Total desperation

Oil tanker MV Erika sinks in the French Atlantic. Photo by Jean Gaumy/Magnum Photos
Oil tanker MV Erika sinks in the French Atlantic. Photo by Jean Gaumy/Magnum Photos

Perhaps angels could not attend the memorial service of Quebec billionaire Paul Desmarais Sr. in December, but many among the high and mighty came to fill the ancient pews of Montreal’s magnificent Notre-Dame Basilica and pay final respects.

Among them were Canadian Prime Minister Stephen Harper, former prime ministers Jean Chretien, Paul Martin and Brian Mulroney, five Quebec premiers, former French president Nicolas Sarkozy, and corporate dealmakers from across North America, Europe and Asia.

The eulogies summarized a man who was smart and scrappy in his youth, yet unfailingly courteous and charming in his last decades – especially when escorting guests at his secluded, ornate chateau-estate in Sagard. A personal net worth estimated at $4.4 billion can buy such Renaissance-era replicas.

Desmarais’s corporate locus was the aptly named Power Corp., which controlled legions of leading Canadian and U.S. insurance companies, mutual funds and holding companies, each of which in turn took valuable positions in yet more companies.

Think former newspaper baron Conrad Black, but without the scornful bombast, debt-plagued vanity press and recently discarded Florida jail jumpsuit. When Desmarais completed a corporate coup, it occurred at a bare whisper. He refrained from making newspapers like La Presse a personal pulpit. And he never faced prosecutors in a courtroom for criminal fraud or fleecing his own shareholders. Call him the mild-mannered mogul.

But no man is a saint. This is the story of one rogue oil company the powerful Desmarais family has controlled, but failed to properly govern, for decades.

In December 1999, disaster struck the French Atlantic coast region of Brittany when a Maltese-flagged oil tanker called the MV Erika foundered in high seas, broke apart, and sent 20,000 tonnes of crude lapping toward prized beaches and fishing grounds. The slick eventually contaminated 400 kilometres of coastline, killed thousands of birds and marine animals, and dealt a body blow to regional fisheries and tourism.

It was the single worst oil spill in European history. The escaped oil belonged to French oil giant Total S.A. In a common industry practice, it had hired the Erika to deliver a cargo of crude across international waters, delegated the ship-worthiness inspection to an Italian company, and allowed it to be shipped under a flag of convenience.

When Total was charged in French civil and criminal courts for the oil spill damages, it sought legal immunity on the grounds that the French courts lacked jurisdiction (since the Erika sank in international waters), and that the insolvent Italian inspection company or untraceable ship owner were solely liable.

Facing intense fury from the French public, press and many politicians for its cunning courtroom evasions, Total belatedly paid some $260 million for cleanup costs, and another $200 million in 2008 after a French court found it criminally liable for the Erika oil spill. Yet the legal ordeal did not end then. The oil company formally sought to have that criminal judgment overturned, but lost that appeal in 2012.

The Erika case was infamous in France, but only a handful of Canadians knew that the Desmarais family has held the controlling block of shares in Total S.A. since the 1980s, and is still the guiding force behind its global operations. Paul Desmarais Jr., CEO of Power Corp., is a current Total director and proxy for key share and voting rights.

It is doubtful any of the Desmarais clan knew the Erika had a badly corroded hull before it left on its fateful sailing, or chose that particular Maltese rust-bucket, or approved a shoddy ship inspection report. But what is telling is that Total spent a decade, and a fortune in legal fees, denying liability for the calamity the Erika caused others on the French coast. And that the tragedy did not compel its powerful directors to adopt a far tighter code of governance. Or instil tougher due diligence measures to prevent future marine oil accidents.

In the spring of 2012, Total’s mammoth gas drilling platform in the North Sea reported a serious, deep natural gas leak. Slated to be a saviour and to reverse slumping company revenues, the Elgin project became known as the “well from hell.” The blowout caused Total share values to plummet $10 billion in mere days. The leak took several weeks to plug, put the expensive, state-of-the-art North Sea rig out of commission for a year, and halted production at the Elgin and adjacent Franklin projects off the Scotland coast.

