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Geo political analysis for an oil company- Keerthan G
Geo political analysis for an oil company- Keerthan G
Geo political analysis for an oil company- Keerthan G
Geo political analysis for an oil company- Keerthan G
Geo political analysis for an oil company- Keerthan G
Geo political analysis for an oil company- Keerthan G
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Geo political analysis for an oil company- Keerthan G

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  • 1. Petro United: Managing Geo-Political and Regulatory Risks Executive Summary University- Indian Institute of Management, Indore Team Members: Abhishek Pai Keerthan G K. Pradeep Rajagopal
  • 2. Geo-political risk and Regulatory risk framework We have developed a scorecard to assess the opportunity for fresh investment and continuance of operations in a particular country. The parameters on which a country would be rated are:- 1) Potential Oil Reserves in that country. Countries with over 100 bbl reserves would assigned score of 10, 10-100 bbl assigned score of 7, 1-10 bbl would be assigned a score of 5 and <1 bbl would be assigned a score of 3 2) Geo Political risk associated with that country:- This will be due to regime changes, internal political turmoil, hydrocarbon endowment factors, Government’s ability to attract foreign investment, political & Legal environment for pursuing Business in that country. Each country would then be banded as having High, Medium and Low Geo-Political Risk. The scores for High, Medium and Low risks would be 2, 5 and 10 respectively. The oil reserves and the Geo Political risks for the MENA countries have been tabulated below:- Country Reserves(bbl)(Wt 0.4) Geo-Political Risk(0.3) Score Saudi Arabia 265.4 7 Iran 151.2 4.6 Iraq 143.1 5.5 United Arab Emirates 136.7 7 Kuwait 101.5 7 Libya 47 3.4 Qatar 25.41 5.8 Algeria 13.42 5.8 Azerbaijan 7 5 Sudan 6.8 5 Oman 4.978 2.6 Egypt 4.4 2.6 Yemen 3.3 3.5 Syria 2.5 2.6 Tunisia 0.425 1.8 Turkey 0.3 4.2 Bahrain 0.125 1.8 Georgia 0.035 4.2 Israel 0.002 2.7 Morocco 0.00075 4.2 Jordan 0.0001 1.8 Palestine 0 0 Lebanon 0 0 Western Sahara 0 0 Somalia 0 0 Armenia 0 0 Cyprus 0 0 Djibouti 0 0
  • 3. Red signifies high Geo Political Risk. The factors contributing to High Geo Political Risk are internal turmoil, Regime Changes, Coup or a Government being overthrown, Armed Conflicts, Dictatorial Government, Hegemony etc. Factors contributing to medium Political Risk (Amber) would be partial regime changes, Minor agitations against Government, Coalition Governments where minority parties are against exploitation of Oil resources etc. Green Signifies relatively stable Government, Favourable Conditions for doing Business and few conflicts or uprisings. It is to be noted that the Geo Political Scenario in a sensitive region like MENA can change very quickly. It is therefore recommended to take stock of the situation once every 3 months and update the risk profile of the country. For the purpose of simplicity, we have divided the potential oil reserves into 4 bands and the risk profile of countries into three categories. The scorecard allows for increase or decrease in the number of bands considered. The Geo-Political risk transition to high, medium or low can be measured by putting it in the following Framework. Libya for example, is undergoing a transition. Even though it is shown as high risk in the analysis, once the newly elected government puts a constituent assembly in place for the democracy of Libya, it is likely to turn to green. However, reports coming out of Libya suggest a military coup headed by Al- Rahel threatening to capture eastern Libya where most of the oil fields rest. Similarly Yemen, Egypt and Tunisia are moving towards red from their previously green status in terms of Geo-Political risk. Some of the mitigation techniques against the political and geo-political risks can be:- 1) To protect against "creeping nationalization" under which a host government by legislation or regulation may unilaterally change the terms and conditions of a petroleum agreement to the detriment of the oil company, companies should negotiate stabilization or equilibrium clauses in their agreements. Such clauses provide that if the fiscal or economic benefits of the agreement are adversely affected by unilateral legislation or regulation of the government, the
  • 4. parties shall adjust the fiscal and contractual benefits of the agreement to give the companies the same benefits of the agreement in the absence of the unilateral action by the government. 2) To protect against the risk of unilateral change, a company should provide that its agreement with the government or state company must be promulgated as the law of the country by appropriate and effective legislation or decree. 3) To protect against the risk of currency controls, a company should provide that there be no restrictions with respect to currency and financial transactions. The company should provide that it may freely export and import funds resulting from operations in the country. The company should also have the right to convert payments and cash flow into convertible currencies at market rates and should not be compelled to keep funds in local currencies. 