The Crude World of Middle East Oil

I really didn't think this would become a series. Through the years, I've written a number of Motley Fool articles dealing with the shaky politics prevailing in the world's oil-producing countries. For whatever unfathomable reason, crude generally wasn't deposited in ultimately tranquil locations.

And so, as August concluded, I described to Fools the multifaceted dangers involved in the year-and-a-half-long attempt by rebels to overthrow the Assad regime in Syria. That description was followed by a piece last Wednesday on the myriad of generally unrealized  -- today's crack media establishment has its attention trained elsewhere -- booby-traps lurking in post-war Iraq. Now, as you can imagine, my sights are trained on the likely fallout from the goings-on in Libya and Egypt.

There almost certainly will be other analyses sent your way, probably sooner rather than later. And hopefully the lesson you'll carry away is the realization that your portfolio simply can't be devoid of energy-related stocks these days.

Too much for granted
It seems that, during the past few years, we've become somewhat energy-complacent in the United States. After all, as the president reminds us frequently, we're producing more domestic crude than at any time in recent memory, albeit as a result of leases and permits issued during his predecessor's administration. And we clearly have more gas than a ... well, I'll let you fill in the blank. My thoughts wouldn't pass muster with my editor.

We've even come to think that we're on the verge of energy independence. Don't believe that for a minute -- not with the steady stream of federal regulations being promulgated to rein in domestic fossil-fuels production. Also affecting this fairy tale is the reality that crude is a fungible, globally transportable commodity. So eruptions in the Arab world -- including Persian Iran -- could have a profound effect on our own supply-demand circumstances. Indeed, as Oil & Gas Journal pointed out in a January retrospective on 2011's so-called Arab Spring, "The Arab world holds 49.6% of the world's proved oil reserves and 29.1% of natural gas."

I think it's a majority
Where I went to school, 49.6% is a stone's throw from half, and to that number you realistically need to add the reserves buried under lands or sea beds controlled by the less-than-dependable likes of Russia, Kazakhstan, Mexico, Venezuela, Nigeria, and Brazil. So the most scientific term I can conjure up to quantify the amount of the world's oil production likely to be affected by contretemps in any significant producing nation or region is "a bunch."

Let's take a brief look at the potential fallout from this week's atrocities in Egypt and Libya. From a 20,000-foot perspective, both countries are in dire need of outside investment to bolster their energy industries.  

Are the pharaohs getting frazzled?
Obviously, much of impecunious Egypt's funding in the past has come from Western companies, with Houston-based Apache (NYSE: APA  ) among the activity leaders in the land of the pharaohs, along with Royal Dutch Shell (NYSE: RDS-B  ) and others. And while Apache's efforts are based in the country's western desert, we have to ask ourselves how much longer any Western companies will be willing to cough up funds to develop reserves in a country whose future and leadership are both open to question.

Mohamed Morsi was elected to the country's presidency in June. Before that, he'd been chairman of the nascent Freedom and Justice Party, an offshoot of the questionable -- there are other, stronger adjectives that might be employed here -- Muslim Brotherhood, one of whose leaders has called for a jihad on Israel. While he's still a newbie as a replacement for the country's deposed dictator, Hosni Mubarak, as Eric Trager of the Washington Institute for Near East Policy detailed, perhaps presciently, in The Wall Street Journal last week, his early moves, edicts, firings, and appointments have done little to demonstrate a reverence for democracy.

For now, with its 2010 oil production having averaged only 675,000 barrels a day -- or far less than Texas -- Egypt's primary role in energy involves its spot as the region's third-largest holder of gas reserves, along with its position as operator of the Suez Canal, the SUMED pipeline, and 10 refineries. Oil transport through the canal has dwindled to about 1% of global crude supply and 5% of the seaborne oil trade, although the LNG that passes through it is on the rise.

SUMED connects the Red Sea with the Mediterranean, supplying the latter with Persian Gulf oil. It's also important to know that Egypt is a key supplier of natural gas to Israel, most recently under a 15-year contract initiated in 2005.

Libya is limping
Libya is a far larger producer, with a 2010 daily output of more than 1.5 billion daily barrels, largely through help from such Western companies as Italy's Eni (NYSE: E  ) , France's Total (NYSE: TOT  ) , and ConocoPhillips (NYSE: COP  ) . However, many of its operations were damaged or destroyed during the fight to overthrow Muammar Gaddafi.

In times past, the country has benefited from its location on the Mediterranean, which has made crude transport to Europe relatively easy, including through the Green Stream Pipeline connecting it to Italy. Beyond that, unlike much of the oil coming out of the Persian Gulf, its crude is light, sweet, and readily subject to refining.

However, even before this week's incident, and with no post-Gaddafi government yet in place, most experts believe that restoration of pre-war production could require three to four years. Now, with what generally is being accepted as a terroristic event on Wednesday, the willingness of the international oil companies to dump more resources into the star-crossed country is clearly open to question.

The Foolish bottom line
Your guess about the next eruption in the Middle East or North Africa is as good as mine. I do, however, believe there will be one, probably of consequence. For now, I'd carefully monitor the changes in attitude among the big companies operating in Egypt and Libya by adding Apache (Egypt) and Eni (Libya) as proxies for the others to My Watchlist.

Fool contributor David Lee Smith doesn't own shares in any of the companies named in the article above. The Motley Fool owns shares of Apache. Motley Fool newsletter services have recommended buying shares of Total. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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