Political Risk: An Analysis of The Oil Industry Investment Environment by Denis Parfenov (2002)

Political Risk: an Analysis of the Oil Industry
Investment Environment
by Denis
Parfenov
A dissertation prepared in partial fulfilment of the requirements for the

Degree of Masters of Business Studies (in International Business)
The Michael Smurfit Graduate School of Business,

Faculty of Commerce,
University College Dublin,
Ireland
Research Advisor: Dr. John F. Cassidy
July 2002
To my Grandmother
ii
Abstract
Companies diversify geographically and gain entry to traditionally
inaccessible regions. Direct foreign investments allow them to exploit unique
assets and to generate larger profits. Investments in any country entail political
risk. This paper aims to examine the concept of political risk as perceived by
three major oil companies (Exxon Mobile, Royal Dutch Shell, British
Petroleum) with activities diversified around the world. In order to compare
companies strategies, the chosen research sample includes the companies
with interests on Sakhalin island, Russia.
The objective of this dissertation is to analyse the current threats of the
international business environment and the strategies companies employ to
deal with them. The sample of three oil companies is taken, presuming that
the exploration business is a typical example, of where political risk is usually
involved.
When the findings of the secondary research are analysed with regard to the
literature available on the research topic many correlations are found. Most
notable is the finding that in order to achieve long term goals, oil companies
have to undertake tasks with risk and uncertainty. Second, the threat of losing
ownership rights is relatively low at present. Host countries are highly
dependent on foreign investments, technology and managerial expertise. On
the other hand, the risks imposed by forces, which are beyond governments
control, and changes in the international relationship are high. The topic of
dealing with risks caused by forces beyond governments control is under
explored in academic literature. Finally, in spite of high bureaucratic barriers,
the Russian Federation is becoming an investor attractive region. The leading
Western oil companies are actively investing in Russia. The multinationals
practices of dealing with risks in Russia do not differ from their practices in
other countries or to each other.
iii
Acknowledgments
Following a great time at the Michael Smurfit Graduate School of Business, I
would like to thank the following for their help and support throughout the
year:
Dr. John F. Cassidy, thank you for your continued guidance and
advice.
Dr. Anne Bourke, thank you for keeping me focused
My family
My friends
J. ORourke, for a great time.
iv
Table of Contents
Page
Chapter 1: Introduction
Chapter 2: Literature Review
Section 1: Theory of Internationalisation
1.1 FDI
1.2 Joint Ventures
1.3 FDI in Oil Industry
Section 2: Uncertainty and Risk
10
Section 3: Political Risk
11
3.1 Macro Political Risks
14
3.2 Micro Political Risk
16
3.3. Managing/ Minimizing Political Risks
18
Step1: Risk Recognition/Evaluation
18
1.1 Sources of Information (Internal and External)
19
1.2 Technique to Assess Political Risks
21
1.3 Industry Associated / Project Associated Risks
23
1.4 Country Associated Risk
26
Step 2: Developing Pre-investing Planning/

Crisis Planning
30
Step 3: Post-investment Policies/

Crisis Management
32
Section 4: Risk/ Return Trade-off
33
Conclusion
34
Chapter 3: Research Methodology

Section 1: Introduction in the Case Study Approach
35
Section 2: The Case Study Approach as a Research Strategy
36
Section 3: Sources of Data for This Study and Their Limitations
38
Section 4: The Selection of Cases
39
Section 5: Generalisation
40
Section 6: Boundaries to Case Studies
40
Section 7: Limitations of the Case Studies Approach
41
Section 8: Research Objectives
42
Conclusion
42
Chapter 4: Background- Global Oil & Russia

Section 1: Oil Industry Profile
43
1.1 Uses of Cruel Oil
46
Section 2: Exxon Mobiles Profile
46
Section 3: Royal Dutch Shells Profile
47
Section 4: British Petroleums Profile
47
Section 5: Russian Oil and Gas Sector
48
Section 6: Product Sharing Agreements
51
Section 7: Sakhalin Projects
52
Conclusion
54
Chapter 5: Case Studies
55
Case One: Exxon Mobile

1.1 Exxons Business
55
1.2 Exxon, Chad and Indonesia
56
1.3 Exxon and Sakhalin 1
58
Case Two: Royal Dutch Shell Group

2.1 Shell in Nigeria
61
2.2 Shell and Sakhalin 2
63
Case Three: British Petroleum PLC
65
3.1 BP and Colombian Oil
66
3.2 BP and Sakhalin 4-5
69
Conclusion
70
vi
Chapter 6: Findings
Section 1: Political Risk and Oil Companies
71
Section 2: Risk Recognition/ Evaluation in the Oil Industry
73
Section 3: Risk Management
74
Section 4: Investing in Russia
77
Chapter 7: Conclusions
79
Future Research Direction
84
List of References
a-f
List of Websites
Appendix I: OLI variables according to Dunning
Appendix II: Histories of Companies
Appendix III: World Energy Fuel Shares 1998 2020
Appendix IV: Map of Sakhalin Island

G
Appendix V: Sakhalin Projects
H
vii
List of Tables
Page
Table 3.1
Comparing a case with others of its type
40
Table 4.1
Which countries have the worlds largest

proven oil reserves.
43
Which countries produce the most oil
44
Table 4.2
List of Figures
Page
Figure 2.1
Patterns of Political Intervention
13
Figure 2.2
Four types of risk
14
Figure 4.1
Rate of oil reserve renewal, 1990-1999 by country
45
viii
Glossary of Terms & List of Abbreviations
Barrel - Crude oil is measured in barrels. One barrel equals 42 US gallons,

or 159 litres.
Crude Oil is a naturally-occurring substance found trapped in certain rocks

below the earth's crust. It is a dark, sticky liquid, which, is classed in science
as a hydrocarbon. This means, it is a compound containing only hydrogen
and carbon. Crude oil is highly flammable and can be burned to create
energy. Along with its sister hydrocarbon, natural gas, crude oil makes an
excellent fuel.
Developed Countries are considered for the purpose of this study to be

OECD member countries. Those countries are primarily are the US, Japan,
European countries.
Developing Countries are considered for he purpose of this study to be the

all countries that are not a member of OECD or former centrally planned
economies. Most developing countries are located in Africa, Latin and South
America and Eastern Europe
FDI- Foreign direct investment
FSU- The Former Soviet Union
MNE- Multinational enterprise
NGO- Non-government organisation
OECD- Organisation of Economic Co-operation and Development
OPEC- Organisation of Petroleum Exporting Countries, which was

formed 14th of September, 1960 in Baghdad, Iraq. The current members are:
ix
Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,
the United Arab Emirates (UAE) and Venezuela.
Political Risk- Changes in operating conditions of foreign enterprises that

arise out of political process, either directly through war, insurrection, or
political violence or through changes in government policies that affect the
ownership and behaviour of the firm. or affect in any way the future
profitability of given investment (Jodice, 1980)
PSA- Product Sharing Agreement
UNCTAD- United Nations Conference on Trade and Development
WEC- World Energy Council
World Oil Reserves are estimated at more than one trillion barrels (OPEC,
2002). The 11 OPEC Member Countries hold about 75 per cent and produce
40 per cent of the world total output, which stands at about 75 million barrels
per day.
Chapter I:
Introduction
Chapter 1: Introduction
As global competition drives corporations into distant, unfamiliar markets,
managers are searching for ways to minimise the uncertainty they have to cope
with. In order to analyse the types of risk most common at present, how foreign
investors manage political risk and how political risk affects their work, the
author takes the case of the three largest oil companies in the world (Exxon
Mobile, Royal Dutch Shell and British Petroleum) which have diversified
interests around the world and at the same time which conduct business in
Russia. This chapter gives the reader the authors reasons for choosing this
topic and states research questions.
Why Political Risk? First, firms operating internationally often have to deal
with dramatic changes in the political, economic and business environments of
host countries. Governments can intervene in the operations of foreign-owned
firms by restricting ownership and control, regulating financial flows and the
employment of foreign management. More radical measures would be
nationalisation, expropriation, or confiscation of assets. Furthermore, civil
disorders, rebellions and revolutions can seriously offset the benefits of
internationalisation. Thus evaluation of political risk and minimising its
exposure can be an important issue for firms operating abroad (De Mortanges
& Allers, 1996). Moreover, besides being subject to political risk, it is also
quite possible that companies miss opportunities because they perceive more
political risk than actually exists.
Second, political risk exists in different forms in all countries and every
investor estimates its presence/degree. However the level is higher in
developing countries than in those which are developed.
Third, international relations more and more influence international business.
Nowadays, trade, political or military sanctions of one government against
Chapter I:
Introduction
another one can affect the investors decisions and companies growth
strategies.
There are two recent examples of how political risk and relations among
nations affect MNEs business. After September 11, 2001 the U.S. worked hard
to get Pakistan into its anti-terrorist alliance. British Petroleum (BP), which
extracts 60,000 barrels of oil a day in Pakistan, has withdrawn all its overseas
executives from this country. At the same time, Britains Premier Oil, a small
exploration company, announced it was expanding its modest presence in
Pakistan through a US$ 105 million joint venture with a Kuwaiti partner
(Tomlinson, 2001a).
Another example is French oil giant TotalFinaElf. Since 1995, Total has
pursued an aggressive strategy of expanding in the Middle East (mainly in
Libya and Iran), where almost a quarter of the company's oil and gas
production is located. Their exploration and production division accounted for
about seventy per cent of the group's operating income in the year 2000.
Considering that, Total got into an extremely sensitive position following the
attacks against America on September 11 and the vow by the U.S. and its allies
to target nations that harbour or sponsor terrorists. (Tomlinson, 2001b)
To conduct quality research on Political Risk, it is necessary to focus on the
specific sector. According to Shapiro (1981) susceptibility to political risk
depends on the industry, where companies work, size of company, composition
of ownership, level of technology and degree of vertical integration with other
affiliates. Taking into account that, the sample of private oil companies is
chosen.
Why oil? The world lives on oil. It is probably the most important commodity
in the world. Oil is the foundation for the plastics and petrochemical industries.
Oil is fundamental to the welfare of the industrialised world and it is a major
component of the farming industry.
Chapter I:
Introduction
In the last twenty years most of the discoveries of oil and gas reserves were
made in third world countries, so it has to be explored there. The majority of
these countries are unfortunately extremely uncertain places. Finally, the
exploration of oil and gas is a business which needs huge investments, so the
losses can be very high. Thus risk assertion and management must be very
thorough.
Why companies with interests in Russia? Russia is still an emerging market
and political risk is still quite high in the Russian business environment. This
fact badly impacts the level of needed FDI there.
Moreover, Russia is a unique example due to its history. Beginning in the
nineteenth century the fortunes of Russian oil had a significant impact, when
the development of an oil industry in Azerbaijan (part of Russian Empire)
around Baku broke the Rockfellers Standard Oil monopoly. Furthermore,
Russia is the place where oil companies experienced the first political
interruption caused by the revolution of 1905. Later, the Bolsheviks export
campaign in the 1920s brought about the global price war that led to the
meeting at Achnacarry Castle in Scotland in 1928 and the As-Is agreement.
In the late 1950s the Soviets drive for market share stimulated price-cutting,
and gave a birth to OPEC on September 14th, 1960 (Yergin, 1991).
The Russian Federation possesses abundant deposits of natural resources
including large stocks of fuel minerals. Historically, the country has been one
of the major producers of oil and gas, providing a significant share of the
supply to the worlds markets. The Former Soviet Union (FSU) used to be the
worlds largest oil and gas producer, with output in 1989 more than double that
of Saudi Arabia, and it was the second largest exporter after Saudi Arabia
(Yergin, 1991). Russia is about to do it again.
The Russian oil and gas industry desperately needs foreign investment,
experience and technology to develop its oil reserves, especially offshore ones.
In spite of the increases in output achieved in the last 3-5 years, without FDI,
making further progress seems to be unachievable goal.
3
Chapter I:
Introduction
The Russian budget is heavily dependent on export revenues. Oil/gas and

metals have 54 per cent and 17 per cent respectively in the Russian export
profile (Gostomstat, 2002). Thus, the raw material exploration industry is a key
sector in the Russian economy.
Risks differ from one country to another, so the strategy of a company
operating in Chad would be somewhat different to a company doing business
in Colombia. In order to compare how companies handle identical types of
risk, it is necessary to look at their operations in the same environments. Exxon
Mobile, Royal Dutch Shell and BP are all involved in business in Russia.
Moreover, all of them have interests in the same region of Russia, on Sakhalin
Island. This suggests that Russia is a good case study for examining the
behaviour of multinationals.
The research questions of this dissertation are as follows:
1. What kinds of political risk are most common at present?
2. How do firms deal with political risk?
3. Why do firms enter a region with high risk and uncertainty?
4. Do companies investment strategies in Russia differ to other countries
and each others?
In order to eliminate the general by focusing on the particular, a case study
approach will be implemented, since the author does not have the choice of a
great deal of suitable cases to include in the investigation. The following
strategy will be followed: chapter two will examine the academic literature
related to political risk matters. Chapter three will introduce the reasons for
choosing the case study approach as a research strategy and its limitations.
Chapter four will give background information on the worlds oil industry,
companies profiles, the oil sector of Russian economy and issues related to it.
Chapter five will deal with case studies. Chapters six and seven will be
dedicated to findings and conclusions with future research direction.

