What insight can be learned about political risk in countries run by totalitarian regimes like in the Middle East?

1.As an director at ENI or Conoco Phillips, what are the plans for the future operations in Libya?

2.As an director at BP, Gazprom, or Sinopec, given this traumatic experience in Libya, would you recommend that in the future, your firm enter another oil-rich country with a similar political system with its typical problems (such as dictatorship, corruption, and nepotism) that provoke mass unrest in the Middle East?

Case Analysis:

Ethical Dilemma - Managing Political Risk in the Middle East: A Focus on Libya

The Middle East is not known for political stability. Yet, multinational oil companies typically have to work with totalitarian governments in this oil-rich region if these multinationals desire to have a presence there. A crucial question is: What should these firms do when political risk in the region, or in a particular country, rises?

In 2011, this question has turned from being a theoretical one to a highly practical one. This is because starting in Tunisia, a series of protests and uprisings have engulfed the region since January 2011. While revolutions in Tunisia, Egypt, and Libya have captured significant media attention, what has been less reported (at least in the West) is the protests and uprisings in Algeria, Bahrain, Jordan, Kuwait, Lebanon, Morocco, Oman, Saudi Arabia, Syria, and Yemen. The spring of 2011 has quickly earned a special name, the Arab Spring, which will be recorded as a turning point in the history of the Middle East.

Nowhere are the decisions made by multinational executives more hair-raising than in Libya. Before 2011, Libya was Africa's third largest and the world's 17th largest oil producer, pumping out 1.6 million barrels (about 2% of world total) a day. Over 85% of its crude oil was exported. About a third of it went to Italy, 14% to Germany, 10% each to France and China, and 5% to the United States. Libya's state-owned National Oil Corporation (NOC) accounted for approximately 50% of the oil output, and the rest was produced by ENI of Italy; Statoil of Norway; Repsol of Spain; Wintershall (a subsidiary of BASF) of Germany; OMV of Austria; Gazprom of Russia; Sinopec of China; and Conoco Phillips, Occidental Petroleum, Marathon, and Hess of the United States. In addition, BP of Britain, Shell of the Netherlands, and ExxonMobil of the United States had signed leases but were still in exploration stages and were not producing oil when violence broke out.

The high-stakes drama in Libya started in February 2011, when protesters and government forces clashed. The confrontation quickly turned violent. It became a civil war between the rebel-controlled East (centered on Benghazi) and the government-controlled West (centered on Tripoli, the capital). As violence escalated, foreign governments ordered evacuations of their nationals, and so did multinational oil companies. Multinationals either completely shut down their production or left the remaining Libyans to run the uncertain operations.

In March 2011, in the face of a humanitarian disaster that would be unleashed by government forces approaching Benghazi, air strikes were launched by allied forces. Spearheaded by French, UK, and US forces in the initial salvos, the allied forces eventually included militaries from 17 countries. There are 13 from NATO countries, three from the Arab League (Jordan, Qatar, and United Arab Emirates), and one country that is neither a member of NATO nor Arab League, Sweden.

The two recent revolutions in Tunisia and Egypt were quick and had relatively few casualties. They lasted a couple of weeks and resulted in the departure of their dictators at a cost of about 200 deaths in Tunisia and 800 in Egypt. International forces did not intervene militarily. However, the civil war in Libya, now involving allied air strikes, has been significantly longer and more bloody, costing at least 10,000 casualties as of May 2011. The hope of early wins and Colonel Muammar Qaddafi's departure has evaporated. Among the allies, bickering over the lack of a clearly defined objective and exit strategy started from the beginning. Both the rebels and the pro-Qaddafi forces seem ready to dig in for the long haul.

While the decision to evacuate expatriates (foreign nationals) and shut down production was relatively straightforward, oil company executives, caught in the middle of all of the above, are scratching their heads regarding what to do next. Attacks on oil fields by the rebels, by the pro-Qaddafi forces, and by the allies have all been reported but seldom confirmed. Executives not only have fiduciary (required by law) responsibility to safeguard shareholders' assets, but also moral and ethical responsibility to look after employees and their families. Most of the employees are Libyan and have not been evacuated. About the remaining assets and employees in Libya, the CEO of Austria's OMV told reporters in April 2011, "We have no precise information at all; we have no official contact at all; we are dependent on random contact."

Italy's ENI, a big player in Libya, has to walk a fine line between the rebels and the regime. While ENI has shut down most production and has been talking with the rebels, it is still supplying natural gas to the government-controlled Tripoli. ENI is presumably doing this to both hedge its bets while the Qaddafi regime hangs on and also to fulfill some of its ethical responsibility to its gas clients stuck in a war zone. When the Italian government has called for Qaddafi's ouster and Italian fighters are dropping bombs on government forces, ENI's balancing act is extraordinarily challenging, and ENI "risks angering both sides no matter what they do," according to an expert.

US firms ConocoPhillips, Marathon, and Hess have taken a different approach, which is totally passive. They keep plans and opinions to themselves. Typical of an "ostrich" approach, a ConocoPhillips spokesman in April 2011 told reporters, "We do not have anyone available to discuss Libya." While nobody knows how the conflict will end and how long it will take, multinationals with abandoned assets and lost revenue in Libya cannot afford not to have any future plans. Stay tuned for how close these plans are to realities as the high drama unfolds.