Narrowing The Gap Between Perception And Reality

02 January 2019

There are sizeable opportunities for energy firms willing to invest and operate internationally. The sector is emerging from a sustained period of weak prices that forced firms to seek production efficiencies and cut back on capital expenditure.

According to PwC, upstream capital expenditure is now forecasted to rise by 6% year-on-year in the period to 2025, having dropped by 45% in 2014-2016. Exploration spending is also expected to rise by a 7% compound annual average growth rate in the near term, having collapsed by 60% in 2014-2016.

Much of this spending will see oil and gas companies operating in higher risk emerging markets, such as Peru, Ghana, Côte D’Ivoire and Mauritania. Entering these territories for the first time can bring exposure to a range of political and security risks for energy firms, whilst risks can shift rapidly in existing countries of operation.

In emerging markets, governments frequently enact contractual alterations at times of fiscal strain to enhance revenues or in response to public pressure for resource nationalist policies. Firms are also likely to experience significant challenges operating in any country that is heavily leveraged to a single commodity in the instance of a price downturn. Falling commodity prices can deplete foreign exchange reserves as export revenues drop. This can often lead to hard currency shortages, limiting the ability of foreign companies to repatriate earnings denominated in the local currency. Governments may also introduce stringent capital controls to limit currency outflows.

Similarly, remote onshore upstream facilities can be attractive targets for terrorist actors due to their strategic significance and international nature.

Risks are not limited to emerging markets. 2018 has seen the spread of political risk into developed economies. In the United Kingdom, the possibility of an early general election increases the nationalisation risks facing utility companies, while Italy has defied the European Union (EU)’s calls for it to revise its spending plans.

The world therefore remains a challenging place in which to do business. Energy firms must navigate these challenging conditions if they are to capitalise on business opportunity, contending with an array of risks in often unfamiliar operating environments. Capital discipline will remain a pressing concern in the energy sector, so effectively managing these risks is particularly pertinent. However, a constant stream of media commentary on geopolitics can make it hard for risk managers to filter through the noise and understand how their international operations are affected by political and security risk.

To tackle this challenge, JLT Specialty’s Credit, Political & Security Risks team created World Risk Review to demystify political and security risk, helping risk managers differentiate between actual and perceived risk. This also promotes a far more informed view of which perils should be insured as World Risk Review categorisation mirrors the coverage options available from the insurance market.

What Is World Risk Review?

World Risk Review is JLT’s online country risk ratings platform, which provides risk ratings across nine different peril indices for 197 countries. Ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international indices. Essentially, World Risk Review tells you how risky a country is to do business in, helping to answer the questions that keep risk managers up at night:

  • Will foreign exchange shortages mean we can’t repatriate profits?
  • Will our people or property be affected by terrorists or civil unrest?
  • How likely is it that the government will seize company property or assets?
  • Will the government fail to respect contractual terms and/or pay us for goods/services provided?

World Risk Review allows users to compare and contrast risk across perils (all of which are insurable), assess historical trends and benchmark risk across countries, building a detailed picture of risk trends that may impact their operations.

World Risk Review Perlis Market Leading Features

Using World Risk Review To Monitor Risk

World Risk Review is a valuable tool in monitoring emerging risk trends. Below, we use the examples of Nigeria and Indonesia to highlight how World Risk Review has tracked country risk in the last 12-months, and provide an outlook for the coming year.

World Risk Review ratings for Nigeria have remained fairly constant between November 2017 and November 2018, particularly when considering the security environment. The Terrorism rating has remained constant at 8.2, reflecting the limited progress that the Nigerian government has made in tackling the threat from Boko Haram in the northeast of the country.

The energy sector has also faced a persistent threat of attack from the Niger Delta Avengers (NDA), particularly as the group pledged in January 2018 to renew attacks on deep water oil facilities. However, this risk is likely to decline as the government extends concessions such as amnesty programmes to the NDA’s leaders.

World Risk Review ratings also suggest an improvement to the operating environment in the last 12-months. Expropriation risk has fallen from 6.6 to 5.7, as the government has been keen to encourage foreign investment in the country.

Looking ahead, expropriation risks may fall further. The February 2019 presidential election is expected to be a close race between the incumbent, Muhammadu Buhari, and opposition candidate Atiku Abubakar. If elected, Abubakar has pledged to privatise oil refineries and aspects of the Nigerian National Petroleum Corporation. However, international companies in Nigeria will continue to face an elevated risk of tax increases or large back-dated regulatory fines, particularly in the telecoms and oil sectors.

Nigeria is pursuing legal action against a number of international oil companies, including Total and ENI, claiming that they have under-declared exports. In March 2018, the Nigerian government opened a dispute with the China National Offshore Oil Corporation in the Federal High Court of Lagos, claiming USD 12 billion in compensation.

World Risk Review ratings for Indonesia have seen little change in the last year, reflecting political stability under President Joko Widodo’s administration. However, firms in the energy sector face elevated Legal & Regulatory Risk (6.0) and Contractual Agreement Repudiation risks (5.6). Risks are likely to remain elevated in the one-year outlook in the energy sector. Widodo is likely to be re-elected for a second term in the April 2019 general elections. This will generally weaken the operating environment in the country as Widodo has failed to implement a proposed reform agenda, instead showing an increasing preference for resource nationalist policies.

For example, new regulations have already been introduced to keep energy costs low, forcing oil companies to seek government approval before changing fuel prices. Such efforts to keep prices low will weigh on profit margins, and lead a number of companies to relinquish exploration and production licenses. Chevron divested its Rokan and East Kalimantan oil and gas blocks in October 2018 when contracts expired.

Interested in accessing World Risk Review? JLT Specialty is offering 6-weeks’ complimentary access to World Risk Review, following a webinar to introduce the platform and provide an overview of CPS products. To take advantage of this offer, please register your interest here.

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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email john_cooper@jltgroup.com.

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