The following chapter outlines the concept of political risk as a part of
internationalisation. The literature included in this section contributed to the
authors understanding of the research issues.
Due the vast range of academic literature regarding the chosen topic, the author
found it appropriate to concentrate on the following strands as the most
important and relevant in regard to dealing with political risk in the context of
the internationalisation process: (Section 1) Theory of Internationalisation,
which examines (1.1) FDI, (1.2) Joint Ventures and (1.3) FDI in Oil Industry;
(Section 2) Uncertainty and Risk; (Section 3) Political Risks looks into (3.1)
Macro Political Risks, (3.2.) Micro Political Risks and strategies of (3.3)
Managing/Minimising Political Risks. The final section (4) is dedicated to
Risk/Return Trade-off.
Section 1: Theory of Internationalisation

The pioneers of the international trade theory are Adam Smith with a theory of
absolute advantage (1776) and Ricardo with a theory of comparative advantage
(1817). These theories state that countries gain, if each devotes resources and
capabilities to the production of goods and services in which it has an
advantage.
However, since these works were written, the world has changed dramatically.
Now international business is not only about trade, but also more and more
about acquiring and placing value creating capabilities and diversifying risks
around the world. The increase in international business activity is mainly due
to: (1) an increase and expansion of technology, (2) a liberalisation of
government policies on cross- border trade, (3) the creation of institutions to
facilitate international trade and (4) the increase in global competition.
1
The International Business channels are: (1) Export & Import; (2) tourism,
transportation, services (consulting, banking etc.); (3) licensing, franchising;
(4) turnkey operations; (5) management contracts; (6) MNE / TNC; (7)
Collaborative agreements; (8) Indirect Foreign Investments (Portfolio
Investment) and (9) Foreign Direct Investment (FDI).
Truitt (1974) points out the difference between indirect foreign investments and
direct foreign investment. Indirect (portfolio) foreign investment is the
purchase and ownership of foreign stock and bonds for the purpose of dividend
as interest payment on return of investment. But in reality, relations among
parent companies and host government can become more involved in business
than in just getting bonuses and thus it is less easily differentiated from direct
foreign investment.
Section 1.1 FDI
Investment implies the acquisition of rights to future income. Alternatively,

transactions that procure such rights may be regarded as forms of investment
(Oman, 1984). Foreign direct investment (Truitt, 1974) can in general be
defined as the acquisition of specific productive capacities abroad, with
entrepreneurial, managerial and technical skills applied to these foreign assets.
The assets may be wholly owned or a part of a joint venture relationship.
According to commonly accepted definitions, any investment worth more than
10 per cent of the total equity of the host organisation counts as direct
investment (Dyker, 2001).
The major part of the literature on FDI relates to the idea of transaction costs.
Simply, this notes that companies involved in so-called oligopolistic
industries which are characterised by technological and financial advantages
produce abroad rather than export or license their technologies. Vernon (1966)
highlighted the importance of location in the theory of FDI in his analysis of
the product life cycle and the potential for the firm to exploit a foreign market.
These ideas were summarised by Dunning (2000) (see Appendix I). In
accordance with Dunning (2000) firms invest abroad because they possess
ownership advantages, location factors and internalisation factors (O-L-I),
which may be described as follows:
(O) Ownership advantages: economies of scale, other technological

advantages, or management skills. These ensure or enable the firm to
recover the costs of investing in different assets abroad.
(L) Location
factors: these contribute to the decision to employ
ownership advantages to produce abroad (e.g. risks or barriers in export

markets or availability of low cost labour or natural resources)
(I) Internalisation factors: foreign production occurs within the firm

an internal market is created between parent and affiliates to control key
sources of competitiveness or to reduce the risk that the firm might lose
control of knowledge or technology (which would happen through
licensing).
Dunning (1977) proposed three potential advantages of FDI over export-import

strategies. First, MNE should have an advantage derived from ownership of
intangible assets such as brand management, trade secrets, technology, or tacit
management capability, which confers a market or cost advantage. Second,
FDI should give the advantage of being located in the host country resulting in
tariff avoidance, transport cost reduction, low factor prices, or proximity to
customers. Third, the MNE should benefit from internationalising and more
fully controlling its foreign business through FDI; from more fully controlling
its foreign business through FDI to more fully appropriating the profits or rents
generated by its unique assets or capabilities.
Dunning (2000) also insists that OLI theory is applicable to home country and
host country FDI. The country-specific determinant of ownership and
internalisation advantages, and the country specific determinants of location
advantages of the host country, explain that FDI has roots in one country
(because the home country possesses ownership and internalisation
advantages), and locates in another (host) country, as the host country

possesses location advantages. The importance of FDI lies in both MNEs and
the foreign host country.
Vernon (1966), in his product life cycle theory, examined the trend for the
production of goods to be concentrated in the developed countries early in the
life of the product, but to move to other developing economies later on. Welch
and Luostarinen (1988) state that there is evidence, that as companies increase
their level of international involvement, there is a tendency for them to change
the method/s by which they serve the foreign markets. There are additional
changes to the shape of companies and the way they conduct business.
1) Operational methods (How?) grow with the increasing commitment of the
investor to FDI (no exporting exporting via agent sales subsidiary
production subsidiary). The future international success of companies will
depend on their ability to master and apply a range of methods of foreign
operations.
2) Sales objects (What?) also progress as companies increase its involvement
in international operations. There is a tendency to offer foreign markets a
mean to deepen and diversify (e.g. expansion within an existing product
line or into new line, or a change to the whole product concept.). The
offering to foreign markets usually begins from the simplest form: goods
and mature further- services systems know-how.
3) Target markets (where?). Companies expanding more distant operations
typically over time in political, economic and physical terms.
Welch and Luostarinen (1988) also noticed the changes in companies
personnel policies, organisational structure and finances with increasing
commitment to internationalisation.
Section 1.2 Joint Ventures

A joint venture (JV) normally applies the sharing of assets, risks/profits and
participation in the ownership (i.e. equity) of a particular enterprise or
investment project by more than one firm or economic group (private
4
corporation, public corporation or even states). The distribution of equity

shares in a joint venture may be determined according to each partners
financial contribution, or it may be based on other forms of capital
contribution, such as technology, management, access to the world markets,
licenses etc.
Daniels & Radebaugh (2001) review the combination of partners, which may
exist in a joint venture:
Two companies from the same country join together in a foreign market
(e.g. Exxon and Mobile in Russia).
A foreign company joining with a local company.
Companies from two or more companies establishing a joint venture in

a third country.
A private company and a local government forming a joint venture

(sometimes called a mixed venture) (e.g. Philips (Dutch) with the
Indonesian Government).
A private company joining a government owned company e.g. BP

Amoco (private UK-US) and Eni (Italian government owned) in Egypt.
Czinkota et alli (2000) argue that: The key to joint venture is the sharing of a
common business objective, which makes the arrangement more than
customer-vendor relationship, but less than outright acquisition. Madura
(2000) states that most joint ventures allow business partners to apply their
respective competitive advantages in a given project. The benefits of the joint
venture as a form of FDI are (Czinkota et alii 2000):
JVs are valuable when pooling of resources results in a better outcome

for each partner than if eachone conducts activities individually.
JVs often permit a better relationship with local government and other
organisations such as labour unions.
JVs allow minimising the risk of exposing long-term investment

capital, while at the same time maximising the leverage on the capital
invested.
Typical problems with JVs are as follows: (1) difficulty with selecting a partner
in a host country (Liu & Bjornson, 1998); (2) Different objectives of foreign
partners, which cause disagreements among partners about business decisions
e.g. strategy, accounting and control, marketing policies, management style,
etc. Liu & Bjornson (1998) state that in principle, MNEs seek to maximise
their firm value, consistent with economic efficiency, while local partners may
seek to maximise short-term profit, sometimes at the expense of product
quality or reputation. Other flaws of JVs are:(3) leakage of know-how from
one partner to another and (4) lack of control for investor over joint venture
Section 1.3 FDI in Oil Industry

In the context of a complex and dynamic world, specific companies or groups
of companies in specific countries or regions develop specific capabilities
(Dyker, 2001). Dyker (2001) states that specific FDI decisions are based on the
perception and scope for internalisation, not only of firm-specific advantages,
but also of location-specific advantages. It is not enough for the investing firm
to have something special to offer, but also the host country has to have
something special as well. Since in the context of FDI the investing firm by
definition provides the capital, with attention focusing on the other two main
factors of production, labour and land (including natural resources), FDI in the
developing countries is mainly cheap-labour-seeking and/or land/naturalresource-seeking.
Furthermore, as products and their marketing become more complicated,
companies need to combine resources that are located in more than one
country. This fact makes business more complex and the companies need a
tight relationship to ensure that production and marketing continue to flow.
One way to help ensure this flow is to gain a voice in the management of one
or more of the foreign operations by investing in it. Vertical integration is a
companys control of the value chain in making its product from raw materials
through production to its final destination. Daniels & Radebaugh (2001) state
that most of the worlds direct investments in the oil industry may be explained
6
by the concept of international vertical integration, as much of the petroleum

supply is located in countries other than those with a heavy demand.
In order to exploit potential sources of competitive advantage gained from FDI,
firms must be able to identify and manage risk in individual foreign markets
(Kashlak, 1998). To examine possible threats the author turns next to
uncertainty and risks.
Section 2: Uncertainty and Risk
The difference between uncertainty and risk is difficult to recognise.

Haendel (1975) argues that some authors have defined risk as uncertainty
concerning possible outcome, so the distinction between risk and uncertainty
would have become a distinction between objective and subjective risk. Risk is
an objective doubt concerning the outcome in a given situation (Haendel,
1975). Uncertainty can be defined as subjective doubt concerning the outcome
during a given period.
More broadly, uncertainty is measured by degree of belief while, risk is a
combination of hazards and is measured by probability. Uncertainty is a state
of mind; risk is a state of the world. Uncertainty imposes cost on society and its
removal constitutes a potential source of gain. Risk is usually associated with
degree of loss (Haendel, 1975).
Country risks can be divided into economic risk, commercial risk, and political
risk.
Economic risk is risk related to the macroeconomic development of the

country, such as the development in interest and exchange rates that
may influence the profitability of an investment.
Commercial risk is risk related to the specific investment, such as the

risk related to the fulfilment of contracts with private companies and
local partners.
The third category, political risk, may in many countries be the most
important one. A country is a political entity, with country-specific rules
and regulations applying to the investment.
The next subsection is dedicated to political risk. For perspective within the
overall context of political risk, various definitions of political risk and
summary of empirical efforts to predict political risk will be given. Ways of
managing different types of risks in terms of reducing its exposure will be
examined.
Section 3: Political Risk
There seems to be considerable confusion among authors concerning what

constitutes a political risk event, which has changed over time and still there
is no consensus over this matter. Each author has avoided in some measure the
difficult task of defining precisely what is meant by and what trends are
covered by the term political risk. One of the pioneers in the risk analysis,
Root (1968) focuses on the sources of the international managers judgements
about future political conditions and events in a host country: Political
uncertainty for an international manager refers to the possible occurrence of
political events of any kind (such as war, revolution, expropriation, taxation,
devaluation, exchange control, and import restrictions) at home or abroad, that
would cause a loss or profit potential and/or assets in international business
operations... When the international manager makes a probability judgement of
an uncertainty into political risk (Root, 1968).
Jodice (1980) defined political risk as: Changes in operating conditions of
foreign enterprises that arise out of political process, either directly through
war, insurrection, or political violence or through changes in government
policies that affect the ownership and behaviour of the firm. Political risk can
be conceptualised as events, or a series of events, in the national and
international environments that can affect the physical assets, personnel and
operation of foreign firms.
8
De la Torre & Nectar (1986) define political risk as the probability distribution
that a real potential loss will occur due to the exposure of foreign affiliates to a
set of contingencies that range from the total seizure of corporation assets
without compensation to the unprovoked interference of external agents, with
or without governmental sanction, with the normal operations and performance
expected from affiliates.
Gilligan (1987) maintains, political risk could be defined as the likelihood that
political forces can cause drastic changes in a countrys business environment
in turn affecting the profit and other goals of a business enterprise. It can be
seen to stem from a countrys economic, political and social environments, all
of which are capable of changing dramatically in a short time, particularly in
the traditionally volatile parts of the world.
Czinkota et alli (2000) give a shorter definition: Political risk- the risk of loss
assets, earning power or managing control as a result of political actions by the
host country. The working definition of this dissertation is The political risk
faced by foreign investors is defined as the risk or probability of occurrence of
some event(s) that will change the prospects for profitability of a given
investment in a home or host country.
Politics and the laws of a host country affect international business operations
in a variety of ways. The political risks can be distinguished between (De la
Torre & Nectar, 1986) 1) the real contingences faced by the firm operating in
the foreign country and 2) the sources of the risk.
There are two different contingencies of losses:
1) Macro risk- (the more dramatic one) the involuntarily loss of control
(generally meaning property rights) over specific assets location in
the foreign country, typically without adequate compensation (e.g.,
expropriation, domestication, civil war, terrorism).
2) Micro risk- (the more prevalent one) the loss in the expected value of
a foreign-controlled affiliate due to discriminatory actions taken
9
against it, either because of
its foreign nature or as a general
tightening on free market rights often imposed by government in

times of domestic crisis.
The political risks can also be classified as Indirect Intervention (micro risk)
and Direct Intervention (macro risk).
Figure 2.1 Patterns of Political Intervention
Indirect Intervention
Direct Intervention
I--------------------------------------------I-----------------------------------------------I
Price controls
Tax controls
Import controls
Labour restrictions
Exchange controls
Market controls
Domestication
Expropriation of
assets
Source: Gilligan, 1987

Another measurement of the exposure to political risks concerns the proximate
cause. It can be differentiated:
a) The actions undertaken by legitimate governments in the exercise of their
national prerogatives, and
b) Those which are the result of actions outside the direct control of the local
government
The source of trouble could be also internal (e.g. political repression) or
external (e.g., dramatic fall in commodity export prices). These forces may
when activated, have very direct impacts depending, greatly, on the maturity
and capacity of national institutions.
The types of most common types of risk facing by foreign investors are
summarised in the Figure 2.2
Figure 2.2 Four types of risk
10
Loss contingencies:
An inventory loss of
control over specific Type A:
a s s e t s w i t h o u t Massive expropriations
adequate
compensation
Type B:
Selective
nationalisations
Value contingencies:
R e d u c t i o n i n t h e Type C:
Type D:
expected value of the
General deterioration of Restrictions targeted to
benefits to be derived
the investment climate
key sectors
from the foreign
affiliate
Macro risks:
Micro risks:
Sudden convulsive
chances that threaten most
of the population of
foreign direct investors
within the country.
Interventions generally
motivated by specific
consideration closely
related to the economic
and the social
conditions prevailing at
the time, and to
specific industry and
firm characteristic
Source: De la Torre & Nectar (1986)

