Oil Resources in Developing Countries: Political Risk

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Oil Resources in Developing Countries
Political Risk
What is political risk? Short of
nationalization, what sort of political risks can
undermine the value of a firms
investment? How can firms contemplating
investment in developing countries predict this
risk?
Nationalization/expropriation
Policy change (regulatory monetary)
Terrorism/war/civil strife
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Oil Resources in Developing Countries
Political Risk

• Predicting Risk
• Grand Tours approach
• Old Hands approach
• Quantitative analysis
• Qualitative analysis Delphi technique

Do you think political risk is predictable?
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Oil Resources in Developing Countries
Political Risk
corporate managers came to view risk analysis as
an ivory tower exercise, rooted in academic
theory rather than managerial practice.
HBS Note on Political Risk
Then how do companies (or their investors or
insurers) decide when political risk is too
great? What characteristics do you think are
correlated with political-legal stability, or
negatively correlated with political risk?
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Oil Resources in Developing Countries Political
Risk
Bergara, Henisz and Spiller 1. Veto points in
the policy process (e.g., divided government,
separated powers, federalism) 2. System
stability, but political change 3. Strong
independent bureaucracy judiciary In other
words, credible commitments against arbitrary
policy changes
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Oil Resources in Developing Countries Political
Risk
How can corporate managers manage political risk?

• Insurance
• Sharing risk with host nation

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Modern Petroleum Agreements

• What are the important differences between these
  different methods of foreign participation in
  developing domestic oil resources?
• Licensing/concession
• Joint venture
• Production sharing agreement
• Service contract

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Modern Petroleum Agreements Legal systems

• Legislatively-prescribed terms
• Delegation to national oil company
• Hybrid system

Standardization ? equal treatment
Rigidity (how?)
Government bargaining power?
Flexibility ? best deal (how?)
Comparison problems ? potential corruption or
discrimination
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Modern Petroleum Agreements
Selecting contractor/developer

• What are the differences between these
  approaches? What are the advantages/disadvantages
  of each?
• Discretionary licensing
• Auction
• Open Competition

What is contractor take?
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Oil Resources in Developing Countries Political
Risk

• Which of the following constitutes corruption?
• Paying bribes to government officials
• Paying filing or transaction fees to governments
  that exceed actual transaction costs
• Giving gifts to government officials
• Making large contributions to the campaigns of
  elected officials who make authoritative
  decisions affecting your business
• What do you think of the U.S. Foreign Corrupt
  Practices Act? Should it be repealed? Exactly
  what does it prohibit?

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What are the political risks associated with
investment in oil development in Nigeria
Kazakhstan Uzbekistan
Excessive governmental control, regime
duration Export / transportation issues
Regime duration, but demonstrated experience with
PSA privatization, Disputed ownership
issues Export / transportation issues
Dependence on oil revenues, but Ethnic violence
vandalism Federalism ownership issues JV
funding problems
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International Law and Political Risk

• When problems arise between the foreign developer
  and the host country (or its representative),
  what legal rights do aggrieved companies have?
  How are disputes resolved, typically? What do
  these doctrines have to do with this question?
• sovereign immunity
• political question
• act of state