OGFJ: How is business for Total?
PATRICK DE LA CHEVARDIÈRE: The financial crisis in 2008 was a shock to everyone, including us. The precipitous drop in oil prices from $114 a barrel in June to $35 in December was stunning. Such volatility is nearly impossible to comprehend. However, we are now in a kind of recovery and are entering a more stable environment with oil prices remaining fairly steady in the $70s and $80s. As a result of this stability, the access to financing is much better.
I'll give you an example. In January 2009, a 5–year bond issue — just to give you a benchmark — cost us 140 basis points over LIBOR after our swap. Today it costs 20 basis points. So we see a great improvement during the year in our access to financing. This is why we didn't shorten the maturity at the beginning of the year, but we gradually raised our maturity quarter after quarter. So, it seems to me that the financing market is recovering. I'm not talking about trading; I'm just talking about funding the company.
To answer your question, I think that business is coming back. Basically, my feeling is that we are now in much better shape than we were a year ago. Not only because the market is more stable, but also that we have taken several steps to reduce risk in different areas of the company. For example, in our [joint venture] deal with Chesapeake Energy in the Barnett Shale, we feel this adds to our long–term stability. In our downstream chemicals division, we have started restructuring. In our specialty chemicals, we enjoyed a 10% average return on capital employed. Who would have expected that?
OGFJ: From what I hear, you are saying that Total has become even more diversified in an effort to spread around financial risk. Is that a fair characterization?
CHEVARDIÈRE: Not exactly. We have been able to resist some of the difficulties other companies experienced in 2009 by continuing our strategy, which is basically to increase our exposure to upstream. As I said, we have been able to go forward with restructuring our downstream chemicals division. We are facing a difficult situation with those markets and are waiting for the economic recovery to improve our returns there.
OGFJ: When I mentioned diversification, I was referring in part to your JV agreement with Chesapeake in the Barnett. This is a dramatically different move for Total, is it not? What was the company's rationale for partnering with an American company in a shale play in the United States?
CHEVARDIÈRE: You are right. This is a kind of diversification for us within E&P. This is a particular regime that we didn't have. Our objective with this venture is not only to be a producer in the US and to enjoy a good return on our capital employed, but also to acquire greater knowledge as to the nature of the Barnett Shale, where the technology is a proven technology. And, parallel to that, we are looking to acquire new acreage, maybe in continental Europe, possibly to utilize this knowledge elsewhere.
OGFJ: An American independent company, Toreador Resources, has recently begun acquiring shale oil assets in the Paris basin in France. Is this an area that Total is looking at for possible petroleum development?
CHEVARDIÈRE: At this time, we are looking for opportunities in Europe, but not in the Paris basin.
OGFJ: Let me ask you to speculate. In your view, is the global economic recovery sustainable? Whether or not it is obviously will impact demand for energy products.
CHEVARDIÈRE: Well, first we need to separate the North American economy from that of Europe and also Asia. Asia is back on track for sure with 8% to 10% growth. We are seeing a booming business there for lubricants, polymers, and specialty chemicals in addition to energy. So we are seeing a significant recovery in Asia, including the Middle East. I'm not as familiar with what is happening in the US because our exposure there has been minimal to date. However, on the other side of the Atlantic in continental Europe the recovery has been slow. Consumption of gasoline and diesel was down 3% in January 2010 in comparison with the very low level in January 2009. This does not take into account the bad weather conditions we had this past January, so that could be a factor in fuel usage. Nevertheless, it is not a good sign. However, there are some positive indicators that a recovery is in progress. For example, more diesel was sold to trucks in January 2010 compared to January 2009, but that was already a very low level. It seems to me that the recovery is slow — and maybe very slow in continental Europe.
OGFJ: As the fourth largest oil company in the world, Total doesn't have the same concerns with the credit crisis as smaller independents. How does Total finance new projects — from cash flow?
CHEVARDIÈRE: In an area like Nigeria, for instance, where we are producing and having cash flow, oil and gas activity is first financed through the cash flow of the company. And then, if needed, by additional funding through the mother company. Any exploration is made through what I call "euro–denominated financing," which is from the equity. But all in all, this year, in aggregate for the group, we financed our capex and our dividend from cash flow from operations for about US$17 billion. Beyond this, we increased our debt within a modest range.
