MARKET RISKS

Sensitivities to market environment

The financial performance of the Company is sensitive to a number of parameters, the most significant being oil prices, generally expressed in U.S. dollars (USD), and exchange rates, in particular that of the U.S. dollar versus the euro (€).

Overall, a rise in the price of crude oil has a positive effect on earnings as a result of an increase in revenues from oil and gas production. Conversely, a decline in crude oil prices reduces income. For the year 2002, the Company estimates that an increase or decrease of USD 1 per barrel in the price of Brent crude either improves or reduces annual net income by around 0.27 billion euros. The impact of changes in crude oil prices on Downstream and Chemicals operations depends upon the speed at which the prices of finished products adjust to reflect these changes. The Company estimates that an increase in Western Europe refining margins of USD 1 per ton improves annual net income by 0.08 billion euros.

All of the Company's activities are sensitive in varying degrees to fluctuations in the euro/U.S. dollar exchange rate. An increase or decrease of USD 0.10 per 1 euro respectively improves or reduces annual net income by approximately 0.63 billion euros.

The Company's results, in particular the Chemicals segment, are also dependent on overall economic conditions.

Risks Relative to Oil and Gas Markets

As part of its normal operations, the Company is a significant player in trading activities in order to optimize both revenues from crude oil production and supplies to its refineries.

In 2001, international trading activities represented a little more than 5 million delivered barrels of oil equivalent per day, of which 4.2 million related to crude oil. The Company's policy is not to sell its future oil and gas production for future delivery. However, as part of its oil trading activities, the Company uses derivative financial instruments such as futures, forwards, swaps and options in both organized and over-the-counter markets. According to the Company's policy, market risks consist of residual price differentials due to variations in qualities, indices, or delivery periods. The notional values of derivatives and their market values as of December 31, 2001 are presented in the Notes to the Consolidated Financial Statements.

In order to measure market risks relative to the price of oil and gas products, the Company uses a "value at risk" method. Concerning crude oil and refined products' trading activities, there is a 97.5% probability that the favorable or unfavorable price fluctuations would have an impact on income of less than 7.7 million euros per day on the basis of positions as of December 31, 2001. The average value at risk registered during the year 2001 is 7.2 million euros. For natural gas trading activities, the value at risk as of December 31, 2001 is not material.

The Company 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. Position limits are approved by the Company's Executive Committee and are monitored daily. In order to ensure flexibility and maintain liquidity, hedging operations are performed with numerous independent operators, such as other oil companies, major energy users and financial institutions. The Company has established limits for each counterparty, and outstanding amounts for each counterparty are monitored on a regular basis.

The Group indicated on November 29, 2001 that its exposure toward Enron was less than USD 25 million and that it had ceased all trading activity with that company as from the announcement of its financial difficulties.

Risks Relative to Financial Markets

Risks relative to cash management activities and interest rate and foreign exchange financial instruments are managed in accordance with rules set by the Company'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 validates results. It values financial instruments and, if necessary, performs sensitivity analysis. The Company only uses simple derivative instruments.

Management of Currency Exposure
The Group seeks to minimize the currency exposure of each exposed entity by reference to its functional currency (primarily euros, U.S. dollars, pounds sterling and Norwegian kroner).

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 Company rarely hedges estimated flows and, in this case, may use options. With respect to currency exposure linked to long-term assets in foreign currencies, the Company makes every effort to reduce the associated currency exposure by using financing in the same currency. Long-term currency debt then partially compensates the economic exposure generated. Net currency exposure is periodically monitored with limits set by the Company's Management.

Management of Short-Term Interest Rate Exposure and Cash
Cash balances, which are primarily composed of euros and U.S. 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 benchmark, primarily through short-term interest rate swaps.

Given the magnitude of cash balances in euros, liquidities are invested either directly in euros or in other currencies through short-term currency swaps, without modification of the currency exposure.

Management of Interest Rate Risk on Long-Term Debt
The Company's policy consists of incurring debt primarily at a floating rate in order to deal with significant changes in cash flows due to external factors (oil prices and the U.S. dollar/euro exchange rate).

Exceptions to this rule must be approved by the Executive Committee.

Long-term interest rate and currency swaps can hedge debenture loans at their issuance in order to create a variable rate synthetic debt. In order to partially modify the interest rate structure of the long-term debt, the Company can also enter into long-term interest rate swaps.

Sensitivity Analysis on lnterest Rate and Foreign Exchange Risk
The table below presents the potential impact on the fair value of the current financial instruments as of December 31, 2001, of an increase or decrease of 10% in the interest rate yield curves in each of the currencies.

As a large portion of the Company's assets and liabilities are denominated in USD, their sensitivity to the exchange rate of foreign currencies is primarily influenced by increases and decreases in the value of the U.S. dollar. Based on the financial statements as of December 31, 2001 and after taking into account the effect of currency swap contracts, a 10% increase in the USD against the euro would increase the Company's long-term debt by approximately 758 million euros.

