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TotalEnergies SE (TTE) Risk Analysis
Risk Overview Q4, 2021
Source: the company's latest filing for the period ended Dec 31, 2021, filed Mar 25, 2022
Risk Change Over Time
- Accounting & Financial Operations - Risk 1TotalEnergies’ profitability depends on its ability to develop its reserves profitably and in sufficient quantities
A large portion of TotalEnergies’ revenues and operating results comes from the sale of oil and gas extracted from reserves developed as part of its exploration and production activities. The development of oil and gas fields, the construction of facilities and the drilling of production or injection wells is capital intensive and requires advanced technologies. In order to preserve its profitability and finance its growth levers, TotalEnergies must renew its reserves with reserves that can be developed and produced in an economically viable manner and that are compatible with the Company's climate change ambition (low technical cost, low-emission reserves). Various factors may undermine TotalEnergies’ ability to discover, acquire and develop its reserves, which are inherently uncertain, including: – the geological nature of oil and gas fields, notably unexpected drilling conditions, including pressure or unexpected heterogeneities in geological formations; the risk of dry holes or failure to find sufficient quantities of hydrocarbons for commercial use; – failure to anticipate market changes in a timely manner; – applicable governmental or regulatory requirements, whether anticipated or not, that may prevent the development of reserves or give a competitive advantage to companies not subject to such regulations; – competition from oil and gas companies for the acquisition and development of assets and licenses; – disputes relating to property titles as well as increases in taxes and royalties, including retroactive claims and changes in regulations and tax reassessments; – economic or political risks, including threats specific to a certain country or region; – pressure from investors and non-governmental organizations (NGOs). These factors may impair TotalEnergies’ ability to complete development projects and to make production profitable. They may also affect TotalEnergies’ projects and facilities further down the oil and gas chain. If TotalEnergies failed to develop new reserves cost-effectively and in sufficient quantities, its financial condition, operating income and cash flows could be materially affected. If TotalEnergies were unable to develop its reserves in an economically viable manner and in accordance with its climate change ambition, TotalEnergies could be required to recognize impairments of assets, which could have a negative impact on its results for the period in which they are recognized. For additional information on impairments recognized on TotalEnergies’ assets, please refer to Note 3D to the consolidated financial statements (point 8.7 of Chapter 8). For the calculation of the impairments of its Upstream oil & gas assets, the Company assumes an oil price trajectory that converges in 2040 towards the price of 50$2022/b assumed by the SDS scenario published by the IEA in 2021, then that converges from 2040 towards the price assumed in 2050 by the NZE scenario also published by the IEA in 2021, i.e., 25$2022/b; and under the assumption that the gas prices used stabilize by 2025 until 2040 at levels lower than current price levels to converge towards the IEA's NZE scenario prices in 2050. TotalEnergies assessed the impact of using the NZE price scenario published by the IEA in 2021 on the discounted present value of its assets (upstream and downstream). Such a scenario would reduce the discounted present value of the Company's upstream and downstream assets by around 17% compared to its reference scenario used to value its investments (Brent at $50/b). In addition, the average duration of the Company’s proved and probable oil and gas reserves is 18 years and the discounted value of the Upstream oil & gas assets of the Company beyond 18 years represents less than 15% of their total value. Furthermore, TotalEnergies' proved reserves figures are estimates made in accordance with SEC rules. Proved reserves are those reserves which, by analysis of geoscientific and engineering data, can be estimated with reasonable certainty to be economically recoverable, from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. They involve making subjective judgments (particularly regarding the quantity of hydrocarbons initially in place, initial production rates and recovery rates) based on available geological, technical and economic data. TotalEnergies’ reserves estimates may therefore require substantial downward revisions should its subjective judgments based on available geoscientific and engineering data prove not to have been sufficiently conservative, or if TotalEnergies’ assumptions regarding factors or variables that are beyond its control prove to be incorrect over time. Any downward adjustment could indicate lower future production amounts, which could adversely affect TotalEnergies’ financial condition, operating income and cash flow
Risk Highlights Q4, 2021
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 19
- Economy & Political Environment - Risk 1ChangedTotalEnergies also faces an increased risk of the imposition of international economic sanctions that are becoming increasingly frequent and less and less coordinated at the international level, as well as a tightening of regulations relating to export controls.