Section 3.1 Macro Political Risks
Situations such as revolutions in Cuba and Iran produce what is known as
macro risk. In such situations, impacts on a firm are totally determined by
events in the external political environments, and organisational characteristics
such as industrial sector and technology become largely irrelevant. Macro
political risk is the chance that political events in a host country will affect all
foreign firms in a country, without regard to what they do or what industry they
are in. These effects occur simply because they are foreign. Under these
conditions, political events affect all firms in much the same way, and it is
reasonable to talk about the investment environment in a given country
(Kobrin, 1981). Root (1974) defines this type of risk as an ownership control
risk, which is linked to events influencing the owners' ability to control and
manage the investment.
11
The term of expropriation has been used loosely by practising international

businessmen, business journals, and the commercial press to cover a variety of
host government actions ranging from the sudden enforcement of previously
unenforced foreign controls to outright confiscation and physical take-over
(Truitt 1974).
According to Gilligan (1987), the expropriation of assets is the official seizure
of foreign property by a host country whose intention is to use the seized
property for public interest. It is typically seen as a far harsher and less fair
coarse of action, since in many cases the multinationals at best received only
partial compensation.
The concept of expropriation is generally narrower in scope than
nationalisation, but the two do not differ in their legal nature. While an
expropriation usually refers to a singular case of a state taking property, a
nationalisation usually entails a number of individual expropriations.
Expropriation, Truitt (1971) argues, is aimed at a particular company or
companies that are taken over by the host government, while nationalisation is
directed toward a general type of industry or a sector of economy.
Neither expropriation nor nationalisation (Truitt, 1974) is to be confused with

confiscation, which may: (1) Be the pejorative term for any expropriation; (2)
Describe the taking of property without prompt, adequate, and effective
compensation, or no compensation at all (De Mortanges & Allers, 1996); (3)
Describe government seizure of the property of war criminals, illegally
transported goods (such as narcotics or pornography), or property deteimental
to the national security.
Domestication is characterised by the gradual take-over of control and is
achieved most frequently by foreign government imposing certain conditions
on the multinationals and their methods of operation. Gilligan (1987) argues
that most the typical of these include:
The gradual transfer of ownership.

12
The insistence on an increasing number of goods being manufactured

locally rather than simply being imported for local assembly.
Nationals being given priority for promotions.
Nationals being given greater decision- making and veto powers.
Domestication is a less extreme and far more gradual strategy than outright
expropriation or nationalisation. According to Kobrin (1987), while these harsh
macro risks tend to attract considerable managerial attention; their number is
relatively limited.
Section 3.2 Micro Political Risks

Micro-political risk is the chance that political events in a host country will
affect only a specific firm or firms in a specific industry. Examples might be
constraints on petroleum firms that do not apply to foreign firms in other
industries, or constraints on a specific firm because it also does business in a
country unfriendly to the host country. Examples of the latter would be
constraints by Islamic countries against firms doing business in Israel.
Although whilst the macropolitical risk is more dramatic and obvious, micropolitical risks are manifested more frequently in a less obvious way, sustaining
over the long term is such as increased controls and restrictions upon operating
methods. Micro risks generally result from situations that do not involve
political conflict or even a change in regime, but rather a change in policy
(Kobrin, 1981) They represent attempts by host country governments to exert
control over their economies in order to attain national objectives.

Kobrin (1979) points out that, political environments can affect both the
security of assets and the viability of operations; possible contingencies may
include non-discriminatory measures.
Madura (2000) summarises the most common forms of micro political risks
which include:
13
Attitude of the consumers in the host country- a tendency of residents to
purchase only homemade goods (Gilligan, 1987).
Attitude of the host government- various actions of host government
which affect the cash flow. E.g., new pollution control standards, tax increases,
price controls, fund transfer restrictions; partial divestment of ownership, limits
on expatriate employment (Kobrin 1979, Gilligan, 1987).
Blockage of fund transfer- a blockage by host government of fund
transfers from subsidiaries of MNE to the headquarters, which could force

subsidiaries to undertake projects that are not optimal (Kobrin , 1979).
Currency inconvertibility- the home currency cannot be freely
exchanged into other currencies, thus, the earning generated by a subsidiary in

the host country cannot be remitted to the parent through currency conversion
(Gilligan, 1987).
Bureaucracy- this type of political risk can seriously complicate
MNEs business. E.g., Eastern Europe in the early nineties.
Corruption- can adversely affect an MNEs business in a host country,
because it can increase the cost of conducting business or reduce revenues.

Root (1972) lists examples of political risk situations, i.e. examples of events
affecting real investments. Root (1972) distinguishes three types of political
risk: transfer risk, operational risk and ownership control risk.
(1) Transfer risk, which is risk related to the transfer of products and services
across national borders, or the transfer of funds such as payments of
dividends.
(2) Operational risk is risk related to the operation and profitability of an
investment in the host country, such as the operation of an assembly plant.
Examples of operational risk are price controls and possible requirements
that the producer should use sub-standard or expensive local suppliers.
(3) Ownership Control Risk is a risk of losing control over asset and
investments in a foreign country.
14
Section 3.3 Managing/Minimising Political Risks

A direct consequence of the uncertain political environments in many parts of
the world is that there is now a greater need than ever for companies to
recognise that the political environment should no longer been seen as a totally
uncontrollable variable, but rather as a factor upon which effective strategic
management can impact (Gilligan , 1987). The MNEs cannot control political
risk much, but can instead manage its exposure through the structure and type
of investment.
The basic approach to the management of the extreme form of political risk,
such as expropriation, in accordance with Shapiro (1981), involves three steps:
1. Recognition of the existence of political risk and its likely consequences;
2. Developing policies in advance to cope with the possibility of political risk;
3. In the event of expropriation, developing measures to maximise
compensation.
Step1: Risk Recognition/Evaluation

Daniels & Radebaugh (2001) state: As managers evaluate countries as a
potential place to do business and as they struggle to succeed once they have
committed resources, they need to be aware of political risk. However, what
concern the international investor is not political events and processes per se,
but the management contingencies they may generate and the impact that any
externally induced shock may have value on its assets (Kobrin, 1981., De la
Torre & Nectar., 1986).
Kobrin (1981) stated, that compared to most types of economic or business
forecasting, political forecasting remains a very underdeveloped art. However
along with Gilligan (1987), If firms are to avoid or at least minimise the
consequences of risk, it is essential that truly effective techniques of political
risk assessment (PRA) and strategies of risk management be developed.
15
The term country risk analysis describes the activity of predicting future
conditions for the investment in a host country. Robock (1971) and Haendel
(1975) identify four steps in political risk analysis:
1) An understanding of the type of government presently in power, its patterns
of political behaviour and its norms of stability.
2) An analysis of the multinational enterprises own product or operations to
identify the kind of political risk likely to be involved in particular areas.
3) A determination of source of political risk.
4) To project into the future the possibility of political risk in term of
probability and time horizons.
Robock (1971) cited one international company that forecasts political risk via
two projections. One projection is the chance that a particular political group
will be in power during a specific forecast period. The second is of the type of
government interference that each political group can be expected to generate.
Step 1.1 Sources of Information (Internal and External)

A number of studies have concluded that firms rely primarily on internal
sources for information about external environments. The most important
sources of information are (Gilligan, 1987):
a) Managers of overseas subsidiaries are the most important resource of
information available to the international firms (as located around the
world, many of whom are host country nationals).
b) A subsidiarys managers are members of the local elite, and although
that often provides the advantage of direct access to top-level officials
of the current government, it may constrain contact with other
important groups, such as student leaders, labour unions and the
political opposition.
c) Regional managers
d) Managers in HQs with international responsibilities
16
The main flaw of using the internal sources for information is that subsidiary
and regional managers are strongly motivated and therefore tend to
underestimate the potential dangers of the country in which they work.
There are at least three external sources of information that the predictions may
be based on (1) written reports; (2) information deduced from financial
markets; and (3) summary measures like risk indices and ratings. Because it is
often difficult to quantify country risk, all three sources of information used
together are likely to provide the investment analyst with the best estimates.
Written reports usually contain descriptions of possible future developments in
a country. Such reports may be issued by private companies or international
organisations like OECD or the World Bank, the International Monetary Fund,
International Financial Statistics UN; U.S. Commerce Department.
Figures
from national accounts may be presented in these reports, but in many cases the
analysis is primarily qualitative and in textual form. Written reports are useful
in providing background information, but may often be too general and give
little guidance to the numerical evaluation. The second source of information is
analyses of prices of assets traded in financial markets.
Moreover many consulting companies and investment banks provide country
and political risk advisory services enabling international investors to identify
and evaluate broad political macro and micro risks in a chosen region from
changes in government legislation and selective discrimination to the impact of
war and terrorism. For example, Deloitte & Touche assesses the likelihood of
more than 40 risks, including:
Currency inconvertibility and capital controls.
Political violence and civil disorder.
Industrial action.
Shareholder action.
Confiscation, expropriation and creeping expropriation.
Adverse tax changes.
Selective discrimination.
Contract frustration or repudiation.
17
Negative investment or trading environment.
Devaluation risk.
According to Mortanges & Allers (1996), while external environments rapidly

change, the data of governmental agencies and international organisations can
create a time lag, which can be crucial. The same can be said in regard to
consulting companies' reports as they are often based on the primary data
which is taken from the governments' resources.
Step 1.2 Techniques to Assess Political Risks

There are various techniques available for implementing country risk
assessment. Some of the most popular are:
Checklist Method - consists of several variables, related to international
cash flows (GNP Growth, GNP/Population, Inflation, Reserves/Imports etc.) or
the balance of payments approach- that are weighted according to their impact
on debt servicing ability, with the weight ranging from 0 to 100. Each variable
in the model is weighted or multiplied by a fixed weight, or coefficient, and the
results are aggregated from the index or composite score. The shortcomings of
this method are the somewhat discriminatory selection of the variables, and
often discriminatory assignment of weight to the variables.
Delphi Method - based on pulling a panel of experts for their estimates of
environmental risks and then aggregating and weighing their responses.
International managers often look to futurists for help in forecasting changes in
their internal and external organisational environments. Futurists use
techniques such as the Delphi method and scenario development to identify
possible futures, often consisting of events and trends, occurring both globally
and within a specific geographical region. The Business Environmental Risk
Index (BERI) and the Business International Index of Environmental Risk (BI)
are based on the Delphi method. Both the BI and BERI indices stress a
description of existing conditions in the host country and are strongly oriented
18
toward short term projections of less than a year, which make then hardly
useful for investors.
Scenarios. As Mortanges & Allers (1996) state, this approach consists of the
formulation of certain possible scenarios for a given country. E.g. the arrival in
power or maintenance in power of a leading political group, defined according
to their attitude towards foreign investment. The next step is to assess
probability of the given scenario coming into being.
Quantitative Analysis. Rather then rely on soft opinion measures (such as
the Delphi method) quantitative measures are based on hard data...
(Haendel, 1975). Quantitative methods are developed to reduce the bias of the
subjectivity of qualitative methods (Mortanges & Allers, 1996). Quantitative
analysis helps a risk analyst to identify characteristics that influence the level
of country risk after the financial and political variables have been measured
for a period of time.
Discriminate analysis is a statistical tool used for this purpose. The general idea
of this analysis is to identify the factors; to help to distinguish between
tolerable risk and intolerable risk countries by examining political and financial
factors of these countries.
Another type of quantitative model was developed by Schollhammer (1978),
uses measures of certain casual factors to forecast political change. He
suggested two types of casual factors: 1) political factors (quantitative
estimates of national riots, armed attacks, death from domestic violence,
government sanctions, defence expenditures and fractionalisation among
parties). 2) The economic factors (e.g. average expenditures, and available food
supply measured in terms of calories per capita) (De Mortanges & Allers,
1996).
The main limitation of these analyses is that they are based on historical data,
which are not always an accurate indicator of the future (Haendel , 1975). The
19
time lag effect of the governmental agencies and international bodies data
can also exist while using the quantitative model for assessing political risks.
Inspection Visits ("grand tours") - involve travelling to a country and
meeting with government officials, firms executives, and/or consumers. Such
meetings help clarify any uncertain opinions the firm has about the country.
The results of this kind of investigation can be very limited, containing only
selective information which does not take into account factors possibly
disastrous for the company (De Mortanges & Allers, 1996). However, when
properly organised, a team of executives can be very useful. Moreover, some
experience with the political environment is better than none. Mortanges &
Allers (1996) suggest supplementing this method with other less subjective
ones.
Company-specific Methods. Shell Oil Company developed the ASPROSPAIR system (De Mortanges & Allers, 1996). ASPRO is short for
Assessment of Probabilities and SPAIR is short for Subjective Probabilities
Assigned to Investment Risk. This approach contains a model of the potential
impact of the political environment on a specific project. Expert analysts are
recruited from a variety of backgrounds to review a set of factors like civil
disorder, sudden expropriation, taxation restrictions, restriction on remittances,
and oil export restrictions. A major disadvantage of this method is that it is very
expensive and appropriate only for large MNEs.
Combination of Techniques. Since each technique has its own pros and
cons, its most appropriate to implement two or more of the techniques
described above (Madura, 2001). An integration of qualitative and quantitative
methods may be a more accurate way to forecast political risks.
There is no consensus as to how country risk can best be assessed. Madura
(2000) suggests dividing the risk evaluation into two steps: 1) the risk
assessment of a country as related to the MNEs type of business
20
(microassessment) and 2) an overall risk assessment of the country