Management of Counterparty Risk
The Company has established standards for which bank counterparties must be approved in advance, based on an assessment of the counterparty's financial soundness and its rating (Standard & Poors, Moody's), which must be of high quality.

An overall authorized credit limit is set for each bank and is divided among the subsidiaries and the Company's Treasury Department according to their needs.

Risks relating to the stock market
The Group holds interests in a number of publicly traded companies (See notes 7 and 8 to the Consolidated Financial Statements). The market values of these interests fluctuates as a function of various reasons, including world stock market trends, the valuation of the sector in which the companies operate, and the economic and financial situation applicable to each such company.

LEGAL AND INDUSTRIAL RISKS

Regulation of Exploration and Production Activities

TotalFinaElf's exploration and production activities are conducted in many different countries and are therefore subject to an extremely broad range of legislation and regulations. These cover virtually all aspects of exploration and production activities, including matters such as land tenure, production rates, royalties, pricing, environmental protection, export, taxes and foreign exchange. The terms and conditions of the leases, licenses and contracts under which these oil and gas interests are held vary from country to country. These leases, licenses and contracts are generally granted by or entered into with a government entity or state company and are sometimes entered into with private property owners. These arrangements usually take the form of licenses or production sharing agreements.

Licenses (or concessions) give the holder the right to explore for and exploit a commercial discovery. Under a license, the holder bears the risk of exploration, development and production activities and provides the financing for these operations. In principle, the license holder is entitled to all production minus any royalties that are payable in kind. A license holder is generally required to pay production taxes or royalties, which may be in cash or in kind. In addition, in certain cases the government entity or state company may acquire a participation in the concession. In a few cases, the government entity or state company has an option to purchase a certain share of production.

Production sharing agreements entered into with a government entity or state company generally obligate TotalFinaElf to provide all the financing and bear the risk of exploration and production activities in exchange for a share of the production remaining after royalties, if any. Usually, a fixed or variable percentage of this production is reserved for the recovery of TotalFinaElf's cost (cost oil) and the remainder (profit oil) is shared with the government entity or state company on a fixed or volume-dependent basis. The right of TotalFinaElf to recover cost oil is limited in certain cases by a requirement that the cost oil not exceed a maximum percentage of production. This right is also limited in certain cases by a requirement that TotalFinaElf's costs be amortized over a specified period of time. In addition, TotalFinaElf's profit margin may also be limited in the event of an increase in oil price due to additional payment obligations. In some cases, the government entity or state company will participate in the rights and obligations of TotalFinaElf and will share in the costs of development and production. Such participation can be across the venture or be on a per field basis.

In certain countries, separate licenses are required for exploration and production activities and, in certain cases, production licenses are limited to a portion of the area covered by the exploration license. Both exploration and production licenses are generally for a specified period of time (except for production licenses in the United States which remain in effect until production ceases). The term of TotalFinaElf's licenses and the extent to which these licenses may be renewed vary by area.

TotalFinaElf is required in certain countries to relinquish a portion of the acreage covered by a license as a condition to obtaining a renewal of the license. TotalFinaElf may also be required in certain countries to relinquish acreage (or to surrender a license) under other circumstances. These circumstances, which vary by area, may include the failure to obtain a production license within a specified period of time or the failure to have a field development plan approved within a specified period of time. TotalFinaElf believes that these requirements have not materially affected its operations.

In general, TotalFinaElf is required to pay income tax on income generated from production activities (whether under a license or production sharing agreement). In addition, depending on the area, TotalFinaElf's production activities may be subject to a range of other taxes, levies and assessments, including special petroleum taxes and revenue taxes. The taxes imposed upon oil and gas production profits and activities may be substantially higher than those imposed on other businesses.

Risks Related to Political and Economic Factors

The oil industry is subject to regulation and intervention by governments throughout the world in such matters as:

• the award of exploration and production interests,
• the imposition of specific drilling obligations,
• environmental protection controls,
• price controls,
• control over the development and abandonment of a field (including restrictions on production),
• restrictions, requirements or sanctions imposed on companies because of ownership, affiliations or operations in certain foreign countries, and
• possible nationalization, expropriation or cancellation of contract rights.

The oil industry is also subject to the payment of royalties and taxation, which tend to be high compared with those imposed in respect of other commercial activities. In particular, substantial portions of TotalFinaElf's oil reserves are located in countries outside the European Union and North America, certain of which may individually be considered politically and economically unstable. These reserves and the related operations are subject to certain risks, including:

•  increases in taxes and royalties,
•  the establishment of production and export limits,
•  the renegotiation of contracts,
•  the nationalization or renationalization of assets,
•  other risks relating to changes in local government regimes and policies and resulting changes in business customs and practices,
•  payment delays,
•  currency exchange restrictions, and
•  losses and impairment of operations by actions of insurgent or terrorist groups.

