Total Failure

It must be “Pick on Total Week” here at Chez Jake:

Total and Zarubezhneft have agreed to adjust their participation in the Kharyaga Production Sharing Agreement whereby Total will transfer a 20% interest together with operatorship to Zarubezhneft.

This is a big development: Kharyaga was the only producing development which Total operated in Russia.  Once this deal goes through, Total will no longer operate anywhere in the country.

“Russia remains a key country for the Group. Total has ambitious plans for the future through its established partnership with Novatek and the ongoing Yamal LNG project”, commented Arnaud Breuillac, President Total Exploration & Production.

A key country for the Group, only we’ve just surrendered our one operated asset?  Hmmm.  I’m not sure that a partnership with Novatek quite compensates. Total is supposed to be a major Western oil company, and the ability to operate difficult assets such as Kharyaga ought to be what differentiates them from non-operating investors.  Regarding Novatek, as I said before, I am of the opinion that Total’s position in Russia ought to be based on something a little more solid than an 18% stake in a company owned by somebody who probably owes his position to having once been Putin’s judo buddy.  What is Total’s role in the Novatek partnership?  Securing funding and supplying cash, probably.  Perhaps some technical assistance.  But once Yamal is built the Russians will figure that on the next development it is pretty easy to hire Technip, point to Yamal LNG, and say “povtoritye”.  Total might make money, but will they add value?

“This transfer represents a new stage in the life of Kharyaga. A more substantial role for Zarubezhneft alongside our continued involvement will allow us to extract maximum value from Kharyaga for many years to come.”

Now this statement is telling, but to see why you need to look at Total’s recent history on Kharyaga, which is hinted at here:

Asked about the report at an oil and gas conference in Paris later on Wednesday, Total’s Michael Borrell, head of Europe and Central Asia said:

“We’ve had significant difficulties with one of the principal contractors [in the project],” adding that the group was working on maintaining the field’s production levels and treating the gas produced so it could be sold.

“In those circumstances it’s normal for us to be talking to our partners about how we address those issues and that together with our partners we optimize the long-term value in an asset like that,” Borrell said.

Significant difficulties?  What difficulties?  Oh, these difficulties:

In February 2011, Total said that it signed a $400 million engineering, procurement and construction contract with Russia’s Globalstroi engineering to update its central oil processing centre under the third phase of the production expansion project.

However, the contractor has failed to perform.

The project referred to is the Kharyaga Phase 3 expansion.  I understand that this is the second (or perhaps third) attempt that Total has made at getting this project completed, and each time they have met with failure.  For a company that managed to get the initial Kharyaga development done in Yeltsin’s Russia, this is some drop-off in competency.  In other words, the reason for the sale is that Total has fucked up the expansion project so many times they have been forced to hand it over to their local partner to get the damned thing done.  It was all a bit too difficult for the French, it seems.

Following the tragic death of Total’s CEO Christophe de Margerie in a plane crash  in October 2014, I said:

[T]he Big Moustache’s enormous character made him genuinely popular among the Russian leadership and it is no certainty that his successor will make the same impact in a country where personal relations count for so much.  It could well turn out that much of Total’s commitment to Russia was down to de Margerie personally.  Having not been involved in E&P in Russia, the new CEO might find it a cold and difficult place to do business.

It seems that prediction has now come to pass.

I cannot see how this can be spun as anything other than a major setback for Total who, with Kharyaga and their involvement with Shtokhman, had such high hopes for Russia only a few years ago.  But it’s not just Russia.  Allow me to present a list of countries in which Total is not operating:

Kazakhstan
USA
Canada
Australia
Brazil
Russia

For an international oil company, these are pretty serious omissions from a global portfolio for two reasons.  Firstly, the USA, Canada, and Australia represent political stability, the producing nations which other majors use to offset their risky operations in places like Africa and South America.  Secondly, Kazakhstan, Brazil, and Russia represent three of the main regions for potential future development, the “new” areas into which the supermajors were hoping to go to boost their flagging reserve replacement rates.  I’m not convinced getting into stalemates in Uganda and doubling down in Nigeria and Angola is a strategy that will pay off in the long run.  Time will tell.

“That went well.”

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