Friday, March 09, 2012

International Development: Western Firms Warned of 'Resource Nationalism' in Developing Countries

By Jaya Ramachandran
Courtesy IDN-InDepth NewsReport

LONDON (IDN) – Western companies should guard against high risks involved in doing business as usual with African countries that have recently discovered offshore oil. A new report asks them to be prepared to manage the perils stemming from "resource nationalism" in institutionally fragile and politically volatile nations.

The warning by UK-based Maplecroft risk analysts refers particularly to countries "where we see a disenchanted poorly educated youth, many of whom following war torn years out of school, are finding reintegration back into society particularly challenging."

New oil frontiers which the risk analysts have in mind include Equatorial Guinea, Cote d’Ivoire, Cameroon, Gabon, and the Congo, all of which are classified in the index as "high risk" countries.

"However, perhaps the most challenging new market will be war torn Somalia, ranked 1st in the (Resource Nationalism) Index," risk analysts say. Recent reports of discoveries in Puntland province alone are estimated as having a potential to yield 10bn barrels, placing Somalia among the top 20 countries holding oil and making it a serious target for investment.

Reportedly, oil companies are signing exploration and production (E&P) contracts with non-sovereign 'governments' in both Puntland and Somaliland, sometimes for the same territory. However, should the country ever return to a semblance of normality, those contracts will be highly vulnerable to cancellation or renegotiation, says Maplecroft.

Maplecroft advises the mining industries to learn lessons from experiences of the oil industry. Associate Director James Smither says: "Extractive companies should acknowledge that they are active players rather than simply passive recipients in the resource nationalism equation.

"Companies that pay bribes to obtain licences, negotiate excessively advantageous tax breaks without adding any value or creating jobs locally, or negatively impact host communities through damaging social and environmental impacts, should expect to be held financially responsible for such actions. The lessons from Sierra Leone, DRC, Liberia and indeed Libya are there to see."

Maplecroft's CEO Alyson Warhurst adds:"Pacifying a populace through more direct returns from sovereign resources is one way authoritarian governments can maintain power. Increasing revenues, when foreign direct investment is being deterred by growing political risks, is an attractive option for states looking to minimise the type of societal unrest witnessed during the Arab Spring."

The risk analysts also point out that business should be wary of developing new contracts with outgoing administrations as regime change often heralds contract review by incoming governments keen to gain popular support and address unfavourable or corrupt agreements.

According to Maplecroft, countries with a "high" or "extreme risk" emerging from "resource nationalism" account for forty-four percent of global oil production. These include eight of the twelve members of the Organization of the Petroleum Exporting Countries (OPEC).

"Resource nationalism is a rising phenomenon where governments of countries hosting large reserves of natural resources try to secure greater economic benefit from their exploitation or leverage political gain through restricting supplies," the risk analysts adds.

They warn: "This not only has operational and financial implications for extractive companies operating in these countries, but it could create further instability for the global energy markets."

The Resource Nationalism Index is intended to enable companies to identify the risk of resource nationalism across 197 countries. It does so by evaluating 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.

At a time when interruption of supplies to Western countries from Iran is leading to an upsurge in the cost of oil, a new Maplecroft 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 hydrocarbons producers.

The Index categorises nine countries as posing extreme risk. These include the mineral rich nations of Somalia on the top, followed by DR Congo, South Sudan, Sudan, Myanmar, Turkmenistan, Yemen, Iran and Guinea. The Resource Nationalism Index classifies 60 countries other countries as high risk.


Much to the concern of the authors of the Index derives from the fact that two thirds of the twelve member nations of OPEC also feature at the top of the index, including Iran, Venezuela, Iraq, Angola, Nigeria, Libya, Ecuador and Algeria. According to the latest figures from BP, these countries account for 21.3 percent of global oil production, while 80 percent of proven global oil reserves are also located in OPEC member countries.

"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," states Smither.

"Supply-side restrictions on the export of commodities for economic gain, geo-strategic purposes, as well as domestic consumption reasons are not uncommon," informs Maplecroft. Aside from Iran, it says, examples include long-standing restrictions on the export of uranium to potential nuclear proliferators; Chinese restrictions on exports of rare earth minerals; the cartel-like actions of OPEC in controlling global oil prices; and Russia’s periodic attempts to manipulate its natural gas exports to neighbouring countries.

The world's largest energy producer, Russia – which accounts for 12.9 percent of global oil production and 18.4 percent of natural gas – is among the highest risk countries in the Resource Nationalism Index.

"As well as leveraging its dominant position as an energy provider for political purposes, state influence in Russia is found to pose a direct investment risk to oil, gas and mining companies. A 2008 law limiting foreign investment in Russian strategic industries subjects investors in the natural resources sector to stringent government control, while concerns over additional regulation or taxation in the future add to investor uncertainty," says Maplecroft.

The report recalls that state level interference was highlighted during the high-profile UK-Russian joint venture TNK-BP in 2010, where control of the Kovytka gas field was ceded by Russia's environmental watchdog, ostensibly due to the failure to develop the field.

"Shareholder disputes within the joint venture caused additional difficulties and saw TNK-BP's then chief executive Bob Dudley flee to the UK amid concerns that punitive regulations would be applied. Russia's Gazprom subsequently gained control of Kovytka, a strategic national asset, via auction," the report notes.

Righting past wrongs

"Resource nationalism not only encompasses economic factors and the control of production, in many nations it has now come to symbolise social justice and a mile-stone on the road to societal transformation," adds Smither. "This is especially the case in some of the poorest and less well governed states that have received the least developmental benefits from extractives investment to date."

Particularly vulnerable are mining destinations throughout the developing world where natural resource companies are widely seen as having taken advantage of the corrupt self-interest of predecessor regimes when negotiating their original licences.

Against this backdrop, risk analysts in London say, subsequent policy changes imposed on mining companies in some of the poorest and less developed countries can be regarded as genuine. A case in point is the wholesale review of mining licences carried out by the Congolese government in 2008-2009. "This action nevertheless created major uncertainty for all investors in that country and received widespread accusations of non-transparency and bias, as well as catalysing a spate of copy-cat reviews elsewhere in Africa," the report states.