Pick up a newspaper on any given day and you’d be forgiven for thinking that the world was in anarchy. Terrorist attacks, civil wars, earthquakes and other natural disasters dominate the front pages. Election season in the U.S. brings with it a different set of concerns. The Zika virus is beginning to spread across the Americas.
From the perspective of natural resources firms, unrest in the Arab world, ongoing political issues in Africa and Latin America and the collapse in global commodity prices over the last year and a half make for a potent cocktail. And sometimes it feels like it is harder than ever to forecast risk. The so-called “Arab Spring” uprisings, and other upheavals in the Middle East are a constant reminder that even the best analysts don’t always see major events coming, and even after they were well underway, nobody was able to predict the breadth and depth of contagion in the region. The subsequent power vacuum has now contributed to a full blown war in Syria and Yemen and on-going political upheaval in Libya.
When we polled C-suite executives at major natural resource firms earlier this year about the risks they were most worried about, they told us that geopolitics remained a major point of concern. But the risks that concerned our clients in oil and gas, metals and mining and other natural resources sub-sectors are a little more nuanced than a simple a fear of terrorist attack.
Risk of expropriation
In fact, with low commodity prices weighing on the budgets of governments of less stable countries who have relied on hard currency from oil, gas, metals and mining, many firms are most concerned about the risk of expropriation – something that, drilling deeper, the Natural Resources Index marks as one of the biggest geopolitical risks firms face.
For the moment, we are unlikely to witness outright expropriation – most governments are savvy enough to understand that simply taking over private firms’ assets doesn’t exactly encourage foreign direct investment – but rather what is often referred to as “creeping expropriation”. This is a more insidious form of government interference which may include the imposition of a burden tax regime on projects and firms or a demand that joint venture agreements be reworked to give the state partner a larger slice of the pie.
The problem for C-suite executives is that while there is a suite of options for expropriation insurance, creeping expropriation is arguably much harder to hedge against. By the time firms are able to claim on a policy, they have to be able to demonstrate that the new terms have made the project economically unviable – not straightforward. But if the current trend continues, demand for these types of coverages will inevitably rise.