(macroassesment).
Step 1.3 Industry Associated Risk/ Project Associated Risk

Not all events will have similar consequences for different projects. Truitt
(1974) points out that some types of investment are more politically exposed
and sensitive to the threat of expropriation than others. De Mortanges & Allers
(1996) state "the vulnerability and likelihood of an adverse political event
increase when moving from firms producing final goods to those using up
natural resources (e.g. oil) in the host country". The latter are subject to
nationalistic feelings.
Shapiro (1981) and De la Torre & Nectar (1986) declare that companies vary in
their defencelessness in the face of political risks, depending on:
1) Industry Factors (Shapiro, 1981., De la Torre & Nectar, 1986)- different
economic sectors experience different propensity to expropriation and
government intervention in general. Level of risk varies enormously from
one industry to another.
a) Activity/ Economic Sector - as stated by Truitt (1974) and backed up by
Kobrin (1981), De la Torre & Nectar (1986) the areas of highest risk are
perhaps the extractive industries and utilities, with developing countries
demonstrating a strong desire to increase their level of control over
natural resources and infrastructure.
b) Technology (De la Torre & Nectar, 1986) and particularly its level
(Shapiro 1981) - the higher the R&D intensity of the technological
complexity of the business, the less likely it is to be expropriated and
the higher the bargaining power of the foreign investor.
c) Product Differentiation (De la Torre & Nectar, 1986)-highly
differentiated goods require specialised inputs for their sale or service
which often cannot be provided by local firms. Differentiated goods
will be less subject to government intervention as they are more capable
of exercising their bargaining power.
21
d) Competition (De la Torre & Nectar, 1986) - the higher the level of
competition (and consequently, alternative sources of capital and
technology) the higher the probability of government intervention.
2) Corporate factors
a) Size (Shapiro, 1981) - with the smaller firm, the asset gain fails to out
weight the loss of confidence and hostile reaction amongst the worlds
financial community:
b) Nationality (De la Torre & Nectar, 1986)- the nationality of a foreign
investor is relevant to the risk factor, because it is subject to the quality
of the relations which the host country has or has had with the
investors home country.
c) Scope of Activities ( De la Torre & Nectar, 1986) and the Degree of
Vertical Integration with Other Affiliates (Shapiro, 1981) - the nature of
the companys activities and the geographic locations of its affiliates
may have a material influence on the level of risk (e.g. US firm does
business in Israel and Arabic countries)
d) Corporate Image (De la Torre & Nectar, 1986., Daniels & Radebaugh,
2001) - bribery scandals or a history of involvement in the financing of
political subversion can leave the company with a damaged reputation
for a long time.
e) Previous Losses (De la Torre & Nectar, 1986) - the relative bargaining
strength of the company can be assessed from those examples where it
avoided losses while most other firms did not.
3) Structural Factors
a) Contribution to the Local Economy (De la Torre & Nectar, 1986)- to
calculate the perceptible benefits to the local economy resulting from
the foreign firms involvement; the higher the benefits, the lower the
likelihood of government intervention.
b) Intra - corporate Transfers (De la Torre & Nectar, 1986)- the more
closely the affiliate or project is tied to the global network of the parent
company, the lower risk of an expropriation or interference.
22
c) Local Ownership (De la Torre & Nectar, 1986) or Composition of

Ownership (Shapiro, 1981) - the degree of the local ownership in the
foreign subsidiary is both the result of a bargaining process and a major
influence on the risk
d) Environmental Dissonance (De la Torre & Nectar, 1986) - the actual
location of the affiliate can have influence on the risk factor as it affects
the noticeable contribution to national development goals and it
exposes the firm to varying levels of population, ethnic, environmental,
unionisation or guerrilla risks.
4) Management Factors
a) Local Management (Shapiro, 1981., De la Torre & Nectar, 1986.,
Gilligan, 1987)- the use of local management to the largest extent
possible can help to reduce the risk exposure.
b) Corporate culture and Management Philosophy (De la Torre & Nectar,
1986) - the more complex and diversified the operations of the parent
company, the more likely it is that it will have to rely on the judgement
and skills of a managers with international experience, which helps to
reduce political risk explosure.
c) Political Responsiveness (De la Torre & Nectar, 1986) . An activist
political role on the part of local management reduces risk. If an MNE
plays an active role in the host country is political life, it can lead to a
better relationship over the long term.
d) Financial Policies (Shapiro, 1981., De la Torre & Nectar, 1986) - the
excessive use of local sources of finance may greatly reduce the risks of
a host government is intervention.
As stated by Truitt (1974), Kobrin (1981) and backed up by De la Torre &
Nectar
(1986) the areas of highest risk, traditionally the areas of foreign
investment, which are most vulnerable to expropriation, are natural resource

investments and public utilities. The developing countries demonstrated a
strong desire to increase their level of control over them. Investments in
extractive, export oriented industries and public utilities combine a peculiar set
of characteristics that make them vulnerable:
23
1) remote location, lack of general social responsibility on the part of the

developer, the instability of export prices (that is fluctuating foreign
exchange receipts for the host;
2) a large investment in exploration;
3) the exploitation of irreplaceable natural resources, which has political
significance and general visibility. Some of the largest and most spectacular
expropriations- Mexican Oil, Iranian Oil, and South American power and
communications- have involved natural resources and public utilities.
Step 1.4 Country Associated Risk

There are political risks in every country, however the level and ranges differ
broadly from one nation to another. De la Torre & Nectar (1986) identifies a
total of 22 variables or composite factors that must be monitored on an ongoing
basis, estimates of possible events, their probability of occurrence and the
expected timetable in order to succeed in assessing the countrys associated
risk:
Economic Factors- Internal
a) Population and Income - historical trends in the size of the countrys
population, its economic growth and per capita income provide an
approximation of the national welfare. When viewed against the recent
past, public proclamation about expected growth rates indicate the
potential disparity between the countrys aspirations and its capacity to
provide for its future
b) Workforce and Employment- the size and composition of the countrys
workforce, its sectoral and geographic distribution, its productivity.
Social instability and political risks, especially in developing countries
can result from the polarisation of the population into urban and rural
camps with different problems and priorities.
c) Sectoral Analysis- strengths and diversity of the agricultural sector,
importance of the industrial sector; who controls strategically important
sectors.
24
d) Economic Geography (natural resources)- the more dependent the

economy is on a single source of wealth, the less stable it is.
e) Governmental and Social Services- Are the basic needs (e.g., health
services, education, economic infrastructure, defence, etc.) adequately
covered? If revenues are highly volatile while expenditures consist of
inflexible social programs, any disorder to the revenue stream could
have rigorous political consequences.
f) General Indicators (e.g., price indices, wage rates, interest rates levels,
money supply, etc.)- the objective is not economic analysis per se, but a
search for indicators of trouble.
2) Economic Factors - External
The following set of questions serves to determine to what extent external
limits will determine domestic economic policy. A high degree of dependency
and instability, together with external debt servicing problems, will boost the
risk of host-government-interference with foreign investors in the country, both
in term of expropriation (macro risks) and convertibility (micro risks).
a) Foreign Trade - countrys current account balance and its
composition; price volatility of imports and exports; competitive
conditions; trade in services etc.
b) Foreign Investments - the size and importance of the foreign
sector, its distributions by sectors of industry, its spread by
country of origin.
c) External Debt and Servicing - the level of outstanding foreign debt
relative to GNP and export earnings; its maturity profile; the level
of debt service relative to national income and exports.
d) Overall Balance of Payments- the capital account, level and
changes in a countrys reserves; its liquidity situation.
e) General Indicators- the official and unofficial exchange rates,
their movements over time; the spread and terms which national
borrowers can obtain in international capital markets.
3) Socio-political Factors - Internal
25
a) Composition of Population - ethnolinguistic groups, religious

persuasion, or tribal and class components, their political activism and
the distribution of wealth and power among them.
b) Culture- an analysis of the underlying cultural values and beliefs of the
host society might hold the essential to insight, not so much of potential
instability, but of the probability that foreign influences (e.g., the local
affiliates of MNE) will be the first to suffer the consequences of any
potential disruption to the established regime.
c) Government and Institutions - comprehension of how the host country
system of government and its socio-political institutions work, or are
meant to work, is a key point in the analysis. To establish the principal
features of the constitutional order, the relative functions of the head of
the state, the government (prime minister, cabinet officers, agency
directors and other appointment officers), the legislative bodies and the
legal system, and the nature and structure of bodies, such as the law
enforcement agencies, the armed forces and the political parties and
similar organisations.
d) Power - who are the key decision-makers; their background and
education; their attitudes to critical issues and their relationship to each
other. What is the role of the internal security apparatus? What is the
influence of pressure groups such as trade organisations, labour unions,
army and mafia?
e) Opposition - the problem with assessing the strength of opposition
groups, their sources of support and effectiveness is the access reliable
and balanced information.
f) General Indicators - the level and frequency of strikes, riots or terrorist
acts, the number and treatment of political prisoners, and the extent of
corruption among local authorities.
4) Socio-political Factors - External
a) Alignments - to establish the countrys international position, its
principal political allies, its public position on global issues (e.g., global
terrorism, the Middle East, etc.) and its mutual dependencies. In this
26
context the examination of the United Nations and World Bank Data
may be useful.
b) Financial Support - this includes direct sources of economic support,
such as provision of financial aid, food and military assistance, in
addition to cases of de facto support by important economic and trade
connections.
c) Regional Ties - Border disputes, external military threats, the possibility
of the spill- over effect of nearby rebellious actions, etc. Can have a
profound impact on the domestic composure of government priorities.
d) Attitude Towards Foreign Capital and Investment - many of the rating
services (e.g., the United Nations and World Bank) maintain up-to-date
records of foreign investment flaws and decisions by local authorities,
courts and local chambers of commerce. They also conduct, on a
regular basis, polls on local attitudes toward foreign investors. This
information can be valuable in assessing trends when examining the
country.
e) General Indicators - human rights records as published by international
organisations such as Amnesty International, the existence of formal
and active opposition groups in exile, signs of diplomatic stress
between home and host country, and terrorists acts committed in third
countries etc.
For international firms, however the bottom line is not a comparison of
countries, but rather of investments; of risk and return. In pursuit of high
investment returns, MNEs assume political risk that cannot be accurately
measured but which can be managed (Liu & Bjornson, 1998).
27
Step 2: Developing Pre-investing Planning/ Crisis Planning

Shapiro (1981) points out that, given the recognition of political risk, an MNE
has at least four separate, though not necessarily mutually exclusive, policies
that it can follow:
1) Avoidance (Root, 1968., Haendel, 1975., Shapiro, 1981)- the easiest way
to manage political risks. However because all governments make decisions
which influence the profitability of business, all investments face some
degree of political risk. Therefore risk avoidance is impossible.
2) Insurance (Haendel, 1975., Shapiro, 1981., Madura, 2000) -is an
alternative to risk avoidance. Some governments provide their investors with
insurance programmes or investment guarantee programm, which cover the
risk of inconvertibility of assets, expropriation and war, revolution or
insurrection. For instance, the US government provides insurance through the
Overseas Private Investment Corporation (OPIC), which covers the risk of
expropriation. The US government insurance premiums paid by a firm
depend on the degree of insurance coverage and risk associated with the firm.
Another example is the Japanese government through the offices of the
Ministry of International Trade and Industry (MITI) which insures investing
companies against losses associated with commercial and political risks.
The World Bank has an affiliate called the Multilateral Investment Guarantee
Agency (MIGA) to provide the insurance against political risk for MNEs with
FDIs in less developed countries. MIGAs insurance covers expropriation,
breach of contract, currency inconvertibility, war, and civil disturbances.
Some host governments in order to encourage more FDIs provide their own
insurance programmes. Russia in 1993 established an insurance fund to
protect MNEs against various forms of country risks (Madura, 2000).
3) Negotiating the environment- defining the rights and responsibilities of
both parties, an investor and a host government prior to undertaking
investment. However, when the host government, changes then concession
28
agreements can become resented or unpopular, and may sometimes even

increase political risk (Liu & Bjornson, 1998).
4) Structuring the investment- structuring the investment is a more active
policy of political risk management than previous three. The firm can try to
minimise its exposure to political risk by adjusting (a) its operating policies in
the areas of production, logistics, export, and technology transfer and (2) its
financial policies by borrowing local funds (Madura, 2000)
The key element of the structuring investments strategy is to keep an
affiliate dependent on sister companies for markets and suppliers, one such
strategy is vertical integration (Shapiro, 1981., De la Torre & Nectar, 1986.,
Liu & Bjornson, 1998). Another element is to concentrate R&D facilities and
proprietary technology, or important components thereof, in the home country.
Furthermore, it is possible to establish a global trademark that cannot be legally
duplicated by a host government. Moreover, control of transportation
(shipping, pipelines and railroads) and sourcing production in multiple plants
reduces the governments ability to hurt the MNEs single plant and thereby
changes the balance of power between government and MNE. Finally,
developing external financial stakeholders by raising capital for a venture from
the host and other governments, international institutions and customers can
reduce risks dramatically.
After recognising the possibility of a change in government policy, the firm
must assess its consequences in the context of its investment. Political risks can
be incorporated in several ways, including:
a) Shortening payback period (Shapiro, 1981)- The MNE can maximise cash
generation for the short term.
b) Rising the Discount Rate (Shapiro, 1981., Madura, 2000)- If the perceived
risk is high in the host country, the investor can charge the high discount rate to
adjust project cash flaws. However there is no precise formula for adjusting the
discount rite to corporate country risk.
c) Adjustment of Estimated Cash Flows (Shapiro, 1981., Madura, 2000)- The
idea is to estimate how cash flows would be affected by each form of risk. E.g.
29
if there is a 20 per cent probability that the host government will temporary
block funds from the subsidiary to the parent, the MNE should estimate the
projects present value under these circumstances, realising that there is 20 pre
cent chance that this will occur.
Step 3: Post-investment Policies/ Crisis Management

