Total’s Russian tangle

Many energy firms have been rapidly cutting ties with Russia following its invasion of Ukraine. This week’s episode focuses on the deep ties French oil and gas major has with Moscow, its feud with the US and why a “Rexit” may be very difficult and very costly, for the company.

We also touch on the financial challenges facing EDF and the role of energy in France’s upcoming presidential election.

Guests: 

• Chris Eales, Editor France
• Muriel Boselli, Correspondent France

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Monte Weekly podcast, bring New Energy Matters in an informal setting. This week's episode returns to France. The country is witnessing its own energy crisis amid low nuclear output and huge financial challenges for the country's largest utility. And that's not even taking into account the need to source more gas in the aftermath of the war in Ukraine. Many firms in Europe and globally are pulling out of Russia, but French firms seem to be lagging behind. Joining me Richard Sverrisson to discuss these issues is half of Montel's French team from a live studio recording from Paris. So a warm welcome to you, Chris Eales, and Muriel Boselli. So let's start off by talking about the crisis in France. What's been the government's reaction so far?

Chris Eales, Editor France: 0:48

The government's moved to freeze gas prices at their October 21 level. And we'll keep this protection in place for the rest of this year. It's also capped power prices at 4% and that should stay in place until the summer gas prices in France have gone up dramatically as they have done across Europe. In fact, the figures look like a thousand percent year on year increase earlier this month. It's a huge cost for the government, 22 billion euros. This these protection measures are expected to cost. So it's a massive undertaking on the electricity side as we know. They've also raised the volume of nuclear powers sold at a regulated rate, the Aaron rate. So you now have 20 terawatt hours extra. In order to help out suppliers. Maybe we'll come back to that.

Richard Sverrisson, Editor-in-Chief, Montel: 1:40

I think we'll touch on that later, Chris. What about, is there a thread of market intervention that is there, has the government said it could intervene in either the price setting mechanism or, capping prices for both power and gas?

Chris Eales, Editor France: 1:51

They are capped, they have capped electricity prices. They have. Limited the frozen gas prices. But yes, if you're talking about the government, we haven't heard from the government yet. It's about to say what they're going to do. But there are people calling for a ceiling on gas wholesale prices. For example, the CEO of Anji, big French company, as called for that demand for example, for a price ceiling on wholesale gas prices. Has been echoed across Europe and has been picked up by the European Commission. We spoke to the European mural, spoke to the EC energy commissioner recently who said that yeah, this is one of the options on the table

Richard Sverrisson, Editor-in-Chief, Montel: 2:26

that's certainly being touted by Spain and Portugal at quite high level. And they're talking, I think, for gas, they're capping the wholesale price at around 180 Euros. But is that the level that they discussing here as well?

Chris Eales, Editor France: 2:35

Level the CEO, she mentioned 150. It's not only on G and not, it's also energy consumers, big industrial consumers also demanding exactly the same thing. And they also would like a a new regulated rate for their power. They mentioned the tartan. Which was something way, way back way back in the days before Aaron, you had a tartan rate. You had a special rate for businesses business rate, which was about similar price similar level to the Aaron. This is what some companies are demanding. Now, some of the lobbies are, they want emergency measures including cap on wholesale gas prices. New regulated rate for their power from EDF and rationing of electricity.

Richard Sverrisson, Editor-in-Chief, Montel: 3:22

Rationing of electricity. Yeah. That's quite a drastic, yeah. Drastic move. Have we seen

Muriel Boselli, Correspondent France: 3:26

gas of, gas the rationing is on gas. It's about, sorry, gas. it's the idea that basically industries. Want to use as little as possible to keep, some stock on, on the side. Just to be precautious. But something I think to add to what Chris was saying, er, and actually the President, Emmanuel Macron, who's playing his reelection now in the next few weeks, has said that we are facing a huge energy crisis. But this time, during the. Pandemic. They were, they had opened all of the the taps and the taps. They had opened the taps. This and macro was very specific. Whatever it costs, we will pay to protect the economy. This time they have repeated. That So our economy ministry and our president have repeated that they would not be in, in that kind of mindset.

Chris Eales, Editor France: 4:15

It's not unlimited, basically.

Muriel Boselli, Correspondent France: 4:16

Yeah. Is what you're saying. Basically, support is not unlimit. The su the support is not unlimited. So they will help. But at the same time, I think they're seeing this as well as an opportunity for people to change the way they're thinking. Especially our energy transition Minister is seeing this as an opportunity to cut our reliance on fossil fuel. It's also a way to make people aware that the supply is not endless for gas and oil, and that people need to change the way, the way they consume.

Richard Sverrisson, Editor-in-Chief, Montel: 4:43

Has there been an impact already? Due to the high prices in terms of, demand destruction from French industry, have we already seen that in terms of gas and power?

