HEARD ON THE STREET: BP's Double Exposure

By Liam Denning A DOW JONES COLUMN After his roasting in the U.S., Tony Hayward might almost regard a mooted trip to Russia as a welcome break. But the BP chief executive's itinerary should remind investors focused on the Gulf of Mexico that it's a big bad world out there. Oil majors represent a collection of assets that they operate at the pleasure of host governments. Indeed, a rationale for industry consolidation has been that Big Oil is better able to resist political pressure--too big to foil, in other words. At that scale, however, replacing reserves is very difficult. In BP's case, that has led it into frontiers like deepwater fields and politically risky countries. Hence, while BP fights to protect its position in the U.S., where it produces 27% of its oil and gas, it must also maintain management focus on Russia, which accounts for 24% of output and where any sign of weakness can quickly be exploited. The disaster may also change the broader industry's strategic thinking. Over the past decade, high oil prices have strengthened oil producing nations and their national oil companies--both competitors with the majors for energy reserves and profits. In response, many majors have shifted investment toward long-lived, but often technically-challenging prospects in politically friendlier countries, such as oil sands in Canada. BP's disaster, however, has managed simultaneously to worsen the political climate in the U.S. and cast doubt on the industry's touted technical expertise. The most straightforward way to address rising political and technical risk is through better diversification. BP having roughly half its production and reserves in the U.S. and Russia leaves it looking exposed. For the majors, being global is just as important as being big. (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at liam.denning@wsj.com) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 21, 2010 15:13 ET (19:13 GMT)