Shapiro (1981) states that once the multinational has invested in a project, its
ability to influence its susceptibility to political risks is greatly diminished but
not ended. He points out five different policies that the MNE can pursue.
1) Planned Divestiture (Shapiro, 1981)- MNE can phase out their ownership
over a fixed time period by selling all or a majority of their equity interest to
local investors. The disadvantages of this policy are: a) a difficulty to satisfying
all parties involved: an investor and a host government; b) if the buy out price
had been set out in advance and the investments were unprofitable, the host
government would probably not honour the purchase the commitment; c)
legislation in certain countries requires local ownership.
2) Short Term Profit Maximisation (Root, 1968., Robock, 1971., Shapiro,
1981)- is an attempt to make maximum profit from the local operation in a
short run by deferring maintenance expenditures, cutting investment to the
minimum necessary to sustain the desired level of production, limiting
marketing expenditures, producing lower quality merchandise. A disadvantage
of this strategy is that it can create a negative attitude in the present and the
future government towards an investor with all its resultant circumstances. An
alternative form of divestiture is to pursue a passive strategy, to do nothing and
believe that the local regime has chosen not to expropriate in case of losing
necessary foreign investments.
3) Adaptation (Root, 1971., Shapiro, 1981) is more a radical approach to
political risk management. This policy entails adapting to potential
expropriation inevitability and trying to earn profits on the firms resources by
30
entering into licensing and management agreements. From the economic

perspective, legal ownership of property is essentially irrelevant, but what
really matters is the ability to generate cash flows from that property. Through
contractual arrangements, continuing value can be received from a confiscated
enterprise in at least three ways (Shapiro, 1981): a) handling exports as in the
past but under commission arrangements; b) providing technical and
management skills under a management contract; c) selling raw materials and
components to the foreign state.
These first three approaches relate less to managing the exposure to FDI for the
long term. The forth and fifth approaches relate to how the MNE makes its
investment and generates benefit streams for the host country.
4) Change the Benefit/ Cost Ratio (Shapiro, 1981) is a more active political
risk management strategy. The general idea of this policy is to increase the
benefits to government of not nationalising a firm affiliate and to increase the
costs if it does. In other words, to raising the cost of expropriation by
increasing the negative sanctions would involve control over export markets,
transportation, technology, trademarks and brand names, and components
manufactured in other countries.
5) Developing Local Stakeholders/ Joint Ventures (Root, 1971., Shapiro,
1981) is the strategy of developing local individuals and groups who have a
stake in the business while it continues existence as a unit of the parent
multinational. Potential stakeholders include consumers, suppliers, the
subsidiaries local employees, local bankers, and joint venture partners. This
strategy can substantially increase bargaining power over the government (De
la Torre & Nectar, 1986).
Section 4: Risk/Return Trade-off

Ironically, it is the case that many multinationals recognise that some of the
areas offering the greatest opportunities for growth and development, are also
31
those areas in which the level of political risks are likely to be the highest
(Gilligan, 1987).
It is known that the expected returns from the emerging markets can be
impressive and these markets can be a highly risky and volatile (Harvey ,
1994a). The return axis may be measured by potential return on assets or return
on equity. The risk may be measured by potential fluctuations in the returns
generated by each project (Madura, 2000). The term efficient project refers
to a minimum risk for a given return.
MNE can achieve more desirable risk- return characteristics form their project
portfolios if they sufficiently diversify among products and markets. For
instance by combining project A with several other projects, the MNE may
decrease its expected return. On the other hand, risks could be also reduced
greatly. Project portfolios outperform the individual projects because of
diversification of risks.
Conclusion
This chapter has had an objective to introduce the reader to the Political risk
related literature. Section one has been dedicated to the Theory of
Internationalisation. Foreign Direct Investments, as one of the alternative ways of
expansion into distant markets, has been reviewed. The benefits and flaws of Joint
Ventures have been discussed. The uniqueness of FDIs in the Oil Industry has been
stated.
Section two has debated the difference in terms between uncertainty and risk.
Section three has dealt with Political Risks. The types of political risk have been
introduced. Ways of minimising political risk exposure (risk recognition /
evaluation, development pre-investment and post-investment policies) have been
analysed. The final section of the chapter has given a brief overview of trade-off
between risk and return.
32
From the analysis of International Trade theories, FDI theories and Joint
Ventures as a form of FDI, it is possible to conclude that there are many
reasons and advantages for companies in internationalisation. However, the
risks can seriously offset these benefits. International managers need to identify
and assess the risk they face on the way to internationalisation. Compared to
most types of economic or business forecasting, political forecasting remains a
very underdeveloped art; In spite of that fact there is a possibility to develop
and implement strategies, which allow the company to reduce the likelihood of
losses or at least lessen its amounts. Investors with projects positioned around
the world have to be concerned with the risk - return characteristics of the
project (Madura, 2000).
33

This chapter will outline the research methodology adopted for the purpose of
carrying out the dissertation. It is the authors intention to make it clear to the
reader how the data was collected and analysed. The research approach taken
was that of multiple case studies. These case studies are related to three
companies: Exxon Mobile (Exxon), Royal Dutch Shell (Shell) and British
Petroleum (BP). The objective of this chapter is to detail the research
methodology employed in this study and to give its limitations.
Section 1: Introduction in the Case Study Approach

With the purpose of this study, to attempt to understand the nature of political
risks in international investment environment and how firms deal with different
forms external threats, it was necessary to examine contemporary events and to
collect qualitative information. The research questions involve specific
objectives in examining complex issues of the relationship between foreign
company and business environments in a host county, and also in exploring the
perceptions and attitudes of managers to evaluating and minimising the
political risk exposure to their companies. In this instance a case study
approach was considered appropriate in providing a greater degree of
flexibility than that offered by other research methods in reply to the research
questions.
Furthermore, the subjective interpretation of relationship would not be suitable
for normative, numerically based data gathering and interpretation. Descriptive
and exploratory research was deemed more appropriate because the author is
interested in gaining insights into the general nature of the topic such as
dealing with different kinds of political risks. So, the nature of the topic should
involve the collection of rich qualitative data.
35
Moreover, as it has been stated in the Introduction chapter, there is a rationale

in focusing on one industry. The oil industry is chosen. There are only a few
big private players in the extractive industry with interests diversified around
the globe and who at the same time conduct businesses in the same country. In
order to provide a multidimensional picture of a situation with political risk,
its assessment and management; it was decided to base the research on a
small-scale research (three cases).
Section 2: The Case Study Approach as a Research Strategy

The case study approach is one of the several research strategies which can be
used to carry out research. There are many reasons why the researcher may
choose this particular method over others available to him. These reasons are
often associated with potential benefits, which the technique offers.
The case study approach places emphasis on a full contextual analysis of fewer
events or conditions and their interrelations. It puts more emphasis on detail
which provides valuable insight for problem solving, evaluation, and strategy
(Cooper & Schindler, 2001). This detail is justifiable from numerous sources of
information. It allows evidence to be verified and avoids mislaid facts. Yin
(1991) gives case study approach the following definition: an empirical
enquiry that investigates a contemporary phenomenon within its real life
context when the boundaries between phenomenon and context are not clearly
evident and in which multiple sources of evidence are used.
The logic behind basing this dissertation focusing on three cases rather than
many is that there may be insights to be gained from looking at individual
cases that can have wider implications and, crucially, that would not have come
to light through the use of a research strategy that tried to cover a large number
of instances (a survey approach). The aim is to illuminate the general by
looking at the particular (Denscombe, 1998).
36
Moreover, what a case study can do that a survey normally cannot is study
things in detail (Denscombe, 1998). The author takes a strategic decision to
devote all his efforts to researching just three cases and there is obviously a far
superior prospect to looking into things in more detail and finding out things
that might not have become obvious through more superficial research.
Furthermore, relationships and processes within social settings tend to be
interconnected and interrelated (Denscombe, 1998). To understand one thing it
is essential to understand many others and importantly, how the various parts
are correlated. Case studies tend to be holistic rather than to deal with
isolated factors (Denscombe, 1998). The case study gives some opportunity
to the researcher of being able to find out how the many parts affect one
another.
Also, the case study approach offers the opportunity to explain why certain
outcomes might happen; not only just to discover what those outcomes are.
Another strength of the case study approach is that it allows the researcher to
use a variety of sources. A variety of data and a variety of research methods as
part of the investigation observations of events within this case study will be
combined with scanning industry specific and financial periodicals. Where
possible, documents from official meetings will be used. These will provide
relevant insights into the different views of the subjects under research.
The advantage of the case study approach is that the author will be ideally
placed to obtain as wide body information as possible: the three cases of oil
majors form the basis of the investigation. It is what already exists. As Yin
(1994) states, the case(s) is a naturally occurring phenomenon. It is not like
experiments where the research design is dedicated to imposing controls on can
variables so that the impact of a specific ingredient can be measured
(Denscombe, 1998).
37
Section 3: Sources of data for this study and their limitations

There is the choice of using primary and secondary sources of data for the
purpose of this dissertation. However, because of the difficulty in accessing the
people responsible for political risk assessment and management for
conducting in-depth interviews and gathering primary data, it was decided to
base this dissertation entirely on secondary sources of information.
According to Cooper & Schindler (2001) secondary sources have many
advantages: sources found more quickly and cheaply; it involves no fieldwork
or data analysis; a useful starting point for researchers and it frequently
contains guidelines for future research.
Secondary sources of data include the use of internal and external data. In
essence, any material collected by a writer other than the author. Internal data
is an important source of background information. However, the problem with
internal data is that it can be difficult to gain access to, especially to the
specific issues like political risk assessment and management.
In collecting data the library facilities at Ilac Centre and UCD, Blackrock and
Belfield, were accessed. The sources of secondary data exploited were:
Bibliography searches in books, theses, periodicals and journals.

Relevant articles illuminated various perspectives of the subject of
dealing with political risks in different regions of the world as well as in
Russia.
Computerised databases such as Fact Finder, ABI Inform (ProQuest),

Econlit, Europe intelligence Wire, General Business File International,
Infotrac.
The official Internet sites of the companies.
Internet search engines, such as Google and Yahoo.
Secondary data has certain limitations, which are worth considering. The
author found it difficult and time consuming to examine vast quantities of data,
37
therefore problems came up in sourcing information particular to the

researchers field of study. Furthermore, in todays dynamic world, secondary
information is often out of date.
Section 4: The Selection of Cases

Whereas the survey approach tends to go for large numbers, the case study
approach tends to prefer small numbers, which are investigated in depth
(Denscombe, 1998).
This dissertation examines in depth three cases. The reasons for choosing
particularly these cases are:
Typical instance. The author finds the cases of all three chosen privately
owned oil companies as typical. The logic involved here is that the particular
cases are comparable in fundamental respects with others that might have been
chosen, and that the findings from the case study are therefore possible to apply
elsewhere. Because the chosen case studies are like most of the rest, the
findings can be generalised to the whole class of things.
A matter of convenience is another reason for the selection of three
private oil companies, which are truly multinational and involved in
exploration business in Russia. Taking into consideration the limits to time and
recourses, the investigation of oil majors is appropriate, because the secondary
information about them is widely available.
Moreover, the firms involved in the extraction of natural resources are
usually most heavily affected by changes in business environments. The author

finds the investigating ways of dealing with political risks in these instances
intrinsically interesting.
On the other hand, the author does not have a great deal of choice of
selection of suitable cases for inclusion in the investigation.
38
Section 5: Generalisation
Denscombe (1998) states that the value of a case study approach is that it has
the potential to deal with subtleties and intricacies of complex social situations.
Although each of the three cases is in some respects unique, it is also a single
example of a broader class of things.
The extent to which findings from the case study can be generalised to other
examples in the class depends on how far the case study example is similar to
other types. Table 3.1 gives an example of the point in which case studies can
be compared to each other.
Table 3.1 Comparing a case with others of its type
Physical location
Geographical area, town,

country
Historical location
Development and changes
Social location
Ethnic grouping, social class,

and other background
information about participants
Institutional location
Type of organisation, size of

organisation, official policies
and procedures
Source: Denscombe (1998)
Section 6: Boundaries to Case Studies

The use of the case study approach assumes that the researcher is able to
separate some aspects of social life so that it is distinct from other things of the
same kind, and distinct from social context (Denscombe, 1998). The notion of
39
fairly distinct boundaries is an important factor in stating what the cases are
and what is outside the case is (excluded from the case studies).
The physical boundaries of the case studies included in this dissertation are
as follows:
1) The type of organisation.
a) Country of the origin. All three companies were set up and operate
from developed countries (The USA, the UK, the Netherlands).
b) Listed/ unlisted on the stock market. The companies are listed in the
stock markets.
c) Annual turnover. The companies are in the Fortunes top 10 world
companies by revenues.
d) Number of employees is significant (around a hundred thousand in
each company).
e) Span of operations. The companies are specialising in oil and gas
exploration and extraction.
2) The widespread interests around the globe.
a) All three companies are truly multinationals. E.g. Exxon Mobile
conducts businesses in 200 countries, BP in 29 countries.
b) All three companies have interests in Russia
The time/ historical boundaries:
1) Being in business for more than a hundred years
2) Conducting business in the exploration sector in Russia in the last 4 years
3) The period of past 20 years will be examined.
Section 7: Limitations of the Case Studies Approach
Case study approach like any other research method has its own pros and cons.
One of the weak points of the case study approach that it is open to criticism is
in relation to the credibility to generalisation made from its findings. The
approach gets accused of lacking the degree of rigor expected from social
science and is therefore a perceived as producing soft data. The boundaries
40
of the case can prove complicated to define in a complete and straightforward

way. In case studies, access to documents, people and settings is vital. It can
also cause ethical problems (e.g. confidentiality). In some instances, there is
the likelihood that the presence of the research can lead to the observer effect,
which means that the fact being researched effects the way of behaviour of
those who are observed (not in this particular case). (Denscombe, 1998)
Section 8: Research Objectives

