When the government of Ecuador seized oil fields operated by Occidental Petroleum Corp. last month, it was a sharp reminder of just how vulnerable companies like the Los Angeles-based oil producer are to shifting geopolitical sands.

For years, Occidental specialized in leveraging carefully cultivated government contacts to secure lucrative oil production deals around the globe. After all, Occidental's longtime chairman, Armand Hammer, made his reputation and fortune dealing with the Soviet regime in what is now Russia.

But now, Occidental, along with the entire oil industry, faces unprecedented challenges in navigating increasingly treacherous political waters, especially in Latin America.

High oil prices have shifted the leverage to governments of oil-rich nations, which are now cutting deals with the companies on terms much more favorable for the countries. Combine that with a leftist and anti-American political tide sweeping across much of Latin America and it's a recipe for government takeovers of oil assets.

In the last several weeks, governments in Ecuador, Venezuela and Bolivia have nationalized some or all foreign oil assets. Nationalization rhetoric also has surfaced in Argentina and Peru.

"It's a series of very worrisome developments in Latin America and a very disturbing pattern for business on that continent," said Bernard Picchi, an analyst with Foresight Research Solutions LLC who said he has a small personal position in Occidental.

Indeed, Occidental has a considerable stake in the political climate in South America. Before the Ecuadorian seizure of Occidental's operations on May 15, about 17 percent of the company's total worldwide production was in South America. About 7 percent or 42,000 barrels per day came from Ecuador, with another 7 percent from Argentina and the remainder from Colombia and Bolivia. Occidental's assets in Argentina and Bolivia came about through its acquisition late last year of Tulsa, Okla.-based Vintage Petroleum for $3.5 billion in cash and stock.

With Ecuador now no longer in Occidental's hands, South America accounts for about 10 percent of Occidental's total output. The remainder is in the U.S. (California and the Texas-Oklahoma region) the Middle East and North Africa.

Occidental has responded aggressively to Ecuador's action, filing a $1 billion claim in the International Center for Settlement of Investment Disputes, an arm of the World Bank. In its arbitration request, Occidental claims that the seizure was the Ecuadorian government's way of negating a previous international court arbitration ruling that a value-added tax on the oil Occidental extracted was illegal and had to be refunded.

Occidental executives have gone further, with chief financial officer Steve Chazen publicly calling the government of Ecuador a "kleptocracy."

Analysts that follow Occidental say the company has a 50/50 chance of winning its arbitration case but that it's unlikely the current government of Ecuador would ultimately pay any compensation. As for Occidental returning to Ecuador, even Chazen admitted at a recent forum that such a return would be unlikely while the current government is in power.

Meanwhile, Occidental has downplayed any risk to its remaining operations in South America.

Spokesman Lawrence Meriage said the company only has a small operation in Bolivia, producing about 3,000 barrels per day. And while the firm has had a longstanding presence in Colombia as a junior partner with 35 percent stake in the huge Ca & #324;on Lim & #243;n oil field Colombia's national oil company, Ecopetrol, is the major stakeholder and operator the central government there has eschewed nationalist rhetoric.

As for Argentina, since Occidental's acquisition of Vintage only completed this year, there's little history to go on.

Wall Street reacts
So far, Wall Street is giving Occidental the benefit of the doubt. When Ecuador's seizure occurred on May 15, Occidental's stock was at a record high $108 per share. That week, Occidental's stock dropped 15 percent. But investors were convinced that Occidental's remaining operations were not at immediate risk and the stock price came back to close at $99.88 on June 1.

"The seizure did have a measurable impact as Occidental dropped more than its peers. But it's not a huge impact," said Steve Enger, an analyst with Petrie Parkman & Co., which has provided investment banking services to Occidental over the past 12 months.

Even if the seizure deprives Occidental of its $1 billion investment, the impact on Occidental's bottom line is expected to be minimal. The company earned $5.3 billion on $16.3 billion in revenue last year, while its market capitalization is about $40 billion, roughly equivalent to Ecuador's entire gross domestic product. The loss of Ecuadorian operations is expected to shave 45 cents of a projected 2006 earnings per share of $11.40, according to Jason Gammel, an analyst with Prudential Equity Group LLC.

The question now facing Occidental investors is just how much risk the company faces in the rapidly changing political climate in South America.

"Political due diligence has always been a factor in the international oil markets," said analyst Picchi. "But no matter how much due diligence a company does, it can always be vulnerable to a change in government.

Indeed, that's precisely what has happened throughout South America in recent years. For instance, when Occidental entered Ecuador 20 years ago, it was on friendly terms with the government in power at the time. But in the last few years, indigenous leaders mobilized their constituency and forced the government into a more nationalist stance.

No one has been more nationalist in his rhetoric than Venezuelan president Hugo Chavez, who has made anti-Americanism his calling card. Chavez announced last month that his government is taking a controlling stake in oil fields run by Exxon Mobil Corp., ConocoPhillips, Chevron Corp., Total S.A. and BP plc.

And earlier in May, Bolivian president Evo Morales that country's first indigenous president dispatched armed forces to take over oil fields and related operations. While Occidental's holdings that yield about 3,000 barrels per day are ostensibly at risk, they are a negligible part of Occidental's overall operations.

But government actions in Ecuador, Venezuela and Bolivia have sparked concerns about similar actions that could come in Peru and Argentina. In Peru's presidential runoff scheduled for this past Sunday (June 4), Ollanta Humala has based his campaign on nationalizing much of the economy, while former president Alan Garcia who was leading in the polls has said he would raise taxes on foreign oil companies.

Columbian reprieve
Meanwhile, in Argentina, president Nestor Kirchner had threatened to nationalize the assets of Madrid-based oil concern Repsol YPF, though last week the government appeared to back off. So for now, at least, Occidental's recently-acquired operations in Argentina appear safe.

Occidental's operations in Colombia also appear safe: late last month President Alvaro Uribe won election to a second term. Uribe, who has been a staunch ally of the U.S., defeated leftist candidate Carlos Gaviria. Also, as a junior partner in the Ca & #324;on Lim & #243;n oil field to the Colombian government, Occidental is viewed as less of a lightning rod for opponents of foreign investment than in other countries.

But the tough political climate for oil companies these days has left Occidental and other major oil firms with a dilemma: they are raking in huge cash flows from historically high oil prices, but are unable to plow those funds into new oil fields around the globe. Many potential oil fields are either off limits because governments have clamped down on foreign investment or the terms for investment are so unfavorable for oil companies that they don't pencil out.

Occidental has focused its cash influx on improving efficiency at its existing oil operations as well as repurchasing shares and increasing dividends.

While that's great for the present, there's no guarantee that even its current oil holdings in Latin America and the Middle East are safe from future political turmoil.

"Changing governments and political trends is the price of doing business in the international oil markets," Picchi said.

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