Occidental Positioned to Become a Major Player in Libya

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When the bombs began raining down on the cities and towns of Libya, Gaddafi’s henchmen tried every possible method to stay in control and continue their vicious attacks on civilians and foreign interests. All that is over now, and oil companies have begun to move back to Libya. In fact, Occidental Petroleum (NYSE: OXY) has been operating in Libya for quite some time after the regime fell, though there was a lull during the most violent of months.

It is easy to assume that all is well in Libya and that there aren't going to be any problems in future. That would certainly be a grave mistake, as Libya maybe free of Gaddafi but it is certainly not free from its troubles, yet. Libya as a nation has suffered for far too long under dictatorial rule and the current government does not seem to be very reliable or trustworthy to me.

First of all, Libya's National Transitional Council claims to be interested in installing a constitutional democracy. It also maintains that it will dissolve itself after a reliable democracy is formed. We need to understand that the NTC itself is composed with various tribes who were united against the dictator. Now that the charismatic dictator is gone, the power struggle seems to be resurfacing anyway. Libyan tribes are very similar to other Arab tribes where each clan fights with the other until they have a common enemy to fight against, in which case they unite.

Thus, to fight away the dictator, the resistance fighters from various Arab tribes of Libya united despite deep mistrust of each other, and finally when they did manage to assassinate Gaddafi and end his brutal regime, their own tribal skirmishes began to resurface. Which tribe gets to oversee the oil exploration activities, which tribal chief gets to be the political head for the oil ministry, which tribe gets the most number of jobs and such other questions have been raised and fought over. These tribal skirmishes are also tainted with fundamentalism, which can be very dangerous to the oil industry of any country. Fundamentalism brings with it instability, suspicion and animosity toward the West.

Western companies like Oxy thus need to be extremely wary when they operate within Libya. To assume that everything is fine now that the sanctions are lifted and that it is business as usual in Tripoli would be naive. Shell (NYSE: RDS-A) recently announced that it would be abandoning Libya and that it will suspend all its operations in the country. The company cites security and administrative problems as possible reasons, though they insist this does not mean that they will never return.

From what I notice, Shell isn't the kind of company that would chicken out from a country where its competitors have begun to reappear. For instance, BBC reported that BP (NYSE: BP) will resume its oil operations in Libya in spite of existing risks. In fact, BP is all set to spend $20 billion in Libya in the next 10 years. This only makes me wonder why Shell is running away from the North African nation. One possible reason is that they understand there are greener pastures where they can explore and operate without having to worry about security and other concerns. Another possibility is that they are being foolish in leaving Libya, when Oxy is doing rather well there.

Oxy is known to have a huge upstream leverage and its stock comes down when oil prices fall. However, it has a very stable and non-risky portfolio in California, the Permian Basin in Texas, North Dakota and Oklahoma. It also has a great chemical business and its business in the Middle East is doing pretty well as well. It's the largest oil producer in Texas and North Dakota and has several multi-billion dollar contracts under its belt. Its stock has certainly come down and to the naive observer, it may appear that Oxy is not doing all that well. However, though Shell's move to backtrack from Libya seems like a smart move, it is not. It speaks a lot about Shell not wanting to take risks and seeking a safer ground.

What one needs to remember is that it is called the curse of oil, and oil rich nations are never risk-free. Shell or its competitors can never expect to be in a safe and secure zone where everything is picture perfect. There are going to be wars, civil wars, unrests, sanctions and terrible security issues. Oxy has managed to stay firm in its place in spite of all these issues in Libya. It has not only stayed back in Libya but has begun to carry out further exploration activities, which I think is commendable.

With secure oil businesses in the U.S. and elsewhere in the Middle East, the honchos at Oxy know that they have more to gain in the long run than the risks that seem to linger in the short term. Investors need to understand that a little bit of risk-taking behavior is extremely important for oil companies, and Oxy is doing exactly that. It has decided to take the risky path and remain in Libya which I think is very impressive. 

ExxonMobil (XOM) and Chevron (CVX) have expressed concerns over security in Libya as well, and I think this apprehension leaves Oxy with advantages. Oxy does not seem to mind taking risks in Libya while its competitors are clearly not very willing to take risks. This adventurous streak will help the company in the long run, and it will be in a better position to establish itself in Libya as a major oil player in spite of the security risks and tribal warfare. 


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