TotalEnergies SE (TTE) 2002 Q4 法說會逐字稿

Thanks for waiting ladies and gentlemen.

The conference call will begin shortly.

Please do continue to stand by.

Once again thanks for waiting.

Total name again, even if it is very clear in the company is not the same as the one that five years ago was the same.

I think we will be relatively quick on the presentation of the numbers on the results.

Because you have seen already the figures certainly for most of you.

Robert Castaigne will start with this presentation and I will come back on the analogies of the outlook for the different business segments and for the group.

We will keep most of the time for your questions.

Good morning.

So I imagine that you all have seen the results and I will start with the evolution of the earnings per share for Total Fina Elf compared to its peer.

As you can see the performances of all oil companies in terms of earnings per share decreased in 2001 compared to 2000.

Especially because the oil environment has deteriorated.

Especially in 2002 even if the oil price was slightly higher 25 compared to 24.4.

The refining margin decreased very strongly from $15-8 per ton.

In addition to that the gas price also decreased by something like 10%, as far as Total is concerned.

Due to the decrease in gas price in Argentina, in the U.S. and also to the formula that applies in the North Sea.

As a consequence of that you can see the evolution of Total Fina Elf for the earnings per share of Total Fina Elf compared to BP, Shell, Exxon and Chevron Texaco.

You can see that compared to our peers, finally our evolution was much better.

Essentially due to, first our self-help program in terms of growth.

You know that we have been able to increase our production by 10% in 2002.

Synergy and productivity were totally in line with the program that had fixed in terms of self-help at the time of the merger with .

In addition to that it is clear that we have been very active for the share buy-back and you will see that compared to the others, we bought back twice, for example what Exxon managed to do.

And three times what BP and Shell managed to do.

Maybe one word before moving to the next slide, to the environment.

At the beginning of 2003, you know that it is much better, the oil price on average is about $32 per barrel and just right now between $33 and $34 per ton in terms of Brent price.

The refining margins in Europe are also extremely good.

As I think, since the beginning of the year we should be on average something like $27 per ton and then some days we have had refining margins of $40 per ton.

So even if the dollar is a little weak compared to Europe, globally speaking we can say that the environment is much better for the beginning of this year.

One word maybe to explain the evolution of the operating profits in 2002.

That was €11b compared to the €13.1b that we had in 2001.

As you see, globally speaking, the impact of the environment was minus €3.1b.

And to explain this minus €3.1b, we have minus €0.2 due to the hydrocarbon prices, especially the decrease in gas prices that I mentioned, 10% for our company.

After that you can see the evolution, the decrease of the dollar compared to euros.

The collapse of the refining margins $8 per ton compared to $15 last year.

The marketing environment, behind this minus €400m, there is often a lag effect that we have seen especially from the commercialization of kerosene but also some deterioration of marketing margins, especially here in the U.K. and also in Germany.

The retailing environment remains very poor.

That explains the minus €0.4b and two other elements, deterioration of the freight rates by the way since the beginning of the year and end of last year.

We have recovered a much better situation for the freight rates.

Then another point that should also be mentioned, is the poor valuation of some products compared to what it should have been according to our model.

I mean especially with the price of gasoline that was relatively poor in 2002.

Then this is of a consequence of a strong production of the exports of gasoline from Europe to the U.S.

So this was for the environment.

Besides that and we as a consequence of the refinery turnaround that we had in 2002, where we had 7 refineries that were shut down. 7 on the total number of 12 refineries that we operate in Europe.

This is a bit unfortunate but as a consequence that this turnaround was decided three years ago by the three companies of the group and it happened that this took place in 2002 and more specifically in the second part of 2002.

So as a consequence the costs of these turnarounds were a little higher, as we have decided to strengthen the control, it takes a little more time and as a consequence of that there is were a lot marketing margins were also higher.

But besides that, we have the results of our internal programs that is estimated at €1.3b.

Of which €0.4b for synergies and productivity, in time due to the growth of our activities, especially our oil and gas production.

Sources and uses of cash you can see for this whole thing the cash flow from operations, proceeds of divestments of €2.3b, capital increase that was an operation for our employees.

Issuance of net debt, €0.5b.

