TotalEnergies (TTE) Risk Analysis

A substantial part of TotalEnergies’ activities is located in strategic geographical areas or countries that may face conditions of political, geopolitical, social and/or economic instability. Some of these countries or areas have experienced such situations of instability in recent years, to varying degrees. Whether these conditions appear alone or in combination, they could disrupt TotalEnergies’ economic and commercial activities in the countries or geographical areas concerned. In addition, the occurrence of epidemics or pandemics may significantly affect the operating conditions of certain projects or even delay their execution. In Africa (excluding North Africa), which accounts for 19% of TotalEnergies’ 2021 oil and gas production, some of these situations of political, social and/or economic instability arose in countries where TotalEnergies has production, notably in Nigeria, which is one of the main contributing countries to TotalEnergies’ production (refer to point 2.3.3 of Chapter 2). In the north of Mozambique, given the evolution of the security situation in the Cabo Delgado province where TotalEnergies is developing the Mozambique LNG project, TotalEnergies confirmed on April 26, 2021 the withdrawal of all Mozambique LNG personnel from the Afungi site. This situation led TotalEnergies, as the operator, to declare force majeure. In the Middle East and North Africa, which accounted for 24% of TotalEnergies’ 2021 oil and gas production, some countries are the setting for political instability that could be associated with violent conflicts and terrorist acts, such as in Libya and Iraq. In Yemen, which is in a state of civil war, the deterioration of security conditions in the vicinity of the Balhaf site caused Yemen LNG, in which TotalEnergies holds an interest of 39.62%, to stop its commercial production and export of LNG and to declare force majeure to its various stakeholders in 2015. The plant has been put in preservation mode. In South America, which accounted for 7% of TotalEnergies’ 2021 oil and gas production, several countries in which TotalEnergies has production have recently experienced political or economic instability, notably Argentina and Venezuela. In July 2021 TotalEnergies, through its subsidiary Total Venezuela, transferred its 30.32% non-operated minority interest in Petrocedeño S.A. to Corporación Venezolana del Petróleo, S.A, a subsidiary of PdVSA. TotalEnergies has also initiated a process to sell its 69.50% interest in the Yucal Placer field and a process to return the license of Block 4 of Plataforma Deltana (49%). In Asia-Pacific, in Myanmar, following the coup d'état of February 1, 2021, TotalEnergies has firmly condemned the violence and human rights abuses perpetuated in the country. In order to maintain a source of electricity to the people of Yangon and western Thailand, and to protect the Company's employees from forced labor, TotalEnergies decided to continue gas production while halting ongoing projects. But, the impossibility - despite the Company's efforts - to meet the expectations of stakeholders regarding the cessation of payments linked to gas sales, and the deterioration of the human rights situation and the rule of law in Myanmar, led TotalEnergies to reassess the situation, which no longer allows the Company to make a sufficiently positive contribution in this country and to decide on January 21, 2022 to initiate the process of withdrawing from contracts, effective July 2022. The occurrence and scale of incidents related to political, geopolitical, economic, health or social instability in certain strategic geographical areas or countries may be unpredictable. Such incidents are likely to adversely affect operating conditions, generate cost increases and lead to a significant declines in production, delays in and even halting of certain projects, and the loss of market share. Such incidents may also expose employees and jeopardize their safety, as well as that of TotalEnergies’ facilities. These risks may have an adverse impact on TotalEnergies’ operating income and financial condition.

Climate change potentially has multiple effects that could harm TotalEnergies’ operations. The increasing scarcity of water could be detrimental to operations, rising sea levels could harm certain coastal activities, and the proliferation of extreme weather events could damage onshore and offshore facilities. All these factors could increase the operating costs of the facilities and adversely affect TotalEnergies' operating income. In addition, in Europe, TotalEnergies' industrial facilities participate in the CO2 emissions trading system (EU-ETS). The financial risk associated with the purchase of these allowances on the market could increase following the reform of the system that was approved in 2018. This emission allowance market entered its fourth phase in 2021. TotalEnergies estimates that approximately 30% of the emissions in the EU-ETS scope will not be covered by free allowances over the period from 2021 to 2030 (phase 4). At the end of 2021, the price of these allowances was about €80/t CO2, and TotalEnergies estimates that this price could reach more than €100/t CO2 in phase 4. This price will depend on the adjustments that will be proposed in 2022 under the European Green Deal. Moreover, more and more countries are likely to adopt carbon pricing mechanisms to accelerate the transition to a low-carbon economy, which could have an adverse impact on some of the Company's activities and lead to a loss of competitiveness and an increase in operating costs. TotalEnergies takes into account a CO2 price, which reaches $1002030/t in 2030 and beyond. In the case where the CO2 price is at $200/t, i.e., an increase of $1002030/t, TotalEnergies estimates a negative impact of 9% on the discounted present value of all the Company's assets (upstream and downstream). In the context of an increased exposure to legal proceedings, TotalEnergies may be subject to claims by public entities in various countries aimed at financing protective measures to limit the effects of climate change, or claims by non-State actors, which could affect TotalEnergies' financial position or its share value (refer to point 3.5 of this chapter).

