Oil firms face increased risk from state intervention

Oil multinationals face increased political and economic risks as governments readdress the balance of power by taking more control over their domestic product, according to Aon’s Political and Economic Risk Map 2008.

The report found that countries such as Venezuela and Uzbekistan pose a high risk for companies with potential problems such as confiscation, sovereign non-payment and political interference. These political risks could threaten global oil supplies and push record oil prices even further.

This is evidenced in yesterday’s threat by Venezuela to cut off the US oil sales after one of the world's four largest oil companies won international court orders freezing up to $12bn in assets of state oil firm Petroleos de Venezuela (PDVSA), said Aon in a release.

The broker also pointed to the Chinese government diverting coal exports back to coastal towns during its New Year winter storms.

Said Aon: ‘Governments with state-owned oil companies have benefited and learnt from the technology, expertise and training from the oil multinationals that originally invested in exploration and production. Now, along with the increasing price of oil and by accruing tax and royalties, these governments have asserted themselves to bring the domestic product is their control through varying degrees of nationalisation. The drivers for state control vary from left wing politics, as evidenced in South American countries such as Venezuela, Ecuador and Bolivia, to capitalist economics.’

As most of the world’s oil reserves are today held by government-controlled oil companies – approximately 90% compared to 30% in 1978 (Source: Hydrocarbon Highway) – multinationals are now dealing with nations with elevated levels of political and economic risk to meet increasing global demand, added the broker.

Simon Lazarus, executive director of Aon's natural resources and construction division commented: ‘A number of oil multinationals are facing serious challenges as governments take greater control over their resources. Not only are we seeing an increase in risk across a number of oil producing countries, but the supply situation could potentially worsen in some regions. This is evidenced by the current ‘gas squeeze’ in the European sector, as well as certain parts of Latin America where there is a serious lack of state investment to keep oil fields productive and to finance expansions into new areas.’

Miles Johnstone, director of political risk at Aon Crisis Management, added: ‘This week alone we have seen Venezuela again threatening to cut off oil supplies to the US. This comes at a time when the main oil producing and refining region in Nigeria continues to suffer from high levels of political violence, kidnappings and general civil unrest, and tensions between the US/UN and Iran over its nuclear programme are ongoing. These factors indicate potential for serious disruption to the operations of key oil producers as well as to established oil transportation routes which could well lead to further spikes in the price of oil.

‘It is crucial for energy companies to understand the nature and extent of these kinds of political threats to their operations and to take appropriate action to mitigate these risks. One way of doing this is by reviewing and strengthening their concession contracts or production sharing agreements; another is through insurance cover, for example.’