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THE BUSINESS (EU): European oil giants gain on Big Three: “What could really bring Total and Eni into line with their Anglo-Saxon rivals, though, would be a transforming acquisition”: “Any sale of Total's $10bn stake in pharmaceuticals firm Sanofi, meanwhile, could fund an acquisition large enough to take the company well beyond Shell in reserves terms…” ( Posted 24 Jan 05


Total concentration: the Big Three oil companies are fighting off Europe's former state-run firms



By Richard Orange

23/24 JANUARY 2005


A LONDON banker tells a tale of how he once watched  a group of European oil       executives leisurely order the final courses of their sumptuous lunch. They had already kept a hall full of London investors waiting for well over half an hour.


Fortunately, such stories -possibly apocryphal - of a peculiarly European approach to both shareholders and lunch are now the exception. In the decade since privatisation, Italy's Eni and France's Total, under the powerful leadership of Vittorio Mincato and Thierry Desmarest have transformed themselves from laggards into serious competition for Exxon-Mobil, BP and Royal Dutch/Shell.


Eni's shares delivered a 35% return to shareholders last year, easily outperforming any Anglo-Saxon oil giant and taking the mantle Total had held the year before.


Total also passed a landmark last year, seeing its shares valued for the first time at a higher ratio to earnings than those of Royal Dutch/Shell, a sign the market recognised it was every bit as high quality.


UK and US firms have struggled to keep oil production from falling over the past two years, while Eni is managing 5% growth and Total is expected to deliver at least 4%. Only BP can compete with these figures.


The continental European companies have set their sights on overtaking the Anglo-Saxons ever since Eni founder Enrico Mattel declared war on the "Sette Sorrelli", or Seven Sisters of oil giants in the 1950s.


In the 1990s, their government backers decided to give them extra impetus by floating them on the market. In 1995, Italy part-privatised Eni. The state now has 30%. Spain quickly followed, selling its stake in Repsol in 2006. Over the same period, France sold its stake in state oil firm Elf Aquitaine, only to see it absorbed into Total in 2000.


Initially at least, this did not temper the obsession with scale at any price. A modern Seven Sisters (with the originals merged into a big three) would include Eni and Total.

Total's acquisition of Elf and Fina brought it the size it needed and created more value than any other merger of the late 1990s.


Eni's Mincato led Eni on an acquisition spree in 2000-2003, buying up British Borneo, Lasmo, Fortum Norway, Italgas and Union Fenosa gas. The high oil price of the past two years means the acquisitions, thought ill-judged at the time, have paid for themselves.


Repsol risked everything on a bid for Argentine state oil firm YPF that dragged it low once the Argentine economy nosedived the next year.


Eni and Total have followed Mattel's strategy of expanding by courting unpalatable regimes and chasing oil reserves in places that are politically difficult or out of bounds to American and UK firms. Total's aggressive courting of West African regimes has bequeathed its fast-growing portfolio. Both have large positions in Iran and Eni is still benefiting from its position in Libya.


Can they sustain their exceptional growth? Probably not, but in an industry whose output grows just l%-2% a year, even the 2%-4% production growth analysts expect from Total to 2012 looks attractive. Eni can grow 5% a year to 2007.


But with Libya open to all, there seem fewer opportunities to exploit political risk. There are few places dosed to the US and UK competition where Europeans can build operations. Total has controversial gas projects in Myanmar and raised eyebrows by returning to Sudan within weeks of a peace deal ending the country's 20-year civil war.


European firms also face management change. Repsol's Alfonso Cortina was ousted in October and replaced by Antoni Bmfau, director of Catalan savings institution La Caixa and former chairman of Spain's Gas Natural with a long-term ambition to create an energy giant. This month Brufau replaced the entire board apart from finance director Luis Manas, concentrating power in himself, and halving the number of business units.

The shake-up has had a positive effect on Repsol shares.


At Eni, meanwhile, 66-year-old Mincato may retire next May. Investors would welcome the promotion of respected exploration head Stefano Cao, but a political appointee foisted on Eni from another state-run company could damage confidence.


Cortina's $15bn (£8.1bn, fll.Sbn) acquisition of Argentine state oil company YPF left Repsol over-exposed. Half of its cash flow and 65% of its oil and gas production comes from Argentina. Some 70% of its new growth depends on just five South American projects. Brufau lacks the cash for acquisitions, so it will be forced to continue the exploration drive in Libya, Cuba and Algeria.


What could really bring Total and Eni into line with their Anglo-Saxon rivals, though, would be a transforming acquisition. This month, Italy's industry minister stressed again Eni's interest in former Yukos assets. Any sale of Total's $10bn stake in pharmaceuticals firm Sanofi, meanwhile, could fund an acquisition large enough to take the company well beyond Shell in reserves terms. Early last year it was targeting Roman Abramovich's oil giant Sibneft. Should Russia's uncertain landscape calm down, that could look promising once again.

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