Maplecroft: Global Oil and Risks of Resource Nationalism
Two thirds of OPEC members and Russia among countries posing the most risk
At a time when the cost of oil is spiking again, in part due to the interruption of supplies to Western countries from Iran, a new report reveals that further risks to global energy prices are manifesting in the form of resource nationalism throughout many of the world’s most important hydrocarbons producers.
The results of the Resource Nationalism Index, released by risk analysis company Maplecroft, show that 44% of global oil production is taking place in countries that pose a ‘high’ or ‘extreme risk’ of resource nationalism; a list that includes two thirds of the twelve members of OPEC (the Organization of the Petroleum Exporting Countries).
According to Maplecroft, resource nationalism is a rising phenomenon where governments of countries hosting large reserves of natural resources try to secure greater economic benefit from their exploitation or leverage political gain through restricting supplies. This not only has operational and financial implications for extractive companies operating in these countries, but it could create further instability for the global energy markets.
Resource-rich economies dominate extreme, high risk categories
The Resource Nationalism Index has been developed by Maplecroft to enable companies to identify the risk of resource nationalism across 197 countries. It does so by evaluating the stability, transparency and robustness of a country’s political and legal institutions; its recent history of resource nationalism (including respect for property rights), and economic factors, such as increasing debt and dependence on natural resources for revenue.
Nine countries are categorised as posing ‘extreme’ resource nationalism risks by the index, including the mineral and energy rich nations of Somalia (1), DR Congo (2), South Sudan (3), Sudan (4), Myanmar (5), Turkmenistan (6), Yemen (7), Iran (8) and Guinea (9). Maplecroft classifies a further 60 countries as ‘high risk.’
Worryingly, eight of the twelve member nations of OPEC also feature at the top of the index, including Iran (8), Venezuela (12), Iraq (13), Angola (18), Nigeria (21), Libya (22), Ecuador (29) and Algeria (52). According to the latest figures from BP, these countries account for 21.3% of global oil production, while 80% of proven global oil reserves are also located in OPEC member countries. Saudi Arabia meanwhile is ranked 89th and is classified as medium risk.
Resource nationalism in key economies: Russia ranked 15th
“Resource nationalism risks include outright nationalisation and expropriation, as witnessed in moves against the gold and oil industries by President Chávez in Venezuela; export freezes for geopolitical reasons, as enacted by Iran; or more commonly increases in taxes on revenues, such as those seen in Australia with the Minerals Resource Rent Tax and in the UK against energy companies operating in the North Sea,” states Maplecroft Associate Director, James Smither.
Supply-side restrictions on the export of commodities for economic gain, geo-strategic purposes, as well as domestic consumption reasons are not uncommon. Aside from Iran, examples include long-standing restrictions on the export of uranium to potential nuclear proliferators; Chinese restrictions on exports of rare earth minerals; the cartel-like actions of OPEC in controlling global oil prices; and Russia’s periodic attempts to manipulate its natural gas exports to neighbouring countries.
Russia (15), the world’s largest energy producer, which accounts for 12.9% of global oil production and 18.4% of natural gas, is among the highest risk countries in the index. As well as leveraging its dominant position as an energy provider for political purposes, state influence in Russia is found to pose a direct investment risk to oil, gas and mining companies.
This was highlighted during the high-profile UK-Russian joint venture TNK-BP in 2010, where control of the Kovytka gas field was ceded to the state by Russia’s environmental watchdog, ostensibly due to the failure to develop the field. Shareholder disputes within the joint venture caused additional difficulties and saw TNK-BP’s then chief executive Bob Dudley flee to the UK amid concerns that punitive regulations would be applied. Russia’s Gazprom subsequently gained control of Kovytka, a strategic national asset, via auction.
Resource nationalism triggers in developing nations
Factors accelerating resource nationalism in a country can also include a desire to right the wrongs of previous corrupt regimes. Maplecroft states that business should be wary of developing new contracts with outgoing administrations in the highest risk countries, as regime change can herald contract reviews by incoming governments to address unfavourable or corrupt agreements. Regimes may also offset the risk of popular unrest through government spending, which is propped up by resource nationalism.
“Pacifying a populace through more direct returns from sovereign resources is one way authoritarian governments can maintain power,” said Alyson Warhurst, CEO of Maplecroft. “Increasing revenues when foreign direct investment is being deterred by growing political risks is an attractive option for states looking to minimise the type of societal unrest witnessed during the Arab Spring.”
New oil frontiers in Africa
New markets, such as the West African countries that have experienced recent offshore discoveries, may hold huge opportunities for oil companies, but Maplecroft advises firms to be aware of and be prepared to manage the risks stemming from resource nationalism in such institutionally fragile and politically volatile jurisdictions. New oil frontiers in this region include Equatorial Guinea (32), Cote d’Ivoire (36), Cameroon (41), Gabon (42), and the Congo (51), all of which are classified in the index as ‘high risk’ countries.
However, perhaps the most challenging new market will be war torn Somalia, ranked 1st in the index. Recent reports of discoveries in Puntland province alone are estimated as having a potential to yield 10bn barrels, placing Somalia among the top 20 countries holding oil and making it a serious target for investment. Reportedly, oil companies are signing E&P (exploration and production) contracts with non-sovereign ‘governments’ in both Puntland and Somaliland, sometimes for the same territory. However, should the country ever return to a semblance of normality, those contracts will be highly vulnerable to cancellation or renegotiation.
Maplecroft is a leading source of global risks analysis. We research, index and map over 500 risks and issues to identify exposures and opportunities in both countries and companies. Our products and services are a vital resource for businesses and investors requiring analysis and insight into complex political, economic, social and environmental risks.
Winner: "Most Innovative Development in ESG" – TBLI: ESG Leaders Awards Europe 2011
Special Commendation: StrategicRISK – European Risk Management Awards 2011
Winner: “Risk Management Product of the Year” – StrategicRISK, 2010 European Risk Management Awards
Winner: "Environmental Risk Initiative of the Year" – Risk Management Awards 2010
Winner: GRI / ING “Big Five” 2010 – Global Reporting Initiative / ING
Natural Gas Europe welcomes all viewpoints. Should you wish to provide an alternative perspective on the above article, please contact firstname.lastname@example.org
Kindly note that we only lightly edit content for grammar and do not edit externally contributed content.