Exxon and the World of Foreign Oil

In its quest to produce as much oil as possible, ExxonMobil (NYSE: XOM  ) has long been a global citizen. One of the early pioneers of world domination, Exxon is now losing its grip as the world flattens out and foreign oil companies push to expand their own asset footprints. Exxon, with its history and current struggle to increase production, provides an excellent lens for viewing the risks of doing business as an oil company in today's global marketplace.

Foreign competition
One of the biggest risks to any business is competition. For Exxon, that doesn't merely mean competitors such as Royal Dutch Shell (NYSE: RDS-A  ) and BP (NYSE: BP  ) , but also entire nation-states. Foreign governments' appropriation of oil companies and their reserves has had a dramatic impact on the entire industry -- and Exxon specifically. In 1970, Exxon was powering the world. The company produced nearly 15% of oil used by non-communist countries. But 1973 marked the beginning of the end of such dominance. A rash of oil company nationalizations in Venezuela, Saudi Arabia, Libya, and Iran drove Exxon's 6.8 million barrels per day of production down to 1.7 million bpd by 1985 -- 3% of the world's oil supply.

The dominance of state-owned oil and gas companies persists today. China, Brazil, Malaysia, South Korea, and others have joined the ranks of high-octane national oil companies, or NOCs, looking to secure an energy future for their respective governments. In fact, these new oil companies are increasingly more flexible than their peers have been historically. Today's NOCs are going global, and in the case of Malaysia's Petronas, more likely to push back on profit sucking governments that traditionally have inhibited business development.

China's state-owned oil companies -- CNOOC (NYSE: CEO  ) , PetroChina (NYSE: PTR  ) , and Sinopec (NYSE: SHI  ) -- have spent more than $200 billion over the past eight years participating in joint ventures and buying up foreign assets. Exxon spends a lot of money, too, but has been forced to spend even more recently, as competition grows and production projects become more expensive. In 2009, Exxon spent less than $20 billion on exploration and production. The company is upping that number significantly and plans to spend $37 billion every year through 2016.

Though foreign governments are increasingly open to some sort of participation by outside oil companies, they often set terms that Big Oil deems unattractive, though oilfield service companies such as Baker Hughes (NYSE: BHI  ) and Schlumberger (NYSE: SLB  ) participate willingly. For example, you won't find Exxon or Chevron (NYSE: CVX  ) in Mexico, but you will find Baker Hughes and Schlumberger. Pemex, Mexico's state-owned oil company, is prohibited by law from engaging in production-sharing contracts with foreign companies, but it can offer fee-based service contracts that appeal to oilfield service companies.

Political risk
Seeking favorable terms can lead to precarious situations. Exxon found out firsthand in Iraq, when the company was banned from doing business with the Iraqi central government because of its pursuit of a more lucrative production-sharing deal with Kurdistan, the increasingly rebellious semi-autonomous region in northern Iraq. Chevron followed suit this past fall and was also subsequently banned from doing business with the central government.

As a result of its deal with the Kurdish Regional Government, or KRG, and getting the boot from Iraq, Exxon's stake in the giant West Qurna oilfield is now up for grabs. First in line for its 60% stake in the field? PetroChina, naturally.

Tensions are high between Iraq and Kurdistan, and the disputed territory where Exxon wants to drill is a large part of the reason. Exxon itself may become the flash point in a situation that right now has both sides advocating for peace while amassing troops along the border in question.

The political risk of doing business in Iraq is high, but it is a risk that more and more supermajors are taking on as they develop new projects. The following six projects represent 50% of new production Exxon is expecting to bring online between now and the end of 2014.

Country

Targeted Production
(boe/d)

Canada

170,000

Indonesia

75,000

Papua New Guinea

62,000

Nigeria

54,000

Kazakhstan

49,000

Angola

40,000

Source: The Wall Street Journal.

The geopolitical risk for some of these projects is pretty obvious, but even a country as seemingly innocuous as Canada can't be taken for granted. Exxon's big project there is in the oil sands, arguably the most contentious source of oil on the planet. Oil sands projects are expensive, complex, and despised by environmentalists, whose protests -- both physical and legal -- can cause delays. This particular project, which Exxon is operating with Imperial Oil (NYSEMKT: IMO  ) , was slated to begin before the end of 2012 but was delayed and is now supposedly weeks away from production.

Foolish takeaway
Exxon's share performance over the past five years is essentially flat, and the company, along with its Big Oil peers, is fighting an uphill battle to stay relevant to investors. The challenge is made more difficult by the changing global marketplace.

Smaller, independent operators such as Kodiak Oil & Gas may provide a better option for investors in the near term.  Kodiak is a dynamic growth story, but with great opportunities come great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To see whether Kodiak is currently a buy or sell, check out our new premium report, which comes with a year of timely updates and analysis.


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