International Oil Company Report: Total S.A.

International Oil Company Report: Total S.A.
Introduction to the International Oil Company
Total S.A. is a French multinational oil company that is one of the top six producers and distributors of oil in the world today. Although the firm started out as a nationalist, state-owned effort in France in 1924, under the name as the Compagnie française des pétroles (CFP), in 1929 it became a private firm and was launched on the stock exchange at the time (Total, 2014). Since then, the company has grown in both size and scope due to the fact that it is responsible not only for oil sales and distribution, but also for the search for and collection of crude oil all over the world as well as the development and sales of petrochemical and related products. The company owns stakes in oil reserves in places such as Russia and Saudi Arabia, and have recently entered the nuclear power sector as well (Total, 2014).
The reasons that this particular international oil company has been chosen are linked to both its relative size and its power in the industry as a whole. With most recent figures stating that the firm brings in over US$155B each year in revenues, Total S.A. wields a significant amount of sway in the development and marketing of shared resources and the movement of oil around the world. There is low supplier risk in the industry since these are natural resources and therefore at the bottom of the production chain. Despite the fact that oil products are commodities, they are also commodities which require deep pockets for production as a whole. As the companies face more difficult locations in which to extract resources, under new regulatory frameworks, their strategic need is to forge alliances in order to share risks. Profitability is therefore high because consumers of oil are subject to the industry’s control. Understanding Total S.A., therefore, can help to shed light on how the industry develops and also how the risks of oil exploration and distribution can be mitigated.
SWOT Analysis
Strengths. Demand for oil will likely be on the rise for a significant period of time, with need required in both the transportation industry and for production capacity, specifically in China, India and the Middle East. Over the last twenty years alone, crude oil consumption in China has been increasing at over seven per cent year over year, while consumption in the United States, Europe and Japan was already falling well before the economic crisis began, and has continued to fall in recent years (Hamilton, 2009). This shift towards China has allowed for equilibrium between supply and demand in a stagnant period of production (Hamilton, 2009). This means that a company such as Total S.A. can use its deep pockets to reach the right markets at the right time. For example, the firm has recently invested in the growing market of Thailand where they are expected to increase production by 50 per cent by 2015 (Total, 2014). In addition, distribution pathways for the firm are entrenched and have been over decades which means that there are sunk costs in these pathways, and no additional resources are likely needed to develop the supply chain. As a whole, therefore, the financial, human, and property resources that are available through this firm are significant and will serve the company well over a long period of time.
Weaknesses. The findings from the research literature in oil and gas exploration demonstrate that there is a decreasing value equation when it comes to locating viable sites, at least in terms of the amount of risk accumulated by geological exploration teams and their firms. Many oil and gas producing countries suffer from social and economic volatility which make them particularly prone to conflict and political instability. As noted above, as environmental sustainability becomes an ever-increasing consideration as well, existing methods of exploration and extraction within the oil and gas industry will no longer be a valid framework in which to facilitate trade, and solutions must be developed in order to prevent a global industry collapse over both the short and the long term (Aguilera & Ripple, 2012). Economic weaknesses within Total S.A. have escalated since the onset of the global financial crisis, as noted by Kaplan (2009). This is because of the fact that the oil and gas producing countries in which Total S.A. works have suffered from social and economic volatility which make them particularly prone to conflict and political instability. Rapid population growth, unemployment in the youth demographic, and, in addition, democracy deficit and failure of regimes to diversify their economies have created severe strain in important oil producing countries have created severe in important oil producing countries like Saudi Arabia and Nigeria. These strains are likely to deepen over time, creating an inhospitable investment climate for Total S.A., who has recently pulled out of Nigeria as a result (Total, 2014).
Opportunities. Experimental protocols can be used in order to seek out and locate oil reserves, and this is how new sources of revenue can be developed over time in certain areas of the world, as noted by Khattak, Khan, Ali, and Abbas (2011). As the research plan suggested by Kontorovich, Epov, Burshtein et al. (2010) in Russia demonstrates, key tools will likely need to include wide-scale environmental and seismic mapping in order to narrow down the possibilities for new exploration before the testing and gaining access phases take place, which is relevant for Total S.A. work in this region of the world. And, as Teichmuller and Wolf (2011) demonstrate, additional correlations using research models from other fields such as biology in combination with geological modeling may prove successful in locating new areas for oil and gas reserves. While in an environment where resources have become more scarce, it is important to take note of all innovations, the integrated exploration model offered by the Garland et al. (2012) research team is likely to be the most viable over the long term. There is a need to develop tools that take advantage of computer modeling techniques that integrate multiple factors as well as scenario predictions in order to determine whether or not to proceed to gaining access and drilling. The integration of models from different locations, but with similar geological features, will help geologists to be able to mitigate potential challenges over the long run, and demonstrate value to both governments and to oil and gas companies. To this end, even though switching at the consumer level is frequent, this may be changing with the increase in new alternative or substitute entrants and more options available to consumer energy buyers. Nonetheless, what is evident is that Total S.A. has been moving into alternative energy sources, which means that they will have the opportunity to develop new markets more easily than some of their competitors.
