When Total, a Global Oil Giant, Imagines the -2-

By Russell Gold Features Dow Jones Newswires

France's Total SA, one of the world's largest oil companies, sent its top executives to Silicon Valley last summer, where they met with tech investors and futurists. At Tesla Inc.'s Bay Area factory, a Total executive tweeted a photo of a gleaming, red Model S -- an electric car that burns no oil products at all.

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The trip was meant to "open their minds," said Total Chairman and Chief Executive Patrick Pouyanné.

Total, like its peers Exxon Mobil Corp. and Royal Dutch Shell PLC, was built to service the world's massive demand for crude oil. Betting that demand will peak in the next few decades, Mr. Pouyanné wants to turn his company into one of the world's biggest suppliers of electricity, or what he often calls "the energy of the 21st century."

More than any other oil major, Total sees electricity as a hedge against oil's eventual decline and is assembling a new business around it. Last summer, it paid $1 billion for a French maker of industrial batteries. It bought a small utility that supplies gas and renewable power to households in Belgium and owns a majority stake in SunPower Corp., a California company that makes high-efficiency solar panels for governments, businesses and households.

If all goes to plan, a large piece of Total's business will one day be selling electricity to homeowners and businesses, some generated by natural gas it has extracted and some from solar panels and battery packs. By 2035, Mr. Pouyanné said, 20% of Total's energy output will be low-carbon energy such as electricity from renewable sources like wind and solar. The company recently created a "gas, renewables and power" reporting segment, which in 2016 earned about 5% of Total's $9.42 billion net operating income.

For decades, Total and other large oil companies have employed a model pioneered by John D. Rockefeller over a century ago. They find crude, pump it out of the ground, refine it into different fuels and chemicals, then sell these products to motorists, airlines and manufacturers. As oil prices rise and fall, different parts of this value chain make money.

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Today, a prolonged downturn in oil prices has dented revenues and profits at the world's large producers. Oil demand is expected to come under further pressure as auto makers improve fuel efficiency, electric vehicles become more popular and many countries push ahead with commitments to burn fewer carbon-intensive fuels.

Producing and selling electricity is a very different business. While oil is a commodity that can be extracted in one locale and stored, shipped and sold to other parts of the world, electricity must be produced and consumed simultaneously. Power grids tend to be regional, so electricity generated in Europe can't be sold to Latin America.

Most electricity is generated from coal or natural gas, and increasingly from wind, solar and other renewable energy sources. Burning oil currently generates just 4.3% of global electricity, a share that has halved in the past two decades and is expected to shrink to 2.5% by 2025, according to the International Energy Agency, a Paris-based group that monitors energy trends.

Total is already a large producer of natural gas, a cleaner-burning fuel that is expected to overtake coal by 2040 as a source of electricity because of its flexibility and lower emissions, according to the IEA. While rivals including Exxon and Shell are also bulking up on natural gas production, Total wants to go further and enter the power business.

Predicting and betting on shifts in energy consumption is a notoriously tricky business. U.K. energy giant BP PLC invested heavily in solar power in 2000, only to shut that business in 2011 after struggling to make money. Shell in 2008 pulled out of a large offshore wind power project near the mouth of London's Thames River after costs mounted.

"Oil companies like to talk about themselves as energy companies, but they are not energy companies. They are commodity companies," said Bob Lukefahr, who helped develop BP's renewable strategy in the 2000s.

Capital budgets are beholden to commodity prices and new oil ventures are costly, which make it difficult for companies to make large investments into new types of power, said Mr. Lukefahr.

At the same time, companies should be ready for the changes brought by technology, said Adam Sieminski, who stepped down as the head of the Energy Information Administration, the statistical arm of the U.S. Energy Department, in January. "You don't want to be the best buggy-whip manufacturer in the world," he said.

Mr. Pouyanné said Total remains "first an oil-and-gas company," and that remains a lucrative business. The company's net income last year, $6.2 billion, was second only to the much-larger Exxon among its Western oil peers. At the same time, he said some investors feel Total needs a diversification plan if governments and the public increasingly demand cleaner energy.

"They have some questions about what will be the impact of climate change on our company. We are trying to bring them some answers," he said.

Some of the challenges are apparent in Mr. Pouyanné's own household. He said he tried and failed to persuade his wife that they should buy an electric car. He still drives a Renault with a conventional engine.

