Understanding the Strategy of French

Energy Giant Total in Mexico

Gerardo A. Escamilla
November 23, 2017

Introduction to Organisations & Corporate Strategy (IO&CS)

At a Glance: Who is Total and Its Strategies; Deep Dive into Mexican
Energy Sector and Recommendations

1 Who is Total? How are its strategies outlined? p.2

2 Mexico is open for business! p.5

3 What is the strategic position of Total in the Mexican O&G industry? p.7
Total should invest in three fronts:
4 1) Deep Water 2) Diversification 3) Alliance with PEMEX p.11

5 Appendix: Internal & External Factors by PESTEL & Porter p.13

Gerardo A. Escamilla | 01
Totals Has Worldwide Presence and Across 3 Oil & Gas Sectors,
while Operations in Mexico Started Since 1982
Totals Value Stream with Operations in Mxico1,2 Mxico Operations
(2016 | Total Income 9,420 Milions of $USD; Net Operating Income & Percent Change fromLast Year)

Downstream Upstream Marketing & Servicing

$4,201 $3,633 $1,586
-14% -24%
-24% -7%

Exploration
& Marketing Worldwide New
Refining & Petrochemicals Renewables Retail Network Gas Oil Supply Energies
Production

700MW 4 Contracts 25% Gas Lubricants,

Solar (2016) de Litoral Special
Fluids

Petro- Specialty
Refining Trading Shipping
chemicals Chemicals

Polymers & Fluid trans. Crude to

Styrene Sealing Port Arthur
Monomers Systems

Sources:
1Total 2016 Financial Statements Gerardo A. Escamilla | 02
2Total in Mexico
Fundamental Part of Totals Prescriptive Strategy Is to Invest in
Affordable O&G Projects, where Mxico Leads through Tenders
Affordable Energy Is One of 4 Pillars to Back Up Totals Ambition to Total Already Considers Growth in Exploration and Production a
Become The Responsible Energy Major Strategic Objective
Totals Ambition & 4 Pillars1 Totals Strategy1
(2017) (2017)

Growth: Exp. & Prod.

The Responsible Energy Major Production +5%/y (2014-2020)
Costs , Cash Refining Competitiveness
Disciplined Investments

Affordable Energy Customer

Clean Energy
Energy Efficiency Service
Increase distribution of
products
Expand Gas Value Chain
High-growth regions
Innovation

While Global Upstream Investments Are Down, Total Plans to Invest in In 2016, Almost 80% of Totals Investments Were Focused in the
New Oil & Gas Projects around $16-17 Billion during 2017 Upstream Sector, with Plans to Invest $1.25B in 2017 Exploration1
Totals CapEx Investment Strategy2 Investments per Sector
($15-17B USD expected for 2017) (2016 | Total Investment of 20,390; Milions of $USD)

Cost Deflation
1 $1.25B USD $10M - $2B USD
Exploration Average Cost of Deep
Optimize Design
2 Budget 2017 Water Projects3

Improve Execution
2017
3 $16-17B USD

Sources:
1Total 2016 Annual Financial Statements 3Bloomberg New Energy Finance Gerardo A. Escamilla | 03
2Total 2016 Annual Shareholders Meeting
At a Glance: Who is Total and Its Strategies; Deep Dive into Mexican
Energy Sector and Recommendations

1 Who is Total? How are its strategies outlined? p.2

2 Mexico is open for business! p.5

3 What is the strategic position of Total in the Mexican O&G industry? p.7
Total should invest in three fronts:
4 1) Deep Water 2) Diversification 3) Alliance with PEMEX p.11

5 Appendix: Internal & External Factors by PESTEL & Porter p.13

Gerardo A. Escamilla | 04
 The 2013 Energy Reform Freed Mexico from a 75-Year Old State-Owned
Monopoly over the Energy Sector
Private Investments3,5
Oil Expropriation1 Generation (48), Supply (24)
Contracts Tender (15+ years)
25-75% for Government

1938 2013 2015 2017

Energy Reforms2,4 NAFTA Renegotiation
Strategy by State (NES, T&D, Nuc) Unclear
Unbundle Chain (GTDS) Against US job losses
Private Investments Chapter 6

