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The latest Value at Political Risk report (Vapor), produced by global advisory firm Oxford Analytica, says that the oil and gas industry is the most politically exposed sector globally due to spiking political violence in the Middle East.

Oil and gas jumped from fifth place in Q2 to first place in Q3, knocking gas and water utilities off the top spot (figure 1), as oil tankers are being seized and attacked in the Persian Gulf and Gulf of Oman, and concerns remain over Libya.

While Oxford Analytica says it isn’t a surprise that oil and gas is now the riskiest sector politically, the move does demonstrate how disparate events can quickly change the risk environment for an industry.

“We believe that oil and gas, followed by gas and water utilities and power utilities are chief concerns for stakeholders in the next 12 months, and are the most politically exposed sectors,” Oxford Analytica’s head of risk analytics, Simon Coote tells GTR.

“Partly as they are more likely to be expropriated in emerging markets when prices are higher, as it’s potentially an easier way of paying down sovereign debts.

“For gas and water utilities and power utilities, the lower growth environments in developing and emerging markets also increase the risk of governments deciding to freeze rates, which often breach prior pricing guarantees to investors” he adds.

The findings coincide with a report that GTR published earlier in the year, drawn from results of the Atradius Economic Update, which found that political uncertainty, and oil price volatility are two of the top five risks for trade finance this year.

Figure 1: Political risk by sector (Q2, Q3)


A game of battleships in the Middle East

“For the oil and gas sector, risks are being driven by political violence and trade embargoes, including attacks like those on the Gulf of Oman. This can result in expropriation or periods of reduced investment, which means risk for investors’ assets is increased,” Coote says.

The Strait of Hormuz is a passage between the Persian Gulf and the Gulf of Oman, carrying an average of 21 million barrels of oil per day (b/d). But this year, tankers have been hit with a string of attacks while passing through the waterway. In May and June tankers came under attack, with crews forced to abandon their vessels and at least one ship set on fire.

The Vapor report holds a negative 12-month risk outlook for eight out of the 14 countries that are OPEC (Organization of the Petroleum Exporting Countries) members. They are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Libya and Venezuela. The six countries with a positive 12-month risk outlook are Ecuador, Kuwait, Nigeria, Congo, Saudi Arabia and the UAE.

It also reveals that slowing global trade suggests oil demand forecasts will be downgraded, while non-OPEC production growth, led by the US, will keep the market buoyant despite disruptions on major OPEC producers. However, weak pricing will be offset by risk premiums associated with conflict in Libya and the threat of US-Iranian tensions affecting oil from the Gulf.

Moving forward, US sanctions on Iran and Tehran’s resumption of uranium enrichment will keep Middle Eastern tensions high. Saudi Arabia is also likely to push for continued output restraint due to limited demand and non-OPEC supply growth. The report predicts that insurance premiums for tanker traffic in the Middle East and Red Sea will remain high.

Coote says that Libyan crude oil production remains steady, just above 1 million b/d, with no increases in output likely, but domestic conflict may disrupt Libyan oil flows as different forces battle to control revenues. In the Middle East, US-Iran tensions are mounting following the attacks on oil tankers. Drone attacks launched by Iranian rebels in Yemen caused further chaos earlier this year, with one drone hitting a station on Saudi Arabia’s east-west oil pipeline, Petroline.

This was followed by another drone attack linked to Iranian rebels last week, which sparked a fire in the Shaybah Saudi oil and gas field, but state-owned energy company Saudi Aramco said it caused no disruption to production.

As well as this, Iran cautioned the US against seizing its super-tanker Adrian Darya 1 – formerly known as Grace 1 – which has now set sail from Gibraltar after more than six weeks of detention. It was seized by authorities in Gibraltar with the help of the British Royal Marines after it was thought to be carrying around 2 million barrels of illegal oil to Syria, but a court ruling in Gibraltar ordered its release this week. US authorities attempted to seize the tanker before it left Gibraltar.


How Vapor works

The report’s ratings are based on political risk, providing companies or investors with detailed understanding of what operating in a certain country might be like.

“Vapor is a platform we launched about five years ago with Willis Towers Watson,” says Coote. “The platform was originally developed with asset-heavy businesses around the world and it was focused on trying to understand what their asset and revenue exposure was globally.

“What the algorithm aims to do is convert the view of the world into a severity view of the world in the form of expected losses. Then there is another part that enables you to include maximum losses, which is a stress testing function, so under extreme circumstances how much could you lose,” he concludes.