Chris Eales, Editor France: 4:51

There have been companies that have cut production other companies threatening to cut production. Oh, yes. It started destruction.

Richard Sverrisson, Editor-in-Chief, Montel: 4:58

Yeah, absolutely. As in other parts of Europe. But if I can turn to, it's quite prominent, we see. Big oil and gas majors declaring, cut to any ties with Russia. We see the Shell BP companies declaring that they won't do new deals with Russian firms such as Gas Pro Ross, nft, et cetera. But one company stands out, Muriel. And that's why I want to talk to you, 'cause I know you're an expert. You've written about this company. So what's going on with Total Energies? The company formerly known as Total. Okay. So what's happening here? Why, what's the reluctance here to cut those energy ties with Russia?

Muriel Boselli, Correspondent France: 5:28

No, you're absolutely right. Total has made absolutely no move to leave despite the economy minister asking them two weeks ago, asking them quite clearly to leave, saying it would be a good idea, anyone saying there was a problem of principle in working with anyone close to Putin. But since then, nothing has happened and Total is not, has said it was not leaving, it said it would not invest further in Russia. But then that would be a pretty good idea not to invest further in Russia because they're so heavily invested. Already much more than other oil majors, which is why they are, they're finding it difficult to leave because they have invested. Billions, billions and billions. 10 tens of billions of euros total has a history of not leaving countries which have a problematic leadership. For instance, they stayed in, in Burma amid the different crisis and civil wars and the argument was always. It's good for an Occidental country to remain. We might be the only ones there, but we can witness, exactions. We know that they are staying for the business. I think what's important to understand is that total is the only major, which hasn't got its own oil and gas reserves. France doesn't have oil and gas, and that's very different from bp, shell or ExxonMobil. So the only way they can access reserves is to invest in countries and often countries mostly, which have difficult regimes. They could have invested in the US with Shell Gas and Shell Oil. But they have very complicated relationship with the us. And partly I think that the reason that Total is not leaving is also form of provocation towards the United States. Because if you think about it Shell, BP, Exxon, all on the American influence. So this is also the way for a French company to say, we don't have to listen to the Americans. They're not even listening to the Americans. But, and total is a state within a state. It's got its own agenda, and it's all about money. It's all about maintaining their role in the country. Even if it's at war, it doesn't matter.

Richard Sverrisson, Editor-in-Chief, Montel: 7:41

Describe this fraught relationship with the US and total what's going on there?

Muriel Boselli, Correspondent France: 7:44

Okay. What happened in the 1990s was America put an embargo against Iran, and total at that point was just about to make a, to sign a huge deal. They went ahead with the deal and they refused to leave Iran. So this really created a huge clash between Total and America. And ever since it's been a kind of cold war between total and America with total constantly going against American decisions. The thing is, in the oil world you trade oil in dollars. America in 1974 set up a deal with Saudi Arabia asking them to trade their oil in dollars. In exchange for protection of the kingdom, Saudi Arabia accepted and other pep countries followed suit. They all started trading in dollar. So once you trade in dollar. You are under the JU jurisdiction of America. So if America decides to set up an embargo or sanctions against some countries, and if a company that trades oil in dollar decides to trade with that country has its, have its own business, then it'll fall under the jurisdiction of America. So there has been many legal. Issues between Total and America. And one big issue between Total and America over Iran, which explains why Total decided to invest in Russia away from America. And they've put all their eggs in the same basket. Basically historically total was in Africa and it was in the Middle East, former French colonies. They went into Russia at the time when former CEO Christophe de Marri predicted that we were getting to the peak of production. It was going to decline around 2008. He predicted that. And so at that point it was, the idea was to go to Russia to extract oil and gas, which was more difficult to access. And that's where, companies like Total have, very smart engineers and they have equipment which are very advanced to, to extract fossil fuels in these areas. Putin in the two thousands. At that time, Putin was keen to have foreign companies come into Russia to modernize the oil and gas industry, and that's what total did. But it was very tricky for total to get into Russia. It's very difficult to get into the close to the power, they made several attempts, several failed attempts, and at one point Christophe de Marjorie decided to do something a bit crazy. He invested in a theater called the Mariinsky Theater in St. Petersburg, where the Orchestra Chief Maestro Gergiev operates. And Gergiev is a very close friend of Putin. They've known each other since the early nineties. When Putin was he was the number two of the city of St. Petersburg. And so Total entered the board of this theater and became friends. So Chris of the Marjorie, the former CO, became friends with Gergiev close friend Putin. And that's how it became friends. And that's how Total got in into Russia.

Richard Sverrisson, Editor-in-Chief, Montel: 11:05

And that's fascinating. Muriel. I think before I then ask you to tell us about the potential what lies ahead for the company. Maybe listeners, you've heard a bit of background noise here. We are not quite on the shams Chambal, but we're not far from it. There's a bit of background noise, but Chris, could you tell us a little bit about other French companies and their position in terms of with Russia, their relationship with Russia?

