Total May Pull Off A Total Turnaround

It was a strong start for a new boss. Thierry Desmarest had barely moved into the chairman's office at French oil company Total when he flew off to Tehran in July to sign a landmark deal he had negotiated as Total's production head. It makes Total the first foreign oil company to explore and produce in Iran since the Shah fled in 1979. Back in Paris, Desmarest is now plotting a similar coup in Iraq for his $27 billion company. After four years of technical talks with Iraq's state oil company, "we're ready to start work quickly" once U.N. sanctions end, he says.

This bold petro-diplomacy galls U.S. policy makers, who nixed Conoco's attempts at an Iranian deal only to see Total step in as Iran's new partner. But Desmarest does not mind annoying Washington if it means furthering his goal: continuing the transformation of Total started under his predecessor, Serge Tchuruk, who has just become chief of beleaguered telecom giant Alcatel Alsthom.

Starting in 1990, Tchuruk and his team took what was a sleepy ward of the French state and transformed it into an aggressive oil and gas explorer that has been scooping up low-cost reserves in the Middle East, Asia, and Latin America. Next, Desmarest wants to engineer a big gain in profits, which still fall short of their 1991 peak (chart).

Desmarest, 49, is less charismatic than Tchuruk, but with his successes at finding new reserves, he has investors' and analysts' confidence. And he has spent 15 years at Total. Such continuity contrasts with Elf Aquitaine, Total's recently privatized arch-rival. A revolving door of political appointees has held Elf back, analysts say.

SPOILS OF WAR. Professionalism at Total is paying off. Industry wags used to say that Total's old name, CFP, stood for "can't find petroleum" rather than Cie. Franaise des Petroles. Now, huge gas strikes in Indonesia, Thailand, and elsewhere have made Total the world's third-largest gas producer, after Royal Dutch/Shell Group and Mobil Oil Corp. It ranks eighth overall in oil and gas, up from tenth in 1990. Crude reserves should rise, following an oil find in Colombia, plus Middle East drilling plans. The moves in Iraq are something of a homecoming, since Total was originally formed from German oil holdings in Iraq that were taken by France as war reparations in 1924. Thanks to the big gains in reserves, Total is likely to pass Elf in output by 2000.

Today, Total's finding costs are among the industry's lowest, says analyst Susan Graham of Merrill Lynch & Co. She adds: "Total has superb management, a real oil industry mentality"--in contrast to the days when the government, which once owned 35% of the shares, was calling the shots. Investors have rewarded Total's exploration gains with a near-quadrupling of its market capitalization since 1990, to $14 billion.

MAJOR FORCE. Yet a dramatic profit advance is still needed. Total lost out on the recent boom in petrochemicals because in the 1980s it sold its chemical units to survive a cash crunch. And its big refining and marketing ventures have struggled due to a cyclical drop in European demand. Fortunately, oil and gas production are quite profitable, and Desmarest is continuing Tchuruk's shift "upstream" in the revenue mix toward production. Thus analyst Caroline Cook of NatWest Securities Corp. sees earnings doubling by 1998, to $1.6 billion.

Meanwhile, the search for reserves continues. Although Desmarest aims to diversify further outside the Middle East--where Total is a major force in the United Arab Emirates--he is delighted to be returning to Iran, where Total pumped oil for half a century before the nationalizations of 1979. As for Iraq, Total's hopes are high because "we know the country better than anybody else," says Christophe de Margerie, head of Mideast operations. Diplomats doubt the U.N. sanctions on Iraq will be lifted any time soon. When it happens, however, rivals may find Total already outmaneuvering them.

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