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Assessment of Political Risk

Malcolm J. Garratt, International Resources Law: A Blueprint for Mineral Development (1991)

The oil industry is no stranger to operating in what are arguably some of the most unsettled countries in the world, indeed recent events in the middle east have highlighted how exposed investments in foreign countries can be. Political and economic changes can lead to serious repercussions on a company's assets or on its ability to do business, and often these changes are outside the control of the individual company. For example, the recent Iran/Iraq war resulted in considerable damage to oil installations and subsequent loss of production. My own company, BP Exploration, has suffered in the past from political actions by host governments particularly in Iran, Libya and Nigeria where assets have been nationalised. Within the oil industry we spend considerable energy and time on assessing the technical risks involved in prospecting for hydrocarbons, that is to say, in assessing the probabilities of finding hydrocarbons of a certain accumulation size in a particular area. We employ many geologists and geophysicists, experts in their field, to do that analysis, which has such impact on investment decisions. But what about the analysis of a country's political future? Can the anticipation of the risks associated with investing in unsettled regions be anything more than crystal ball gazing? Those risks are equally as important as technical risks, and should be considered seriously