All together it is €14.7b.

In front of that we have for the uses, €8.7b for investments; €2.6b for the dividends and €3.4b for the share buy-backs.

We bought back last year 24m shares, including 3m shares for the stock options.

Concerning the investment, you can also note that 71% was for the Upstream essentially ENP, 13% for Downstream and 14% for Chemicals.

Share buy-backs are something that I have already mentioned.

As you can see what we have managed to do since September 2000 when we decided to implement a share buy-back policy, 1.6% in 2000, 5% in 2001.

This was especially due to the fact that in 2001 we managed to sell part of our stake in [Sanofi-Synthelabo], then 3% in 2002 where we also sold part of our interest in Sanofi-Synthelabo.

And all together a little less than 10%.

You can see that this is about twice what Exxon Mobil managed to do over the same period and three times what Shell and BP compared to their size, also managed to do over the same period.

We had estimated that the impact of share buy-back was about 5% at the level of the earnings per share in 2002, taking into account a reduction in the number of shares and the financial cost of this share buy-back.

Just in January 2003, we repurchased 0.7% of our equity.

The last point is an important point.

The dividends.

We decided to increase the dividends by 8% in 2002.

Which represents between 1999 and 2002 an increase of 74%.

With this 8% increase in 2002 we managed to increase a payout from 35-44% and we confirm that we are still committing with our dividend policy that you can say towards a 50% payout on average over time.

Okay.

Thank you Robert.

Moving now to the business segments.

Upstream first.

Well production growth was as expected at 10% in 2002.

In fact the real figure, the underlying figure is at 11.7%.

But we have suffered mainly from OPEC quota reductions, an impact of 1.5%.

So the real figure, which we have in the accounts, is a 10% production growth.

It concerned a lot of different areas.

You can see that production in Europe, in Africa, in the Middle East has contributed to this very substantial increase in productions.

It is mainly the start-up or the build-up of the four major projects that we described previously.

Elgin Franklin in the U.K., Sincor in Venezuela, Girassol in Angola and South Pars in Iran, which have contributed to this production cost.

This growth is a profitable one and just to give one figure of Upstream return on capital employed and now we have changed the definition to be fully consistent with our first definition and we are speaking of return on average capital employed was at 23% last year.

We continue to be very careful about the evolution of the technical costs in spite of the fact that we are in a relatively high-priced environment, which means relatively high investments and competition between our contractors.

We have kept technical costs in 2002 at the same level as in 2001 at $7.1 per BOE.

I would say that the exploration costs have been reduced thanks to the good results of the exploration.

Concerning the production costs, it is a good performance to give it, because we have some foreign exchange impact.

We are expressing the figure in dollars but we have a lot of areas, Norway and in Africa, which are more euro related than dollar dominated and with the increase of the value of the euro against the dollar.

It means that the underlying figure we have in fact reduced the production costs.

Concerning DD&A, the slight increase is linked to the fact that when you start these big projects, at the beginning you take a careful approach, just thinking in consideration for the DD&A you need the proven reserves.

And later on you move from the proven to the probable results when you have a better recognition of the fact that the probable results will become proven reserves and you reduce later on in the life of the project regarding DD&A per unit.

Globally we think we should remain with a very competitive position, which is $7.1 per barrel for oil equivalent for the technical costs.

2002 has been a good year for exploration and appraisals.

Our estimate of probable reserve, contribution of these exploration and present works, is that it will increase our resource base by close to 1b barrels of oil equivalent at an average cost of $0.8 per BOE.

You can see on the map on the left what have been the main contributors.

In terms of exploration it is Angola, Nigeria, which are the most important.

Kazakhstan is a substantial contributor both in terms of definition on the Kashagan discovery and our new discovery Kalamkas.

Elsewhere we have made some discoveries in the [Alwyn] area in the U.K., in Algeria, in Libya and we have made some appraisals, which I think the reserves of the Dolphin project in Qatar.

Globally if you look to the three years average for finding costs, you can see that we have a very good figure.

We don't have yet the figures of our competitors, but we were in the best position last year and we think we should remain the same this year.

Now looking to the future.

First for 2003, our expectation is to grow the production by 5%.