Over 137,000 km2 of Land Is Auctioned in Area Blocks Concentrated in Less than Half of 157 Auctioned Area Blocks Are Formalised, while
Deep Water and Shallow Water Contracts Round 2 Had CheapestCosts of Installed Capacity3
Auctioned Area per Contract Type and by Auction Round3
(137,558 km2 Auctioned Area; 157 contracts/rea blocks)
Round 1 Round 2 Round 3 Tendered Price per MWh ($/MWh)6
2015 2016 2017 (2016; Round 2 Power Auctions)
140 90 40
8 90k km 2 of
Deep 29,152 km2 82,143 km 2 26,263 km 2 $40/MWh Max
Thousands

6.8
Thousands

80 Water contracts
120 38 of 54 31 of 68 0 of 35
40 29% 70 8.9 need huge capital
formalised formalised formalised $32/MWh $33.5/MWh Avg
100 60 investments
$27/MWh
80 50
40
60 0.8 66.4
30
4.5 70% 46% 0%
40 90 65% 20
10 23.8 26.3
20 -
0
- Round 1 Round 2 Round 3 Round 1 Round 2 Round 3
Sources:
1Discurso del Presidente Lzaro Crdenas con motivo de la Expropiacin Petrolera, 1938. 3Comisin Nacional de Hidrocarburos 5El Universal Gerardo A. Escamilla | 05
2Mensaje a la Nacin con motivo de la Presentacin de la Reforma Energtica, 2013. 4KPMG 6Bloomberg Energy Finance
At a Glance: Who is Total and Its Strategies; Deep Dive into Mexican
Energy Sector and Recommendations

1 Who is Total? How are its strategies outlined? p.2

2 Mexico is open for business! p.5

3 What is the strategic position of Total in the Mexican O&G industry? p.7
Total should invest in three fronts:
4 1) Deep Water 2) Diversification 3) Alliance with PEMEX p.11

5 Appendix: Internal & External Factors by PESTEL & Porter p.13

Gerardo A. Escamilla | 06
52 Factors Highlight Totals External Opportunities in the Mexican
Energy Sector and Predominant Strengths Over Weaknesses
The Energy Sectors Outlook Can Be Analysed due to Standardised 13% More Opportunities than Threats and 3.5 Times More Strengths
Methodology of External and Internal Factors than WeaknessesAre an Advantage to Undertake the Market
Internal/External Factor Analysis Extract1 Factor Analysis by SWOT1
(2017; Porter & PESTEL Factors, SWOT and Internal/External Categories) (2017; 52 Total Factors)

13% More

ABRIDGED EXTRACT

3.5x More
52 Valid Factors from 14
Sources

Almost Two-Thirds of Identified Factors Are External, Particularly on SWOT Analysis Highlights
(2017;52 Total Factors)
PESTEL StrategyAccounts for More than Half of Factors
Factors Affecting Total in Mxico, by Factors Affecting Total in Mxico, by Better profitability (8.7%) than major competitors
External/Internal
(2017;52 Total Factors)
PESTEL/Porter
(2017;52 Total Factors)
S R&D: increase production & address the 2C Scenario
External Internal PESTEL Porter
Huge size lowers agility to react, leaving space for New Entrants
W Supplier of Oil & Gas in Mexico is whoever wins the contracts
18
Below average income per capita (12,806 USD/y) = cheap labour
35% 24
28
O New entrants must invest heavily in Upstream capital projects
46%
34 54% Creation of multiple New Ventures after the Energy Reform
65% T 36% of adults between 25-64 have upper secondary education

Sources:
1Gerardo A. Escamilla Analysis Gerardo A. Escamilla | 07
Economic PESTEL Factors Indicate Safety Risks and Low Labour
Cost in the Mexican Energy Sector
More than Two-Thirds of PESTEL Factors Belong to Economic All Drilling Areas Auctioned by the Mexican Government Are Overseen
Reasons, Including Illegal Economic Activity in Mexico by Drug Cartels and Have Caused Losses in the Past
PESTEL Factors, by External/Internal1 Drug Trafficking & Energy Auctions Map3
(2017; 28 PESTEL Factors)

Energy Auction Area Blocks

The Mexican War on Drugs Caused almost 8 Times More than the
Afghanistan War, Causing Downturn for Household Earnings
Killings in Mexico vs. Civilian Deaths in Mexicos Rank in Homicide rate4
Afghanistan and Iraq2 (2016; OECD Avg3.6, per 100,000 inhabitants)
(2007 2015)
8x More 6.5x More Hom icides
2x More than OECD Countries

