Managing political and investment risk in the international oil and gas industry

Many practitioners and academics have argued that the risk of investing in international markets has increased in the last ten years; and that the greater the real or perceived risk of an investment, the less likely it is that a particular investment will be made.;The effectiveness with which these risks are managed in the oil and natural gas industry are important for several reasons. First, oil and natural gas are essential for sustaining current economic activity and promoting economic growth. Second, the balance between supply and demand determines the price of oil and natural gas and their impact on the economies of all nations. Therefore the price and availability of oil and natural gas are also matters of national security. Third, the search for a secure supply of oil and natural gas affects the political, military and economic relations between countries.;This study addresses four questions. What institutions and strategies are available for managing political and investment risk in the international oil and gas industry? How and when did they develop? In what circumstances is each used? How effective have they been?;The institutions available for managing risk include oil and gas exploration contracts, domestic courts, national constitutions, bilateral investment treaties, multilateral investment treaties, governmental and non-governmental regulatory agencies and international energy forums. The organizations that manage uncertainty and risk include international oil companies, oil service companies, national oil companies, and public and private providers of financial capital and insurance. Their strategies include corporate finance, joint ventures, project finance, alliances and energy diplomacy.;This study supports the view that existing institutions change and new institutions are created when organizations perceive that a change in the status quo will enhance the profitability of existing projects and make new projects economically feasible. However, the process by which these institutions are created and evolve is easier to describe in theory than it is to explain in practice, because institutional development takes place in small steps; and frequently involves several organizations, some trying to change the existing institutional environment and others trying to preserve it.;Finally, the institutions supporting the international oil and gas industry can be arranged in a hierarchy based on their relative importance. Contracts, informal relationships and transparency are the most important institutional mechanisms used by international oil and natural gas companies to manage risk. The second line of defense includes domestic law, bilateral treaties, and international courts and tribunals. A third line of defense includes multilateral treaties and international forums.