We have so far [eliminated] at the beginning of the year of the events in Venezuela and our project is just resuming and it's production now.

In fact the people of our company were not on strike in Venezuela, but the loading facilities are controlled by which were on strike.

We were by mid December with the storage full, we had to stop the production.

But it should be back close to normal before the end of the month.

The impact will be roughly 12,000 barrels of oil equivalent per day on the average of the year, which means something like 0.5%.

This being said we think we have good chances to meet our target of 5% despite of this element.

The main areas where we will grow our productions are Africa, which represents one third, mainly Angola, Nigeria and Libya where we will start on .

Another third comes from the Americas, in the deep offshore in the Gulf of Mexico but also in Venezuela and in Bolivia.

And the rest comes from the Middle East mainly Iran, mainly Indonesia and some production coming from Russia.

I would like to stress that we are growing our exploration and production in what we think a very efficient way of using capital.

We have indicated on this slide the ratio of our exploration and production CAPEX divided by our existing production, which is a way of measuring the relative intensity of the development in financial terms, of the exploration and production activities.

And you can see that for Total Fina Elf, in fact we are investing compared to our size, roughly the same numbers than our competitors.

And even in the recent plus a bit less than our competitors.

And the big difference in the two bottom lines where you can see the results of this effort and very clearly we are able to grow our production far more substantially than our competitors while devoting the same rate of investment.

This is partially due to the fact that we are a more recent company than our competitors and we have less decline to be faced than our competitors.

The other reason, I think is the reason that earlier than most of our competitors, we have oriented our efforts towards developing countries where you can get access to large fields, which can be diversed with economies of scale at a relatively low cost.

Production growth after this year between 2004, 2003 and 2007, we should continue to grow our production by 5% a year on average.

We confirm our target for 2005 at 2.8b barrels of oil equivalent.

And you can see on this map where we have just reported the main project contributing to the group, that we are in fact very much diversified in Africa, in Latin America, in the North Sea, in the Caspian Area, but also in the Middle East and in the Far East.

I would just like to stress that there plenty of other projects which are under but for which we think that we have not yet in a position to put them on this chart.

So that is for Upstream.

Moving now rapidly to the Downstream.

Well we faced as Robert has explained, weak environment in 2002.

The impact of the weak economy growth, the mild weather on both sides of the Atlantic.

The consequences and certain elements on jet fuel demand.

And globally, product demand has decreased in the OACD countries in 2002 by comparison with 2001.

On the topics, which are specific to the company, we have the program of refinery turnaround.

But normally these turnarounds take five years, we organize in such a way that we don't have such a high addition of turnaround in the same year which creates problems because it is a lot of work simultaneously for our teams, but also for the contractors that we use in these contractors.

This being said, we have had self-help coming from synergies and productivity gains, which have produced, relatively reduced the impact of this negative elements.

And at the end of the day we have had a return on capital employed in the Downstream at 8% in 2002, which of course is a very different figure from what we got in the two previous years around 20%.

we are confident that we will be able to come back to a good level of return and we confirm our target for 2005 to bring it to 16% in our reference environment, which is $12 per ton for the refining margin.

And we think that we have still a lot to deliver in terms of production of the breakeven of the refining in terms of efficiency of the marketing and we are confident that in this reference environment, which is a relatively one.

Because when you look to what has been averaged, the refining margins in the last five years, it is more around $15 or $16 per ton than the $12 per ton that we have .

Chemicals now.

Well the performance last year globally has not been excellent.

The situation in the different segments of the Chemicals is relatively contrasted.

With the base chemicals, the petrochemicals suffering a lot.

And I think an operating income in fact close to zero.

Specialty reference environment for the ethylene, polyethylene chain and the chlorine chain.

The intermediates have registered better in the context of low demand.

And what has been a good performance concerns specialties with improvement performance despite of the fact that the environment was not very favorable too for all of this business.

We want to move our Chemicals business substantially in the coming years.

We will come back to the divestment policy in a minute, but I would just like to comment our decision to be more involved in Asia where we expect that most of the growth in terms of Chemicals will come in the next few years.

And we have this project of joint venture with Samsung in South Korea, which we think is very attractive.

We started investing in Asia with Qatar where we have signed last year the agreement.