The research objectives of this dissertation are: 1) to identify which kinds of
risks most common at the moment; 2) to examine how MNEs deal with
political risk; 3) to establish the MNEs reasons for entering a region with high
risk and uncertainty; and 4) to establish how the companies investment
strategies in Russia differ to other countries and each other.
Conclusion
This chapter has brought the reader through the rationale for the study. The
importance of the research methodology has been emphasised. It has been
established that the case study approach has got both advantages and
disadvantages, but the researcher finds it the most appropriate for his research.
Sources of data for this study and their limitations have been discussed. The
boundaries to the case studies have been established. The reasons for choosing
the cases of Exxon, Shell and BP and potential for generalisation have been
pointed out. The limitations of the case study approach have been given. The
research objectives have been stated.
41
Chapter 4: Background Global Oil and Russia
Chapter 4: Background - Global Oil and Russia

Today we are so dependent on oil, and oil is so rooted in our daily doings, that
we hardly recognize its large-scale importance. It is oil that makes possible
where we live, how we live, how we commute to work, how we travel. Life as
we know it today would be extremely difficult without oil and its by-products.
This chapter analyses the world oil industry. It gives an overview of the oil
industrys current situation, its trends and the profiles of the largest private
players on the oil market. It is also, gives insights into the Russian oil and gas
sector, Product Sharing Agreement legislation, and oil and gas projects on
Sakhalin Island.
Section 1: Oil Industry Profile

At end-1999 world proven crude oil reserves stood at 1,042,536 million barrels,
of which 811,526 million barrels, or 77.8 per cent, was in OPEC Member
Countries (OPEC, 1999).
Table 4.1 Which countries have the worlds largest proven oil reserves.
Country
Crude oil reserves (mill. barrels)
Saudi Arabia
262,784
Iraq
112,500
United Arab Emirates
97,800
Kuwait
96,800
IR Iran
93,100
Source: OPEC Annual Statistical Bulletin (1999)
According to the reference case of OPEC's World Energy Model (OWEM)
(2001) and World Energy Council (WEC)(2002), the total world oil demand in
2000 was at 76 million barrels per day. As a growing world population and
rising energy demand for economic growth continues, crude oil demand will
43
also rise to 90.6 million barrels per day in 2010 and 103.2 million barrels per
day by 2020.
Table 4.2. Which countries produce the most oil

Country
Crude oil production (million barrels per

day)
Saudi Arabia*
7,565
Former Soviet Union
7,434
United States
5,925
Iran
3,439
China
3,212
* Including share of production from Neutral Zone.
Between the 1998 and 2001, proved recoverable reserves of hydrocarbons
remained comparatively stable overall: oil reserves fell by 2.7 per cent while gas
reserves went up by 2.8 per cent (WEC, 2002). In the case of oil, Africa and
South America were the major regions to experience growth (of around 4 per
cent in each case) whereas Africa (plus 13 per cent) and Oceania (plus 11 per
cent) witnessed the largest percentage additions to gas reserves. At the current
rate of production, the industry could continue to produce oil for 40 more years,
gas for over 55 years. The geographic breakdown of hydrocarbon resources
remains basically unchanged, with a high concentration in the Middle East (65
per cent) and in the OPEC countries for oil, and a more equitable distribution
between the Former Soviet Union (FSU) (37 per cent) and the Middle East (35
per cent) for gas (WEC, 2002).
During the 1990s, the discoveries of new oil fields were concentrated in a small
number of countries. In point of fact, during the period 1990-1999, 50 per cent
of new fields were concentrated in 10 of the 95 countries where discoveries
were made. These new fields were primarily located in regions long known or
recently found to be oil-rich: Iran and Saudi Arabia, on the one hand, and Brazil
and Angola (deep offshore) on the other (OPEC, 2002). Brazil and Angola
44
reported a high reserve renewal rate most of which are in offshore zone (Figure
4.1).
Figure 4.1 Rate of oil reserve renewal, 1990-1999 by country
Source: World Energy Council (2001)

Deep offshore extraction is an ongoing technological challenge. In 1978, the
greatest production depth was 300 m. By 1998, deepwater production was under
way at 1,800 m, a record set by Petrobras in the Campos Basin in Brazil. During
this twenty-year period, the deep offshore sector continued to push back its
technological limits. Deep-offshore conditions present certain characteristics
(high pressures, low temperatures, large water-depth range, the constant
presence of ocean currents, etc.)(WEC, 2001).
Oil exploration can cost tens or hundreds of billions of dollars. The actual costs
depend on such factors as the location of possible oil reserves (i.e. on land or in
deep water), how large the oil field is expected to be, how detailed the
exploration information must be, the type and structure of the rock below the
ground and many more different issues (OPEC, 2001).
45
It can take 3-10 years from the decision to explore, through discovery and
testing, development and the delivery of oil from a new field. The time required
depends on where the oil is and thus how hard it is to discover, test and develop.
An offshore oil field in deep water can take much longer to discover and test,
due to the challenging conditions such as bad weather. Drilling in deep water is
also difficult, and it can be very expensive.
OPEC (1999) believes that oil demand will continue to grow strongly and oil
will remain the world's single most important source of energy for the
foreseeable future. OPECs forecast is that the oil share of the world fuel mix is
falling slightly, from over 41 per cent today to just over 39 per cent in 2020.
However, oil will still be the world's single largest source of energy. The
reduction in the oil market share is largely due to the stronger growth enjoyed
by other forms of energy, particularly natural gas (see Appendix III).
Section 1.1 Uses of crude oil
Most of the crude oil goes to plants for refining. The best known product
derived from oil is gasoline, or petrol. However, there are many other products
that can be obtained when a barrel of crude oil is refined. Other fuels include
liquefied petroleum gas (LPG), naphtha, kerosene, gasoil and fuel oil.
Lubricants and asphalt (used in paving roads) are also manufactured from
refining crude oil. A range of sub-items like perfumes and insecticides are
ultimately derived from crude oil (OPEC, 2002). Furthermore, several of the
products listed above which are derived from crude oil, such as naphtha, gasoil,
LPG and ethane, can themselves be used as inputs or feedstocks in the
production of petrochemicals. There are also more than 4,000 different
petrochemical products (Yergin, 2001).
Section 2: Exxon Mobiles Profile
According to the Time & Fortune Group's 2002 Fortune Global 500 list of the
largest companies by revenue, Exxon Mobil Corporation is the second biggest
company in the world (after Wall-Mart Stories) and the worlds number one
46
vertically integrated non-state owned oil and gas company (ahead of BP). In
2001 its revenues were US$ 191,581 million (per cent change from 2000 is
minus 8.9). Some consider Exxon the most powerful corporation in the world to
day (Fortune, 2002a). Worldwide it employs over 100,000 people (Business
Week, 2001).
Exxon Mobil engages in oil and gas exploration, production, supply,
transportation, and marketing around the world. It has proven reserves of just
less than 21 billion barrels of oil equivalent ( Business Week, 2001). Exxon
Mobil's refineries can handle more than 6 million barrels per day. Petroleum is
mostly sold through Exxons 45,000 Esso and Mobil service stations in 118
countries (including more than 16,000 in the US). Aviation fuel is sold at more
than 700 airports in 80 countries. Exxon Mobil Marine Fuels serves more than
300 ports in 70 countries. Exxon Mobile conducts business in almost 200
countries worldwide. It also produces and sells petrochemicals, and it has
interests in coal mining, minerals, and electric power generation.
Section 3: Royal Dutch Shells Profile
Royal Dutch Shell Group is the world's number three in its industry and number
eight in the world. It made US$ 135,211 million in 2001 ( per cent change from
2000 is minus 9.3) (Fortune, 2002). It has proven reserves of 9.5 billion barrels
of oil and 55.8 trillion cubic feet of gas. The Group is a joint venture between
Royal Dutch Petroleum (60 per cent) and "Shell" Transport and Trading (40 per
cent). It generates sales mainly from oil products, but it also makes chemicals,
transports natural gas, trades gas and electricity, and develops renewable energy
sources. It operates more than 46,000 gas stations world-wide (Business Week,
2002). Shell employs 101,000 people worldwide (Mortished, 1997).
Section 4: British Petroleums Profile
British Petroleum (BP), formerly BP Amoco, is the world's number 2 integrated
oil company, behind Exxon Mobil. It is ranked by Fortune (2002) as the fourthlargest company in the world with its 2001 revenue equal to US$ 174,218
47
million (per cent change from 2000 is plus 17.7). The company, which was
formed in 1998 from the merger of British Petroleum and Amoco, has grown
further by buying Atlantic Richfield Company (ARCO). BP has proven reserves
of 15.2 billion barrels of oil equivalent, including large holdings in Alaska and
the North Sea. It is the largest US oil and gas producer. Also a top refiner (3.2
million barrels of oil per day capacity) and petrochemicals and specialty
chemicals manufacturer, it has expanded by buying motor-oil maker Burmah
Castrol. BP operates 29,000 gas stations world-wide (Business Week, 2002) and
conducts operations in 29 countries around the world, from Algeria to
Zimbabwe (Cairncross, 2002).
Section 5: Russian Oil and Gas Sector
Although commercial production only began in the second half of the
nineteenth century, for centuries before, oil was gathered by peoples who lived
in the parts of the world where it seeped to the surface. In Russia, the first
written mention of the gathering of oil goes back to the sixteenth century.
Travellers described how tribes living along the banks of the river Ukhta in the
far northern Timan Pechora region gathered oil from the surface of the river and
used it as a medicine and lubricant. Oil gathered from the Ukhta river was
delivered to Moscow for the first time in 1597 (Yergin, 1991). The first oil well
in the world was sunk in Baku by the Caspian Sea in 1846, about a decade
before the first oil wells were drilled in the US. By the end of the nineteenth
century Russia accounted for over 30 per cent of the worlds oil production
(Yergin, 1991).
At present, Russia is a significant oil and gas exporter. Russia pumps on the
world markets 4.5 million barrels daily (OPEC, 2001). It is the world's largest
exporter of natural gas (and has the largest known natural gas reserves). It is
also the world's second largest energy consumer. Even though production of
both has declined in recent years, consumption within Russia has declined even
further so net energy exports have increased.
48
The oil industry is a key natural resource sector and one that is extremely
important to the Russian economy, due to the large contribution to government
budget revenues and Russian exports. It plays a critical role in the Russian
economy: while its employees accounts for only 1 per cent of the Russian
workforce, the oil sector represented 6 per cent of GDP, 16 per cent of exports
and 22 per cent of budget revenues in 1998, as pointed out by Mc Keansey
survey (2001).
According to the OPEC (2001) sources, Russia has an estimated 49-55 billion
barrels of oil proven reserves, but ageing equipment and poorly developed fields
are making it difficult to develop these reserves. The development of existing
oilfields could have made better progress, but the deterioration in transport
infrastructure, and the shortage in investment- aggravated by the countrys
August 1998 financial crisis- speeded down the development. Large amount of
capital, mostly from foreign investors, is needed to develop new fields and to
extend the life of existing oilfields.
Oil production in Russia has fallen by almost half over the last 10 years, from a
peak of 12 million barrels per day in 1988 (19 per cent of world production) to a
low of 6.1 million barrels per day in 1998 (9 per cent of world production). The
decrease in production reflects the lack of new field development, the 30 per
cent fall in domestic demand since 1990, as well as the export drop to former
USSR republics and East European countries (Kharkukov, 2002).
As maintained by the Economist Intelligence Unit (2001), although the
countrys natural gas production has decreased only slightly (8 per cent from
1992 to 1999) during the transition to democracy, low investment has raised
concerns about future production levels: production in the established West
Siberian fields that account for 76 per cent of Russian gas output is declining,
while the planned development of new fields continues to be delayed as a result
of lack of investment resources.
Gasprom, which is a 38 per cent government-owned company, dominates
Russias gas sector. Gasprom controls more than 90 per cent of Russias gas
49
production, runs the countrys 90,000-mile gas pipeline grid and 43 compressor
stations. It operates trading houses and marketing joint ventures in many
European countries, and holds one-fifth of the worlds natural gas reserves. In
addition, Gasprom is Russias largest earner of hard currency, and its tax
payments account for around 25 per cent of federal tax revenues.
The oil & gas industry was privatised in 1993-1994, but government retains
stakes in several large companies. Privatisation involved very little foreign
investment. The group of private majors includes the six largest oil companies
with zero or only symbolic state participation and countrywide operations: OAO
Lukoil, OAO Yukos, Surgutneftegaz (OAO SNG), Tyumen Oil Co. (TNK), and
Siberian Oil Co. (Sibneft). Until recently, this grouping of privatised and
independent companies included Sidanco Oil Co., whose oil production shrank
dramatically in 2001 and which is now controlled by Russian TNK (69.3 per
cent) and British Petroleum (25 per cent) (Khartukov, 2002). The majors
accounted for about 72 per cent of Russias oil production in 1997. There were
approximately 90 smaller production companies at this stage.
From the beginning of privatisation, foreign oil companies expressed interest in
making investments in the Russian energy sector and in particular the oil
industry. However, foreign involvement has so far been fairly scarce in this
field. One of the obstacles which foreign investors face is the infrastructure.
The export oil infrastructure has been operating at full capacity and has not been
enlarged since 1991. The Russian government controls crude oil exports
through the state owned pipeline monopoly Transneft. Many of these pipelines
are in a state of despair, with Fuel and Energy Ministry figures indicating that
almost 5 per cent of crude oil produced in Russia is lost through pipeline leaks
(The Economist Intelligence Unit, 2001). The government also use Transneft to
create barriers to crude oil exports in order to force oil companies to supply
insolvent domestic sectors in exchange for tax offsets.
The McKeansey survey shows that assurances such as workable taxes as well as
a fully liberalised domestic oil market with open access to an enlarged export
infrastructure could double Russian oil production in the next ten years by
50
attracting investment worth US$ 80 billion. Furthermore, it would increase

exports by more than 50 per cent.
Section 6: Product Sharing Agreements (PSA)

