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.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Click here to Read Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 74 percentage points in 2.5 years. Our beta is only 1.2 (download a FREE newsletter and see the details inside)

Lists

Best Selling Magazines in the World

Shortest People in History

The Most Celebrated Holidays in the World

Most Expensive Handbag Brands in the World

Top Selling Comic Book Issues of this Century

The Most Powerful Women in Politics

Best Paid DJs

Most Rebellious Female Artists

Best Paid TV Actresses of 2014

Best Paid Actors of 2014

Most Expensive Horses in the World

Tallest People Ever

Most Encouraging Feminist Celebrities

Best Paid Supermodels of 2014

Top 10 Suburbs for Retirement in 2015

10 Wealthiest Cities in America

Top 10 TED Talks for Entrepreneurs

Best TED Talks on Education

25 Most Dangerous Places to Live in America

Top 10 Ski Resorts in the United States – 2014 List

Top 10 Most Remote Places in the World

Most Visited Museums in the United States

Wealthiest Photographers in the World

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!