Now we want to develop in North East Asia.

And we have the opportunity to get access to modern plants with good with the possibilities of making at the very competitive price, which is roughly 50% of the cost of construction on the project.

And that is for which are between very good quality equipment.

Our assessment is that this investment should deliver a return on capital employed around 14%, 15% in the mid-cycle condition.

And that is the best rate that we have to get introduced in the North East for Chemical market.

Concerning management and restructuring.

Well we have already met our targets, which were set three years ago for 2000 and 2003 concerning the divestments.

At the end of 2002, €0.8b has been achieved.

And at the end of this week, we should have the final conclusion of divestments of paints which will represent another €0.9b.

We will continue to reduce our capital employed in the share of our capital employed devoted to Chemicals.

Our intention, even it is not always very easy to get a good price for Chemical, essentially because it is clearly a business in which there are sellers than buyers, our intention is to continue to divest at a rate of roughly €500m per year.

Which means that in the medium term, the share of capital employed in Chemicals should be at a maximum of 20%.

I would just remind you that we were at 28% at the time of the merger with .

We should normally have a CAPEX of around €1.2b per year in Chemicals, the figure will be a bit higher for 2003 with the impact of the Korean acquisition.

We work continuously to improve the competitiveness of our existing operations, which mean that particularly in Europe, to close some sites, to close non-competitive units.

We have already done those in France and outside France on 24 sites and we have still 20 of them, which are in the process of closing.

Turning now to the outlook at the corporate level.

I would first like to come back to the consequences of our growth policy.

I know that there has been a lot of debate to know if looking for growth or looking for return, what was the most attractive?

I think that if you put in place a growth strategy, which is based on high profitability projects, you can have both growth and profitability.

And yet at the end of the day maximize the .

We can see here that we have taken examples of three periods, relatively short-term 2000-2002.

You can term 1998-2002 a bit longer term. 1996-2002 and you see within the five largest international oil companies, what has been the length between an oil production growth and an annualized return to shareholders.

And you can see that in the first case, we are number one both in terms of oil production growth and with return to shareholders.

In the second case, we are number two in terms of growth and number one in terms of return.

And probably what is the most and the longer period, 1996 - 2002 we are number one both in terms of growth and in terms of return to shareholders.

So I think that by continuing to implement this policy of substantial growth based on very strict criteria of selection of profitable projects, we implement the best policy to create value for our shareholders.

For 2003, our CAPEX program is roughly at the same level as it was last year at €8.7b.

With a continuing priority to extreme growth.

We devote 67% of this CAPEX project to the Upstream, 15% to the Downstream, 18% to Chemicals including should have been around 13% or 14%.

Concerning the self-help program that we defined just after the mergers. €4.4b improvement on a regular basis at the end of the period, which has raised at around 12.8.

You can see that we are well on track of those figures.

We have delivered 3.7 and we should meet this target of 4.8.

Moving now to returns on capital employed.

Last year, we had 23% for the Upstream, 8% for the Downstream, 5% for Chemicals, which gives at the group level including 15%.

If we recalculate this return according to our reference environment and an oil price of $17 per barrel and a refining margin at $12 per ton, the figures are 14% 13% 10%which gives an average of 13%

Our targets for 2005 are 16% on the Upstream, 16% for the Downstream, 14% for Chemicals, 15.5% for the group.

The figures for Downstream and Chemicals have not changed by comparison with what we showed in the past.

For the Upstream the figure is lower, it was previously 17.5%.

But out of the 1.5% change, half of it is explained by the fact that we have moved from the return capital employed at the beginning of the period to the return on average capital employed for the Upstream, linked to the fact that we are growing rapidly the Upstream and growing the capital employed in Upstream.

And for the rest, it is explained mainly by the increase in the tax on the offshore production in the U.K.

And for the rest by the consequences of the huge devaluation of the Argentinean peso, which means that the gas prices we get for our production, for domestic consumption has been divided by three.

In conclusion, I would like first to stress that the continuity in the is an important point.

It is an important for you for the visibility of the company, but it is also an important point because we think that setting consistence, growth and profitability targets are the best way to motivate the workforce.

We confirm our target of growing consistently the Upstream by 5% per year between 2002 and 2007.