Most industry forecasters expect oil to remain a major source of energy fueling global economies. The IEA says consumer demand for oil will keep growing for another two decades unless governments take sharper action to curb emissions.

But electricity consumption is expected to grow faster than oil -- 2% a year through 2040, compared with oil's 0.5% growth, according to the IEA.

Underlying this shift is a global push to use fuels with lower carbon emissions. Over 140 countries have ratified an 2015 agreement struck in Paris to reduce emissions as a way to tackle climate change. Their methods generally include shifting away from oil and coal and toward energy sources like gas, renewables and even nuclear, which all generate electricity. The U.S. has since said it plans to pull out of the accord.

Producing clean energy was much more expensive in the late 1990s and early 2000s, when oil companies conducted highly public experiments with alternative energy sources. Production costs for solar panels and other renewable energy projects have since plummeted.

"Sometimes you can be wrong if you are 15 years" too soon, said Mr. Pouyanné.

Shell last year led a consortium that won a bid to build a wind farm off the coast of Holland that could power a million homes at prices lower than competing coal and gas projects. Norwegian oil-and-gas company Statoil ASA recently announced plans to increase its spending on renewables from 5% today to at least 15% by 2030, with an emphasis on offshore wind.

Mr. Pouyanné, 53 years old, accelerated Total's expansion into electricity after two events rattled the company. In October 2014, Total's then-CEO, Christophe de Margerie, was killed in an airplane crash in Russia. Mr. Pouyanné, who was running Total's refining and chemicals business, was quickly promoted to the top job.

At the same time, a glut of oil was overwhelming demand, causing oil prices to collapse from a high of $107.26 a barrel to $53.27 by the end of the year. Total recorded a $5.7 billion loss in the final quarter of 2014, its worst quarterly result in decades, and the first quarter with Mr. Pouyanné at the helm.

"I became CEO at the worst possible moment," he said.

He took over a nearly century-old company with fossil fuel operations in 130 countries. Like its fellow Western oil companies, Total had large exploration, refining and chemical divisions. Mr. Pouyanné began cutting costs including the company's capital budget. Total returned to profitability in 2015 even as oil prices fell further. Oil currently trades around $46 a barrel.

Mr. de Margerie, his predecessor, was outspoken about the challenges facing the oil business. At an industry conference in London in 2007, the former CEO surprised the crowd by declaring that oil-production growth forecasts were too optimistic because of depleting conventional reservoirs.

That outlook prompted Total to begin exploring alternative sources of energy. It paid $1.37 billion for a 60% stake in SunPower in 2011, and scooped up smaller stakes in early-stage clean-energy startups.

Total's stake in SunPower has since lost more than half its market value amid a sharp decline in prices of solar panels. SunPower has posted losses for the past two years.

Unlike oil and gas, where output can be turned up or down in response to demand, solar energy is produced only when the sun is shining. Its value to consumers and power companies is limited unless the energy can be stored. That thinking drove Mr. Pouyanné in 2016 to purchase Saft Groupe SA, a French battery maker

Saft supplied high-end batteries for satellites, airplanes and smart meters. While much of the battery industry focused on bringing down prices, Saft specialized in long-life and durability. When the European Space Agency sends a robotic rover to Mars in 2020, the exploration vehicle will use Saft batteries.

Saft Chairman and CEO Ghislain Lescuyer said Saft is looking for ways to work with SunPower. While he declined to discuss details, such a partnership could produce a solar panel-and-battery combination that could compete with Tesla -- which recently acquired SolarCity Corp. -- and other companies exploring similar energy products.

Tom Werner, SunPower's Chairman and CEO, said the company benefits from Total's focus on long-term strategy and size, even though it can be at odds with the speed and nimbleness required of a solar company. "There is no model to emulate," he said.

Last June, Total acquired another piece of the puzzle it is trying to assemble when it paid about $200 million for Lampiris NV, a gas and renewable power retailer in Belgium. After operating for a little over a decade in the Belgian residential energy market, the company won more than one million customers.

Now that Total controls companies that generate, store and sell electricity. Mr. Pouyanné is trying to figure out how to fit the pieces together.

"To be clear, these are investments," he said of Total's foray into electricity. "We have to be patient."

Write to Russell Gold at russell.gold@wsj.com

(END) Dow Jones Newswires

June 13, 2017 11:19 ET (15:19 GMT)