Threats. It is evident that the context of oil and gas exploration is changing in a significant way. One of the challenges that is faced in exploration at the present day, which will need to be addressed by geologists in the near future, is the fact that research has shown that most estimates of oil and gas potential are likely to be overstated (Jakobsson et al., 2011). What this means is that it is important to understand that as oil and gas reserves become more scarce, positive exploration opportunities have tended to become overestimated in a general sense. In other words, while the technologies for finding and gaining access to oil and gas reserves have become more sensitive and usable, the means by which to extract and refine the oil has become more difficult over the long term. Not only are there more barriers in place at the regulatory level, but the viability of reserves has become more tentative no matter where and how the exploration takes place. Due to social awareness of the impact of oil on the environment as well as social changes in oil-producing countries, oil companies face growing security risks as well as they move into more unstable parts of the world in search new oil reserves (Luft, 2006) In many of these regions of the world, as well, oil companies also come into contact with the threat of terrorism, even in the context of significant support from local government agencies (Al-Thani, 2009). This means that there are increased risks that may continue to become issues as increased strain is caused by social and political change in these regions. In addition, pipelines have been shown to be able to be sabotage, which can result in a cessation of the flow of oil. For example, “the sabotage campaign against the world’s vulnerable pipelines has already brought to a cumulative loss of over one million barrels per day and is likely to continue to spread to new territories” (Luft, 2006, p. 10) To this end, pipeline sabotage has, over time, been used as a means of controlling supply more frequently, resulting in an increase in the premium on gasoline by approximately $10-$15 per barrel of oil (OPEC, 2012).
Rankings. In order of importance, the threats to Total S.A. rank number 1. This is aligned with the fact that the production side of the industry is characterised as high risk due to the sizeable investment level on the part of investors, as well as the range of geological, fiscal and political uncertainties these investors need to bear both in their own locations as well as those associated with host producing countries (Al-Thani, 2008). There is also risk associated with the sale of oil and gas products, related to uncertainty of the crude (supply) and the product market (off-take) (Al-Thani, 2008). The scope of the risk management framework for the oil and gas industry is illustrated in the following Figures.
Figure 1: Typical Risks in the Oil and Gas Industry

(Source: Al-Thani, 2008, p. 3).
Figure 5: Risk Factors Influencing the Price of Oil

(Source: Luft, 2006, p. 13)
Given these factors, it is important to note that a risk management approach needs to be applied to marginal oil and gas fields projects, as well as to the management of production and sales of these resources in order to improve them and make them commercially viable. This means that order of importance, the strengths of Total S.A. rank number 2. The company will need its financial and human resource strengths to manage these risks. Opportunities will rank number 3 because of the relative importance of changing the status quo due to the uncertainty of oil production, and number 4 will be weaknesses as, while these will need to be mitigated, it will be more important to focus on managing threats and opportunities.
Three Key Recommendations
Three key recommendations in terms of the strategic direction of Total S.A. are as follows. First and foremost, the company will need to look at the threat it poses in terms of environmental damage, and the possible culling of its activities in future decades due to regulation. This is because environmental issues can affect all businesses, but have a very specific effect on the oil and gas industry. The frequency and intensity of natural disasters have a direct correlation with the changes in the global temperature (Church, 2010), which many world leaders and consumers are blaming on oil and gas companies and their explorations, and Total S.A is coming under more and more scrutiny. Firms within this industry must be able to deal with “an eventual slowing down or reversal of some of the factors that have been favorable for so long, including global peace and Indo-Chinese growth” (Rogoff, 2006, p. 298). As environmental sustainability becomes an ever-increasing consideration, growth within the oil and gas industry will no longer be a valid framework in which to facilitate trade. Without resorting to extreme production techniques, different long term solutions to environmental damage must be developed in order to ensure the firm has security from a possible global collapse of the oil industry. Total S.A. is only just beginning to explore this in terms of alternative technologies such as nuclear power, but its competitors are also examining, wind, solar, and other forms of power, which Total S.A. needs to examine as well.