We will continue to divest on strategy assets, in particularly in the Chemicals.

But we have also this very substantial stake in Sanofi-Synthelabo at 24.5%.

While in the present market conditions are very attractive to divest it, but it remains clearly medium-term target to continue to divest our involvement in the pharmaceuticals.

You have seen that we should be able to increase profitability in each of the business segments in a stable environment and we will pursue equity buy-back programs while maintaining gearing at about 30%.

So all these elements should allow us to continue to growth substantially our earnings per share in a constraint reference environment.

So these were the points that we wanted to present in front of you and now my colleagues and myself, we are ready to answer your questions.

Yes good afternoon, it's Dave Thomas (ph) of Commerz bank.

I have a question on Russia please.

Could you please give us your views on the timing of asset related deals in Russia, rather than the equity type deals such as BP have just announced recently?

And specifically, could you please give some comment on and the timing of completing of that deal please?

Well I think that Russia is an attractive place for investment.

Even if the cocktail of freights may be a bit different from other places in the world.

Up to now, we have preferred in Total Fina Elf an approach based on joint ventures, on the project type project basis, because we think that the visibility, the cocktail first associated with this approach is better than entering in the equity of a large existing company.

Where you have a cocktail of businesses which is particularly complex and secondly a lot of Downstream business where transparency is not in a gentle way.

And where on top of that in the Upstream, you have an environment of heritage, which will be difficult to manage.

This being said, I think you are raising a very good question, which is to see if, well on a project-by-project approach is more attractive.

But the real problem is to know if you get to the conclusion and are able to launch the project.

We think it is possible.

We don't underestimate the difficulties.

We have done it already on one case, which is a not a very large for us, where have a production share contract which is producing.

We would like now to do it at the larger scale and we are following several projects.

One is a very large one offshore in the Baron Sea, the [Stockmann] project which is a roughly two times the and where we think that we can bring economically on attractive terms gas to Western Europe.

So we have discussed with the officials and with the partners that the have designs which are .

We are at the beginning of the process.

Even if a lot of technical studies have already been made.

But I think in the long-term it should be a very attractive project.

With private partners we have discussions on .

We have an agreement that went to the 52% level in this project.

There are some legal complexities due to some discrepancies of point of view between the other partners, which we hope will be clarified relatively soon.

Once we think of a preference for a project-by-project approach in Russia, we do not say that we will never look to the possibility of an equity deal.

This being said, the problem is to see what is under the equity and what are the other equity orders to see if you can have a sufficient level of confidence to embark such an approach.

It's Irene Snolner (ph) with Morgan Stanley.

A question on visibility concerning the strategy.

You are now focusing on medium term targets on return on capital for 2005.

So you have stopped talking about 2003 returns.

Your cost cutting program expires at the end of 2003 and you have not really told us how much of this from cost cutting you will need beyond 2003 to get us to the 2005 targets?

Additionally I note on one of your slides on refining, I think its slide 23.

You do mention a reduction on capital employed as one of the ways of getting you to the 2005 target?

So my question is, how much additional cost cutting and how much capacity reductions do we need between 2003 and 2005 to get us to the target?

Well first one explanation about setting targets.

Generally, we prefer when we define a program for several years to go up to the end of the program to show what we have delivered.

So it's the reason why we decided that this year we will for 2003, we will continue to report on this four year program and give you a final assessment of what we have delivered at the end of the four year program.

Which means that next year at the same period of the time, we will produce a new program, probably for three or four years, more likely three years than four years, of improvement of the performance of the company.

We are still thinking about the main criteria it will be in an absolute figure in terms of pre-tax operating income.

Which will be another option, which allows to integrate the buy-back policy in the picture in terms of evolution of the earnings per share in a stable environment.

So we are still thinking a bit about it and we will prepare it this year to give it to you at the beginning of next year.

What is clear when you compare the period 1999 to 2003, you have had a very large contribution coming from the synergies of the two mergers. at the end of 2003 we are at the end of the synergies programs, which means that we will have a different balance between the different components of the self-help.

And I think that we should have substantial contributions, not very different from each other, coming from the growth meaning the exploration and production, the productivity date in all business segments.

