Registration document 2007 - Total.com

29) Market risks
Oil and gas market related risks
Due to the nature of its business, the Group has a significant
involvement in oil and gas trading as part of its normal operations
in order to attempt to optimize revenues from its crude oil and
gas production and obtain favorable pricing for supplies for its
refineries.
In its international oil trading activities, the Group follows a policy
of not selling its future oil and gas production for future delivery.
However, in connection with these trading activities, the Group,
like most other oil companies, uses energy derivative instruments
to adjust its exposure to price fluctuations of crude oil, refined
products, natural gas and electricity. Furthermore, the Group also
uses freight-rate derivative contracts in its shipping activities in
order to adjust its exposure to freight-rate fluctuations. In order to
hedge against this risk, the Group uses various instruments such
as futures, forwards, swaps and options on organized markets or
over-the-counter markets.
To measure market risks related to the prices of oil and gas
products as well as the price of electricity, the Group uses a
“value at risk” method. Under this method, for the Group's
trading activities of crude oil, refined products and freight rate
derivatives, there is a 97.5% probability that unfavorable daily
market variations would result in a loss of less than 11.4 M€ per
day, defined as the “value at risk”, based on positions as of
December 31, 2006. Over the year 2006, the average value at
risk was 8.6 M€, the lowest value at risk was 4.3 M€, the highest
value at risk was 12.9 M€.
As part of its gas and electricity trading activity, the Group also
uses derivative instruments such as futures, forwards, swaps and
options in both organized and over-the-counter markets. In
general, the transactions are settled at maturity date through
physical delivery. There is a 97.5% probability that unfavorable
daily market variations would result in a loss of less than 6.0 M€
per day, based on positions as of December 31, 2006. Over the
year 2006, the average value at risk was 9.1 M€, the lowest
value at risk was 3.5 M€, and the highest value at risk was
21.7 M€.
The Group has implemented strict policies and procedures to
manage and monitor these market risks. Trading and financial
controls are carried out separately and an integrated information
system enables real-time monitoring of trading activities.
Limits on trading positions are approved by the Group’s
Executive Committee and are monitored daily. To increase
flexibility and encourage liquidity, hedging operations are
performed with numerous independent operators, including other
oil companies, major energy consumers and financial institutions.
The Group has established limits for each counterpart, and
outstanding amounts for each counterpart are monitored on a
regular basis.
Appendix 1 – Consolidated financial statements
Notes to the consolidated financial statement
9
Financial markets related risks
Within its financing and cash management activities, the Group
uses derivative instruments in order to manage its exposure to
changes in interest rates and foreign exchange rates. This
includes mainly interest rates and currency swaps. The Group
might also use on an occasional basis futures, caps, floors and
options contracts. The current operations and their accounting
treatment are detailed in notes 1 M, 20 and 27 to the
consolidated financial statements.
Risks relative to cash management activities and to interest rate
and foreign exchange financial instruments are managed in
accordance with rules set by the Group’s Management. Liquidity
positions and the management of financial instruments are
centralized in the Treasury Department.
Cash management activities are organized into a specialized
department for operations on financial markets. The Financial
Control Department handles the daily monitoring of limits and
positions and calculates results. It values financial instruments
and, if necessary, performs sensitivity analysis.
Management of currency exposure
The Group seeks to minimize the currency exposure of each
exposed entity by reference to its functional currency (primarily
the euro, dollar, pound sterling, and Norwegian krone).
For currency exposure generated by commercial activity, the
hedging of revenues and costs in foreign currencies is typically
performed using currency operations on the spot market and in
some cases on the forward market. The Group rarely hedges
estimated flows and, in this case, may use options.
With respect to currency exposure linked to non-current assets
accounted in another currency than the euro, the Group has a
hedging policy which results in reducing the associated currency
exposure by financing in the same currency.
Short-term net currency exposure is periodically monitored with
limits set by the Group’s executive management. The Group’s
central treasury entities manage this currency exposure and
centralizes borrowing activities on the financial markets (the
proceeds of which are then loaned to the borrowing subsidiaries),
cash centralization for the Group companies and investments of
these funds on the monetary markets.
Management of short-term interest rate exposure and
cash
Cash balances, which are primarily composed of euros and
dollars, are managed with three main objectives set out by
management (to maintain maximum liquidity, to optimize revenue
from investments considering existing interest rate yield curves,
and to minimize the cost of borrowing), over a horizon of less
than twelve months and on the basis of a daily interest rate
TOTAL – Registration Document 2006 227