Is Hard to Get Energy Worth the Risk?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The loss of human life in Algeria at an energy installation was a sad example of the risks companies are taking to find oil and natural gas. These are important fuel sources, but some are questioning if the risks being taken to acquire more oil and gas outweigh the benefits. Giving up access to politically hard to reach oil and gas could be costly for some companies, but others would likely benefit and so can investors.
People Can Do Awful Things
Human created disasters are, perhaps, the most difficult to deal with. The most recent example being the now ended crisis in Algeria. An al-Qaeda related group is accused of taking control of the Sharan In Amenas facility run by BP (NYSE: BP) and Statoil (NYSE: STL) with the hope of stopping France from continuing its military operations in Mali. After the country's military ended the situation, more than 80 people were dead. The event is clear evidence of the risks that companies are taking to gain access to oil and natural gas.
Norway, the home of largely government controlled Statoil, has an increasing chorus of residents suggesting that the risks of being in nations like Algeria simply aren't worth the benefit. In a nation that has managed to stay out of the financial crisis on the strength of its oil and gas reserves, that's a pretty notable statement. And it sets up some interesting scenarios.
If more western countries decide to get out of or simply avoid dangerous regions, what does that do for profitability? If they stay, what increased costs are they going to face for security, wages, and insurance? The choice to stay or go is going to be a tough one and it might boil down to politics and social issues rather than money.
If the West Pulls Out?
The collection of integrated oil companies large enough to travel the world looking for new sources of oil and natural gas isn't all that large. The more places like the Middle East and Africa heat up, the more likely it will be that companies like Statoil, Exxon Mobil (XOM), and Chevron (CVX), among others, will have to second guess their commitment to such areas or by government fiat be forced out. That said, if companies like these pull back, someone will step in to take their place. Here are a few that could benefit from risk avoidance:
BP was involved in the massive spill in the Gulf of Mexico that quite literally had industry-wide repercussions, but most of the haze surrounding that event has passed. There are still lawsuits to face, at likely massive costs (the company recently settled one for some $4.5 billion), but at least the final repercussions of the spill are starting to be known. Indeed, the company's future now appears much brighter than it did in the days and weeks after the spill.
BP, however, will not be the same company it was prior to the incident. While it will still be a massive industry participant, it has had to sell off assets to help pay for the costs of the spill. This has put BP in a position to be even more aggressive than it was prior to the spill. The company's risk taking, however, has been a bit different of late. For example, it is making a foray into Russia, a country that isn't known for being business friendly with outsiders.
ENI (NYSE: E)
Perhaps the most distinguishing feature of ENI is its solid relationships with countries that are typically considered difficult to deal with. This is particularly true with regard to Africa and the Middle East. Hailing from Italy gives it a proximity benefit that others can't compete with. However, management has gone to great lengths to ensure the company's access to reserves in these countries. In fact, the company is one of the biggest players in Africa. It is highly unlikely that ENI will give up on the region for any reason. Moreover, with a material presence there already and a long operating history, it could be among the first in line to benefit if others pull out.
PetroChina (NYSE: PTR)
PetroChina is certain to attempt to take advantage if other companies pull away from difficult countries or dangerous regions. This integrated oil company is effectively controlled by the Chinese government, with a major goal of securing energy resources for its fast growing home market. Although the company's ultimate outlook depends heavily on the Chinese economy, demand for fuel in that nation seems set to continue advancing for years to come as more consumers enter the middle class. That means that PetroChina is likely to be increasingly aggressive in its efforts to gain access to oil and gas. Its efforts will be that much more productive if western firms start pulling out of risky regions.
Total (NYSE: TOT)
Total is something of a wild card. Hailing from France gives the company a very un-American feel, which residents in some nations would likely find desirable. Moreover, the company already has business relationships with countries that have suspect histories when it comes to dealing with outsiders, including Russia and countries throughout Africa and the Middle East.
However, the incident in Algeria was specifically directed at France. This could put the country on something of an emotional high alert, making business with risky countries harder to justify. Since France's population is known for making things difficult for the government, via such things as massive protests, more such attacks have the potential to cause social discord in the country. For that reason, Total could go either way on the issue, which makes it worth watching, if not buying.
Oil isn't Going Away
Oil and natural gas will remain important commodities for decades to come. Alternative technologies simply don't have the financial or distribution profile to replace them. Since the easy energy has been found, someone is going to go after the hard to find oil and gas. If the list of companies willing to take the needed risks is small, then the financial benefits are likely to be amplified. As an investor, this is an issue worth keeping an eye on.
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!