TotalFinaElf, like other major international oil companies, attempts to conduct its business and financial affairs so as to protect against such political and economic risks. However, because the requirements imposed by such laws and regulations are frequently changed and actions by insurgent or terrorist groups cannot be anticipated, there can be no assurances that such events will not adversely affect TotalFinaElf.

In August 1996, the United States adopted the Iran and Libya Sanctions Act (the "Sanctions Act"). The Sanctions Act requires the President of the United States to impose two or more of certain enumerated sanctions on any person or company, regardless of nationality, that makes investments in Iran of $ 20 million or more, or in Libya of $ 40 million or more, that directly contribute to the enhancement of Iran's or Libya's ability to develop their respective petroleum resources. TotalFinaElf has engaged in certain activities in Iran and Libya. In May 1998, the U.S. Department of State issued its determination that the investment made by TotalFinaElf, Gazprom and Petronas in Iran's South Pars gas and condensate field constituted activity covered by the Sanctions Act, and, at the same time, communicated its decision to waive sanctions under section 9(c) of the Sanctions Act with respect to such investment. The waiver only applies to certain of TotalFinaElf's activities in the South Pars field, and does not address TotalFinaElf's other activities in Iran and Libya. The Sanctions Act was renewed for an additional 5 year period in August 2001. TotalFinaElf cannot predict future interpretations, or the implementation policy, of the U.S. Government regarding TotalFinaElf's other investments that are covered by the Sanctions Act.

As compared to the Group's 2001 results, the financial impact related to the devaluation of the Argentine peso is not material and has not resulted in a financial charge. However, the evolution of the situation in Argentina could have a material effect on the Group's business in that country, which is limited as compared to the scale of the Group.

Risks Related to Oil and Gas Exploration and Production

Oil and gas exploration and production require high levels of investment and have particular economic risks and opportunities. These activities are subject to risks relating to the physical characteristics of an oil and gas field. These operating hazards may include crude oil and natural gas blowouts, explosions, encountering formations with abnormal pressures, cratering and crude oil spills and fires, any of which could result in damage to or destruction of crude oil and natural gas wells, destruction of production facilities, damage to life or property, suspension of operations, environmental damages and possible liability to TotalFinaElf. In accordance with customary industry practices, TotalFinaElf maintains insurance against some, but not all, of such risks and some, but not all, of such losses.

These activities also involve uncertainties relating to estimating quantities of proven and potential reserves and the capabilities of production facilities as well as uncertainties about the ability to control unit costs in exploration, production, refining and marketing. A high degree of risk of loss of invested capital exists in almost all exploration and development activities that TotalFinaElf undertakes. No assurance can be given that crude oil or natural gas will be discovered to replace reserves currently being developed, produced and sold, or that if crude oil or natural gas reserves are found, they will be of a sufficient quantity to enable TotalFinaElf to recover the substantial sums of money incurred in their acquisition, discovery and development.

Developing oil fields, construction and drilling activities are subject to numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain. TotalFinaElf's operations may be curtailed, delayed or cancelled as a result of numerous factors including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment.

Risks Related to Downstream and Chemicals Operations

TotalFinaElf's downstream and chemicals businesses are subject to significant governmental regulation, particularly in the areas of antitrust and competition regulation, environmental protection and industrial safety. Operational risks can vary widely in nature, insofar as they arise in diverse sectors of activity, such as refining and petrochemicals, intermediate chemicals, and performance and specialty chemicals. Among these operational risks are the risks of explosions or fires involving hydrocarbons or petroleum or chemical products. Likewise, the nature of operational risks arising from transportation depends not only on potential hazards from the type of product transported but also on the means of transportation employed (such as pipelines, shipping whether by sea or river, rail or road), and the quantities of product involved.

TotalFinaElf seeks to minimize the risks inherent in these activities by putting in place a dedicated internal organization, systems of quality management, and safety and environmental management systems, and by conducting rigorous audits and maintaining a pro-active investment program. In addition, taking into account the wide variety of products transported, the chemicals branch seeks to ensure that its products are stocked, conditioned, handled and transported under the best safety conditions available, using service providers selected according to criteria established by professional organizations.

TotalFinaElf maintains insurance against some of such risks and losses, but our insurance will not be adequate to cover all potential hazards inherent in these businesses. In addition, our refining and chemicals activities are subject to wide fluctuations in supply and demand in various markets, resulting in earnings volatility. Some of our products are also subject to commercial risk from product liability claims, such as claims regarding defective products. Although we believe that any reasonably forseeable costs and liabilities associated with the foregoing matters will not have a material adverse effect on our consolidated financial position, results of operation or liquidity, there can be no assurance that such costs and liabilities would not have an adverse effect on our business and operations in the future.

