Key Political Risks for the Oil and Gas Industry in 2013
By Charlotte Ingham, Senior Political Risk Analyst at Maplecroft
Maplecroft has released the fifth edition of its annual Political Risk Atlas (PRA). The PRA 2013 provides an analysis of short-term political risks, such as conflict and the business environment, alongside longer-term structural issues such as energy security and infrastructure readiness. This comprehensive assessment of political risk enables companies to identify and manage both risks and opportunities in their investments, operations and supply chains.
Increasing risk of political violence
The PRA 2013 highlights escalating levels of political violence across the globe, with 20% of countries host to a substantial increase in risk in the Political Violence Index 2013, while just 5% of countries saw a substantial lowering of their risk level. Many of those countries exhibiting the highest risk of political violence are major oil and gas producers, including Iraq (ranked most at risk out of 197 countries), Nigeria (10th highest risk), Russia (14), Iran (30), China (34) and Indonesia (35). Such high risk levels present significant security, cost, logistical and reputational risks to firms choosing to operate therein.
Both Tanzania and Kenya – two countries with nascent hydrocarbon industries – are among those countries which are host to a significant increase in the risk of political violence in 2013. In Tanzania, recurrent unrest in Zanzibar highlights growing security risks amid a strengthening secessionist movement. The increasing political instability ahead of a scheduled 2014 constitutional referendum has the potential to create further obstacles for the exploration and extraction of the territory’s offshore hydrocarbon resources.
Meanwhile in Kenya, there is growing tension ahead of elections scheduled to take place in March 2013. Not only would a repeat of the 2007/2008 post-election violence – which left at least 1,300 people dead and 500,000 displaced – significantly undermine investor confidence, the ensuing political instability would seriously hinder efforts to progress existing extractive activity, or establish new ventures. Moreover, the International Criminal Court’s indictment of leading candidates in the polls heightens the risk of violence, and would severely affect Kenya’s international standing and investment climate if the candidates came to power.
Heightened threat of increasingly sophisticated forms of resource nationalism
The PRA 2013 highlights a heightened risk of resource nationalism, as host countries use increasingly sophisticated measures to secure greater economic benefits from their natural resources. Increasingly, resource nationalism manifests not only as attempts by governments to directly control assets via ‘traditional’ methods, such as outright expropriation, but also through more subtle initiatives intended to gain a greater share of revenue. The pervasive nature of the tactics employed - including changes to tax codes and requirements for increased local content in the production process - makes them difficult to avoid.
Among those countries ranked as the highest risk for resource nationalism are Venezuela (ranked 4th highest risk), Libya (6), Iraq (7), Kazakhstan (8), Uzbekistan (13), Russia (14) and Indonesia (18). Even countries that have historically been the most attractive for FDI are reviewing their positions, in part because of domestic pressure to ensure that a greater share of the proceeds of extractive activity is enjoyed by wider society.
The trend of an increased risk of resource nationalism is likely to continue in 2013, with commodity prices playing a central role in determining the demands made, and the tactics employed, by host governments. Furthermore, with the global macroeconomic set to remain challenging in 2013 - with more than 50% of countries host to a significant deterioration in their score in the Macroeconomic Environment Index compared to the previous year - the pressure this places on governments increases the likelihood that struggling economies will resort to resource nationalism in an attempt to bolster public finances.
Significant risk posed by persistently high levels of corruption
More than two thirds of the world’s countries are ranked as extreme and high risk for corruption in the PRA 2013, including many of the world’s top oil and gas producing nations. Russia, Iran, Mexico, Iraq and Indonesia are ranked as ‘extreme risk’, while China, Saudi Arabia and Kuwait are ‘high risk’. Despite the obvious commercial opportunities in these countries, the risk of corruption increases the potential that firms might be implicated in such practices, with subsequent legal and reputational repercussions.
Egypt and Libya both ranked as ‘extreme risk’ for corruption are among the countries host to a significant increase in the risk of corruption in 2013, as economic challenges and a lack of effective authority encourage and facilitate graft. In these countries, not only does corruption inhibit investor confidence, it is also contributing to wider public anger about the pace and direction of reforms, frustration which continues to manifest in mass protest actions which pose a direct threat to the stability of new governments.