And the aggressive impacts of the buy-back.

We will come back with more precise figures next year.

But I think the three pieces will be substantial companies in terms of improvement of the earnings per share.

Hi, good afternoon, it's Doug Leggett (ph) from Citigroup.

Two question if I may.

Firstly on disposals.

Following the sale of , contributions of your specialty chemicals business at the operating levels was quite small.

And the returns don't look compelling for the group.

What is the strategic rational, the strategic benefit for continuing to hold on to the remainder of your specialty businesses?

And secondly, on reserve replacement.

Can you just confirm if you have included anything from Kashagan, given that it has been declared commercial, but the development hasn't yet been approved?

Is that in your reserve replacement numbers for last year?

Well on the first question.

In fact when you look to our chemicals portfolio.

We think that we are at a point where the specialty chemicals will have been relatively well concentrated on a position where we have a very good competitive position and we can get satisfactory returns.

In fact last year our return globally 5% is to a large extent linked to the petrochemicals themselves, which have faced very low margins.

And in most of the specialty businesses now we are the double-digit figure or close to a double-digit figure in terms of return on capital employed.

And I think that there is still some possibility of .

So we will continue to concentrate our position there and to produce globally the value of the intermediates and specialty products.

But concerning the specialties themselves, we have some very good position in additives for instance, in rubber products division, in which is a chemicals , which performed very well.

So I think we have to remain selective.

Globally, we will reduce the rate of chemicals, but we are still in fact the operating result of specialties, I think .

In the context which was not particularly brilliant.

Concerning the booking of reserves.

There were two areas where we are in the start-up phase of the projects, which are Kashagan and Dolphin.

We have booked Kashagan, we have not booked Dolphin.

Well when I say we have booked Kashagan, we have booked a first [trench] of Kashagan, because if we you will have seen it.

Two short questions really.

Firstly, can you just confirm as at the end of January, the number of shares in issue?

You said you had bought some more shares back in January.

And given the current price whether you will accelerate that program?

And the second question is to what extent do you think your production will be affected by any war in Iraq?

I mean how much will be affected from that region?

Well I will time to collect -

We sold 4.8m shares the number of shares that will have been issued by the end of January, .

So first to the war.

Well we have no production in Iraq.

So there is no direct impact for us.

There may be some indirect impact if following a decline of the Iraq production, the [effected] countries decide to increase their quotas.

And there are a few countries in which we will be concerned by this increase, which are mainly and Nigeria.

But on the other hand, the OPEC has already decided to increased its quotas to compensate for the disappearance of the Venezuelan production.

And as the Venezuelan production is coming back, we don't know exactly what will be their decision because there is no more Iraq production, they will have to enter in the picture, I think simultaneously the fact that the Venezuelan production back and that the Iraq production is down.

So we are not sure that they will move a lot their quotas.

Perhaps in the first steps to avoid any over-reaction in the market, they would do it but very likely they will after that have to take into consideration the fact that Venezuelan is .

So on the number of shares?

Yes.

The number of shares that we in 2000 include earnings per share by the end of January should be something like 650m shares.

That's the number of shares.

Because the number of shares that was issued by the end of last year was something like 678m because we still have some 32m to 40m shares.

That was the figure that you have to take into account 650m by the end of January.

Shares not controlled by the company.

Absolutely.

Yes, a question just again on the sort of last year of the self-help program.

Can you give us an idea of how much of the sort of remaining €1.1b the program is likely to come from growth and how much is ?

Well roughly a bit less than half from growth, a bit more than half coming from the end of synergies and productivity gains.

Neil Perry (ph) from UBS Warburg.

Your competitors over the last few years have spent quite a lot of money in the Downstream in a whole series of acquisitions by BP and Shell in particular.

And you are, I just think by having less exposure to the Downstream and by being very euro-centric.

You don't really have a global Downstream brand.

Is that a weakness in terms of opportunity for investment?

Particularly given your targeted returns on capital are the same Upstream and Downstream as they are practically across the board to the other major oils?

Well it is not the first time that I have stressed this idea, but I am personally convinced with the volatility of the refining margins, the safest way to secure in very good return in the Downstream is to keep the capital employed at a low level.