Chris Eales, Editor France: 11:24

The other big company is oni, the French energy giant. And they have importantly a stake. I think it's a 10% stake in, in, in Nord Stream two. They also have a similar share in Nord Stream one. That's interesting. Their position is that they are going to stay, they're going to stick in the country along with Total Hotel. Their argument is that they're providing a public service. They have to make good on their commitments. They're committed to providing gas, and they have to do that. They also are aware that the, any cut in gas is will have a huge impact on prices. That's their argument and it's unlikely to change unless or until they're a sanction.

Richard Sverrisson, Editor-in-Chief, Montel: 12:07

But what's the government view here? Are they likely to step in and demand that they do this

Chris Eales, Editor France: 12:11

well, the government have said, started off saying, I think it was Bruno Le Mayor if I'm rightly, who said something like, it's problematic dealing, having dealings with Russia. Absolutely. And so that indicated at the time, perhaps, we thought maybe that's a bit of pressure. Yeah. But since then, nothing. And in fact they've, they did backtrack on that. I think for

Muriel Boselli, Correspondent France: 12:31

what, what happened was that who's the currency of total energy? Met with macro, and after that meeting that was last week, he felt, he said, we're not pressured to leave. From, so no pressure from the government and on ng. It's the same thing. The, the g the French state has a 24% stake in Engie. So they could,

Chris Eales, Editor France: 12:51

they could apply pressure, but they're not.

Muriel Boselli, Correspondent France: 12:54

So they have a double standard Chris? I

Chris Eales, Editor France: 12:55

think they probably do. I think they probably do.

Richard Sverrisson, Editor-in-Chief, Montel: 12:59

It sounds like it. Sounds like it guys. Yes. But Muriel, what the steps ahead for Total here? Surely they must be afraid of. Sanctions. But from what you're saying there is, there's still gonna be a reluctance to, to pull out completely.

Muriel Boselli, Correspondent France: 13:12

I remember Patrick Piani, the CEO of Total saying, he told me when I was writing my book about the crash, about the death of Christoph de Marjorie he told me, I think that Christoph de Marjorie has gone too far in Russia. He's invested too much, and now that, that they're stuck in their commitments. I think it's a gamble. It could either be a good choice and maybe, since we're talking here about a lot of the, the projects are LNG. So they'll be able to, if we're looking further out they'll be able to sell their LNG to China Asia, which they're already doing, but they could boost their supplies towards the east and stop supplying the, Europe for instance. But they could also lose a lot because Europe has said that it wanted to cut by two thirds. It's reliance on Russian gas by the end of the year. A lot of the supplies are coming to Russia so that they've invested too much and they stand to lose. So right now they are hoping they're crossing their fingers that. Somehow they've made the right choice, but any company knows that you do not put all your eggs in one basket. And this is really the mistake that total made. I think one thing I would like to add, and one reason, another reason why they're not leaving is because they have a stake in Novatech, and Novatech is is a private company, whereas the BP, Shell and ExxonMobil were invested in public companies, so that makes a big difference. Public companies, we know they're directly financing the war whereas Novatech is a private company. The number two of Novatech is an oligarch. Who on the sanctions list who's on the sanctions list? So they're using that argument Total is using that argument. We're not financing a state company, so we're okay, but we know that the oligarchs are, that they've been created by Putin and they have to. Serve him in a way, it's all massively intertwined, isn't itt. It's completely intertwined.

Richard Sverrisson, Editor-in-Chief, Montel: 15:16

Yeah, absolutely. Chris, if potentially, the company to tell Eng g even could face substantial reduction in earnings, in revenues. A big hit. Speaking of which, EDF has announced that it would have a big drop in revenues, was it?

Chris Eales, Editor France: 15:31

Yeah. They announced that the hits would be much bigger, much deeper than expected. EDF is now saying a new estimate. It's gonna cost. These problems are gonna hit earnings by 26 billion. That's a phenomenal figure. Huge, massive amount of money. Absolutely. The majority of this estimated hit on 2022 earnings. Is due to low nuclear output. It's that record low. The target for nuclear power production this year is at its lowest for 30 years, maybe even more than that. Next year, it'll be low as well. So it's a huge problem that costs them a fortune. They're having to buy supplies that they're already committed to supply on the market. So this is a double hit. They can't make the money that they usually make from production, and to make up for that, they've gotta buy huge prices on the market. So it's a massive problem for them. Then on top of that, you have the Aaron and the changes to the regulated rate, more volume being sold on that regulated rate of 46 Euros from April until the end of the year 20 te hours more. Will be on sale. So obviously they're going to lose out from that because again, they've got you're comparing, Aaron rates something like four times cheaper than mar market prices. So that's a triple whammy. Yes. So the, those are the two major costs facing them. And so already the government has said that they will bail out E-D-E-D-F with a capital increase of 2.5. Billion 2.1 of which will come from the government says it will subscribe to those new shares. What's coming next? I don't know. Exactly. Could it be a nationalization? That's all the moment ruled out, at least until after the elections.'cause remember, there's elections coming up within a month. In France. So what is going to happen to this company? It's a very big question. They have enormous targets. They want to build new reactors. They want to extend reactors. These things cost and expand renewables. And expand renewables. Of course, where will the money come from?

