Oil companies weigh geopolitical risk

Balancing exposure to geopolitical risk with the need to replenish reserves is a perennial challenge faced by oil and gas companies as they decide where to allocate their capital. This year is shaping up to be particularly tricky.

The US' withdrawal from the Iran nuclear deal and its potential to exacerbate instability in the Middle East is the latest in a series of flashpoints in energy-rich countries. Russia's relationship with Washington and its allies is rooted at a post-Cold War low, and Venezuela shows little sign of recovering from its economic collapse.

Of the world's largest private-sector oil firms, Total, BP and Italy's Eni have the highest upstream exposure to non-OECD countries. Total tops the list, with 77pc of its production coming from outside the OECD last year and 22pc from the Middle East and north Africa (Mena) region.

Total's near-term investment plans are directly at risk from the reimposition of sanctions on Tehran's oil and gas sector. The firm will be forced to withdraw from developing phase 11 of Iran's giant South Pars gas field unless it can persuade Washington to grant it a specific waiver.

The decision to enter South Pars 11 is part of Total's wider strategic push to bolster its access to low-cost resources in the Mena region. The company took over as operator of Qatar's 300,000 b/d al-Shaheen oil field last year. It has since renewed its participation in Abu Dhabi's offshore sector and acquired US firm Marathon Oil's Libyan assets — although it is at loggerheads with Libya's state-owned NOC over the legality of the Marathon deal.

Total has counterbalanced its growing exposure to the Mena region with the $7.45bn takeover of Denmark's Maersk Oil this year. The bulk of Maersk's reserves are in OECD countries.

Eni has differentiated itself from its peers in recent years with an enviable track record of discovering and developing new reserves at low costs. But the majority have been in non-OECD countries.

Around three-quarters of Eni's production last year was outside the OECD, and more than 40pc came from the Mena region. Eni's risk exposure is unlikely to change in the short term — its new project start-ups are concentrated in areas with heightened political risk, such as Egypt. The firm has strengthened its Middle East portfolio after securing stakes in two of Abu Dhabi's restructured offshore concessions this year.

Over 70pc of BP's output was from non-OECD countries last year, or around 60pc if the firm's stake in Russian-state controlled Rosneft is excluded.

"I do not apologise for BP working in Russia, we have got a good relationship there," chief executive Bob Dudley said last month.

BP got 16pc of its production from the Mena region last year. That proportion is likely to fall this year after the company failed to win a stake in Abu Dhabi's new offshore licences. Dudley says he is "glad" BP is not in Iran. But this week's expanded agreement with Iraq to help develop six fields in the north of the country highlights the firm has not lost its appetite to invest in the Middle East. It is unclear if US sanctions will affect BP's planned sale of its stake in the North Sea's Rhum gas field, which is half-owned by Iran's state-controlled NIOC. BP agreed to sell its 50pc share in the field to London-listed independent Serica Energy last year.