Hard to Stomach Energy: Exxon Mobil Corporation (XOM), BP plc (BP) and More

Big oil firms are going to great lengths to find new sources of energy. Taking on harsh environments is one big issue, but so, too, is taking on the hard to quantify risk of operating in certain nations. The recent Algerian hostage situation is just the most recent example of the risks about which investors need to be very aware.

Exxon Mobil Corporation (NYSE:XOM

Hard to Find

Royal Dutch Shell plc (ADR) (NYSE:RDS.A), a well-respected oil giant, recently saw its Kulluk drill ship run aground in the arctic waters off Alaska during a storm. The event, though likely to be much less devastating than some other notable accidents, quickly brought out critics demanding that arctic drilling be halted across the board.

This is problematic because the easy oil has already been found and the world still craves, and needs, so-called black gold to keep moving. Since alternatives aren’t economically viable just yet, drilling will have to continue. That said, increasingly, oil discoveries are in hard to reach areas fraught with risk.

Nature isn’t the Only Obstacle

If nature were the only problem with oil and other energy sources it might not be so bad. However, people are a problem, too. For example, large energy companies have increasingly had to travel to far off lands to get access to this fuel source. Sometimes these countries are outright hostile to Western nations and other times the country’s residents are the problem.

The recent human created disaster in Algeria is a prime example. With more than 80 people dead, this event is clear evidence of the risks that companies are taking to gain access to oil and natural gas. In Algeria an al-Qaeda related group is accused of taking control of the Sharan In Amenas facility run by BP plc (ADR) (NYSE:BP) and Statoil ASA(ADR) (NYSE:STO) with the hope of stopping France from continuing its military operations in Mali.

The Risks Only Seem to Get Bigger

Although natural gas has seen a resurgence because of new drilling techniques, the world’s demand for energy isn’t set to fall any time soon. Events like the one in Algeria are sad, but are likely to continue taking place. While this situation was resolved, with military force, employee deaths are clearly an undesirable outcome. BP and Statoil are likely to see legal issues arise from this event and the cost to protect workers and facilities might also increase. Neither are positives.

These two aren’t the only ones exposed to such risks. For example, TOTAL S.A. (ADR) (NYSE:TOT)’s efforts to find new reserves has taken it to some interesting places, including countries that have suspect histories when it comes to dealing with outsiders. Russia is one such country, but Total also has notable dealings within Africa and the Middle East. If militants attacked an energy facility run by British and Norwegian companies to stop a French military action, Total must be gravely concerned about its operations in Africa. This is also one of several reasons why the French energy giant’s dividend yield is well above industry leader Exxon Mobil Corporation (NYSE:XOM)’s.

Italy’s Eni SpA (ADR) (NYSE:E) is another company with notable exposure to countries with questionable histories. That said, management has worked diligently to foster positive relationships with its country partners. While its proximity to Africa has been a benefit in this, these exposures also come with risk. If BP and Statoil were targeted, why not Eni? Investors in Eni need to understand that working with difficult to deal with countries is a part of Eni’s business focus.

Governments get into the Act, Too

Noted above is the fact that Total has operations in Russia, which can be just as big a risk as Africa. That country doesn’t have the same level of respect for the rights of foreigners as most other western nations. But it isn’t the only suspect country. Chevron Corporation (NYSE:CVX), for example, has been locked for years in a battle with Ecuador over claims of oil spill damage. Chevron has refuted that claim and won multiple court battles held outside Ecuador. That said, the case reads more like an international spy novel than an oil spill lawsuit.

Then there are countries like Venezuela and Argentina which simply take over operations because they say it is in the best interest of their countries. For an example of the damage that such things can cause, look at YPF SA (ADR) (NYSE:YPF), which was nationalized by Argentina. That stock once traded in the mid-$40 per share range, but now trades hands at less than half of that amount. Investors can’t look at that stock in the same away ever again.

A Risk to Watch

Oil and natural gas aren’t going away any time soon. There is too much demand for energy and too much existing infrastructure in place. Moreover, alternative energy sources aren’t yet viable enough to replace the energy we currently use. That means investors need to take some time to think about the many risks these international players face and how to react when bad things drag prices

Yours,

The article Hard to Stomach Energy originally appeared on Fool.com and is written by Reuben Gregg Brewer.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!