The second recommendation in terms of rank is the implementation of risk management. This is because Total S.A. is continually putting its deep pockets at risk with investments in more and more risky ventures that can result in ongoing social and legal impacts on the firm. For example, while drilling was the classical method for gaining access to oil and testing for reserves after the prospecting phase, this has changed since the industry shifted towards alternative locations in the last several decades as more typical oil deposits have dried up which increases financial risk (Dvir & Rogoff, 2009), and, in the case of Total S.A., has led to accusations of unethical practices in the field. Drilling is also the most expensive means of oil exploration (Jakobsson et al., 2011), which means that it produces the highest level of financial risk for geological surveys. Legal risks are also necessary to mitigate. Legal challenges that will likely have an effect include those connected with the environmental and economic challenges outlined above. As regulators hold oil and gas companies responsible for environmental disasters, they will likely become more legally liable for those disasters, adding to risk. The company needs to develop the kinds of risk management protocols that will be needed to address all of these challenges, as has been made evident through the recent BP oil spill in the Gulf of Mexico. A risk management mitigation protocol will require the company to look more carefully at how they evaluate new opportunities and whether these are worth the risk.
The third recommendation in terms of rank is that the firm needs to build on its strengths and develop its markets in China, India and the Middle East rather than rely on existing markets in Europe and North America, because of the fact that these regions represent the biggest new growth in the industry. This approach may require the firm to build on its existing pipelines in places such as Russia because of their physical proximity to these markets, but at the same time the recent political issues in Russia may also need to be mitigated in order to take advantage of any new opportunities.
Conclusion
In summary, the French multinational oil company Total S.A. is one of the key players in their market, but they are the smallest of the large producers and distributors. At the same time, the company has been able to boast high revenues and profits and has carved out niches for exploration in many areas of the world. Total S.A. has divested itself of some of its most risky ventures, such as its long term work in Nigeria, but at the same time the company has also had to deal with some major challenges when it comes to its environmental and ethical records. This means that Total S.A. needs to be able to think about the impact of the risks that it is taking when going after new forms of revenue. The company, like others in the field, seems to be facing more significant challenges when it comes to sourcing oil in an ethical way, which means that these kinds of risks will become more apparent over time. This report recommends that the firm move into alternative energy sources, explore risk management strategies that will work over the long term, and develop new markets aligned with existing resources.
References
Aguilera, R. F., & Ripple, R. D. (2012). Technological progress and the availability of European oil and gas resources. Applied Energy, 96, 387–392.
Al-Thani, F. (2008). The Development of Risk Management in the GCC Oil and Gas Sector. Presentation at Institute of Risk Management Conference, Managing Risks in the GCC: The Challenges and Opportunities, Doha, Qatar, November 9.
Church, J. A. (2010). The changing oceans. Science, 328, 1453.
Dvir, E. & Rogoff, K. (2009). Three Epochs of Oil. NBER Working Paper No. 14492.
Garland, J., Neilson, J., Laubach, S. E., & Whidden, K. J. (2012). Advances in carbonate exploration and reservoir analysis. Geological Society, London, Special Publications, 370(1), 1-15.
Hamilton, J. (2009). Causes and Consequences of the Oil Shock of 2007-08. NBER Working Paper 15002.
Jakobsson, K., Söderbergh, B., Snowden, S., Li, C. Z., & Aleklett, K. (2011). Oil exploration and perceptions of scarcity: The fallacy of early success. Energy Economics, 34, 1226–1233.
Kaplan, R. S. (2009). Risk management and the strategy execution system. Balanced Scorecard Report, 11(6), 3-8.
Khattak, N. U., Khan, M. A., Ali, N., & Abbas, S. M. (2011). Radon Monitoring for geological exploration: A review. Journal of Himalayan Earth Sciences,44(2), 91-102.
Kontorovich, A. E., Epov, M. I., Burshtein, L. M., Kaminskii, V. D., Kurchikov, A. R., et al. (2010). Geology and hydrocarbon resources of the continental shelf in Russian Arctic seas and the prospects of their development. Russian Geology and Geophysics, 51(1), 3-11.
Luft, G. (2006). The Oil Crisis and its Impact. Washington, DC: Institute for the Analysis of Global Security.
OPEC. (2012). OPEC basket price report. Available from: http://www.opec.org.
Rogoff, K. (2006). Impact of Globalisation on Monetary Policy. Paper prepared for Symposium sponsored by the Federal Reserve Bank of Kansas City on The New Economic Geography: Effects and Policy Implications Jackson Hole, Wyoming, August 24-26, 2006.
Teichmuller, M., & Wolf, M. (2011). Application of fluorescence microscopy in coal petrology and oil exploration. Journal of Microscopy, 109(1), 49-73.
Total S.A. (2014). Corporate website. Retrieved from http://www.total.com/en/.