Types of risks
TOTAL is exposed to risks related to the safety and security of its operations.
TOTAL engages in a broad range of industrial activities, including, in particular, drilling, oil and gas production, processing, transportation, refining and petrochemical activities, storage and distribution of petroleum products, specialty chemicals and solar energy. These activities involve a wide range of operational risks, such as explosions, fires, accidents, equipment failures, leakage of toxic products, emissions or discharges into the air, water or soil, and related environmental and health risks. In the transportation area, the type of risk depends not only on the hazardous nature of the products transported, but also on the transportation methods used (mainly maritime, river-maritime, rail, road and pipelines), the volumes involved and the sensitivity of the regions through which the transport passes (quality of infrastructure, population density, environmental considerations). Moreover, most of the Group’s activities will eventually require environmental site remediation, closure and decommissioning after operations are discontinued.
The industrial events that could have the most significant impact are primarily:
- a major industrial accident (fire, explosion, leakage of highly toxic products); and
- large-scale accidental pollution or pollution at a particularly sensitive site.
Each of the described risks corresponds to events that could potentially cause death, harm human health, damage property, disrupt business activities or cause environmental damage. The Group’s employees, contractors, residents living near the facilities or customers can suffer injuries. Property damage can involve the facilities of the Group as well as the property of third parties. The seriousness of the consequences of these events varies according to the vulnerability of the people, ecosystems and business activities impacted, on the one hand, and the number of people in the impact area and the location of the ecosystems and business activities in relation to TOTAL’s facilities or to the trajectory of the products after the event, on the other hand.
Acts of terrorism against the Group’s plants and sites, pipelines, transportation and computer systems could also severely disrupt business activities and could cause harm to people, the environment and property.
Like most industrial groups, TOTAL is affected by reports of occupational illnesses, particularly those caused by past exposure of the Group’s employees to asbestos. Asbestos exposure has been subject to close monitoring at all of the Group’s business segments. As of December 31, 2014, the Group estimates that the ultimate cost of all pending or future asbestos-related claims is not likely to have a material impact on the Group’s financial position.
Certain segments or activities of the Group face specific additional risks.
TOTAL’s Upstream segment faces, notably, risks related to the physical characteristics of oil and gas fields. These risks include eruptions of oil or gas, discovery of hydrocarbon pockets with abnormal pressure, crumbling of well openings, leaks that can harm the environment and explosions or fires. These events, which may cause death, injury or environmental damage, can also damage or destroy oil or gas wells as well as equipment and other property, lead to a disruption of the Group’s operations or reduce its production. In addition, since exploration and production activities may take place on sites that are ecologically sensitive (for example, in tropical forests or in a marine environment), each site requires a risk-based approach to avoid or minimize the impact on human health, flora and fauna, the ecosystem and biodiversity. In certain situations where the operator is not a Group entity, the Group may have reduced influence and control over third parties, which may limit its ability to manage and control these risks.
The activities of the Refining & Chemicals and Marketing & Services business segments also entail additional health, safety and environmental risks related to the overall life cycle of the products manufactured, as well as the materials used in the manufacturing process, such as catalysts, additives and monomers. These risks can arise from the intrinsic characteristics of the products involved (flammability, toxicity or long-term environmental impacts such as greenhouse gas emissions), their use (including by customers), emissions and discharges resulting from their manufacturing process (such as greenhouse gas emissions), and from material and waste disposal (recycling, regeneration or other processes, or waste elimination).
Contracts signed by the Group’s entities may provide for indemnification obligations either by TOTAL in favor of the contractor or third parties or by the contractor or third parties in favor of TOTAL if, for example, an event occurs leading to death, personal injury or property or environmental damage.
With respect to joint ventures in which an entity of the Group has an interest and the assets of which are operated by such Group entity under an operating agreement between the joint venture and such entity, contractual terms generally provide that the operator assumes full liability for damages caused by its gross negligence or willful misconduct.
With respect to joint ventures in which an entity of the Group has an interest but the assets of which are operated by a third party, contractual terms generally provide that the operator assumes full liability for damages caused by its gross negligence or willful misconduct.
In the absence of the operator’s gross negligence or willful misconduct, other liabilities are generally borne by the joint venture and the cost thereof is assumed by the partners of the joint venture in proportion to their respective ownership interests.
With respect to third-party providers of goods and services, the amount and nature of the liability assumed by the third party depends on the context and may be limited by contract. With respect to their customers, the Group’s entities ensure that their products meet applicable specifications and abide by all applicable consumer protection laws. Failure to do so could lead to personal injury, environmental harm and loss of customers, which could negatively impact the Group’s results of operations, financial position and reputation.
Crisis management systems are necessary to respond effectively to emergencies, avoid potential disruptions in TOTAL’s business and operations and minimize impacts on third parties and the environment.
TOTAL has crisis management plans in place to deal with emergencies. However, these plans cannot exclude the risk that the Group’s business and operations may be severely disrupted in a crisis situation or ensure the absence of impacts on third parties or the environment. TOTAL also has implemented business continuity plans in order to continue or resume operations following a shutdown or incident. An inability to restore or replace critical capacity in a timely manner could prolong the impact of any disruption and could have a material adverse effect on the Group’s business and operations. For more information on the Group’s crisis management systems, see point 2.2.3. below.
