workers enjoy on the Girassol platform, women sell bananas, dried fish and clothing from baskets that they carry balanced on their heads.
Open sewers aid a cholera epidemic that had killed 2,000 people in the country this year as of July 4. Disease has been a factor in Angola's average life expectancy of 38.6 years, the fourth lowest in the world and less than half the average life expectancy of 79.7 years for people in France.
Traveling more than about five blocks in Luanda, which the Portuguese National Ultramarine Bank proclaimed as the ``Paris of Africa'' in 1872 for its villas and wide boulevards, is impossible without traversing dirt roads and encountering reeking garbage. Refugees from the civil war built a maze of tin-roofed and plastic-sheet-covered homes in shantytowns that now stretch for miles.
$2 Billion From China
When the war ended, Angola agreed to an International Monetary Fund reform program with the aim of obtaining IMF and World Bank funds. In 2005, it broke off negotiations for an IMF loan, which required greater accountability in how oil revenue is used to alleviate poverty. Instead, it borrowed $2 billion from China, which had no such requirements.
In March, the IMF issued a formal report describing its preliminary findings. It recommended that the Angolan government be more transparent in how it spends its $10 billion in oil revenue, which accounted for more than 90 percent of the country's export earnings last year.
Global Witness, a London-based organization that monitors corruption, especially in areas with diamonds, timber and oil, says as much as $1 billion a year of Angola's oil revenue is unaccounted for since 1996. It may have been diverted from the Angolan National Bank into Angola's national oil company and to the presidency, the group says.
Jose Eduardo Dos Santos, 64, has been Angola's president since 1979. The country held its only elections in 1992, and he won, continuing his rule.
`No Proper Debate'
``There is no proper debate on openness or transparency or reconstruction,'' says Sarah Wykes, an African specialist at Global Witness. ``How much of the oil wealth is going to the good of the country? Without good governance, you'll never know.''
Angola ranked 151st out of 158 nations in Transparency International's 2005 Corruption Perceptions Index. The agency rated Angola 2.0 out of 10 for perception of bribery and misuse of public funds. Iceland scored 9.7, making it the most transparent.
Ismael Gaspar Martins, Angola's UN ambassador, says the government has been tackling the issue of transparency.
``If conditions are so bad, or opaque, of course you would not invest,'' Martins says. Angola is spending 40 percent of its budget on social issues such as education and health, he says.
``One of the things needed is rehabilitation of the infrastructure,'' he says. ``This is a major effort that is being done.''
`Not My Job'
Total officials say they support more transparency. At the same time, they won't tell the Angolan government how to run its affairs.
``Our philosophy is, we work with the government in place,'' de Margerie says. ``How can an NGO tell me I have to change the government?'' he says, commenting on nongovernmental organizations such as Transparency International. ``That's not my job.''
France, which produces only 3 percent of the oil and gas it consumes, has always taken unconventional routes when it comes to petroleum. Industrialists set up Cie. Francaise des Petroles, which became Total, at the government's behest in 1924. That year, the government granted the new company a 23.75 percent share in Iraq Oil Co., which had been owned by Deutsche Bank and was given to France as compensation for damages in World War I. Oil was discovered in Iraq in 1927.
`Can't Find Petroleum'
After World War II, CFP had trouble discovering oil and relied on refining. It was even ridiculed as ``Can't Find Petroleum,'' a play on its initials. CFP's fortunes changed when Serge Tchuruk, a former Mobil executive, became CEO in 1990.
``A company that could not find oil and was dependent on refining was dangerous,'' Tchuruk says. ``The general opinion was that Total was a dead company.''
Tchuruk disposed of 200 subsidiaries, eliminated 6,500 jobs and rechristened the company Total in 1991 ahead of selling shares on the New York Stock Exchange. He expanded exploration, leading to major discoveries of oil in Colombia and natural gas fields in Indonesia.
Tchuruk, 68, stayed for five years before leaving to run Paris-based telecommunications equipment company Alcatel SA. He handpicked Desmarest, then 49, to replace him.
Desmarest had joined Total in 1981 after graduating from Ecole des Mines in Paris and spending more than a decade as a technical adviser in the French ministries of economics and industries.
`Cold-Blooded Guy'
``He's a cold-blooded guy,'' says Tchuruk, who remains a Total board member. ``I say that in the positive sense. You have to take risks. You have to know up to what point you can go and when you'd better back off.''
Desmarest continued Tchuruk's aggressive expansion. Desmarest flew to Tehran in 1995 to sign a $610 million contract to develop Iran's Sirri offshore oil field, stepping in after U.S. President Bill Clinton barred Conoco Inc., which had won the contract, from working in Iran.
Alfonse D'Amato, then a Republican senator from New York, pushed for sanctions on Total and sponsored the Iran and Libya Sanctions Act, which called for financial penalties on non-U.S. firms that dealt with Iran. Clinton signed the bill into law on Aug. 5, 1996. The law didn't cover Total's existing contracts.
In 1997, Total again tweaked the U.S.'s nose with a deal to run the second phase of Iran's South Pars natural gas field, the biggest in the world. As Shell and others stood on the sidelines, Total took a 40 percent stake in a $2.2 billion contract along with Gazprom and Malaysia's Petroliam Nasional Bhd., known as Petronas.
U.S. Waiver
Desmarest ignored the threat of sanctions. In May 1998, the U.S. granted Total a waiver after Secretary of State Madeleine Albright said the sanctions wouldn't prevent the project from proceeding.
