44% of global oil production taking place in countries with a ‘high risk’ of resource nationalism – new report
Two thirds of OPEC members among countries posing the most risk
At a time when the cost of oil is spiking again, due mainly to the interruption of supplies to Western countries from Iran, a new Maplecroft 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 Maplecroft’s Resource Nationalism Index 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 eight 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 Nationalism Index 2012
© Maplecroft, 2012
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 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, two thirds 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.
Key economies acting out resource nationalism policies
“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. A 2008 law limiting foreign investment in Russian strategic industries subjects investors in the natural resources sector to stringent government control, while concerns over additional regulation or taxation in the future add to investor uncertainty.
State level interference was highlighted during the high-profile UK-Russian joint venture TNK-BP in 2010, where control of the Kovytka gas field was ceded 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.
Social transformation, righting past wrongs through resource nationalism
“Resource nationalism not only encompasses economic factors and the control of production, in many nations it has now come to symbolise social justice and a mile-stone on the road to societal transformation,” adds Smither. “This is especially the case in some of the poorest and less well governed states that have received the least developmental benefits from extractives investment to date.”
This has happened across many mining destinations throughout the developing world, where natural resource companies are widely seen as having taken advantage of the corrupt self-interest of predecessor regimes when negotiating their original licences. In this light, many of the justifications behind subsequent policy changes imposed on mining companies in these countries can therefore be seen as genuine. This was a major justification for the wholesale review of mining licences carried out by the Congolese government in 2008-2009. This action nevertheless created major uncertainty for all investors in that country and received widespread accusations of non-transparency and bias, as well as catalysing a spate of copy-cat reviews elsewhere in Africa.
Maplecroft states that there are important lessons for the oil industry to take away from the experiences of the mining sector. Extractive companies should acknowledge that they are active players rather than simply passive recipients in the resource nationalism equation. Companies that pay bribes to obtain licences, negotiate excessively advantageous tax breaks without adding any value or creating jobs locally, or negatively impact host communities through damaging social and environmental impacts, should expect to be held financially responsible for such actions. The lessons from Sierra Leone, DRC, Liberia and indeed Libya are there to see.
Key risks in new investment frontiers
“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.”
Maplecroft also states that business should be wary of developing new contracts with outgoing administrations as regime change often heralds contract review by incoming governments keen to gain popular support and address unfavourable or corrupt agreements.
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, particularly where we see a disenchanted poorly educated youth, many of whom following war torn years out of school, are finding reintegration back into society particularly challenging. 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.
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