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The French Connection (Oil giant Total trying to get back into Iraq?)
Forbes ^ | 7 July 2003 | Joshua Levine

Posted on 09/04/2003 7:29:34 PM PDT by Stultis

Oil giant Total has long played a dangerous game in Iran, Sudan and Burma. Now it's trying to get back into Iraq.

Total S.A., The French oil major that has been in Iraq since 1927, isn't saying much these days about how it's going to maneuver its way back in. But that doesn't mean it can't dream. Word is that it has already had informal discussions with ExxonMobil about forming a joint venture to exploit Iraq's Majnoon and Nahr bin Umar oilfields as soon as a new Iraqi government is formed. Together those two fields have the potential to pump out 1 million barrels a day of sweet, easily extracted and supremely profitable Iraqi crude. There might be 250 billion barrels under Iraq, good for $3 trillion of gross profit. Not something the world's pushiest oil company wants to leave on the table.

How galling for the globe's fourth-largest--and only French-speaking--petroleum outfit. Particularly since Total (nyse: TOT - news - people ) had negotiated a contract for Bin Umar with Saddam Hussein, and Elf Aquitaine, which Total acquired in 2000, had done the same with Majnoon. The Paris-based outfit regards Iraq as its historical turf.

But those contracts were never signed--a failed gambit in Total's cat-and-mouse game with Saddam. Russia's Lukoil pursued a different strategy, signing with Baghdad's butcher for the huge West Qurna field. (It is now trying to keep the deal alive.) So Total's stuck without a valid contract and little chance of getting back into those fields as sole operator. But what it's learned there would give any joint venture that includes it a year's head start in getting the oil out. Any takers?

"It would accept a smaller stake in a joint venture just to get its foot back in the door," says Valerie Marcel, senior research fellow specializing in the oil sector at London's Royal Institute of International Affairs. "We think they've spoken to ExxonMobil, but Total is being very careful--there's so much international scrutiny on Iraq right now that no one wants to take any unusual risks."

Total has good reason to walk on tiptoe these days. It's only four years since it swelled up via a merger with Belgium's Petrofina and, a year later, a bruising takeover of France's larger Elf Aquitaine. Last year it earned $6.6 billion on revenue of $108 billion. Its $116 billion market cap makes it the biggest company in France.

In acquiring Elf, Total also inherited a Pandora's box of past corruption; it has found it difficult to close the lid. Former Elf Aquitaine chairman Loik Le Floch-Prigent is on trial, charged with presiding over what the French papers called "System Elf"--a money machine that siphoned off $300 million in the 1980s and 1990s. The cash went into the pockets of executives and, allegedly, to President François Mitterrand's Socialist party and into lavish gifts for the rotten West African governments that gave Elf most of its oil.

Among the nuggets that came out at the trial: Mitterrand happened to mention to Le Floch-Prigent in 1991 that his golf buddy, Dr. Laurent Raillard, wanted to sell his country villa outside Paris. Elf bought the villa for 20 million francs, plus another 6 million under the table. Raillard ended up living there rent free. Since the merger, Total has reportedly been making good on various unpaid debts incurred by Elf, no questions asked, to make them go away. It was partly against this backdrop of horrendous publicity that Total commissioned an audit of its corporate citizenship, released in May. "Our change in size has increased the expectations of civil society," says Total Chairman Thierry Desmarest. "But if you are averse to risk, you should probably find another job."

Desmarest clearly isn't. He has plotted a course for Total that often steers it where the mix of hydrocarbons and human misery gets stickiest. He rose through the rowdy ranks of exploration and production, where he demonstrated both a sharp nose for new oil and a robust appetite for risk. He took over as chairman in 1995 at age 49. Before that, he had already done much to kill the old joke that CFP (the initials of Total's forebear, Compagnie Française des Pétroles) stood for "Can't Find Petroleum."

In West Siberia the young Desmarest negotiated a production-sharing agreement for the Kharyaga field before Russia had any legislation, leaving Total unprotected. "Desmarest sees an opportunity before anyone else--that was a very gutsy move," says Florence Fee, who once ran Mobil's exploration and production in Russia and now heads her own oil consultancy.