Grande Paroisse

An explosion occurred at the Grande Paroisse industrial site in Toulouse, France on September 21, 2001. Grande Paroisse, an indirect 79.85% held subsidiary of the Company, is principally engaged in the production and sale of agricultural fertilizers. The explosion, which involved a stockpile of ammonium nitrate pellets, destroyed a portion of the site and caused the deaths of 30 people and injuries to many others. Significant damage was inflicted on a portion of the City of Toulouse. All production activity immediately ceased and the site was placed under a strict security regime.

Investigations regarding the cause of the explosion are still underway. Pursuant to Article 1384 paragraph 1 of the French civil code, Grande Paroisse is presumed to bear sole liability in the first instance, creating an obligation on Grande Paroisse to bear the entire obligation to indemnify damage to third parties (e.g., physical, material and other) caused by the explosion, unless this presumption is ultimately refuted. At this preliminary stage of the proceedings, the Group estimates that the amount of third party claims could reach approximately 1.8 billion euros, exceeding by 0.95 billion euros the Group's 0.85 billion euros civil liability insurance coverage. A gross charge of 941 million euros was registered in the accounts of the Company, with a resulting impact on Net Income (Group share) for fiscal year 2001 of 597 million euros.

Antitrust Investigations

During 2000, Atofina Chemicals, Inc., a U.S. affiliate of the Company, became the subject of an investigation by the United States Department of Justice ("DOJ"), following the issuance of three subpoenas issued by a grand jury empanelled by the United States District Court of the Northern District of California, regarding certain practices in the chemical industry, to determine whether such practices were in violation of civil and/or criminal laws. A similar investigation covering practices of Atofina S.A. relating to certain chemical products was commenced in 2000 by the European commission. In early 2002, Atofina S.A. entered into a settlement with the DOJ pursuant to which it agreed to pay a fine of $8.5 million. Moreover, three of the employees of Atofina S.A. are the subject of criminal proceedings.

While it is not feasible to predict the outcome of the pending claims, proceedings, and investigations described in the two subsections immediately above with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations.

RISKS RELATED TO THE ENVIRONMENT

TotalFinaElf is subject to extensive environmental laws and regulations concerning land use, air emissions, discharges to waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Although environmental laws and regulations have an increasing impact on TotalFinaElf's operations in almost all of the countries in which it operates, it is impossible to predict accurately the effect of future developments in such laws and regulations on TotalFinaElf's future earnings and operations. Some risk of environmental costs and liabilities is inherent in particular operations and products of TotalFinaElf, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred. However, TotalFinaElf does not currently expect any material adverse effect upon its consolidated financial position as a result of compliance with such laws and regulations.

Sinking of the Erika tanker

In 2001, following the sinking of the Erika petroleum tanker which was transporting products belonging to the Group, the Company continued, and nearly completed, the cleaning of the coastline, acting through the Atlantic Coast Task Force. The treatment of the waste removed during the cleaning process required the construction of an industrial treatment center. The perfection of the treatment process has been delayed due to the need to perform some additional technical studies. It is anticipated that it will take about one year to finish treating the waste.

TOTAL FINA ELF S.A., as a legal entity, as well as five of its employees, have become the subject of a criminal investigation undertaken by a Paris criminal court (Tribunal de Grande Instance de Paris) of the sinking and the resulting pollution. This investigation is still underway. TOTAL FINA ELF S.A. believes that the accusations against it and its employees are without merit both in fact and in law.

INSURANCE PRACTICES

The Group maintains insurance coverage relating principally to industrial risks, civil liability and other risks and liabilities pertaining to its businesses in amounts and of a nature management believes are adequate. Primary coverage is either retained, in the form of deductibles or self insurance, or purchased from internationally recognized insurance companies.

OTHER RISKS

Risks Related to Competition

There is strong competition both within the oil industry and with other industries in supplying the energy needs of industry and consumers. TotalFinaElf encounters strong competition from other major oil companies in acquiring properties and leases for the exploration for, and production of, crude oil and natural gas. Competition is particularly intense with respect to the acquisition of desirable undeveloped crude oil and natural gas properties.

Risks Related to Integration of PetroFina and Elf Aquitaine

TotalFinaElf has substantially increased its operations through the combinations with PetroFina and Elf Aquitaine in 1999 and 2000, respectively. These transactions have required and will require TotalFinaElf to integrate businesses that have previously been operated separately and that together are substantial in scope and size relative to its historic activities. TotalFinaElf, has already realized a large portion of the expected synergies from the integration of these activities and continues to pursue integration successfully, however, there can be no assurance that all of the expected cost savings, synergies and operational improvements will be realized.