Because you don't suffer too much in the bad days and you have a lot of diverge on the good days.

And we have resisted and I intend to continue to resist the temptation of making big acquisitions because these asset are not made at very low prices.

Certainly not this prices.

So it is possible that we may a few limited acquisitions to increase our market share in one or two countries, in Italy or Germany where we would like to be a bit closer to 10% level in terms of market share.

But it will not have a material impact on our whole capital employed in the .

The trend will be while not growing the capital employed in the Downstream, to reduce it a bit in Europe in a mature market where now there is no growth and to increase it a bit in Africa and a few niches elsewhere.

Where we think that the outlook will be more attractive with more substantial growth.

Hi Zed Westec (ph), J.P. Morgan.

Three questions.

One is on the outlook for refining margins.

Atlantic-based inventories are very tight.

The EIA are saying that refining could be strong for two years.

What are your views?

The second question is one Chemicals.

Other countries are downgrading their mid-cycle assumptions.

Are you still confident in your mid-cycle assumption on Chemicals, which makes up most of the increase in return?

And finally on technical costs. $6.5 obviously disappeared sometime last year.

What should we expect for Upstream technical costs?

Well on the last question, the disappearance has been progressive concerning technical costs because last year we already mentioned that we felt that due to some external elements, the $6.5 per barrel was too ambitious and we remained closer to $7 than to $6.5.

This year we have kept a $7.1 per BOE figure, the same as the previous year.

In fact there is some improvement underlying but it does not appear in the figures due to some exchange rate impact.

This being said we have a strong level of concern of this situation of the contractors of the oil industry.

They are not in very good shape.

Some of them are close to disappearing and we are really concerned to avoid a lack of competition within our contractors.

Or in some places, I think some of our competitors have suffered with a lack of quality of insufficient quality in .

We are relying on the same contractors, so we are claiming the same boat.

But I think it's a point that we have to keep in mind at the point in time the CAPEX budgets are going a bit, to be sure that we will have contractors who can deliver a good job at a reasonable price.

There is a lot of hardware I think where the Far East contractors continue to make a good job and .

There are other where the situation is less favorable.

On the refining margin.

Due to the nature of your question, I will ask our Chief Strategist --?

Thanks very much.

Maybe I could just kill off a little bit on the Chemicals.

Let's just be clear about Chemicals first of all.

When we talk about mid-cycle we are not under the dilution that you come always to the same mid-cycle margins.

There is a secular decline and you oscillate around that secular decline, okay?

So I think that clears that aspect.

Refining margins, I think it's amusing that after an absolute catastrophic year in 2002, the people are now talking about two years of very strong margins.

I think one of the things that we had to think about when we saw those margins in 2002 after let's fact it a very, very good years in 2000 and 2001 was, was there any structural change in the industry that was causing these very poor margins in 2002?

And the conclusion that we have come to, we think, is that there was a conjunction of very short-term effects in 2002.

There was a very mild winter, we have talked about it already, low jet fuel demand, the OPEC quotas which narrowed the differential because and heavy sour crudes and killed off conversion margins.

And we think that is enough of an explanation for the 2002 margins.

What you have seen obviously in 2003 is the reverse of that.

We have a very cold winter, we have still got very severe weather conditions in the U.S.

You had the strike in Venezuela which took all that refining capacity out of the market in Venezuela.

You also had American refiners who were relying on treating Venezuelan crude and clearly when you have a disruption particularly in shortfall crudes, it's very difficult to replace that supply.

With Middle Eastern crude that has got a very long transit time.

So what you are seeing now is very low inventories, strong jet fuel demand for military purposes, which again is a turnaround compared with last year.

A tendency of people to want to stock-pile products with the threat of a war coming up and not being able to stock-pile those products because there isn't enough product in the market, pushing prices up.

I think the low inventories will keep the market, the refining margins strong into the driving season.

Because I think with the heating on demand and with the jet fuel demand, and with a low inventory position refineries are not going to be able to switch into gasoline production early enough to cover the driving season.

So I have got some visibility.

I mean I think the refining margins are horribly volatile, but I have got some visibility into the driving season.

After that, I will leave you to the EIA to figure out what is going to happen after that.

