FRANCE: TOUR D'HORIZON WITH TOTAL CEO

UNCLAS SECTION 01 OF 04 PARIS 000328

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STATE ALSO FOR EB/ESC, EUR/ERA, AND EUR/WE
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TAGS: EPET ETTC ENRG EINV PINR FR
SUBJECT: FRANCE: TOUR D'HORIZON WITH TOTAL CEO

Ref: 03 Paris 8019


1. (SBU) SUMMARY. Over lunch with the Ambassador January
13, Total CEO Thierry Desmarest provided a wide-ranging
overview of developments in the world oil and gas sectors.
Among the highlights were his description of Total's
activities in Iran and Libya, and his view of China's
aggressiveness in securing worldwide energy supplies. END
SUMMARY.

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BACKGROUND
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2. (U) The Ambassador hosted Total CEO Thierry Desmarest
January 13 for a wide-ranging discussion of global energy
developments. Desmarest was joined by his Executive VP for
Exploration and Development Christophe de Margerie. DCM,
EconCouns and PolCouns accompanied the Ambassador.


3. (U) Total is France's largest company, and the result of
the amalgamation of the historic French Total, Belgian
Petrofina and French state oil company Elf-Aquitaine.
Having consolidated its name and logo in 2003, the Total
Group claims to be the fourth largest international oil and
gas company in the world (after ExxonMobil, BP Amoco, and
Royal Dutch Shell, and just ahead of ChevronTexaco),
operating in more than 130 countries with over 110,000
employees. Total's worldwide operations are conducted
through three business segments: upstream, downstream, and
chemicals. Now completely privatized, 60 percent of Total's
shareholders come from the euro zone, 20 percent from North
America and 20 percent from the UK. Total is the
predominant oil and gas company in Africa and is the number
two international company in the Middle East.


4. (SBU) Asked by the Ambassador about reports that Total
may be looking to sell its chemicals business, Desmarest
said that the company is satisfied with its petrochemical
and specialty chemical operations, but would likely spin off
its intermediate (industrial) chemicals business. Liability
issues are clearly a factor, as Desmarest noted that legal
suits in this sector are a danger for "a deep-pocketed
company." (For example, Desmarest claimed that a September
2001 explosion at their chemical fertilizer plant in
Toulouse cost the company $1.5 billion after insurance
compensation.)

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U.S. OPERATIONS
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5. (U) Although Total sold its 55% stake in its North
American arm, Total Petroleum, to Ultramar Diamond Shamrock
in 1996, the company still has a number of activities in the
U.S. dating from its absorption of Petrofina and Elf. These
include a Petrofina refinery, some of Elf's chemical
business and some deepwater Gulf of Mexico operations. U.S.
investors own some 20 percent of Total's equity.

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WORLD OIL PRICE OUTLOOK AND CHINA
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6. (SBU) Desmarest believes that we should see oil prices of
US$30-35 per barrel (Brent) later this year, noting that
prices have dropped considerably already from their peak of
$52 in November. He expects this level to be acceptable to
OPEC and especially the Saudis, who balance their accounts
at a price level of $25-27 per barrel. Mild winters in
Europe and North America should help.


7. (SBU) Desmarest described the Chinese as extremely
aggressive in securing access to global energy supplies.
China alone accounts for 40 percent of new demand, he
claimed, and gaining access to oil and gas is clearly a
major priority for Beijing. Asked where the Chinese have
been active, Desmarest said it's sufficient to follow the
travel itineraries of top Chinese leadership, especially in
Africa, the Middle East and Central Asia. (See also related
comments in reftel para 8.) This Chinese assertiveness in
the sector is relatively new, and in sharp contrast to
China's previous lackadaisical activity on energy issues.

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IRAN AND ILSA SANCTIONS
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8. (SBU) We have followed closely Total's pursuit of energy
interests in Iran. In 1995, the year Thierry Desmarest
became CEO, Total contracted to develop two large oil and
gas fields in Iran, despite USG pressure not to do business
there. The next year, Total led a consortium, including
Russia's Gazprom and Malaysia's Petronas, in a $2 billion
investment in Iran's gas sector, just days after selling its
55% stake in its North American arm, Total Petroleum, to
Ultramar Diamond Shamrock. December 2004 press reports said
that Total (with partner Petronas) had signed a "framework"
agreement with Iran for the Pars LNG project and the related
development of Phase 11 of the South Pars gas project.


9. (SBU) Asked about the December press reports, Desmarest
confirmed that Total has signed a contract to undertake one
year of engineering design and cost evaluation studies for
the LNG project. He noted that the South Pars field is
divided between Qatar and Iran, and the Iranian government
is concerned it may lose out as development and exploitation
of the field on the Qatari side far outpaces Iranian
efforts. (Total is number two in the energy sector in
Qatar.) Should the South Pars engineering and cost studies
prove positive, investments on the order of $4-5 billion
could begin as early as 2006. (Comment. Desmarest has
commented frequently that Total consults with its U.S.
shareholders and U.S. legal counsel with an eye to ILSA
sanctions implications of its actions. End Comment.)