Mexicos Rank in Personal earnings4 Geokinetics Spent 5% of Contract

(2016; OECD Avg$44,290)
with PEMEX on Security5
65% Low er than
OECD Countries
$2.5
Million USD
Sources:
1Gerardo A. Escamilla Analysis 3Business Insider 5Wall Street Journal Gerardo A. Escamilla | 08
2 INEGI; Iraq Body Count; United Nations 4OECD Better Life Index
Porters Five Forces Reveal a Concerning Competitive Situation to
Acquire Energy Contracts from the Mexican Government
Almost 80% of Porters Five Forces Factors Dealwith New Entrants or Participating Companies Are Equally Divided between Local and
Competitors, and Almost Half Are Internal withinTotal Foreign, although Three-Fourths of Contracts Stay in America
Porter Five Forces, by External/Internal1 Participating Companies by Location Type1 Formalised Contracts per World Region1
(2017; 24 PESTEL Factors) (2015-2017; 67 Companies) (2015-2017; 133 Formalised Contracts)

100
3x
More
76%
4 Contracts
Held by Total
(3%)

While Holding 3% of Contracts, Total Owns 12% of Area Blocks Leaned

to Deep Water Like Other Foreign Companies
Top 20 Companies by Area Awarded and per Total Area Blocks Awarded per Contract Type From 67 Companies, Only 6 Pose Threat to due to Financial Health and
Contract Type
(2015-2017; 67 Companies, 31,295 km2 awarded)
(2015-2017; 67 Companies, 31,295 km2 awarded)
Strategic Objectives2,3,4
Good position
18,816
3,863 km2
Country USA France UK Norway China Malaysia Mxico
(12% of Area) 53% of
Investment Mkt Cap
($USD B)
341.3 137.6 128.7 65.3 60.0 - -
6,159 6,320 Op. Profit 11.5 7.7 6.2 9.7 4.9 8.1
-
($USD B)
5% 5% 3% 17% 19% 16%
Op Cashflow
($USD B)
30.0 20.9 15.7 14.8 12.6 13.0 -

Production
Occupied 21% 15% 79% (KBOE/d)
2,365 2,452 3,300 1,978 453 2,363 -
6 Threats
20 Companies of 67 Available 71,200 km2 38,800 km2 1,680 km2 Yes Yes Yes Yes No No Yes
(km2) Strategy?

Sources:
1Gerardo A. Escamilla Analysis 3ExxonMobil, BP, Statoil, CNOOC, Petronas Financial Statements 2016 Gerardo A. Escamilla | 09
2 Seeking Alpha 4Sierra Oil & Gas Web Site
At a Glance: Who is Total and Its Strategies; Deep Dive into Mexican
Energy Sector and Recommendations

1 Who is Total? How are its strategies outlined? p.2

2 Mexico is open for business! p.5

3 What is the strategic position of Total in the Mexican O&G industry? p.7
Total should invest in three fronts:
4 1) Deep Water 2) Diversification 3) Alliance with PEMEX p.11

5 Appendix: Internal & External Factors by PESTEL & Porter p.13

Gerardo A. Escamilla | 10
Total Should Focus in Upstream Investments, Lowering Risk by
Diversifying and Establishing Alliances with PEMEX
1. Invest in Deep Water to Meet5% Growth/y, 2. Diversify Investments Across Segments 3. Establish an Alliance with PEMEX: The Client,
Backed by IEAs Assurance of Demand and Other Countries Supplier and Competitor
Totals Exploration Budget and Growth Target1 Total and Mexicos Production Growth1,2
(2016) (2016-2020; Milions of Barrels per Day)
Joint
Target: 5% Growth/year (Barrels/Day) Contracts
2017
$16-17B USD $1.25B USD 20% $250M USD
Exploration Budget Deep Water Mexico
Gap will get bigger
Mxico is not enough to
meet Totals goals
Reform Effect in Oil Production Shared Job
by 20402 Risk/ Exchange
Revenue Programs
76% More
Renewables Chemicals Gas Transport
1. Increase in Oil Demand 2022
2. Not Enough Upstream Projects Solar Lubricants Acquisitions
+1.6 million 3. Lack of Projects Price Increase
barrels/day Wind Specialty Alliances
Products Technology
Network Leasing
Existing Development
Partnerships

Results Ownership of Deep Water Operations in Mxico Results Reduced risk of overall losses due to Exploration Results Enhanced communication within infrastructure

20% of Budget for Mxico is low-risk and enough Additional Revenue from existing channels Stronger tramsportation networks

Win against lower competition for Deep Water projects Higher probabilityto win joint contracts with BP, Statoil,
Petronas, CNOOC or ExxonMobil

Risks Extra expenses to cover for security (5% of Project?) Risks Investing is too diverse for Upstream purposes Risks Ineffective negotiation leverage