Total’s North Sea blowout was traced to deep-sea pipe corrosion, which the company claimed last March was understood and preventable. But in October, corrosion-induced pipeline leaks knocked out a huge new oil project under the Kazakhstan portion of the Caspian Sea just as it was being commissioned by a consortium led by Total.

The $40 billion Kashagan oil deposit is one of the world’s biggest, richest discoveries in recent years. The project partners include Total, ExxonMobil, Royal Dutch Shell and Italian oil company Eni. Despite companies with such experience and deep pockets, the ominous corrosion leaks put Total’s Caspian project in peril and its oil revenues in limbo, and hammered company stock.

These three examples – the 1999 Erika oil spill, the 2012 North Sea natural gas leak and the 2013 Caspian pipeline cracks – are particularly pertinent because Total has leased vast tracts of northern Alberta to dig up the greasy black bitumen known as oil sands, and export it for decades via the proposed Northern Gateway pipeline to oil tanker terminals on British Columbia’s spectacular, pristine coast.

Total announced plans last November to increase output from its $8 billion Joslyn oil sands site in northern Alberta from 100,000 barrels per day to 160,000 barrels per day. It also holds a joint-venture interest (with Suncor and Teck Resources) in the $13.5 billion Fort Hills oil sands project (estimated production 180,000 barrels per day), and another with ConocoPhillips called Surmont, which is ramping up oil sands output to 136,000 barrels per day.

Given these heavy bets on oil sands output, Total’s worst nightmare is having no pipelines to carry the crude to ocean export terminals. So it has pre-booked capacity on the proposed Keystone XL pipeline, which would link Alberta to Total’s diesel refinery in Port Arthur, Texas. And it is one of the companies that put up $10 million to help Enbridge get regulatory approval for the Northern Gateway pipeline across B.C.

But the Keystone XL option may already be dead. With major stateside refineries at full capacity, U.S. companies and politicians are now pressing Washington for unrefined oil export licences – and fast losing interest in aiding oil sands competitors from Canada or sharing tight U.S. pipeline and refinery capacity.

If the Keystone XL pipeline dies from such disinterest, then the Northern Gateway pipeline becomes the equivalent of a desperate Hail Mary touchdown pass for companies like Total. With Alberta oil sands output predicted to triple in the next two decades, pressure on Ottawa to ensure pipeline approvals will intensify. (This is even as a growing chorus of investors wake up to the risks of such projects becoming stranded assets in an increasingly carbon-constrained world, in which Total currently has the seventh-largest carbon reserves of all oil and gas companies.)

How far will Total go with its lobbying efforts? Will it push too far?

In May 2013 French prosecutors recommended criminally charging Total and its CEO, Christophe de Margerie, for corruption and embezzlement relating to secret oil deals with the Iranian government in the 1990s. Both the company and CEO have denied the criminal charges, saying Total acted at all times in accordance with applicable laws. The case has not yet proceeded to trial, and no convictions have been registered.

In a related, simultaneous U.S. court action, however, the U.S. Justice Department fined Total $398 million for bribing Iranian officials to obtain valuable oil concessions there, and violating the Foreign Corrupt Practices Act. It was the fourth-largest penalty ever paid under the statute.

Total agreed to pay the $398 million bribery penalty, but conceded no guilt. Instead, its chief financial officer merely remarked: “These settlements, the outcome of which are customary in the United States, allow us to put an end to this investigation.”

Sinking oil tankers. Deep-sea blowouts. Corrosion-cracked Caspian pipelines. Bribery schemes. If one of the most powerful, politically connected Canadian dynasties cannot or will not responsibly govern a company like Total S.A. from inside the boardroom, then who on the outside can?

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