The Great Debate

Why energy exploration in North America has its own political risks


Leading non-integrated oil and gas producer Apache Corporation found itself in the spotlight in recent weeks, as the latest company to grapple with the question of how big a commitment to make to North America’s shale gas and tight oil revolution. Jana Partners LLC, a leading investor in Apache, published a letter to investors July 21 urging the company to exit its international investments and focus on exploring US shale formations such as the Permian Basin in Texas and New Mexico. Just last Friday, Apache announced plans reflecting this advice, as they intend to divest completely from two liquefied natural gas (LNG) projects in Western Australia and Canada in an effort to reduce international assets.

Jana’s letter highlights a recent trend — driven by the technological innovations that have reversed decades-long declines in U.S. oil and gas production – in which traditionally globally-oriented oil and gas producers are “onshoring” back to their roots in North America.

Investors should be cautious of this trend, which trades one form of political risk for another. Instead of fears of sanctions, armed conflicts, or forced nationalization of the oil and gas industry, oil and gas producers may face opposition from local communities and others on environmental grounds. They’ll also have to contend with a growing risk of saturated domestic markets for light oil and natural gas, and the need to receive politically-sensitive regulatory approval in order to export overseas. While North America is safer for workers, and companies can launch public policy campaigns to address these challenges, investors should not underestimate the complexity of doing business in the region.

Since 2009, top oil and gas producers like Hess, Devon Energy, EnCana, ConocoPhillips, Husky Energy, Occidental and EOG Resources have increased the proportion of their exploration and production budget that they devote to North American interests. While EOG Resources and Hess devoted less than half their exploration and production budget to the region in 2009, in 2013 they devoted 94 percent and 62 percent, respectively. Following a similar strategy, Pioneer Natural Resources sold off its last international operation in 2012.

As the Jana letter suggests, one apparent benefit of this North America-centric approach is the ability to shift away from the challenges — political and otherwise — of working in energy-rich developing markets. Anyone looking at headlines from the Middle East or Russia can see the potential appeal of such an approach.

Too much at stake for long drilling moratorium

Deepwater oil production in the Gulf of Mexico accounted for 23 percent of all oil produced in the United States last year, and 7 percent of all crude consumed in the nation’s refineries, according to the Energy Information Administration’s “Annual Energy Outlook.”

Offshore production has risen 770,000 barrels per day since 1990, helping offset declining output of almost 2.9 million barrels elsewhere. In the Gulf, deepwater has been the fastest growing segment in recent years, accounting for more than three-quarters of all production last year.

Before the blowout of BP’s Macondo well, and the subsequent drilling moratorium, EIA forecast deepwater output would rise another 35 percent to hit 1.67 million barrels per day in 2015, up from 1.23 million bpd in 2009. By then, Gulf deepwater output would account for almost 29 percent of all oil produced in the United States.