How You Can Play The Oil Game
With the Middle East in turmoil, the action has moved to Russia, Asia, and Latin America. Here are the likely winners.
By Jonathan Weber

(Business 2.0) – Volatility always spells investment opportunity, and the global oil market still offers plenty of both. Most energy stocks have already enjoyed a good run, but the risks to the global oil supply, rising demand from China and India, and America's allergy to conservation combine to suggest that oil prices will stay high over the long run. And that means that even armchair investors still have a chance to get in on the always-entertaining game of oil geopolitics.

If you're an oil price bull, you have plenty of choices. You can always buy futures—not a recommended strategy for individual investors, but a lucrative one if you're right. Or you can take the low-risk approach and bet on the international oil majors.

For a more exotic option, you can place your chips—via mutual funds or American depositary receipts—on a group of companies known as the emerging oils. These Russian, Asian, and South American firms are mostly the spawn of government oil ministries, and the state in many cases retains a good chunk of ownership. In the oil business, that can actually be a good thing: Those with access to cash, credit, and guns are often the ones in the catbird seat.

Let's start with Russia. The world's No. 2 oil producer is sitting on some of the biggest untapped fields anywhere, and international energy players have eyed it hungrily since the fall of communism. But after a brief period of cowboy capitalism, Russian president Vladimir Putin has reasserted state control over the sector. Mikhail Khodorkovsky, who built Yukos into an oil power, now sits in a jail cell, and in December the Kremlin orchestrated a virtual state takeover of Yukos's main assets. (The government's attack on Yukos has given rise to a new term in investing circles: "oligarch risk"—the danger that Putin may go after other business moguls who are judged to have earned undeserved fortunes on the privatizations of the 1990s.) Western oil companies with big Russian stakes, notably BP, are watching nervously to see if they'll be allowed to go about their business.

Yet the West's tut-tutting over the Yukos situation doesn't much matter to Gazprom, the state-controlled gas giant that's now in the process of becoming an oil power too. Transparency and efficiency won't be Gazprom's forte, but for investors who are comfortable riding with Russia's "oil generals," that may not matter.

Another way to play Gazprom is via the German utility Eon. Gazprom needs to export much of its gas to Europe, and Eon has been happy to link arms on strategic projects. Meanwhile, Russia's Lukoil, though subject to oligarch risk, has gone out of its way to make nice with Putin and stands to capitalize on the latest Kremlin games. Its alliance with ConocoPhilips could help it exploit holdings in Iraq. And Siberia's Surgutneftegas may also gain from cozy relations with the state.

In Asia, government-backed companies are starting to make noise. CNOOC, PetroChina, and Sinopec, China's dominant crude producers, have been aggressively exploiting offshore and overseas opportunities. India's ONGC has three things going for it: steady production growth, close ties to Russia, and general Asian wariness of China.

Elsewhere, Thailand's state-controlled PTT and its separately traded exploration and production unit, PTTEP, are determined to climb into the big leagues. Like most emerging oils, they pay dividends. And Petrobras of Brazil, until recently out of favor with investors due to poor execution, is expected to see huge production increases in the next few years.

The biggest threat to all of these investments, ironically, is peace in the Middle East. The region still accounts for 60 percent of the world's crude reserves, and if the big three—Saudi Arabia, Iraq, and Iran—were to achieve any kind of political stability, the global oil business would look very different. I'm not holding my breath for that. Otherwise, it's about capital, political pull, and the ability to invest for the long term. The emerging oils have all three.

Striking Gushers?

For investors willing to take a chance on state-controlled oil companies in emerging markets, the fundamentals look good.

Note: Market caps and ownership percentages as of Jan. 5. Source: Bloomberg