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Price acts as catalyst for switch

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Price acts as catalyst for switch

By Carola Hoyos

Published: July 9 2008 03:00 | Last updated: July 9 2008 03:00

When Christophe de Margerie, Total’s chief executive, early last year floated the idea that the French oil and gas company, eventually needed to be part of the “nuclear adventure” he stressed this would only be in the very long term.

Even so, the rest of the industry scoffed at the notion that an oil and gas company would some day go nuclear.

But the very long term has become the short term and Mr de Margerie has mapped out his strategy far more quickly than even he had expected.

Through bringing nuclear energy to the Middle East, Mr de Margerie wants to win access to oil reserves, make a decent return and help the region overcome its gas shortage.

And the unusually frank and sometimes provocative Frenchman is no longer alone. Paolo Scaroni, chief executive of Italy’s Eni and a fierce competitor, wants to do the same.

The catalyst, ironically, has been the oil price. International benchmark oil prices have more than doubled in the past year, prompting oil-rich countries, such as Kazakhstan and Venezuela, to demand an ever-increasing stake in projects and to squeeze international oil companies out of fields.

This has meant big oil and gas companies, including BP, Royal Dutch Shell, Eni, Total, ExxonMobil and Chevron, have struggled to increase their production and are looking for new ways to grow.

Many are moving into liquefied natural gas, but even here there is a limit to the amount of projects available in the next decade.

That leaves the companies sitting on huge piles of cash. Even with a generous buy-back policy and consistent dividend payment plan, ExxonMobil, the biggest of the bunch, holds more than $40bn.

Exxon may not be ready to move into nuclear energy yet – an adventure the company says it tried unsuccessfully in the 1980s – but Eni and Total believe nuclear may be a better place for their money than the bank.

The move may be controversial, but it would also help the world meet the huge challenge of generating the 50 per cent increase in energy forecasters say will be needed to satisfy demand in the next 22 years.

To cut CO 2 emissions aggressively while meeting demand, the world would need to build 32 new nuclear plants each year from 2010-2050, the International Energy Agency, the developed countries’ watchdog, told the G8 last month.

That makes nuclear a more interesting industry than alternatives such as solar and wind, despite its high entry cost, some oil executives believe.

But why are Total and Eni focusing first on the Middle East?

The nuclear industry long assumed that the region would use its gas resources and therefore have no need of nuclear power.

However, the Middle East now faces an acute shortage gas and power.

In spite of billions of barrels of reserves, the region is short of gas, largely because its countries have failed to invest adequately in oil’s “poorer brother”.

Some analysts estimate the total shortfall for the six countries of the Gulf Co-operation Council – Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates – will reach at least 7,000bn cubic feet by 2015.

That is as much as 41 per cent of the UK’s entire remaining proven gas reserves. This shortage could have profound effects on the countries’ ability to meet the quickly rising power demand that comes with booming economies in need of air conditioning, or to fulfil their ambitions to grow their petrochemicals business, which needs gas as a feedstock.

Eni and Total believe they can capitalise on the region’s interest in nuclear energy – and perhaps in the process redefine themselves.

Even Saudi Arabia, in whose rich oilfields most international oil companies wish they could operate, has expressed an interest in nuclear power.

There could be other benefits from moving into the nuclear arena.

Eventually companies such as Total may well be forced by dwindling natural gas supplies to use nuclear power to extract extra heavy oil from the Alberta tar sands.

Having an understanding of the industry could give them an edge over their competitors. Even those who do not agree with Total and Eni’s nuclear vision acknowledge that their companies are having to change profoundly.

Antonio Brufau, executive chairman of Repsol YPF, said oil and gas companies would have to find new ways to grow in the future. “In 10-15 years companies like us will become energy companies, not oil companies,” he said.

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