Total's Future Lies in Africa's Deep Offshore

PARIS, May 22, 2007 (Dow Jones Newswires)

Oil major Total SA (TOT) is betting Africa's reserves will save it from decline and help it top rivals' production growth. But the French company will have to rely on longtime relationships with the region's major players to overcome political risks in a continent torn by internal conflicts.

Total's push in Africa, which represents about a third of its output and upstream investments, is yet another sign of how oil companies have to explore new frontiers, technologically and geographically to secure key reserves and renew depleting fields.

After recording a 5.3% drop in oil-and-gas output last year, Total expects to post the fastest increase among its largest competitors in 2007 and beyond, mostly thanks to African startups.

The company is targeting 5% annual growth between 2006 and 2010 on average, a trend that should propel total production to three million barrels of oil equivalent a day. Africa is expected to generate about two-thirds of this growth and will soon replace a declining Europe as Total's top production zone, said Jean Privey, president of Total's exploration and production in Africa.

Still, Total isn't immune from political risks, surging costs and increased competition from the U.S. and China, which could curb its ambitions in Africa and erode profits, analysts warned. The company is Africa's second-largest foreign oil producer-after Exxon Mobil Corp. (XOM)-pumping 719,000 barrels of oil equivalent a day.

But the black gold doesn't come easily. Violence and other problems plague oil production in Africa, particularly Nigeria, where persistent militant attacks on foreign oil companies' facilities have led to disruptions and reduced onshore production. In Sudan, civil war has prevented the company from exploring the ground for two decades. Total also has grappled with a dark history of corruption in some of France's former African colonies, where its Elf Aquitaine unit had privileged access to oil resources. Following a probe, some executives, who are no longer at the company, were convicted.

Total's strengths in the continent are mainly its geographically diversified assets, analysts said, and its relatively large exposure to Africa, as production-sharing agreements prove efficient buffers to current industry-wide cost overruns.

"Total has been a forerunner in Africa, pioneering deep-offshore and securing large reserves a long time ago. The company's early positioning remains a competitive advantage, as terms negotiated have proved, and will continue to prove very attractive," Kepler Equities analyst Bertrand Hodee said.

The key to the continent's massive reserves is drilling ever deeper in the oceans, Privey said. "Africa has always been a series of technical challenges," he noted.

Total bolstered its presence in Africa with the acquisition in 2000 of Elf Aquitaine, which started searching for oil in the 1930s in France's former colonies with Gabon used as a hub.

Angola and Nigeria, Total's main growth contributors and two countries where the company took bold risks earlier than rivals, have turned into oil El Dorados thanks to deep-offshore prospects.

Onshore drilling was disappointing at first, as seismic technologies wouldn't enable the company to detect oil fields beneath large salt layers spreading through the West African ground, recalled Privey, a former Elf employee. This "pushed us to the sea," he said.

A few fields 50 meters deep off the Gabon coast kick started the group's African offshore operations in the 1960s. But the real boost came with the company's decision two decades later to step into Angola's offshore concessions, in the midst of civil war.

Elf acquired Angola's Block 3 and discovered reserves totaling one billion barrels of oil equivalent. A decade later, the country, in need of money as war continued to rage, awarded deep-offshore concessions.

"We tested 17 positive wells in a row. But we didn't even know how to develop those fields beneath 1,500 meters of water," Privey recalled.

The EUR2.8 billion development of the giant Girassol field in the block marked a major technological success for the company.

"With Girassol, Total pioneered deep-offshore production in Africa. This early win has secured solid positions in the minds of African governments," Natexis analyst Eric Meniger said.

This year, Total is heading for growth thanks to Girassol's sister field in Block 17: Dalia, which came on stream in December and is already pumping 240,000 barrels of oil a day.

The same block is home to the Pazflor field - an expected 200,000 barrels a day - and the "CLOV" fields - an additional 850,000 barrels a day - which should be developed after 2010.

Nigeria, too, where Total is the third-largest foreign oil producer, will massively fuel growth, said Privey, thanks to the Apko field, which is expected to pump about 225,000 barrels a day by 2008.

Total recently made discoveries in Congo-Brazzaville, where the company has operated since 1928. It ranks as the top foreign oil producer in Gabon, second in Cameroon and holds concessions in Northern African countries such as Libya and Algeria.

Surging services costs also could be a threat. "A drilling rig used to cost $150,000 per day to rent a few years back. It costs $450,000 per day currently," Privey noted.

But African countries' typical oil and gas concessions have allowed Total to limit profit erosion, Kepler's Hodee notes. "PSAs mean the oil company gets its investment totally reimbursed with oil barrels. This covers cost rises, and that's largely why Total is our best pick," Hodee said.

A slowdown in oil developments could also be an issue. Given high oil prices, local governments could decide they have enough oil money to finance their economies and slowdown the pace of projects, Hodee said.

Such a scenario could hit the development of Block 32, hinted as Total's next Angolan blockbuster.

Copyright (c) 2007 Dow Jones & Company, Inc.

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