Risk and reward: The world's most dangerous business locations
Convenience is not a priority when it comes to commodities. Drilling and exploration often takes place in war-torn, risky environments and none more so than Somalia.
The East African failed state tops the list of risk analysis company Maplecroft's latest Resource Nationalism Index, which claims that 44% of global oil production comes from countries which it rates as "high risk".
Resource nationalism is a rising phenomenon where countries with natural resources attempt to reap economic or political benefits by restricting supplies. If successful, such activity can have operational and financial implications for commodities companies and even impact on global energy supplies and prices.
"Over the years the oil and gas business has consistently had to work in the most extreme conditions, such as resource nationalisation which can be impact a company in its entirety, like Argentine energy company YPF, or part, which is generally more justified such as Mozambique levying a tax on LSE:COV:Cove Energy during the takeover bid. It's part of the risk shareholders have to assess all the time when buying a stock," warns Malcolm Graham-Wood, oil & gas adviser for VSA Capital.
He adds that sometimes extreme governments are easy to deal with but propriety of payments can be a problem as the "bung" culture is prevalent and what works on the ground in some places doesn't fit well with the local bribery act elsewhere.
"This can apply to the highest levels i.e. gaining licences from governments all the way down to on the ground working where local 'contractors' demand fees even if they don't actually do any work. The Chinese often bring in their own workforce and put massive fencing around the site and the locals never see them, nor do they make any money out of them. Rather on these lines, Tony Buckingham of Heritage Oil (HOIL) is an ex-military man himself and he treats it like a military operation apparently."
Maplecroft's Index evaluates 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.
Somalia tops nine mineral and energy-rich countries that are categorised as posing "extreme" resource nationalism risk. These are the Democratic Republic of Congo (2), South Sudan (3), Sudan (4), Burma (5), Turkmenistan (6), Yemen (7), Iran (8) and Guinea (9).
Terrorism, piracy and decades of civil war make Somalia an unsurprising 'winner' on the 197-strong list, but the report also highlighted eight of the 12 Organisation of Petroleum Exporting Countries (OPEC) member states as potentially most problematic jurisdictions.
As supplies of Iranian oil to the West are interrupted and the cost of oil spikes again, a new 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 hydrocarbon producers.
Beyond Iran at number eight, classed as "extreme risk", the report's "high risk" category included Venezuela (12), Iraq (13), Angola (18), Nigeria (21), Libya (22), Ecuador (28) and Algeria (52).
According to data from BP (BP.), these countries account for around a fifth of global oil production.
Overall, the report maintains that almost half of global oil production is taking place in countries with a high risk of resource nationalism.
On the legal legitimacy side, Graham-Wood points to the Kurdistan/Iraq dispute as interesting: "The Baghdad government can't just take out the Kurdistan Regional Government any more and in due course the Kurds will have virtual self-determination and... an alliance with Turkey," he says, adding: "That's why the Kurds are lobbying the US not to sell F16s to Iraq as they are worried that they will be used on them."
Major oil exporter Saudi Arabia came in at 89, branded "medium risk", but rival Russia grabbed number 15 in terms of the threat of resource nationalism, just one place above Kazakhstan.
As the world's largest energy producer, Russia accounts for 12.9% of global oil production and 18.4% of natural gas. State influence there can produce extraordinary impact, as witnessed with the high-profile UK-Russian joint venture TNK-BP in 2010.
In contrast, the UK came in at 173, despite last year's North Sea tax grab and is "low-risk" along with the US and Denmark. Qatar, China and Brazil were "medium-risk' as were - surprisingly - Australia and Canada.
AIM-listed Range Resources (RRL) knows all about operating in high-risk environments. Its exploration in Somalia's semi-autonomous region of Puntland struck lucky and it is partnering Red Emperor Resources (RMP) in the Dharoor Valley basin there.
Both companies are believed to employ government troops and Western security advisers.
The Maplecroft report has some stark food for thought for investors: "Due to the fragility of the central government, which lacks the authority to implement the rule of law, the means to enforce investor and other legal rights are severely undermined."
It warns: "As a result, any contracts that are entered into or negotiated could easily be reneged on and any property expropriated. Contracts signed with the self-proclaimed governments of aspiring breakaway 'states' in the north (Somaliland) and north-east (Puntland) of Somalia also have a highly vulnerable legal status in this regard."
To this end, companies which cover themselves now by signing exploration and production (E&P) contracts with both Puntland and Somaliland, perhaps even for the same territory, may find these deals are vulnerable if the country heals.
With burgeoning yield estimates, Somalia is perhaps the ultimate risk versus reward conundrum.
Frontier market countries have middle-to-lower rankings on the Index, with Côte D'Ivoire at 36, Kenya at 54, Tanzania at 98 and Israel at 177.
"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," says Maplecroft associate director, James Smither.
The report also alerts companies to "creeping expropriation" where policy or legislative changes occur gradually.
For many, corporate social responsibility (CSR) goes hand in hand with any overseas business. But its positive effects can bring more commercial benefit than some may imagine.
"Companies that pay bribes to obtain licences, negotiate excessively generous tax breaks without adding any value or creating many jobs locally, or through their actions create adverse social and environmental impacts, should expect to be held responsible for such actions eventually," Maplecroft warns.
But the last word goes to VSA's Graham-Wood who points out that "being mugged by the finance ministry" is another risk and that the UK has a bad track record on this issue: "Last year they arbitrarily changed the tax rate and didn't have anyone in the Treasury who seemed to know the difference between oil and gas," he comments, adding, "Many more volatile states and regimes have kept stable tax rates and had less tax changes than the north sea over the years."
UK-listed firms operating in the top 10 high-risk countries
- Somalia - Range Resources, Red Emperor,
- Democratic Republic of Congo - Mwana Africa (MWA), Alexander Mining (AXM), Tullow Oil (TLW)
- South Sudan
- Burma - Marks and Spencer (MKS), Associated British Foods (ABF)
- Turkmenistan - Petrofac (PFC), Dragon Oil (DGO)
- Guinea - Ophir Energy (OPHR), Avocet Mining (AVM), Stellar Diamonds (STEL), Sovereign Mines of Africa (SMA)
- North Korea.
Malcolm Graham-Wood of VSA Capital explains who's who and which investors can expect big things from the region in: Key players in the East African offshore corridor.
|MARKS & SP. ORD 25P||484.40p||-0.70%|
|RANGE RES. ORD NPV (DI)||0.54p||-10.83%|
|TULLOW OIL PLC||365.00p||4.02%|
|ASSOCIATED BRITISH FOODS PLC||3,103.00p||-1.80%|
|ALEXANDER MINING PLC||0.63p||-3.85%|
|MWANA ORD 1P||1.88p||0.00%|
|RED EMPEROR ORD NPV (DI)||1.43p||9.62%|
|PETROFAC ORD USD0.02||706.00p||5.61%|
|STELLAR DIAMONDS PLC||1.20p||-2.04%|
|DRAGON OIL ORD EUR0.10||557.00p||2.39%|
|AVOCET MINING PLC||6.75p||3.77%|
|OPHIR ENERGY PLC||134.30p||4.51%|
|SOVEREIGN MINES OF AFRICA PLC||0.53p||0.00%|
|All data 15min delayed as of: 16:40:56 01/02/15|