Prices for oil and natural gas may fluctuate widely due to many factors over which TotalEnergies has no control. These factors include: – international and regional economic and political developments in natural resource-producing regions, particularly in the Middle East, Africa, South America and Russia; along with the security situation in certain regions, the magnitude of international terrorist threats, wars or other conflicts; – the ability of OPEC and other producing nations to influence global oil and gas production levels and prices; – prices of unconventional energy as well as evolving approaches for developing oil sands and shale oil, which may affect TotalEnergies’ selling prices, particularly in the context of its long-term gas sales contracts, and the valuation of its assets, particularly in North America; – global economic and financial market conditions; – regulations and governmental actions; – variations in global and regional supply of and demand for energy due to changes in consumer preferences or to pandemics such as the COVID-19 pandemic. Generally, a decline in oil and gas prices has a negative effect on TotalEnergies’ results due to a decrease in revenues from oil and gas production. Conversely, a rise in oil and gas prices generally has a positive effect on TotalEnergies’ results. In addition to the adverse effect on revenues, margins and profitability, a prolonged period of low oil or natural gas prices may lead TotalEnergies to review its development projects, adjust its reported reserves, and revise the price assumptions on which asset impairment tests are based, which could have an adverse effect on its results for the period in which they occur. For additional information on impairments recognized on TotalEnergies’ assets, refer to Note 3D to the consolidated financial statements (point 8.7 of Chapter 8). Prolonged periods of low oil and natural gas prices may reduce the economic viability of projects in production or in development and reduce TotalEnergies’ liquidity, thereby limiting its ability to finance capital expenditure and/or causing it to cancel or postpone investment projects. Conversely, in a high oil and gas price environment, TotalEnergies may experience significant increases in costs and government withholdings, and, under some production-sharing contracts, may see its production rights reduced. An increase in prices can also lead to a fall in demand for TotalEnergies’ products. The results of the Refining & Chemicals and Marketing & Services segments are primarily dependent on the supply of and demand for petroleum products and the margins on sales of these products, with a strong dependence on the transportation sector. Changes in oil and gas prices affect results in these segments, depending on the speed at which the prices of petroleum products adjust to reflect movements in oil and gas prices. TotalEnergies’ refining margins, which were slightly up in 2021, continue to be characterized by high volatility. The activities of trading and shipping (oil, gas and power trading and maritime transportation) are particularly sensitive to market risks and more specifically to price risks resulting from the volatility of oil, gas and electricity prices, to liquidity risk (inability to buy or sell cargoes at market prices) and to counterparty risks (when a counterparty does not fulfill its contractual obligations). In 2021, impacted by the gradual recovery of demand and the discipline of oil exporting countries, oil prices saw a continuous appreciation, reaching $85/b in November. Driven by rising demand and supply difficulties, gas prices in Europe (NBP(1)) and Asia (JKM(2)) rose sharply in 2021, reaching historical highs in the second half of the year. Electricity demand has experienced a significant rebound since 2010, with global growth of around 6% in 2021(3). Wholesale prices have risen sharply in some countries, driven by gas, coal and CO2 prices, particularly in Europe. The oil and gas markets continue to be characterized by high volatility. For fiscal year 2022, in the retained scenarios applied below, TotalEnergies estimates that a change of $10 per barrel in the average annual liquids selling price would lead to a change of approximately $2.7 billion in the same direction in adjusted net operating income(4) for the year and of approximately $3.2 billion in the operating cash flow before working capital changes(5) for the year. In addition, TotalEnergies estimates that a change in the average annual NBP gas sales price of $10 per Mbtu would result in a change in the same direction in the adjusted net operating income for the year and in the operating cash flow before working capital changes of approximately $3.0 billion. The impact of changes in crude oil and gas prices on downstream operations depends on the speed at which the prices of finished products adjust to reflect these changes. TotalEnergies estimates that a change in the variable cost margin indicator – European refining (VCM) of $10 per metric ton would lead to changes of approximately $0.4 billion in the same direction in adjusted net operating income for the year and of approximately $0.5 billion in operating cash flow before working capital changes for the year. All TotalEnergies’ activities are, for various reasons and to varying degrees, sensitive to fluctuations in the dollar exchange rate. TotalEnergies estimates that a year-on-year decrease of $0.10 per euro (strengthening of the dollar against the euro) would increase annual adjusted net operating income by approximately $0.1 billion and would have a limited impact on the operating cash flow before working capital change for the year. Conversely, a year-on-year increase of $0.10 per euro (weakening of the dollar against the euro) would decrease adjusted net operating income for the year by approximately $0.1 billion and would have a limited impact on operating cash flow before working capital change for the year. In addition, as part of its financing, TotalEnergies is exposed to fluctuations in interest rates. Based on its portfolio of bond debt and short-term debt securities (commercial paper), TotalEnergies’ floating rate debt (after taking into account hedging instruments) was approximately $22.6 billion on average over the course of 2021. Within this perimeter, a fluctuation in the various reference rates, mainly the USD 3-month LIBOR rate, of +/- 1% would have resulted in a variation in the cost of debt, the theoretical impact of which on TotalEnergies’ adjusted net income and cash flows is estimated at approximately -/+ $0.20 billion.