Exxon drilling plans turn dicey in trouble spots

New York City, New York – (StockNewsDesk) – 08/10/2014 — The search for oil, and its associated drilling, forces large, multinational full service oil companies to do business in some of the most dangerous parts of the world. In recent months, as geopolitical events continue to intensify, Exxon is finding its operations disrupted.

Some of the trouble spots include the Kurdistan region, which is being threatened by Islamic State forces; Liberia, due to the Ebola breakout; and trade sanctions, stemming from the conflict in Ukraine, which has complicated Exxon’s drilling efforts in the Russian field. Due to these factors, some of Exxon’s oil streams have been streamlined. Of course, one of the reasons for Exxon’s success has been its ability to do business in these difficult areas, transgressing culture lines and animosity toward the US in hostile places.

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Nevertheless, Exxon has been forced to pull back due to the safety risks. The most dangerous situation currently is in Iraq, where the Islamic State is pushing down hard on Kurdistan, forcing President Obama to announce a bombing and humanitarian campaign. In recent years, the Kurdish oil fields have been the fastest growing source of revenue for Exxon. Additionally, it was a point of pride in the company’s public image that it had helped the Kurds thrive since the ouster of Saddam Hussein.

However, these gains are under jeopardy with the Islamic State’s stated objective to wipe out the Kurds and take over their land and resources. It brings into question Exxon’s recent decision to shift resources to the Kurdish oil fields with its estimated 45 billion barrels. It is hard to predict how these events will transpire and most experts expect a drawn out conflict that could jeopardize operations in the region for years to come.

In Liberia, the condition is even grimmer in the short term as the outbreak of Ebola has led to a complete shutdown of operations, as most personnel have left the country. The incredibly infectious and lethal disease has been spreading at a rapid rate with the disease spreading across many African countries, many in which Exxon has projects. The disease has infected 1,700 people, some in Nigeria, where Exxon also has a significant stake. Although production continues in Nigeria, if the spread continues to worsen, it is possible that operations would have to be shut down there, as well.

Another complication for Exxon has been the continual fight between Ukraine and Russia, which has forced US sanctions. Russian Prime Minister Vladimir Putin has not steered away from his course of action, at all, and has not backed away from influencing events in Ukraine. Although military action seems off the table for the US, the country has placed some sanctions on Russia and threatened more severe sanctions. With no progress in talks, it is expected that even future sanctions will begin to affect the ability of US businesses to do business in Russia. Already, Russia has threatened to retaliate against US sanctions by seizing American contracts and property.

This is obviously bad for Exxon, as it was supposed to begin drilling in the Arctic, into what is estimated to be a 100 billion gallon oil field. Given the uncertainty of the political condition and the current unwillingness of both sides to even negotiate, it is very possible that this project will be disrupted, as well. In the battle of sanctions and rhetoric, it is easy to imagine Putin scapegoating Exxon.

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The scary thing for Exxon is that all these events are completely out of the company’s control, complicating efforts to plan for the future and distribute resources. In the short term, there has not been much of an impact on Exxon’s production or oil prices, however, in the long term; this could have a material impact on Exxon’s bottom line, as these projects were expected to replace wells that are drying up. The positive for Exxon is that it has hundreds of similar projects all over the world, so they are well diversified and able to withstand disruptions in the short term.

Although Exxon’s oil production is at a five year low, and oil prices have been range bound for the last couple of years, the stock has performed admirably as it continues to reap gains from improving operations and streamlining costs.

XOM

The company’s stock has generally followed the performance of the large cap, broader indices, such as the Dow and S&P 500. This shows a little sign that these events have affected investors’ perceptions of Exxon.

On a longer term time frame, Exxon continues to make its stockholders happy as it is regularly reaching new all time highs. Here is the 10 year chart below:

XOM-10-year-chart

Overall, despite these scary headlines, the stock has managed to remain strong. And in the short term, if these events cause a spike in oil price, it is possible that Exxon would initially benefit due to its diversified streams of revenue.

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