No one has got any visibility in refining margins beyond the middle of the year in my opinion.

Well thank you.

Probably just because generally short-term assessments are more risky than long-term assessments.

Forget then for the long-term before you can have the reality in front of you.

Hi it's Fred Lucas (ph), Cazenove.

You mentioned that the Sanofi share price makes it quite unattractive to place more of that stock into the market.

Is there anything specific that stops you finding a strategic buyer for your entire stake, thinking perhaps of the shareholder agreement with [L'Oreal]?

I had some difficulty catching your question.

We have as you know a shareholder's agreement which normally ends in December 2004.

It could be extended on a yearly basis.

As I have indicated since the beginning, the first days after the merger that we are not considering the of the group.

There is no reason for which we should extend the shareholder agreement.

And I think our interest is to keep maximum flexibility to see how we can monetize our stake in Sanofi-Synthelabo.

I think that up to now we have made a decent job in that concern, selling the most ahead of time where the value of the stock was maximum.

Today we think that the market doesn't recognize what we feel is the full value of Sanofi, so we are not in a hurry to sell.

We assume that we have not real balance sheet problem.

And while we will see in the future, but I think the maximum of flexibility is clearly in the interest of the company and .

Well perhaps last questions, not to leave you too hungry, too long.

Neil Morton (ph), Dresdner Kleinwort Wassertein.

I just want to revisit this issue of the change to your Upstream ROACE.

You mentioned the 1.5% around half of that was a definitional change and the remaining half was split roughly 50/50 between the U.K. and North Sea tax increase and Argentine gas prices.

I just wondered if you could be a little bit more specific on the ROACE in 2005 at $17, what the top line effect is in terms of U.K. taxes and potentially also a bottom-line effect on the capital employed?

And also secondly, what vis-à-vis the current situation in Argentina has caused you to change your assumption for 2005, i.e. what sort of recovery in Argentine gas prices are you assuming over that time period?

Well, our assessment is in fact that it goes for the short-term and for the medium period.

I think when you look to the speed at which our capital employed growth in the Upstream, we should have moving from the capital employed at the beginning of the period to the other end between the beginning and the end of the period.

And in fact of 0.7% also in 2005.

Concerning the U.K. impact.

It was for 2002 close to 0.5%.

In 2005 as a company we will have growth which will be closer to 0.4% than to 0.5%.

But it's not a very big change in the figure.

For Argentina, to answer more precisely your earlier question.

We have taken a relatively pessimistic view which considers we have lost in fact two thirds of the value of the gas that we are producing in Argentina for the consumption.

Because we have to keep the former prices for export which is I think the least that we could have obtained for domestic production.

And we have considered that we will continue to have a gas price being blocked by the authorities, the exchange rate between the peso and the dollar remaining at roughly one third of what it was one year previous.

So perhaps we are a bit pessimistic on this side.

We could be a bit more optimistic, but we have taken a specific approach.

And in such a case it was an impact of 0.3% for last year and in 2005 it will be close 0.25%.

So globally the impact of 1.5% it will be between 1.4% and 1.5% in 2005.

It's not a big change.

Yes, it’s Nicholas Aldridge (ph) from Deutsche Bank.

I was wondering whether you could just give an update on Block 32 in Angola?

And in particular on whether there are any immediate plans for exploration beyond the one where you have already drilled out there?

Well I am a bit embarrassed to answer your question, because well this is good news that is close to being delivered.

But we are not allowed to release press releases without an explicit consent of National Oil Company.

So we will have to wait a few weeks which is the .

I will make a more general comment on what is taking place in Angola.

I think we are on top of Block 32.

Good flow of a positive use, we have made also some positive moves on Block 17 which means that on top of the Girassol project, producing now around 220,000 barrels of oil per day.

On top of which will be launched now very soon because we have already received the offers in line with our budget and should be .

We think now that following a recent exploration work, there is a high level of probability that we will have enough reserves in the South East corner on Block 17 in the to justify .

So we think that definitely this Block will be a with a very high production and there is also some very good news coming from Block 14 where .

So there is a lot continuing to come from Angola for, as I say not next five years but probably on the longer period of time.

Well thank you very much for your attention and I propose that we meet around the table at lunch.