Many analysts consider that the main obstacle for FDI in the Russian oil
industry is the lack of a proper legal framework for a Production Sharing
Agreement (PSA). PSAs guarantee oil companies tax breaks in return for a
percentage of output being handed to the state (Gill, 2000a).
PSA is a contract between the government and the investor, which protects the
latter from any unfair future changes in the tax and regulatory system and
ensures the government higher tax revenues when oil prices are high. The
Norwegian tax system, for example, is fairly flexible and adapts to the world
market situation: When prices for crude oil are strong, Norwegian oil companies
give 90 per cent of their profits to the state, but when the price is weak the rate
may be cut down to a few per cent (Boratyreva, 2002).
Although Russia passed a law on PSAs in 1996, only a handful of PSAs exist
on Russian territory today (Moscow Time, 2002). Two PSA-related draft laws
are currently (July, 2002) on the State Dumas waiting list: one on taxation and
one on the mechanism of compensation of investors expenses. A total of 28
projects are seeking PSA status, and only three of them are being developedSakhalin 1, Sakhalin 2 created before the law took effect) and Khryaga TumenPechora.
All three functional PSA projects owe their existence to presidential decrees
issued by the former President Boris Yeltsin (Pirogov, 2002). Although, the
former president, Boris Yeltsin, was in favour of PSAs, State Duma (the
parliament) was constantly opposed to the government. Deputies blocked PSArelated laws for political rather than economic reasons. Each PSA needs
approval from the State Duma, central government and the local authorities,
wherever the field is located and also a dozen committees in several bodies
51
including the Energy Ministry, the Economic Development and Trade Ministry
(Gorst, 2000).
Section 7: Sakhalin Projects
Sakhalin is the largest island in Russia. The population of the island is about
670,000, of whom 180,000 live in the capital, Yuzhno-Sakhalinsk. Sakhalin is
situated in the Russian Far East, just north of Hokkaido, Japan (see map in the
Appendix IV). The island is 948 km long from north to south and 27-160 km
wide from east to west. The Sea of Okhotsk on the east and the Tatar Straits, an
arm of the Sea of Japan on the west, surround the island. At about 520 north
latitude, arctic conditions prevail with winter temperatures as low as minus 40
deg C. Sea ice occurs for 6-7 months per year, from December to June,
essentially restricting ocean access to the island to the summer months
(Sumrow, 2002).
Sakhalin Island is in a very seismically active location. Russia's worst ever
earthquake, measuring 7.5 on the Richter scale, occurred on Sakhalin Island's
north end in May 1995, killing 1,989 people in the town of Neftegorsk
(Sumrow, 2002).
The first onshore oil was discovered and produced on Sakhalin in 1928, and
though offshore oil was indicated, the Soviet Union lacked money and
technology to explore these reserves.
A Japanese-Russian joint venture
discovered the first offshore fields in the 1970s, though declining oil prices and
increasing international tensions stopped the project by the early 1980s
(Sabirova & Allen, 2001). Onshore Sakhalin oil and gas reserves have been
produced for decades, but are now largely at a low level. In 1998, 46.8 per cent
of Sakhalins trade was related to oil and gas (Sabirova & Allen, 2000). The
offshore fields lie within the 12-mile territorial limit.
Oil and gas deposits in the Russian Far East and offshore Sakhalin could
significantly contribute to meeting Southeast and Northeast Asias needs and
enhance energy security by supplementing imports from outside the region with
52
supplies form nearby fields. Moreover, co-operation in energy development

could not only help to meet energy requirements, but also provide a foundation
for co-operation in other areas among 1) Russia, 2) Japan, 3) South Korea, 4)
China, 5) The United States and 6) India (Parfyonov, 2002).
There are currently seven oil and gas projects offshore in Sakhalin (see
Appendix V), in various stages of development. The total expected volume of
investment could exceed US$ 100 billion over the next forty years.
Approximately US$ 25-45 billion could be spent over the next 20 years to
develop on Sakhalin a production and transportation infrastructure, resulting in
significant opportunities for Western contractors and joint ventures. In 1999
Sakhalin claimed one in every four dollars of Foreign Direct Investment coming
into the Russian Federation, making it No.1 in investment in the Russian Far
East and No. 2 in Russia (behind Moscow) (Sabirova & Allien, 2000).
At present, one of the primary obstacles for developing the Sakhalin oil and gas
fields is the political tension that make potential partners (both government and
industry) wary of co-operating. In this context, the signing of a peace treaty
between Japan, the largest market in Northeast Asia today, and Russia, the
worlds largest gas exporter, is an important, but very challenging task. Russia
and Japan have been in conflict since the early 19th century over the volcanic
Kuril islands, which neighbour Sakhalin. Russia won back the islands along
with southern Sakhalin after World War II, although the dispute continues as
Japan still lays claim to the islands (Gill, 2000a).
A similar situation exists with peaceful co-operation on the Korean peninsula.
Lack of normal relations among nations makes it difficult to build the trust and
confidence needed to sustain costly projects that require long timeframes for cooperation (Ivanov, 1995).
Another major factor affecting the economics of the projects is the absence of a
pipeline network in the region, in particular in Japan. Although a number of
companies, politicians and academic experts in Japan are actively promoting
53
pipeline construction projects, there is no general agreement yet as to how to

proceed (Parfyonov, 2002).
Furthermore absences of common legal and regulatory frameworks also make
energy development in Northeast Asia difficult (Ivanov, 1995). European
nations and Japan signed the energy chapter and are willing to implement
common approaches to ensure rights of transit. Russia has not ratified the
chapter. In Asia, however, each country has different approaches to regulation of
energy investments, including environmental standards. The abovementioned
factors make billion dollar worth development projects tremendously difficult.
Conclusion
This has been an examination of the worlds oil industry with reference to the
oil sector of the Russian economy. The first section has analysed the oil industry
in respect to the worlds oil reserves, total world oil demand and a geographical
widespread of the new discoveries of the oil fields. The trends in the world oil
market have been discussed. The complexity of deep offshore exploration; cost
and time of oil field development have been introduced. The subsection has
reviewed the uses of oil in order to emphasise the importance of oil in our dayto-day life.
The brief profiles of the oil companies included in the research sample have
been given. The situation with the Russian oil and gas industry and its
importance to Russian economy has been analysed. Furthermore, the primary
obstacles in the way of FDI into the Russian oil and gas sector have been
reviewed. The necessity of foreign investments for future progress in the oil
exploration in Russia has been emphasised.
Finally, the situation with PSA
legislation in Russia and an overview of Sakhalin island and its projects have
been introduced.
54
Chapter 5: Case studies

This chapter contains three case studies of the worlds main private players in the
oil and gas markets: Exxon Mobile (Exxon), Royal Dutch Shell (Shell) and
British Petroleum (BP) respectively. Each case study consists of instances of
dealing with political risks in different countries and describes the companys
current status and progress in Sakhalin projects. The Exxon Mobiles case also
includes a description of the issues in the companys growth strategy.
Case 1: Exxon Mobile

"The industry is going through another major expansion cycle driven by
geopolitics and technology," Lee R. Raymond, the chairman and chief executive
of Exxon Mobile Corp., explains in an interview with Business Week (2001). "We
have opportunities today we could not have envisioned 10 years ago." Today's
increasingly globalised energy markets are pregnant with profit, but they also are
more complex and more volatile than ever. (Business Week, 2001)
Raimond is famous for his successes in many business settings, but has a poor
image in the public arena. Exxon has a long track record of conflicts with
environmental and human rights groups. The most recent examples are Indonesia
(Landler, 2001., Bradsher, 2002), Angola and Chad (International Trade Finance,
1998).
Section 1.1 Exxons Business
Oil has always been an extremely volatile commodity. Since mid-1998, the price
of crude oil has soared from US$ 10 a barrel to a high of US$ 35 and the current
2002 price is approximately US$ 26 (OPEC, 2002). The average price from 1990
to 1999 was US$ 18, a mark that Exxon's management believes will be
comfortably exceeded over the current decade as worldwide consumption of oil
55
increases at 2 per cent a year and natural gas in excess of 3 per cent. The
company's goal is to grow at about the same rate, raising its daily capacity from
4.3 million oil-equivalent barrels (this includes natural gas) to 5 million by 2005.
(Business Week, 2001)
In many industries, an annual growth of 3 per cent would be considered poor, but
not for an oil company of Exxon Mobil's size. Just maintaining existing
production capacity requires intensive development because the output of mature
fields tends to diminish by 7 per cent to 8 per cent a year (Business Week, 2001).
To compensate for the decline in production and add 3 per cent on top requires
Exxon to carry out many costly and risky development projects. In 2001 alone,
the company planned to invest about US$10 billion in exploration and production.
More and more oil and gas must come from wells sunk into the ocean floor at
depths of up to 5,000 feet in the territorial waters of Third World countries
(Business Week, 2001). In these countries only poverty and political turmoil are
constants.
At the same time, Exxon also must look for new reserves in many of these same
problematic locales. To remain in business long term, an oil company must
replace the reserves it extracts for sale with an equal volume of new discoveries.
In Exxon's case, it must find 1.6 billion barrels a year just to stay even. What is
more, it must add these volumes cost effectively to have any hope of turning a
profit. This is one area where Exxon's technical expertise has really worked to its
advantage. Exxon does have a remarkable record of technical innovation in oil
and gas. The company's finding costs in 2000 averaged just 65 cents a barrel,
compared with US$ 4 in the 1980s (Business Week, 2001).
Section 1.2 Exxon, Chad and Indonesia

In December 2001, Exxon Mobile began building
a 660-mile pipeline from the
oil fields of Chad, in the geographic heart of Africa, to the coast of Cameroon.
From landlocked by land Chad to the Gulf of Guinea, Exxon's pipeline will cut
through forests and farmland as it makes its way to the sea. The project is worth
56
US$ 3.5 billion. Other participants are Chevron Texaco and Petronas. The partners
are going to earn as much as US$ 5.7 billion over the project's 25-year life
(Ussem, 2002).
From the start, the Chad project was acclaimed by critics as the most controversial
one in history, due the environmental concerns and involvement of Chads
President Idriss Derby, whose regime is far from democratic. Derby is a former
warlord and has a long track record of human right abuses. Others say the project
is a good chance for Chad and its people to recover from a forty-year war for
independence.
Chad is the fifth poorest country in the world. It is heavily dependent on
agriculture. Annual per capita income is US$ 230. Life expectancy is 47. Threequarters of the population lacks access to health care, sanitation, or safe water. By
carrying some 225,000 barrels of oil a day to a marine terminal for export, the
pipeline could bring the non-coastal nation more than US$ 2 billion over 25 years,
increasing the government's annual budget revenues by half. "The critics forget
that this is the opportunity of the century," says Nassour G. Ouaidou, a former
prime minister of Chad and now the government's coordinator for the project
(Ussem, 2002).
The solution for avoiding further controversy around the project is a complex,
four-way agreement between Exxon, the host governments, activists, and the
World Bank. Exxon has donated US$ 1.5 million for building schools, funding
health clinics, advising local entrepreneurs, handling an AIDS-education van, and
distributing 32,000 anti-malarial mosquito nets. It has also paid for prostitute
focus groups, gorilla habitat studies, even ritual chicken sacrifices (Ussem, 2002).
In the meantime, Exxon has gathered a database of every mango tree, bean plant,
and cotton field in the pipeline's path. Their cultivators are entitled to
reimbursement based on a plant's life expectancy, annual yield, local fruit prices,
and so forth. Exxon says it has paid out US$ 7 million to 7,000 people so far.
(Recipients can either take cash or select goods from a glossy catalogue of plows,
carts, sewing machines, bicycles, water pumps, and other items) (Ussem, 2002).
57
Chad is not the only place where Exxon is dealing with repressive regimes. Two
years ago it declined to join other major oil companies in signing a pact to prevent
human-rights abuses near their facilities (Ussem, 2002). The issue reappeared on
March 13, 2001, when Exxon decided to suspend production at Indonesian Arun
province and evacuate its employees from there because of attacks by armed Aceh
rebels (Landler, 2001). Military forces providing security for the company were
accused of torturing and killing civilians. A labor-rights group is suing Exxon in a
Washington, D.C., court; the company denies the charges and has moved for
dismissal (Ussem, 2002).
The shutdown of Arun operations has added tension to the company's relations
with the Indonesian government, which is heavily dependent on gas revenues and
is loosing US$100 million a month (Landler, 2001). It is not clear whether Exxon
Mobil will return to Arun, which, by the company's estimate, has about 10 years
of reserves remaining.
Section 1.3 Exxon and Sakhalin 1
Exxon reached Russia in 1995, when it negotiated with several partners a
preliminary agreement with the Russian government to develop a big oil and gas
find off Sakhalin Island. (This is the second Exxon appearance in Russia, the first
goes back to the beginning of the twentieth century (see Company History in
the Appendix I) The Sakhalin region for about a decade drew the attention of
multinational companies and experienced contractors because of oil and potential
gas projects, carried out on Production Sharing Agreement (PSA) basis. The PSA
mechanism allows Russians to work with western oilfield development
knowledge and technology in difficult conditions of northern seas, obtaining
royalties, oil and gaining know how as a part of such agreements (Sabirova,
2001).
To one extent or another, all the Sakhalin projects by terms of their PSAs are
required to contract with Russian companies whenever possible. Article 7 of the
PSA law calls for 70 per cent of the contracts for equipment and 80 per cent of
58
personnel to be Russian. However, the PSAs establish that a joint venture with 50
per cent or more Russian participation is considered a Russian company for PSA
Russian- content counting purposes. In order to develop the Sakhalin 1 project,
Exxon established the Join Venture- Exxon Neftegas (Sabirova, 2001).
Exxon Neftegass stakeholders are Rosneft (Russia-23 per cent),
Sakhalinmorneftegaz (SMNG) (Russia-17 per cent), Sodeco (consortium of
Japanese companies, including JAPEX, Itochu, Marubeni, JNOC-30 per cent) and
Exxon (US-30 per cent) (The Russia Journal, 1999b). In 2001 a company from
India purchased shares in Sakhalin 1 and joined the project. Exxon says that the
Sakhalin 1 consortium has already invested US$ 500 million in a 5 year
evaluation-drilling program, with overall Sakhalin 1 capital investment to be US$
12 billion over 30-40 years (Sumrow, 2002.,The White House Press, 2001).
The Sakhalin 1 project PSA was signed in 1996. The consortium was granted a
license to explore the Arkutun-Dagi, Chayvo, and Odoptu fields on the Sakhalin
shelf. The first phase of Sakhalin 1 is focusing on the Chayvo and Odoptu fields
with first oil expected from Chayvo at the end of 2005 and from Odoptu in early
2008. The consortium plans a Phase I oil production plateau of 250,000 barrels
per day along with gas production to meet the island's domestic demand (Sumrow,
2002). The Chayvo field has larger gas potential than the other fields. Gas
production for export from the Sakhalin 1 area will begin around 2010 with the
completion of a pipeline from the southern tip of Sakhalin Island to the northern
Japanese island of Hokkaido (Gorst, 2001).
Sakhalin 1 lost its 1999 drilling season when exploratory work at Chayvo was
denied approval by the Russian Federation State Ecological Expertise Review
(SEER). The SEER panel objected to Exxon Neftegas plans to dispose of waterbased muds and cuttings into the Sea of Okhotsk. While permitted by
international conventions and standard practice in the industry, it was considered
illegal according to one Russian federal law (Russian federal laws covering oil
and gas exploration were developed to deal with onshore activities. Applied to
offshore activities, the laws and regulations are among the world strictest in the
world in terms of environmental provision.). The Prime Ministers Office
59
subsequently gave a special exemption to this determination. Exxon Neftegas was

