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North Sea gas leak doesn't justify hit to Total shares

A customer exits a Total SA gas station shop in Paris on Monday, Nov. 2, 2009. The company releases its earnings this week.

Antoine Antoniol/Bloomberg

Two years after BP's deep sea Gulf of Mexico disaster, Total is facing an underwater emergency of its own. The French oil major said earlier this week that it could take up to six months to stem the flow of gas from a leaking well off the Scottish coast. That sent shivers down the spines of investors who watched BP lose about half its market value as the Deepwater Horizon disaster turned from bad, to worse, to catastrophic.

Still, the drop in Total's share price since the spill began looks excessive. By market close on March 28, the shares had lost 5.4 per cent in three days, equal to more than €6-billion of market capitalization. That looks impossible to justify based on the cost of lost production alone. Total, the Elgin field's 46 per cent owner-operator, says its share of production is 60,000 barrels of oil equivalent per day.

The leaking well is one of several in the field, and was in the process of being abandoned. Even if the entire field were shut for six months, the lost production should only cost Total about €380-million, based on last week's U.K. gas prices for next-day delivery – about 3 per cent of last year's net income.

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Spill response and cleanup costs also seem unlikely to make up the difference. The Elgin reservoir lies deep beneath the sea floor and is technically challenging to operate. But it also sits in much shallower water than Macondo, which may make it less difficult for Total to "kill" the gusher, if that becomes necessary.

BP has spent more than $14-billion (U.S.) over the past two years cleaning up the nearly five million barrels of oil that spewed from Macondo. Elgin's gas should prove far less polluting than gooey crude. Local authorities in Scotland, whose economy depends heavily on North Sea oil and gas, have already said the impact on the environment is likely to be minimal. The human toll, so far at least, is also lower. Eleven workers died on the Deepwater Horizon rig, but Total hasn't suffered any casualties.

Total's relations with the authorities have to be factored in. And governments are likely to be less tolerant of accidents than before. But there is also a growing realization that tapping deepwater and other hard-to-reach deposits will be essential to meet growing energy demand. Such operations will never be risk-free.

After Macondo, you might have thought the market would have realized that and discounted share prices, ahead of accidents, accordingly.

Kevin Allison

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