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Financial Times: ‘Acceptability’ is Total’s growth model

By Ed Crooks
7 September 2007

Christophe de Margerie, the chief executive of Total, remembers forecasting a troubled future for his industry when he heard a few years ago that oil had reached $33 a barrel.

“I said, you know what’s the worst of news of the day? We are at $33 a barrel.”

He warned back then that the industry faced an inflationary spiral in the price of oil and gas, problems negotiating contracts and a dilemma over how to split the cake between the different stakeholders.

This was more than just a hard-luck story. A high oil price is a mixed blessing for the big oil companies. It means they generate enormous amounts of cash but at the cost of undermining their longer-term prospects.

Over the past couple of years, as oil has gone from $50 a barrel towards $80, the shares of the European oil majors have significantly underperformed the market.

The flare-up on Thursday of the government of Kazakhstan’s unhappiness over the Kashagan field, in which Total has a more than 18 per cent stake, is a vivid example of the friction created by expensive oil.

Speaking to the Financial Times on Thursday, Mr de Margerie set out his vision of the right response to what he described as “a revolution” in the industry.

“The world has changed,” he said. “It is not any more a concern about ‘can you build more capacity and will you be faced with a problem of overcapacity?’, as it happened in the ’70s and ’80s. It is much more a question ‘can you [meet] the demand?’ Because the demand is there and the capacity we have is not enough.”

The reason is that the countries that control most of the world’s oil and gas are granting access to the international oil companies only on their own terms.

“There is a wish of certain countries to keep their reserves for the long term. They are making sufficient money with what they produce, they have the feeling that it’s good for their own citizens to keep it for the future . . . and they don’t want to develop those reserves too fast,” Mr de Margerie said. “And can you blame them? I am not sure.”

For Total, that means the byword for its operations is “acceptability”.

The company needs to be able to persuade resource-rich countries to give it access. “There is what we call the Total model for growth, which is how to make you accepted,” Mr de Margerie said.

“The old sustainable development was to say ‘we are nice, we talk to the communities, we give books to the schools,’ which was good, but is not enough any more. Now you have to prove that what you bring to the local economy is needed and can be used for development.”

That means stressing Total’s contribution in bringing technology and skills such as project management, and maximising local involvement.

The most conspicuous success for this approach has been the deal to give Total a 25 per cent stake in Gazprom’s vast Shtokman gas project.

Sometimes, it is less successful. The $15bn plan for a liquefied natural gas project in Iran, Pars LNG, remains deadlocked.

“Today, we have a problem. The contract we had negotiated in the past does not make the project viable with the new estimated of cost. The estimated cost has doubled between the time we were negotiating the contract and now . . . So if we cannot solve this issue, we will be stuck,” Mr de Margerie said.

But overall, even after Total’s announcement on Wednesday that its production is set to grow by an average of 4 per cent during 2006-10, not 5 per cent as previously predicted, Total is still comfortably outpacing Royal Dutch Shell and BP.

The importance of acceptability looks like something that Eni of Italy, the operator of Kashagan, should be studying very closely.

Copyright 2007 Financial Times

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