4) To protect against the risk of partiality in a local tribunal, the company should provide for international arbitration in the event of a dispute or disagreement with the government under their agreement. The arbitration provision should be "self-executing" so that the conduct of either party will not frustrate the arbitration process. Self-executing arbitration mechanisms can be provided by institutional arbitration - the AAA (American Arbitration Association), ICC (International Chamber of Commerce), the World Bank's ICSID (International Center for the Settlement of Investment Disputes) and others. To provide for impartiality, the place of arbitration and the arbitrators should be of a neutral country. The decision of the arbitrators should be final and be given full effect by a court of appropriate jurisdiction. 5) With respect to the risk of the applicable law being only the law of the host country, a company should provide for international law, regulations, traditions and customs applicable to international oil and gas ventures between a company and a government to also be applicable. 6) With respect to exploration and production licenses from a host country, a company must take special care that there are no boundary disputes between adjoining or adjacent countries. 7) In the event a company is interested in drilling rights in areas where there are boundary disputes, the company should not assume the political risk of accepting a license until the countries involved resolve their differences themselves in direct negotiations or resolve them at the International Court of Justice or other tribunal before a company undertakes a drilling and seismic program. Otherwise, the political risks in drilling in disputed territory are too high to accept. 8) A company in its dealing with domestic political issues must exercise not just a common degree of due diligence but a high, even an extraordinary, degree of due diligence in dealing with political risks. Due diligence to lessen political risks would require an in-depth knowledge of the host country's laws, culture, traditions, religion and history, particularly in relation to the international oil and gas industry in its conduct of oil and gas operations in the country. Sensitivity to a country's historical influences would be important for an oil company. 9) One of the rules of international exploration seems to be that the most prospective oil and gas reserves are in countries of high political risk. One must be careful not to invest too heavily in a single country or region with high political risk. The political risks may be too great. A company should diversify its exploration efforts - consistent with its strategic planning - to provide against inordinate concentration in a particular country or region. There is no absolute certainty that risk mitigation strategies will be effective. They must be reviewed constantly and adjusted to meet changing circumstances. It is inevitable that there will be changes in international risk scenarios and careful attention to such changes will result in maximum ability for effective response. Regulatory Risks: - Regulatory Risks can be classified into Financial Regulations, environmental and political regulations.
  • 5. a. Financial regulations like Dodd-Frank, restrictions imposed due to Euro zone crisis, exchange rate and futures trading and compliance related regulations are likely to impact all MENA countries in the same way. b. Environmental regulations are those related to emissions, oil spills, shale gas exploration and shift towards renewable sources. c. Social and political regulations cover those related to labour working standards, wage related regulations, UK anti-Bribery law, GOP Energy Bill and any regulations imposed by the host country where Petro United is operating in. The framework for capturing regulations related risks has been described below:- We have plotted the regulations in a 2X2 matrix. The matrix used is a slightly modified version of one used by the Australian Tax office in its operating strategy. The dimensions of the matrix are Likelihood of Event occurring and Consequence of non-compliance. Then each regulation is plotted on the graph based on the parameters. The mitigation strategy for each regulation is based on the quadrant in which it is located and is given in the box in each quadrant. Also, it should be noted that the consequence should not be measured purely in monetary terms but should also include other qualitative factors as well. The details of how to make the framework operational and how to deal with specific Financial, Environment and Socio-Political Regulations will be provided once more details on specific challenges faced by Petro United are provided.
  • 6. Appendix/References  Standard and Poor Ratings have been factored while determining band for Geo-Political risk.  A supplement on political risk mitigation strategies to the IPAA International Primer by Alfred Boulas.  Gartner, Forrester, Data Monitor and IDC reports to get data on Oil Reserves and various Regulatory Risks.

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