Muriel Boselli, Correspondent France: 17:37

But maybe it's possible that given the crisis, the energy crisis we're facing right now and the Ukraine War, I think the French are hoping that the. The commission is changing the way it's thinking about a lot of subjects, notably, about EDF and nationalizing EDF or doing something that involves let the state more heavily. So this, they thing that they are in a good position. The government thinks it's, things could be changing in the next few months as part of the huge change we're facing anyway at the moment.

Richard Sverrisson, Editor-in-Chief, Montel: 18:11

Yeah. Is energy.

Chris Eales, Editor France: 18:13

However, just sorry. Yeah, it's a very interesting point and I think the, the EC decision on, on, on the green aspect of the green, green quotes nuclear being green, that's very important. However the trouble for EDF is not only trouble for EDF, it's trouble for the whole of France. It's that important. So if EDF is in big. In murky waters. Choppy waters so is France. So where even, obviously you need to have government involvement, massive government involved, state involvement to build nuclear power plants, obviously. Absolutely. Obviously. But we, when you're in a position, already France has being hit. By COVID, by the war that impact the costs. Where is the government can find the money?

Richard Sverrisson, Editor-in-Chief, Montel: 18:55

Yeah. No, absolutely. Yes.

Muriel Boselli, Correspondent France: 18:56

The debt has exploded. The French debt has exploded. That's how they're financing everything. But it's the French who are gonna be paying the price at the end of it.

Chris Eales, Editor France: 19:04

That's you and me, Muriel.

Muriel Boselli, Correspondent France: 19:06

Absolutely.

Richard Sverrisson, Editor-in-Chief, Montel: 19:06

Even though I'm not French Live and the hood of elephants above us, above our heads. But but Miro is energy is it? How big a part of the election is it, is it a big issue that

Muriel Boselli, Correspondent France: 19:16

in my lifetime, I've never heard so much about energy in the news and as part of an election, nuclear has been a very central topic, despite the fact that there hasn't really been a debate because the people who have mainly been talking about nuclear have been the people on the center on the right and on the far right, and they're all pro-nuclear. On the left, they are more nuanced. They understand that nuclear reactors will have to be prolonged because we don't have much choice about that. But they're against the building of new EPRs. Which is something that our President Emmanuel Macro has announced. In February, he announced the Build of Six EPRs with an option for eight more EPRs. But this has not it's part of the election. It's central, but there hasn't been a debate and there's, we should have a refer. This is an opinion. And it ha that's something that some some candidates are calling for. They're calling for a referendum. Because it's such a huge it's, it impacts our lives for millions of years, building new nuclear reactors. But we are in France, it's a pro-nuclear country, and decisions tend to be made by the people high up in government and discussion doesn't really have a place in this. So it's sad that in 2022 we're still in that situation where nuclear is imposed on the country.

Richard Sverrisson, Editor-in-Chief, Montel: 20:38

That's, there's strong words there, Muriel, I think. But but it's interesting that. It's nuclear is taken for granted. Its position in France is taken for granted. It's just what you add in addition to it. Would that be a one way of looking at it, Chris?

Chris Eales, Editor France: 20:48

Yeah, but the problem with that is, is that the two are related obviously, because the more you put into nuclear, I think it's true to say the less you put into renewables, it's not bottomless pit. No. Everyone. Sell, but it's both, it's not either or. Yes. But if you put too much into one, you do take away from the other. And that's what's happened in France. That's why France is so far behind. It lags way behind other countries in terms of renewables. And that's because of an obsession, I would say, with nuclear power. And we are paying the price for it now. And we are in a situation in France where we are too dependent on one source of power. And that's, that's causing problems because it's so expensive to extend reactors, it's so difficult to do that. Safety issues, we the reactors are I don't wanna say they're plagued with safety issues, but we have so many of them it almost every year, and these corrosion ones at the latest, which are very serious

Richard Sverrisson, Editor-in-Chief, Montel: 21:37

and it's very costly when it goes wrong and they can't run. Guys, I'd like to say thank you very much for joining Montel Weekly podcast this week and keep up the excellent reporting on what's happening in France and the French energy sector. Listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.