Assessing Political Risk of Oil Investment Ventures
Authors: Gebelein C.A. , Pearson C.E. , Silbergh M. 
Published: December 2007

Politically motivated changes in contracts among governments and private Politically motivated changes in contracts among governments and private oil operators require new methods for assessing technical and economic ventures. This paper describes a procedure for evaluating the political situation in which an oil company must operate. The probability of specific adverse political action is processed and evaluated systematically using the opinions from various disciplines.

Introduction
Recently, unprecedented changes have occurred in the contractual relationships with which oil companies operate. These changes result from an accelerating assertion of sovereignty over natural resources by the host country and its determination to claim a major share of increased financial benefits after the quadrupling of the official price of oil in 1973-74. price of oil in 1973-74.Whatever the reason, oil production contracts are being amended, renegotiated, and sometimes abrogated. This situation necessitates going beyond conventional technical and economic analyses of oil ventures to include an evaluation of the political climate in which these ventures may operate.
This study describes an analysis tool developed to assess "political risk." The tool was designed to assess and communicate identified components of nontechnical (political) risk facing a petroleum exploration and production venture. production venture.When we decided to systematize political risk analysis, three alternative approaches were explored.
1. To develop an analytical model of the causal relations among political and economic factors and political risks based on statistical analyses of sequential, observable economic and political data.
Unfortunately, with the exception of violent conflict, little research has been conducted to establish causal links between observable economic and political events and the occurrence of actions detrimental to an oil company's operations. After preliminary research, we concluded that validating this approach of forecasting political risk would require extensive case studies of past political actions against foreign businesses, with the strong possibility of reaching only inconclusive results. possibility of reaching only inconclusive results. Accordingly, this approach was not pursued.
2. To determine if any procedures for assessing political risk were offered by consultants or were available political risk were offered by consultants or were available from organizations such as banks or government agencies that could be used or adapted for an oil company's use.
We reviewed the available literature and visited appropriate government agencies, banks, academics, and consultants. We concluded that no off-the-shelf system for forecasting risks to a specific operator was available, and that an inordinate amount of adaptation would be required of existing general-purpose risk indicators to relate them to an oil company's particular concerns. This approach also was not pursued.
3. To devise a way to use a multidisciplinary panel of experts on countries to assess systematically the probabilities and effects of specific, adverse political probabilities and effects of specific, adverse political actions in a particular country and then to communicate this assessment to the company affected.
JPT
P. 725