Struggle & spend millions to maybe not win a contract Totals 5% growth gap becomes too big to compensate ExxonMobil advantaging from Totals alliances
intention
IEA could be vastly wrong about its demand/Price Gas Transport Cartel Security Cultural shock between Total and PEMEX & posible
scenarios ineffective deals

Sources:
1Total 2016 Annual Financial Statements Gerardo A. Escamilla | 11
2 OECD Economic Surveys: Mexico 2015
At a Glance: Who is Total and Its Strategies; Deep Dive into Mexican
Energy Sector and Recommendations

1 Who is Total? How are its strategies outlined? p.2

2 Mexico is open for business! p.5

3 What is the strategic position of Total in the Mexican O&G industry? p.7
Total should invest in three fronts:
4 1) Deep Water 2) Diversification 3) Alliance with PEMEX p.11

5 Appendix: Internal & External Factors by PESTEL & Porter p.13

Gerardo A. Escamilla | 12
Appendix. Factors Influencing Totals Strategic Position in the
Mexican Energy Sector: PESTEL
Internal
PESTEL (28) External

1. Technological Higher technological experience and investments than Mexico, is a strength for Total when investing in Deep Water and Shallow Water projects.
2. Technological Terrestrial Fields, unlike Water fields are easier to operate and require less technology. Total, has resources and technology to deepen Shallow Water
S and Deep Water contracts.
3. Environmental Total bases their R&D, and future investments with two objectives: to increase production and to account for the 2C Scenario from the IEA. By investing
responsibly, Total presents a strength against many other competitors.
4. Environmental Total is susceptible to the environmental parameters of the oil and financial markets. This is a risk of the company's strategic decisions.
W 5. Social Cultural barriers may be a relevant weakness for Total's upper management when dealing with the Mexican Industry.
6. Political Mexico ranks above average than OECD on civic engagement. Receptive people to investments represents an opportunity to Total.
7. Economic Below average ranking in jobs and earnings represent a positive outlook for foreign investment.
8. Economic Below average income per capita (12,806 USD/y) represents a cheap labour force in Mexican operations
9. Economic Below average employment rate of 60% of people between 15 and 64 represents an opportunity to acquire labour across the country
10. Economic Mexico reflect a reality that is still far from a competitive marketplace, and the benefits that such markets generate. This situation is especially obvious in
sectors that operate through network infrastructures
11. Economic 2016 US presidential elections strengthened the USD. This is an opportunity in currency exchange across countries.
12. Economic Economic growth in the United States is expected to increase the demand for goods and employment in Mexico, positively affecting the growth rate of
O the domestic economy.
13. Economic The new industry organization is similar to the wholesale electricity market models established around the world since the early nineties of the last
century. This represents an opportunity to Total since the untapped Mexican environment is well known in its behaviour.
14. Environmental Oil & Gas Area blocks are in a war-free zone, protected by Mexican and American government.
15. Legal The Mexican Energy Reform has established special penalties to severely punish monopolistic practices and concentration phenomena
16. Political Federal Commission of Economic Competition (COFE CE) was set up, which, in its capacity as a autonomous constitutional body, was vested with a set
new powers aimed at eliminating barriers to competition and free market participation, regulating access to essential consumables, and ordering the
separation of assets for the purpose of eliminating their anticompetitive effects.

Gerardo A. Escamilla | 13
Appendix. Factors Influencing Totals Strategic Position in the
Mexican Energy Sector: PESTEL (Contd)
Internal
17. Social Mexico ranks above average than OECD on civic engagement. Receptive people to investments represents an opportunity to Total External
O 18. Social Mexico has below average work-life balance, where 28% of employees work very long hours. An opportunity to use these hours for new ventures is
possible
19. Economic 2016 decision of England to exit the European Union caused multinational impacts in Economy
20. Economic 3.4% Inflation Rate in Mexico during 2016 is driven by higher price of electricity and fuels, and deviation of the Mexican peso against other currencies
near the end of the year.
21. Economic 2.3% growth in Mexican GDP. Marginally lower than previous year (2015).
22. Environmental Below average environmental quality in Mxico poses a threat for private investments in the Oil&Gas Sector.
23. Environmental General Law on Climate Change aims to reduce greenhouse gas (GHG) emissions by 30% below a business-as-usual scenario by 2020 and by 50% by
2050 from the 2000 level, conditional on international financial support
T 24. Environmental Carbon tax on fuels was introduced in 2014 and the retail price of gasoline and diesel will be raised until 2017
25. Political Reform holds state responsible of planning and control of the National Electric System (SEN) and electricity transmission and distribution. This
represents a political threat due to lack of control within the supply chain
26. Political Mexico's president argued that violence is reducing in Mexico during his third State of the Union address, while in reality violence has increased slowly.
This poses a political threat to Total
27. Political Jaguar was founded in 2014 by PEMEX and SENER ex-functionaries. This is a threat to Total that shows an underlying sense of corruption
28. Social Only 36% of adults between 25-64 have upper secondary education. A majority of uneducated workforce presents a threat for technical offers, but an
opportunity for manual labour

