Will Saharan Dangers Threaten This Oil & Gas Major's Bottom Line?

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The Sahara has become a dangerous place to do business. In this article, I will discuss the impact this will have on a key operator in this region, BP (NYSE: BP).

What Happened? 

The slaughter of Western energy workers by Islamic militants in southern Algeria has horrified the world and brought new tribal and religious strife to the war on terror. The Algerian military attacked Islamic militants who were holding as hostages a number of Western and Algerian workers at a gas processing facility at In Amenas, some 800 miles south of Algeria's capital, Algiers, and some 20 miles west of the Libyan border.

In Amenas is a gas project, owned and managed by a joint venture consisting of the Algerian state oil and gas company Sonatrach, Statoil of Norway and BP, which is located in the eastern central region of Algeria, about 60 km west of the Libyan border. People from more than 25 countries work at In Amenas, which is a large operation with a workforce of 500 to 700 people on the site at any time. The substantial majority of these are Algerian nationals who work directly for the joint venture, and for Sonatrach and contracting companies. They are supported by a smaller international workforce from contractors including BP and Statoil.

Impacts on BP

BP is the largest foreign investor in Algeria with operations in the two main gas fields: In Amenas in the southeast near the Libyan border, and In Salah, further west near the Malian border. BP’s second gas facility in Algeria, In Salah, 300 kilometers west of the attacked site of In Amenas, is operating at a much higher level of security, said the company. BP's output from Algeria represented 40,000 barrels a day oil equivalent in 2011, out of 3.3 million barrels a day globally including Russia.

BP said that it remains committed to operating in Algeria, where it has high quality assets and has had a presence for over 60 years. In Amenas is one of the largest wet gas projects in the country and involves the development and production of natural gas and gas liquids from fields in the Illizi basin of southeastern Algeria. In Salah Gas, also a joint venture with Statoil and Sonatrach, is one of the largest dry gas joint venture projects in the country and involves the development of seven proven gas fields in the southern Sahara, 1,200km south of Algiers.  It is the world’s first full-scale carbon dioxide capture project at a gas field.

Global Ramifications

The latest battle in Algeria may be over for the moment, but the war for control of the Sahara has just started as French and African troops descend on neighboring Mali. This could destabilize energy and mining production in the region while involving the U.S. and its Western allies in another costly and protracted conflict with terrorists backed forces. This would result in turning Mali into a hub for terrorist activity for many years. 

The Sahara and the Niger River valley may seem like arid wastelands but possess a number of lucrative resources, such as natural gas, oil, gold, uranium and bauxite. Almost every major oil and gas company has some sort of presence in North Africa. Algeria is the third-largest exporter of natural gas in the world, funneling gas via pipeline to Spain and Italy and liquefying it for transport to the UK and elsewhere. 

Natural gas prices are depressed in the U.S. because of the surge in onshore shale gas extraction but remain relatively strong in Europe, making it an important business for multinational energy companies. This incident has raised the stakes on what had originally been an internal Malian affair. Now all nations near Mali should be on alert, in addition to the many multinational firms operating in energy and resource extraction throughout the region from Libya to Nigeria.

The Price of Doing Business Globally

In its quest for enhanced production, BP, like many of its competitors, has been forced to operate in areas where militant attacks are not uncommon. Simply put, this is the cost of doing business there. In countries ranging from Colombia to Yemen, oil producers have been the target of violence because the industry is regarded as a highly visible symbol of political and economic power.

Royal Dutch Shell (NYSE: RDS-A) is still producing in Nigeria despite raids, kidnappings, and pipeline bombings. A court recently rejected a suit against Shell brought about by Nigerian farmers regarding an oil leak. Shell's local subsidiary, Shell Nigeria, was found responsible and ordered to compensate the farmers. In October 2012, Shell announced that it missed production estimates for two types of oil pumped from Nigeria. It blamed the setback on attacks on its pipelines by thieves trying to steal crude.

Anadarko (NYSE: APC) also operates in the Berkié basin and in 2011 generated revenues of $2.3 billion from its Algerian operations, making it a major source of production for the company. It is about to commence its latest mega project in Algeria at El Merk, where it plans to produce 65,000 barrels of oil and 600 million cubic feet of natural gas per day. The company plans to release its fourth quarter earnings soon. Anadarko has beaten analysts' estimates for the last four quarters. In the third quarter, the company beat estimates by $0.08.

Conclusion

Algeria accounts for a small proportion of BPs global production, and these disruptions are unlikely to have a significant impact on the company, even though North Africa is a convenient base for exports to Europe.  BP continues to be an excellent income investment with a dividend yield in the region of 5%, and it is reasonably priced at around nine times trailing earnings. The company is financially solid and well diversified, and I recommend it as an investment option, particularly if you are looking for an income investment with attractive returns.


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