Desmarest has committed Total to an audacious program of oil discovery--and has so far delivered. Total increased production of oil and natural gas 10% to the equivalent of 2.4 million barrels a day in 2002 while the four larger petroleum companies were either down, flat or (in the case of BP) up 3%. Production is likely to rise 5% annually over the next six years, says Desmarest. Total channels 67% of its capital into upstream development--compared with an industry average of 60% or so--an estimated $6.8 billion this year.

To keep getting those impressive results, Total deals with many incarnations of the Devil. Its E&P people spend a lot of time in places like Iran and Burma, where oil and gas are still plentiful. As a Total executive told a consultant in one of its more troublesome spots recently, "God, in His infinite irony, took most of the world's oil and put it into the hands of criminals."

And Total has never met a hand it was unwilling to shake. In Burma it laid the pipeline that connects its Yadana gas field in the Andaman Sea to a terminus in Thailand, which buys most of the 175 billion cubic feet that flow through it yearly. The pipeline generates an estimated $400 million a year in revenue for one of the ugliest governments around; the junta's take helps keep it afloat. Total has defended itself against accusations that the pipeline was built with forced labor that included women and children since that work began in 1995. There are charges, too, of displaced villages along the pipeline route, and lawsuits against Total on behalf of Burmese complainants are pending in France.

Desmarest's rebuttal: "Every company has its hot spot: Shell has Nigeria; Exxon has Indonesia; for us, it's Burma." As far as slave labor goes, he will only say, "Just imagine women carrying huge sections of pipe that weigh in the tons." Even one of Total's own consultants finds its various defenses tough to swallow: "Time and time again, they're caught with a smoking gun, and they say, ‘Just because it's a gun and it's smoking doesn't mean we just shot it.'"

Total drew Uncle Sam's ire when it signed a deal to operate the $2.2 billion South Pars gas field in Iran. This was in September 1997, a year after the U.S. passed the Iran-Libya Sanctions Act, placing Iran off limits to American investment. Around the same time, Total began selling its network of a few hundred gas stations in the U.S., leaving it with virtually no business interests here. "Can we accept that one country tells you what is good and what is not good?" asks Christophe de Margerie, Total's president of exploration and production. Total cranked up its lobbyists at the law firm of Patton Boggs and got a waiver on the act as part of a package of trade considerations, including, importantly, bananas. Which doesn't mean the U.S. has forgiven and forgotten. "Total really blotted its copybook with the U.S. government over South Pars," says Florence Fee.

Total has been holding concessions to Block B for around 20 years in the disputed south of Sudan. The last thing it wants is to start pumping the waxy, sulfurous oil right where Sudanese are massacring Sudanese. So Total and the Khartoum government play a little game: Every year Sudan's oil ministry tries to compel Total to begin extraction under its contract; every year Total invokes force majeure, pays some $50,000 to renew the license for its concessions and does nothing. ChevronTexaco (nyse: CVX - news - people ) abandoned Sudan in 1984 without a drop of oil to show for its $1.5 billion investment. Total hangs in, hoping the winds of change will one day blow the country's unsavory image away. There's up to 5 billion barrels under the bloody Sudanese soil, including Block B. "I'm not sure we'll ever get any oil out of there," sighs Desmarest.

Total and its acquiree played a similar game of rope-a-dope with Iraq, and for much higher stakes. It's no secret why Saddam picked two French companies to get these prizes, and Russia's Lukoil for the huge West Qurna field. "[The Iraqis] tried to sign contracts with members of the U.N. Security Council that would support lifting the embargo," says Total's Christophe de Margerie. For their political support, French companies were rewarded with contracts to sell $3.5 billion worth of goods to Baghdad under the U.N.'s oil-for-food program, making it Iraq's largest Western trading partner from 1996 to 2001. Then a change in policy--"smart" sanctions keeping a tighter rein on funds to Iraq--earned France a commercial slap on the wrist from Saddam that dropped it from its high perch.

