It's not just foreign nations that bring companies `political risk'
Companies with overseas holdings constantly worry about what a foreign government might do. But protecting themselves from the actions of their own governments is also tricky. Can an oil company insure against events such as the United States government's demand that US oil companies leave Libya? And since the State Department says the presence of US oil companies in Syria is ``inappropriate'' - but has not yet asked them to leave - how should a company protect itself?
``Political risk'' insurance is divided into three basic categories: contract repudiation, confiscation and nationalization, and export credit insurance. But the world is not that simple.
Oil concession agreements, for instance, are generally not covered, because these are long-term contracts over several years, says Miles Wright, assistant managing director of American International Underwriters Ltd. in London.
Political risk coverage usually lasts three years, but nowadays most are only one year - although, Mr. Wright says, ``there is a possibility you could cover concession agreements under contract repudiation, in a good country.''
In a ``good country,'' however, there is little need to hedge against political risk.
Insurers are also unwilling to offer cover in a country where creeping expropriation is occurring. In such a case, says Julian Radcliffe, director of Hogg Robinson, a Lloyd's of London broker, a government may say, ``You take your staff out. You haven't paid your taxes. We seize your assets.''
Misinterpretations of host government policy, and even personality clashes with government officials, find little sympathy in the insurance market. And if a leading candidate in an election campaign advocates drastic policy changes toward foreign investors, insurance is not likely to be available.
When the US government demanded oil companies leave Libya, there was no compensation. But there is a possibility that this contingency could be insured.
``You cannot insure against the acts of your own government,'' says Nigel Farrell, managing director of Frizzell Political Risks. ``There has to be a cross-border risk, but this could be included under export license cancellation or embargo.''
But when the insurers are faced with a claim, they ask, says Mr. Radcliffe, ```What have you [the company] done to repossess assets?''' But this causes yet more problems.
In Libya, the attempts by American companies to safeguard their assets have incurred Washington's wrath. Switching operations to European subsidiaries is not acceptable to the State Department. So some tried a more creative approach.
One oil company official, who asked not to be named, described the actions of a geophysical contracting company. When its employees left Libya, the company leased its equipment to the Libyans, at a low rate, with the proviso that it would be returned when the fuss blew over. (Industry insiders describe this situation as ``just like South Africa.'')
The situation in Syria bears a few similarities. US oil companies who have operations in Syria - Marathon and Pecten - have said that they will do whatever is required of them by the US government. Pecten, a subsidiary of Shell, recently transferred operatorship of Syria's Thayyim field to Royal Dutch/Shell, which also hold a stake in the field.
Oil industry sources say that a number of European oil companies have signed exploration concessions in Syria. In the event that the US does demand that US oil companies leave Syria, this creates a risk that certain European governments could be tempted to follow suit.
Could European oil companies insure against such a contingency, however remote, on the private market? The insurers reply, ``We'll have to think about this.''
Political risk in South American countries is also a concern.
Occidental Petroleum's assets in Peru where nationalized after the government claimed that Oxy's Peruvian subsidiary had failed to reinvest in the country certain tax credits it received. Another US company, the Belco Corporation, was also in dispute with the Peru.
Oxy finally paid the Peru $68.1 million, and renegotiated its concessions. Belco's assets were nationalized, and compensation remains unsettled. Oxy was reimbursed by its insurers for most of the $68.1 million, but has filed a lawsuit for a remaining $9.1 million.
Oil companies in Colombia shivered when the government began to tighten its grip on its newly developing oil industry. Changes to taxation and foreign remittance rules were announced.
Plans were published that the state oil company, Ecopetrol, would take over the operatorship, though not ownership, of the pipeline from Colombia's largest oilfield, Cano Limon, to the Caribbean coast. This raised howls of protest from the companies, who described the pipeline move as expropriation.
Colombian oil officials contended that pipelines were a public utility and should be operated by the state. Although some companies became interested in political risk insurance, it is doubtful they could be covered.