OGFJ: What differentiates Total from some of the other supermajors?
CHEVARDIÈRE: First, we have the lowest technical costs in the industry. We are also one of the best operators in the world, and this gives us access to new resources because of our reputation. For instance, when a Japanese company makes a discovery in North Australia, they call Total because of our expertise. When the Russians have a project in the Shtokman field in the Barents Sea, which is extremely challenging technically, they call Total. This reputation of being a very good operator, which we share with Exxon by the way, gives us access to new resources, and this is key to us. So where there is some competition, our technical expertise gives us an advantage because people trust us.
OGFJ: What is your strongest business segment today — upstream, downstream, chemicals?
CHEVARDIÈRE: Our strategy is to increase our exposure in the upstream sector, which we feel has the greatest upside potential. We believe that world demand will be constrained by supply by the end of this decade, and we want to be in a position to take maximum advantage of this situation. Our goal is to devote about 75% to 80% of our capex to the upstream sector, which will mean some integration, some restructuring.
OGFJ: What are Total's core producing areas globally?
CHEVARDIÈRE: The Gulf of Guinea, especially Nigeria and the Congo, and also Angola. Another core area is the North Sea, which is declining but cannot be neglected. It remains very important.
OGFJ: Do you have any plans that include offshore Brazil?
CHEVARDIÈRE: Not yet. Unfortunately I cannot elaborate too much on that. For now I'll just say that Total's expertise is in the ultradeep offshore, and Brazil is ultradeep and offshore. So there may be some transactions to do in that respect using our reputation as an outstanding operator in this province.
OGFJ: What about Asia?
CHEVARDIÈRE: In China Total has a production sharing contract in the planning stages with PetroChina in the highly challenging South Sulige tight gas field in the Ordos Basin, northeast of Beijing. A wholly–owned subsidiary, Total E&P Chine (TEPC) was established in 2006 for implementation of the project. Total is also exploring cooperation both domestically and internationally with Chinese NOCs. In addition, we are producing in Thailand, Indonesia, and Burma (Myanmar).
OGFJ: What are Total's plans in the Gulf of Mexico? Aren't you partnering with Cobalt there?
CHEVARDIÈRE: We signed an agreement with Cobalt International Energy to jointly explore the deepwater Gulf of Mexico. The alliance brings together Cobalt's proven expertise in the region, along with Total's worldwide experience in deep offshore exploration and development. The leases will generally be shared on the basis of 60% for Cobalt and 40% for Total. This will provide both companies with access to large areas of contiguous acreage, mainly sub–salt, similar to major discoveries in this area (Miocene, Paleogene). Total will not be the operator. Cobalt, which has been very successful in the Gulf of Mexico, has the expertise to do this.
OGFJ: Can you elaborate a little on your decision to partner with Chesapeake Energy in the Barnett Shale?
CHEVARDIÈRE: Our rationale is that we wanted to be a producer in the US, be a non–operator, and to acquire a knowledge that we don't already have. Chesapeake has significant expertise in shale formations, and the timing was good for us because the cost of participating was less than it was two years ago. So, in December, we entered into a joint venture agreement with Chesapeake whereby Total acquired a 25% stake in Chesapeake's Barnett Shale portfolio in Texas. We will also have the right to acquire a 25% interest in any new acreage they acquire in the Barnett, and we will study certain other North American shale gas opportunities together as well.
OGFJ: Total is partnering with PetroChina and Petronas to develop the Halfaya oil field in southwestern Iraq. Considering the recent strife and violence, isn't this a risky investment?
CHEVARDIÈRE : Yes. We are not the operator, and our exposure will be limited. We have invested about US$600 million because we feel it is important to maintain a footprint in Iraq despite the fact that the return on capital in this project is not very good. Total is well known in Iraq, and we want to keep a presence there.
OGFJ: What makes Total an attractive company for investors?
CHEVARDIÈRE: I like to keep it simple. Having Total in your portfolio means that you receive good dividends on your investment. We are able to do this because we have the lowest technical costs in the industry. As I said previously, we are among the best in class among the majors. Wherever we are in the world, we go in with a commitment to do the best job, and we have the resources to do so.
OGFJ: Thank you for your time and the best of luck to you.
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