Economic sanction regimes, combined with export controls, can target those countries in which TotalEnergies operates, and thus restrict certain types of financing or access to critical technologies, impose restrictions on the export or re-export of a number of goods and services, and hinder TotalEnergies’ ability to continue its operations. In addition to particularly heavy financial sanctions, the breaching of economic sanction regimes adopted by the United States may lead the authorities to impose measures that freeze companies out of the US market, such as a ban on using the US dollar, the currency in which most of TotalEnergies’ financings are denominated. For instance, in 2021 TotalEnergies held 21% of its proved reserves and carried out 18% of its oil and gas production in Russia. Since July 2014, international economic sanctions have been adopted against certain Russian individuals and entities, including various entities operating in the financial, energy and defense sectors. Since the month of February 2022, Russia's invasion of Ukraine led European and American authorities to adopt several sets of sanctions measures targeting Russian and Belarusian persons and entities, as well as the financial sector. TotalEnergies holds investments in major LNG projects (Yamal LNG and Arctic LNG 2) both directly and through its holding in the company PAO Novatek(1), whose production and sale of LNG are not materially impacted by the sanctions adopted as of the date hereof. Depending on the developments of the Russian-Ukrainian conflict and the measures that the European and American authorities could be required to take, the activities of TotalEnergies in Russia could be affected in the future. TotalEnergies announced on March 1, 2022 that it condemned Russia's military aggression against Ukraine, supported the scope and strength of the sanctions put in place by Europe that will be implemented by the Company regardless of the consequences on its asset management and that it will no longer provide capital for new projects in Russia. This context has led the Corporation not to qualify anymore as proved reserves as of December 31, 2021 the resources associated with the Arctic LNG 2 project, given the uncertainties of technological and financial sanctions on the ability to complete the Arctic LNG 2 project under construction. The sanctions regimes impacting Russia, as well as the international economic sanctions impacting other countries, are described in point 3.2 of this chapter.
- Economy & Political Environment - Risk 2ChangedThe development of protectionist measures affecting free trade between nations may have an impact on TotalEnergies’ business, its strategy or its financial condition.
Against a backdrop of risks of deglobalization and fragmentation between nations in the form of protectionist measures, trade tensions between certain countries contribute to restricting the free trade of goods and services, financial flows, along with international transfers of labor or knowledge. These tensions, particularly when they require the modification to the contractual framework of partnerships or the operating conditions of projects, are likely to have a negative impact on TotalEnergies’ business and its operating income. If TotalEnergies were unable to manage the impacts of these commercial tensions in an appropriate manner, it would potentially incur significant increases in costs for the development of its projects, lose markets, see its production or the value of its assets fall, which could adversely affect its financial situation.
- Economy & Political Environment - Risk 3ChangedTotalEnergies is exposed to the implementation of the energy transition, particularly by States
The COP26 held in Glasgow in November 2021 led to the adoption of the Glasgow Climate Pact and showed an acceleration of States' commitments to carbon neutrality (net zero emissions) in the context of the Paris Agreement trajectory. Civil society, numerous stakeholders and States are encouraging reductions in the consumption of carbon-based energy products and the establishment of an energy mix more geared towards low-carbon energies, so as to meet the requirements of the fight against the climate change, particularly in view of the objectives set by each State in the context of the Paris Agreement. The pace of change in the energy mix of countries must, however, take into consideration the needs and ability to adapt of the various energy consumers, who expect energy players to supply them with energy that is both cost-effective and environmentally friendly. In this context, companies in the energy sector are led to improve control over their greenhouse gas emissions. They will also be able to help create solutions that contribute to reducing the CO2 emissions associated with the customers’ use of their energy products, as well as technologies and processes to capture, store and reuse CO2. Consequently, they may be led to change the energy mix of the products they offer while at the same time having to manage the cost and the execution of projects supporting the energy transition. An insufficient ability to adapt to the pace of deployment of the energy transition towards carbon neutrality in the various countries where the Company supplies energy to its customers could affect TotalEnergies’ outlook as well as its financial position (lower profitability, loss of operating rights, loss of revenues, increased funding difficulties), reputation or shareholder value.
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