Total's Recall of Oil Risk

Cut through the jargon, and the oil business really boils down to one thing: risk management. Ultimately, the majors exist to bridge the many pitfalls involved in finding, developing, producing and distributing energy.
This tends to come into focus only when something goes wrong, like Total's TOT +1.25%natural-gas and condensate spill in the North Sea. Down 6% Tuesday, Total is leaking value almost as fast as the Elgin field. That is likely an overreaction, but this in itself should worry oil and gas producers everywhere.

French oil major Total sent a remotely operated vehicle to evaluate the situation at the Elgin platform in the North Sea, where an accident prompted the company to stop gas extraction. Dow Jones's Sarah Kent and Alexis Flynn have the latest. Photo: Getty

Unlike BP's BP +0.27%Deepwater Horizon disaster of 2010, there are no fatalities from Total's incident. Moreover, this leak mainly involves natural gas, which presents some danger in the immediate area but will disperse into the atmosphere rather than foul beaches. And while fixing Elgin might take as long as six months, its overall value to Total is only around €2.6 billion ($3.47 billion), Sanford C. Bernstein estimates—far lower than the €6 billion drop in market capitalization.

But the stakes are actually bigger than that. Deepwater Horizon significantly undermined confidence in the oil industry's ability to manage risk. This has had two effects.

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First, it means investors are more likely to sell at the first hint of trouble, afraid to rely on initial company estimates of the damage involved, which proved far too optimistic in BP's case. Second, it has heightened political sensitivities, meaning even relatively small spills can become a cause célèbre. Witness the continuing uproar in Brazil over Chevron's CVX +0.72%offshore leak in the Frade field.

Reuters

As their recent strategy presentations demonstrate, the majors are relying on pushing further into frontier prospects like deep-water drilling and hydraulic fracturing of shale resources to underpin growth. Their ability to do this at all, let alone cost-effectively, diminishes with every foul-up, big or small. The Elgin leak matters less for Total than it does for the oil industry in totality.