While Total was exploring in Iran and Libya, a series of mergers rocked the industry. With oil prices at less than $15 a barrel, companies discovered that the best way to grow was to take over rivals and cut costs.
In August 1998, BP acquired Amoco Corp. and followed nine months later with Atlantic Richfield Co. Desmarest says he was concerned Total might end up being bought. Instead, he planned on striking first.
``We were mindful that we were becoming an attractive target,'' he says.
Desmarest says he realized Total was too small to tackle Elf and first went after Petrofina.
`First-Mover Advantage'
``The strategic conclusion was clear,'' says Albert Frere, 80, who controls Cie. Nationale a Portefeuille SA, Total's biggest shareholder, with 127 million shares valued at $7.8 billion. ``The one who linked with Petrofina had the first-mover advantage.''
On Monday, July 5, 1999, three days after the Petrofina paperwork was finished, Desmarest faxed a 42 billion-euro offer to Philippe Jaffre, his counterpart at Elf.
``We did not want to wait one extra day,'' Desmarest says. ``When you shoot first, you have the credibility of a management team which takes initiative.''
Jaffre hired Goldman Sachs Group Inc. and Morgan Stanley to make a counteroffer for Total. Shareholders preferred Desmarest.
``Total had a CEO who'd spent two decades in the oil industry,'' Institute of French Petroleum President Olivier Appert says. ``Elf's had no understanding of the business he was in.''
Jaffre had been a civil servant in France's ministry of finance and CEO of Paris-based lender Credit Agricole SA before being named to head Elf.
Sub-Saharan Africa
What Elf did have was a history of investing in sub-Saharan Africa and finding oil in Angola, Congo, Gabon and Nigeria. One of the most-promising areas was off Angola. Engineers discovered the Girassol field in 1996 after exploring along the Congo River, which flows along northern Angola and into the Atlantic.
It took five years to develop a three-dimensional seismic appraisal covering 1,100 square kilometers (425 square miles) of ocean and then narrow it to a production field of 140 square kilometers, slightly larger than the city of San Francisco.
Then Total had to install well-head and gathering systems in 1,400 meters of water and connect the pieces without the aid of divers. It added riser towers, 1,250-meter-tall structures made of four production pipelines, to bring the oil to the platform.
It also installed two pipelines to pump water or gas back into the well, feats never accomplished at such depths. In 2001, the Girassol field started production. The platform, two football fields long and weighing 343,000 tons, is painted an easily visible bright yellow. Girassol is Portuguese for sunflower.
Rivals Circle
Rivals are circling in the once-empty expanse of the Atlantic Ocean. Exxon Mobil pumps 550,000 barrels a day from its two Kizomba offshore-Angola fields, which came on line in 2004. BP is planning to spend $8 billion in Angola and expects to pump its own oil in 2007.
In June, China Petrochemical Corp., known as Sinopec, offered $2.2 billion to explore in two offshore locations even though it has little deep-water experience. Total may help operate the fields with China, which is the biggest consumer of oil after the U.S., says Andrew Hayman, a Geneva-based analyst for IHS Inc., a consulting firm in Englewood, Colorado.
``Angolans recognize that the Chinese don't have the experience and expertise to go that deep yet,'' Hayman says. ``Total certainly does.''
Oil Sands
To supplement its offshore activity, Total is exploring oil sands, a semisolid form of oil that companies first mine and then upgrade. In September 2004, Total paid $1.6 billion for Canada's Deer Creek Energy Ltd., which plans to mine oil sands north of Fort McMurray, Alberta.
To get the oil out, engineers will shoot steam jets hundreds of feet under the frozen ground to loosen the tar-like mix. Total may also bring in giant cranes with shovels to scoop oil-soaked rocks.
``Our first reaction was that this is not our business; it is mining,'' de Margerie says. ``Something I would have said was undoable in 2000 is now doable.''
In Africa, Total's offshore production requires even more extreme measures. One challenge is to keep the oil temperature at more than 40 degrees Celsius so it flows smoothly through as much as seven kilometers of flow line from the well-heads to the platform. That's not easy when the seabed water temperature is only 4 degrees.
With standard non-insulated steel tubing, the oil temperature would fall 18 degrees Celsius for every kilometer of flow line, turning the oil semisolid. Total devised synthetic foam that withstands water pressure of 140 bar, or 2,000 pounds per square inch, and offers an insulation capacity 500 times greater than steel.
`Limit of Equipment'
``At those depths, you come to the limit of equipment,'' says Olivier de Langavant, head of Total's Angolan operations. ``You don't have to reinvent the wheel, but you have to stretch the limit of material.''
By the end of the year, another massive vessel will float to the east of the Girassol field's platform. Total plans to start production from Dalia at depths of 1,500 meters to bring in about 240,000 barrels a day. The company has two more fields to bring on stream by 2013, adding another 500,000 barrels a day.
``Unconventional is now conventional,'' de Margerie says. ``Being a big company helps because we can take risks.''
As the West's grasp on the petroleum-rich Middle East and Latin America grows more tenuous, Total and its rivals are spending billions of dollars in the most-inhospitable regions of the globe.
Whether such risk-taking yields increasing profits depends on the world's continued addiction to oil and its willingness to pay stratospheric prices for it.
To contact the reporters on this story:
Kambiz Foroohar in London at kforoohar@bloomberg.net
Tom Cahill in Paris at tcahill@bloomberg.net