Still, while Desmarest determined never to breach the embargo, he didn't mind skating close to the line. Total was negotiating during a period when Hussein Kamel, Saddam's son-in-law, was serving as minister of oil, before he defected, was lured back to Iraq and killed. But it was always clear who really ran the negotiations. "All the main decisions were taken above the ministerial level," says Alain Lechevalier, Total's senior vice president in the Middle East. "The guys we were negotiating with had no authority."

Total's own lawyers counseled against dealing with the shadowy presence De Margerie calls "the invisible man," but Desmarest overruled them. "We did it anyway, and we are not in jail," says De Margerie. But when the Iraqis pushed for a signature, Total balked, saying it would sign only if there were a clause stipulating that work would begin when sanctions law permitted. "Iraq was trying to induce us to break the sanctions," says De Margerie. "Even our government said that if we signed, we would be on the other side of a red line."

Now Desmarest finds himself with no contract, but he's still got a few cards left to play. For one thing, Total has long relationships with Iraq's oilmen, many of whom it trained during its years there. This may not count for much under U.S. interim authority, but ultimately those same Iraqi technocrats are likely to run the country's oil industry again. Total can be patient--just look at Sudan.

Meanwhile, says Desmarest, no one is starting work on Iraq's new oilfields before there's a stable government that can sign contracts. Reason: Each field will require an investment of $3 billion to $4 billion and up to five years before any oil starts flowing. Total will be happy to take a smaller piece of these huge fields down the road, if that's the best deal it can get.

A willingness to accept half a baguette sets Total apart from its Anglo-Saxon rivals, says Desmarest. "We adapt better to these countries than perhaps an American company would. We're more flexible on contract terms, as long as there's a fair return."

As in its $2.2 billion investment, shared with two partners, for a 40% stake in Iran's massive South Pars offshore gas project, which it operates as of now. The deal transforms Total from an equity partner into a contractor, giving it 80,000 barrels a day of condensate for expenses and a return reportedly near 20%. Total relinquished control of the field to the National Iranian Oil Co. earlier this year. In the process it set up a program to train 650 students. Of the program's 420 graduates, 350 are working today in South Pars. This can't hurt Total, as it eyes Iran's vast reserves of oil and gas.

Any new deal in Iraq is likely to resemble South Pars because no future Iraqi government can afford to be seen giving up rights to anything that lies under its liberated sand. "I tell my people, ‘Stop crying about Iraq,'" says exploration chief Christophe de Margerie. "Before we couldn't sign any deal. Now we can."

Total doesn't need Iraqi production to meet its current targets. More important to Total's immediate future is the mammoth Kashagan field in Kazakhstan, with proven reserves of 13 billion barrels of oil. Total holds a 20.3% interest in Kashagan, but it wants to be operator, as do its partners ExxonMobil and Royal Dutch/Shell. The current player in that position is Italy's Eni--not nearly in the same weight class as its partners, who are all waiting for it to fail. Can Desmarest outmaneuver his partners to take over as operator? And if so, can he get the oil out through the politically embattled Caspian pipeline by the production date of 2005? "Dicey days ahead," says Florence Fee. "But if anybody can do it, Desmarest can."

TOPICS: Business/Economy; Foreign Affairs; Front Page News; News/Current Events
KEYWORDS: elf; elfaquitaine; exxonmobil; france; french; frogs; iraq; oil; petrofina; saddam; total
This seems to have been missed in July. Thought it was worth posting.
1 posted on 09/04/2003 7:29:35 PM PDT by Stultis
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To: Stultis
The cash went into the pockets of executives and, allegedly, to President François Mitterrand's (Read, Chiraq & Company as France has been under single management since de Gual of the that French General:) Socialist party and into lavish gifts for the rotten West African governments that gave Elf most of its oil.
2 posted on 09/04/2003 7:50:29 PM PDT by Jumper
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To: Stultis
My attitude is that there should be not one Frenchman in Iraq while Chirac is president. Not one Canadian company operating there while Chretien is still in office.

If that means no UN agreement, and no additional UN troops, thats just fine.
3 posted on 09/04/2003 8:39:25 PM PDT by marron
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