TOTAL is subject to stringent environmental, health and safety laws in numerous countries and may incur material costs to comply with these laws and regulations.
TOTAL’s workforce and the public are exposed to risks inherent to the Group’s operations that potentially could lead to loss of life, injuries, property damage or environmental damage and could result in regulatory action and legal liability against the entities of the Group and its officers as well as damage to the Group’s reputation.
TOTAL incurs, and will continue to incur, substantial expenditures to comply with increasingly complex laws and regulations aimed at protecting health, safety and the environment.
These expenditures include:
- costs incurred to prevent, control, eliminate or reduce certain types of air and water emissions, including those costs incurred in connection with measures taken to address climate change;
- remedial measures related to environmental contamination or accidents at various sites, including those owned by third parties;
- indemnification of individuals or entities claiming damages caused by accidents or by the Group’s activities;
- increased production costs and costs related to changes in product specifications; and
- costs related to the decommissioning of drilling platforms and other facilities.
Such expenditures could have a material effect on the results of operations of the Group and its financial position.
Furthermore, in countries where the Group operates or plans to operate, the introduction of new laws and regulations, stricter enforcement or new interpretations of existing laws and regulations or the imposition of tougher license requirements may also cause the Group’s entities to incur higher costs resulting from actions taken to comply with such laws and regulations, including:
- modifying operations;
- installing complementary pollution control equipment;
- implementing additional safety measures; and
- performing site clean-ups.
As a further result of, notably, the introduction of any new laws and regulations, the Group could also be compelled to curtail, modify or cease certain operations or implement temporary shutdowns of facilities, which could diminish the Group’s productivity and have a material adverse impact on its results of operations.
All TOTAL entities monitor legal and regulatory developments in order to remain in compliance with local and international rules and standards for the assessment and management of industrial and environmental risks. With regard to the permanent shutdown of an activity, the Group’s environmental contingencies and asset retirement obligations are addressed in the “Asset retirement obligations” and “Provisions for environmental contingencies” sections of the Group’s Consolidated Balance Sheet (refer to Note 19 to the Consolidated Financial Statements, chapter 10, point 7.). Future expenditures related to asset retirement obligations are accounted for in accordance with the accounting principles described in Note 1Q to the Consolidated Financial Statements (chapter 10, point 7.).
Laws and regulations related to climate change and its physical effects may adversely affect the Group’s business.
Growing public concern in a number of countries over greenhouse gas emissions and climate change, as well as a multiplication of stricter regulations in this area, could adversely affect the Group’s businesses and product sales, increase its operating costs and reduce its profitability.
The regulations concerning the market for CO2 emission allowances in Europe, the European Union Emissions Trading System (EU-ETS), entered a third phase on January 1, 2013. This phase marks the end of the overall free allocation of emission allowances: certain emissions, such as those related to electricity production, no longer benefit from free allowances, while for others, free allowances have been significantly reduced. Free allocations are now established based on the emission level of the top-performing plants within the same sector (“top 10 benchmark”) and lower-performing plants must purchase, at market price, the necessary allowances to cover their emissions over and above these free allocations. Moreover, the Group’s plants will need to indirectly bear the cost of allowances for all electricity consumed (including electricity generated internally at its own facilities).
Given these new rules and the European Commission’s decision to apply a “cross-sectoral correction factor” (CSCF) that reduces the total amount of free allocations for all sectors combined by an average of 11.6% over phase 3 (2013-2020), the Group estimates that approximately 30% of its emissions subject to the EU-ETS will not be covered by free allowances during the 2013-2020 period.
The revision in 2014 to the list of “sectors exposed to carbon leakage” confirmed that the refining sector in Europe is an exposed sector and, as such, it may continue to benefit from free allowances. However, performance for 2013 showed that this sector, which produces significant amounts of CO2, is almost the only sector with a free allowance deficit exceeding 20%. This deficit resulted mainly from effects of an ambitious sectoral benchmark and the CSCF, which is expected to become more severe year by year, thereby increasing the refining sector’s deficit to more than 30% by 2020.
The Group has taken legal actions in relevant local courts having jurisdiction for its concerned industrial sites to contest national decisions granting free allowances. In addition, the courts of different Member States brought the matter before the Court of Justice of the European Union for a preliminary ruling on the procedures for determining the free allowances.
The financial risk related to the foreseeable purchase of these allowances on the market should remain low for the Group if prices for emission allowances remain close to their current level (€7 / t CO2). Nevertheless, due to important regulatory changes that occurred in phase 3, such as the authorization given to the European Commission to intervene at its own discretion in the allowance auction calendar (backloading), or due to possible future regulatory changes, such as the establishment of a “market reserve”, prices for CO2 allowances could increase substantially, which could cause a significant adverse impact on the results of the Group’s refining operations.
In addition, more of TOTAL’s future production could come from unconventional sources in order to help meet the world’s growing demand for energy. Since the energy intensity of oil and gas production from unconventional sources can be higher than that of production from conventional sources, the CO2 emissions produced by the Group’s activities may increase. Therefore, TOTAL may need to incur additional costs related to certain projects.
Finally, TOTAL’s businesses operate in varied locales where the potential physical impacts of climate change, including changes in weather patterns, are highly uncertain and may adversely impact the results of the Group’s operations.