Gerardo A. Escamilla | 14
Appendix. Factors Influencing Totals Strategic Position in the
Mexican Energy Sector: Porter
Internal
Porter (24) External

1. Competitors At 8.7%, Total had better profitability than major competitors in the international industry, BP, Chevron, ExxonMobil and Shell; thus showcasing its
Operational Strength
2. Competitors Total reaches for consistent investments of $15-18B through 2020. Focusing on cost deflation, optimizing design and improving execution.
3. Competitors Total performed favorably with those peers, confirming capacity to withstand low oil prices
4. Competitors Total has operational excellence as a leverage tool. This serves as a strength against existing competitors in the Energy sectors.
5. Competitors Total ensures their capacity to manage complex projects, which means a strength in logistics and operational expertise. These trumps against
competitors coming into the marketplace.
S 6. Customers Total entered into an agreement to rebrand a network of around 250 service stations around Mexico City. This is a strength towards end-customers by
increasing the value of the brand.
7. Customers Total has Refineries in Port Arthur (USA) that already buys crude oil from Mexico. This network is a strength against bargaining power of buyers
8. New Entrants Total has shown average annual growth of 5% during 2014-2020. The strategy focused in entry into low-cost producing fields is crucial for Mexico
9. New Entrants Total has plentiful assets in technological expertise, which makes them a leader against new entrants.
10. Substitutes Total ensures advantage over substitute products by selling petrochemicals directly to Mxico by partnering with PEMEX
11. Suppliers Alliances with PEMEX and winning contract tenders provides Total with a control of the supply of crude oil from deep water projects. This is a strength
within the supply chain, lowering the bargaining power of suppliers.
12. New Entrants Total's huge size reduces its agility to react to the Mexican Energy Sector, opening place for nimbler New Entrants.
W
13. Suppliers The supplier of Oil & Gas in Mexico is whoever wins the contracts, Total has a weakness with other companies winning contracts.
14. New Entrants Federal Commission of Economic Competition (COFE CE) was set up, which, in its capacity as a autonomous constitutional body, was vested with a set
new powers aimed at eliminating barriers to competition and free market participation, regulating access to essential consumables, and ordering the
separation of assets for the purpose of eliminating their anticompetitive effects.
O
15. New Entrants Reform states that private work will be stated under contracts, protecting the safety of the projects for all entering companies.
16. New Entrants Record low prices on the Second Auction reflects an extremely cost-competitive scenario for competitors. Total can benefit from their huge infrastructure
to reduce costs

Gerardo A. Escamilla | 15
Appendix. Factors Influencing Totals Strategic Position in the
Mexican Energy Sector: Porter (Contd)
Internal
17. New Entrants After reform, 48 new entrants in exploration and extraction & 24 transport & commerce of natural gas. This is an opportunity for Total to dominate a new External
market .
18. New Entrants New entrants in Mxico must invest heavily in capital projects, especially for Upstream. Total, having plentiful resources, can outshine existing New
O Entrants
19. Substitutes Through tendering process, any competitor can dominate the contracts. There is an opportunity to employ economies of scale and technology to reduce
costs.
20. Competitors Jaguar and Sungod dominate the market in the Mexican Energy Sector, reducing the possibility to win contracts.
21. Competitors Economic reform enhances a fair competitive marketplace, which is far from what currently exists in Mxico. This represents an opportunity to diminish
political factors in business decisions and create fair competition.
22. Competitors Grupo Carso holds 3 contracts as of 2016, and has 27% Operating Profit in their Energy sector
T
23. New Entrants Creation of multiple New Ventures after the Energy Reform, threatens companies by increasing the amount of companies competing for market share
dominance
24. New Entrants Economic reform enhances a fair competitive marketplace, which is far from what currently exists in Mxico. This represents a threat in the way that
barriers of entry in Mxico are lowered.

Gerardo A. Escamilla | 16