10. (SBU) Overall, Desmarest described Iran as a difficult
partner with which to negotiate contracts, particularly due
to serious internal divisions, but a good partner in the
implementation of signed contracts. Iran is too important
an energy provider to ignore, in his view -- world number
two in natural gas (15-20 percent of world reserves) and
number three in oil (10 percent of reserves). If Western
firms do not take on the business, Desmarest argued that
China and India would step in to do so.


11. (SBU) The Ambassador reminded Desmarest of U.S. law
regarding investment in Iran. There are important global
and regional issues at stake in Iran, and the West needs to
gauge closely how Iran performs on issues such as Iraq
stabilization, nuclear non-proliferation, and support for
terrorism. Desmarest commented that the Pakistan/India
example made it much more difficult to convince Iran to give
up its nuclear aspirations.

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IRAQ
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12. (SBU) Desmarest noted Total's historical ties to Iraq
and its efforts even under Saddam Hussein to maintain a
foothold in the country. The company "was born in Iraq"
after World War I to develop Iraqi oil supplies. Total
tried in the 1990s to preserve a presence in the country,
but the Saddam regime refused to sign any contracts that
recognized UN sanctions then in effect. Desmarest says
Total will be interested in international contracts expected
to be opened in the Iraqi energy sector in 2005 or 2006.
Desmarest had attended meetings earlier in the day with
visiting Iraqi President Yawar. The company maintains good
contacts in the sector and Desmarest expressed admiration
for how much of the energy infrastructure Iraq's engineers
were able to maintain during the sanctions period.

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RUSSIA, LIBYA AND OTHER SUPPLIERS
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13. (SBU) RUSSIA: Desmarest said the past six months have
been bad for the Russian energy sector. The Yukos affair
has raised serious questions about the climate for doing
business and has called into question at times who is
actually making decisions at the helm of the Russian
economy. Desmarest said that while Putin and the Russian
leadership may have had valid political reasons for going
after Khodorkovsky, they have done so in the most
destabilizing manner possible from a business investment
perspective. With obvious frustration, Desmarest related
that Total has had to go before a state monopoly commission
in an attempt to purchase a 25 percent stake in a Russian
gas company that holds only a five percent market share,
despite Gazprom's 85 percent stranglehold on the sector.


14. (SBU) LIBYA: Desmarest described doing business with
Libya as "surrealistic". The long-term potential is huge,
but the process is "crazy". He noted that, for the moment,
the Libyan government is overreaching in trying to profit
from its newfound international acceptability. Recent
energy sector tenders, for example, have featured secondary
concession areas of marginal interest on very bad terms.
One set of tenders for exploration/development attracted 130
bids from 68 companies -- when there do not exist 68
qualified companies worldwide to do such work, implying that
some well-connected Libyans may be attempting to cash in on
the current environment. Desmarest did note that the
Libyans have been quite sage in one area, "cleverly" holding
aside historic U.S. concession areas during the long dark
days of U.S.-Libyan tensions.


15. (SBU) SUDAN: With its partner Marathon Oil, Total has
recently signed a contract with the Government of Sudan for
southern Sudan energy concessions. The agreement was
completed before the recent peace treaty signing in order to
ensure its validity post-treaty, as the treaty prescribes.
Desmarest noted that Sudanese authorities tried to use the
interest of an Indian competitor (ONGC Ltd. India) to wrest
better terms from Marathon/Total. Such competition from
both India and China is increasingly evident in
international negotiations.


16. (SBU) AZERBAIJAN AND KAZAKHSTAN: Desmarest noted that
Total is active in both countries. With the exception of
British Petroleum, most recent exploration efforts in
Azerbaijan have been disappointing. Kazakhstan shows more
promising potential, but Desmarest described the Kazakhs as
much more difficult to work with.


17. (SBU) VENEZUELA: Desmarest describes Total as the
largest investor in Venezuelan energy (several billion
dollars),along with Chevron Texaco. While President Chavez
is viewed as erratic, Desmarest says he has told Total
executives "don't listen to my words", and the GOV has
generally been a good investment partner, despite a recent
unilateral change in previously-agreed energy sector
royalties.

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LEARNING FROM THE SHELL DEBACLE
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18. (SBU) Desmarest ascribed Shell's recent problems over
energy reserve estimates to its historical bipolar
British/Dutch structure and the existence of too many
"separate baronies" in its organization. Not surprising for
a Frenchman, Desmarest prefers central management and
believes that Shell's regional managers often have too much
autonomy. While expressing admiration for the company's
overall record, he noted that Shell is "an 80-year-old
marriage that has yet to be consummated."

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BIOGRAPHIC NOTE
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19. (SBU) Desmarest has been CEO of Total in its various
forms since 1995. He is a serious, personable businessman,
and has been a straight talker with Embassy contacts. Age
59, he is a graduate of the Ecole Polytechnique and of the
Ecole des Mines, and has been employed with Total since 1981
after a decade as a mining and energy industry technical
expert in the French government. He speaks excellent
English.
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