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Total Expands Offshore Drilling as $7.3B Campaign Finds Dry Hole

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February 11, 2014

Ocean Rig Olympia is under contract with Total until mid-2015 with options out to mid-2017. Image: Ocean Rig

Feb. 11 (Bloomberg) — Total SA began life as Cie Francaise des Petroles, or CFP, almost a century ago. Thirty years since changing its name, the French oil giant is fighting to prevent its “Can’t Find Petroleum” moniker from coming back.

Three years and $7.3 billion into an exploration drive, Chief Executive Officer Christophe de Margerie still finds large discoveries elusive. Better drilling results — at least 12 “high-impact” wells are planned this year — are critical to bolster output and profit. Total will say tomorrow adjusted net income fell 11 percent last year to 11.1 billion euros ($15.1 billion), according to the average estimate of 22 analysts surveyed by Bloomberg.

“Total has been quite disappointed with its exploration,” said Theepan Jothilingam, an oil industry analyst at Nomura Holdings Inc. “There will be a reassessment of returns on capital that has been spent on the effort. Questions will be raised in 12 to 18 months.”

While peers have struck resources off Africa, Europe and the Americas, Total has been forced to pursue acquisitions and alliances to access new reserves. With de Margerie promising to assess exploration progress in 2014, he’ll need good results from planned wells in Angola, Brazil, South Africa and Ivory Coast to prove the move into more diverse areas was worthwhile.

More Risks

“At this stage discoveries haven’t reflected the efforts,” de Margerie said Jan. 15 to lawmakers, who regularly call on the chiefs of France’s energy companies to report on performance. “We are taking more risks but so far it’s true we haven’t come up with new reserves.”

The Paris-based company declined to comment further before the earnings presentation.

Its shares rose as much as 1.4 percent to 43.55 euros in Paris trading today.

Total had a 2013 exploration budget of about $2.8 billion, up from 2012’s $2.5 billion and $2 billion the year before. De Margerie has estimated the company has so far spent an extra $1 billion during the expanded drilling campaign.

Total also has been trumped by smaller explorers such as Lundin Petroleum AB, which discovered the Johan Sverdrup field with Statoil ASA in 2010, Norway’s biggest find in decades.

“The major oil companies have increased their exploration budgets in recent years,” said Jeffrey Woodruff, senior director for natural resources and commodities at Fitch Ratings. “It’s still the smaller companies having greater exploration success.”

Old Reserves

Just under half of Total’s exploration wells in 2012 were dry, a proportion little changed since 2008, according to the company. In 2011, Total was 21st out of 28 explorers ranked by success in replacing old reserves with new discoveries, according to data compiled by Bloomberg. Larger peer BP Plc was third on the list.

Total’s travails hark back to a similar struggle in the 1970s when the company, known then as CFP, had trouble replacing reserves lost in Algeria. Ridiculed for years as the company that “Can’t Find Petroleum,” CFP’s fortunes changed when former Mobil executive Serge Tchuruk became CEO in 1990 and disposed of 200 subsidiaries and expanded exploration.

Now the company finds itself leaning on acquisitions as wells fail to throw up “elephant” finds — discoveries holding half a billion barrels of oil equivalent or more.

French Guiana

While Eni SpA and Statoil have struck resources off Africa and the Americas, respectively, Total has reported empty wells in the Gulf of Mexico and French Guiana. It has resorted to purchases and partnerships, winning an auction for Brazil’s Libra field in October and buying a stake in gas discoveries in Papua New Guinea in December.

“The exploration push has not worked so far and I think that is one of the reasons they were attracted to Libra,” said Alejandro Demichelis, an analyst at Exane BNP Paribas in London.

Total said in September it would start to lower capital expenditure in 2014 after heavy spending strained the balance sheet. The stock has gained about 12 percent in a year, outperforming BP and Royal Dutch Shell Plc.

Since unveiling its revamped exploration campaign in early 2011, Total has counted a single gas discovery off Azerbaijan as an “elephant.” Given that it announced the find in September 2011, it can’t be attributed directly to the campaign. Total has confirmed just one “big cat” — with more than 200 million barrels — in Bolivia in May 2011 that extends a 2004 discovery.

– Tara Patel, Copyright 2014 Bloomberg.

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