granted a water-use license for its 2000 drilling program on the condition of zerodischarge for this well only (Sabirova, 2001).
About the same time as the Sakhalin 1 project was started, Royal Dutch Shell
joined a separate group in a similar project on a nearby offshore block. Exxon's
project, Sakhalin 1, has been overwhelmed from the start by operating problems
and disputes with authorities while Shell's venture, Sakhalin 2, has proceeded
smoothly (Business Week, 2001). "Work with Exxon goes on with great difficulty
and with much friction," complains Valery Z. Garipov, Russia's Deputy Energy
Minister "Shell is more active and more flexible than Exxon." (Business Week,
2001).
By Western standards, the Russian approach to business is highly politicised and
irritatingly improvisational. Yet other foreign oil companies operating in Russia
have been willing to proceed without the degree of contractual clarity that Exxon
demands. The company blames the Russian government for holding up its oil
prospecting. In Exxon's view, existing legislation authorizing production-sharing
agreements needs to be amended to shore up the assurances given to foreign oil
companies. The Russian Federation authorities agree that the Sakhalin 1 project,
could develop faster. Only in October 2001, a meeting of the Consultative Council
on Foreign Investments reached agreement with the government on taxation for
projects developed under production-sharing agreements. Shortly after that,
Exxon Mobil announced the second phase of its investment program, calling for
US$ 2,3 billion (Boratyreva, 2002). On October 29, 2001, the Sakhalin 1
Consortium declared the project commercial (The White House Press, 2001).
Russia will get desirable benefits from Sakhalin 1; with royalties, taxes and oil
export receipts bringing US$ 35 billion to US$ 40 billion to the government
treasury over the duration of the project (The Russia Journal, 1999b).
60
Case 2: Royal Dutch Shell Group

Iran possesses huge oil reserves. However, after September 11th it came under
unilateral U.S. sanctions making it a negative prospect for foreign investors
operating there. Shell has an US$ 800 million investment in Iran to develop
two offshore oil fields in the Persian Gulf. Sure, Iran remains a politically
risky place to invest. But who thinks the Middle East will ever be a snug, safe
place for Western multinationals to operate? (Tomlinson, 2001a)
Section 2.1 Shell in Nigeria
Shell produces oil in a large portfolio of countries. However, Nigerian
operations are noteworthy, accounting for about 10 per cent of the companys
petroleum sources. Shells involvement in Nigeria began in 1920. In 1937 it
formed a joint venture (JV) with British authorities that had exclusive rights to
explore for oil. The JV found oil in 1956 in Ogoniland and later in other areas
of Nigeria. The Nigerian governments revenues from Shells operations in
one or another area have traditionally gone to the countrys central
government, and very little has been redistributed back for the needs of people
living where oil fields are located (Daniels & Radebauch, 2001).
In 1992 a group of people living in Ogoniland, the area where Shells main
exploration sites and production facilities are based, formed the Movement of
Survival of Ogoni People (MOSOP). Their leader was the author and
playwright Ken Saro-Wiwa. In 1993 he staged massive protests against Shell,
forcing it to cease operations in Ogoni. MOSOP campaigned for political selfdetermination, a greater share of oil revenues, compensation for losses from
Shells activities and Restoration of the environment in Ogoniland
(Mortished, 1997., Daniels & Radebauch, 2001). The protestors stated that
Shell caused serious damage to Ogonilands ecology (oil spills have despoiled
farmlands and fishing areas, oil flares have affected health). The complaints
brought international attention to the region and drew the attention of General
Sani Abacha. In 1994 five Ogoni chiefs were murdered. A year later SaroWiwa was arrested along with eight others, found guilty of fabricated charges
61
of inciting violence and sentenced to death in November 1995 (Lenzner,

2000).
Shell had publicly opposed the executions, but the company has been blamed
for not doing enough. A representative from Green Peace said: Shell is the
most powerful political actor on the Nigerian stage, both historically and
currently. In Nigeria, the power doesnt come from people it comes from
Shell. If Shell wanted to make difference, they would. (Daniels &
Radebauch, 2001)
In 1997 Shell faced severe public pressure outside Nigeria, because of its
operations there. The Sierra Club urged its 650,000 members to boycott
Shell's products (Lenzner, 2000). Demonstrations around the world against
Shells activities and trouble with shareholders, who called for more public
accountability of Nigerian operations, made Shells life more complex.
Meanwhile, two other Nigerian ethnic groups- the Ijaw and the Akassas have
followed the Ogonis and stepped up their complaints about the lack of
economic benefits going to the people were oil fields are located. Small
groups have used military-style tactics to shut down Shell. Maxwell Oko, a
28-year-old architect, native Akass, leads the 3,000 members of the militant
Elimotu Youth Movement. In December 1998 he and nine comrades raided
one of Shell's flow stations in Kolo Creek in the hub city of the Delta oil
industry. Before dawn, the raiding party entered the control room and disabled
the station's computers, which automatically closed the flow station. (Lenzner,
2000). Shell has also faced sabotage of its pipelines, kidnapping of employees
and the hijacking of expensive equipment for ransom in many places around
Nigeria.
In 1998, Ijaw from 500 villages demanded that all oil on Ijaw land be declared
tribal property, and that the military withdraw from it. Nigerian soldiers
attacked, killing more than 200 demonstrators. Again, Shell was identified
with the vicious troops guarding its outposts (Lenzner, 2000).
62
Shell spent US$ 52 million on hospitals, roads and schools in the region in
1999. However, even when Shell is giving money away, it has a hard time
finding partners for community development, since many worry about
associating with Shell (Lenzner, 2000).
In 1999, a year after the new Nigerian government was elected, Royal Dutch
Shell proposed an US$ 8.5 billion integrated oil and gas investment there over
a five-year period, which would be the largest industrial investment in Africa.
The participants in the project are private companies, mainly Shell, and the
Nigerian government, 70 and 30 per cent respectively. The main reason for
Shells participation in the projects is that Nigeria offers low cost petroleum
extraction. Shell realises that political risk in Nigeria is still extremely high,
but the company feels that an additional investment in the country could win
friends and lower risk. Shell estimates that the proposal will bring an
additional US$ 20 billion to the government of Nigeria over a twenty-five
year period (Daniels & Radebauch, 2001).
Section 2.2 Shell and Sakhalin 2
The Sakhalin Energy Investment Company Ltd. was established in April 1994
to develop the Sakhalin 2 offshore oil and gas project. Shareholders (until
recently) were Marathon Sakhalin Limited (parent company U.S., 37.5 per
cent), Mitsui Sakhalin Holdings B.V., (parent company Japanese, 25 per cent),
Shell Sakhalin Holdings B.V. (parent company British-Dutch, 25 per cent) and
Diamond Gas Sakhalin B.V, (parent company Mitsubishi, Japan, 12.5 per
cent) (Saburova, 2001). Sakhalin 2 is the only Sakhalin offshore project with
no Russian partner. Sakhalin 2, based on a production sharing agreement,
involves the development of the Piltun-Astokhskoye and Lunskoye offshore
fields, which contain a total of 140 million tonnes of oil and 408 billion cubic
meters of gas (Interfax, 2002a).
Sakhalin 2 first produced oil in July 1999, the first from any of the Sakhalin
offshore oil and gas development projects. It was the first consortium, which
63
signed a production sharing agreement (PSA) with the Russian government in

1994 (Gill, 2000a).
Shell became the major partner in the Sakhalin 2 consortium with a 62.5 per
cent share in December 2000 when it acquired 37.5 per cent from U.S. oil
firm Marathon. Shell took Marathon's interest in Sakhalin Energy in exchange
for interest in Shell offshore projects in the United Kingdom and Mexico, plus
settlement for current-year expenditures for the Sakhalin project. Mitsubishi
Corporation (Japan) then acquired an additional 7.5 per cent share from Shell.
This left the final distribution of shares in Sakhalin Energy Investment Co. as
of December 2000 as follows: Shell 55 per cent; Mitsui 25 per cent,
Mitsubishi 20 per cent (Pravda, 2002).
Sakhalin 2 has so far cost its operators US$ 1.3 billion, with the total required
for full field development of oil and gas reserves expected to be US$ 10
billion. Investments include shareholder capital as well as project financing
from international organisations. Ultimately, this project will reportedly
require US$ 10 billion in investment. This means that when Sakhalin 2 comes
to completion it will be one of the largest private investments in Russia (Gill,
2000a).
The Sakhalin 2 project members are focusing on LNG production. Sakhalin 2
includes the Piltun-Astokh (oil and condensate) and Lun (gas) fields, located
15 km off the north-eastern coast of Sakhalin. The US$ 10 billion
development plan includes a 600 km gas-oil pipeline from offshore platforms
to a LNG (liquified natural gas) plant and oil export terminal in the south of
the island near Prigorodnoye on Aniva Bay (Parfyonov, 2002).
Shell is convinced that Sakhalin will develop into a strategic supply source for
a number of countries in the Far East, not least of which is neighbouring
Japan. Asias demand for gas is projected to grow sharply in the next two
decades. Japan, Korea and Taiwan even today are the worlds largest
importers of LNG. In light of its proximity to these countries, the development
of Sakhalin gas in the next decade is particularly attractive (Parfyonov, 2002).
64
However, there were also problems in developing Sakhalin 2 project. An

environmental controversy centres on oil spills, including a spill that occurred
in September 1999 from the Vityaz Marine Terminal, part of Sakhalin 2
project. Although there is no consensus on how much oil was actually spilled,
most experts say that it was comparatively serious. News of the spill
stimulated great concern, not only on Sakhalin, but also in Japan where
members of the Duet (parliament) and fishery interests have been watching
developments closely (Gill, 2000a).
Direct revenue to the Russian budget at various levels during the entire period
of Implementation of the Sakhalin 2 project will amount to US$ 49 billion
(Interfax, 2002b). Analysts say this step would be a massive boost for the
Sakhalin project and the local economy, but many remain sceptical that such a
large sum of capital will be forthcoming (Gill, 2000a).
"The Royal/Dutch Shell Group has the potential to become the largest foreign
investor in the Russian Federation, but we recognise that Russian
rather than western priorities must be the starting point for
developing new partnerships and strategies for success. Today, we are
anticipating the emergence of a new Russian model based on
Production Sharing Agreements, rooted in a stable legal and fiscal
regime." (Van der Veer, 2001).
Case Three: British Petroleum PLC

Today BP is a big investor in troublesome Angola, which some say will soon
be producing more oil than Kuwait or Nigeria. Not long ago the company
announced its intention to publish details of all the payments it makes in order
to develop Angola's immense oil and gas reserves (Oliphant, 2002).
65
Section 3.1 BP and Colombian Oil

BP is the biggest investor in Colombia (Gillard et alii, 1998), and together
with Occidental Oil Co. accounts for 90 per cent of Colombia's foreignoperated oil production (Wade, 2000). In the 1980s and early 1990s Colombia
experienced the oil boom. However the very difficult security environment
caused oil companies to reconsider their investment positions in the
Colombian region. Due to the security concerns large operators such as BP
have scaled back earlier investment plans. Some oil companies have left the
country.
The security issues include exposure to guerrilla attacks, controversial
relationships with the state security forces, and problems caused by common
crime in Bogot. There is little indication that these risks and the cost of
dealing with them will lessen in the near future.
According to official statistics, there were 1,354 reported kidnappings in
January-July 1999, an increase of more than 20 per cent compared with the
same period in 1998. In the first 10 months of 1999, 23 kidnappings were oilsector related, 11 victims were of foreigners. Abductions range from shortterm imprisonment to long-term selective kidnappings for ransom, that can
last for months. They sometimes result in death (Wade, 2000).
In the case of BPs employee Alistair Taylor, he was kidnapped in 1999, and
held hostage in the jungles of Colombia for almost two years. Taylor was
captured by members of the National Liberation Army (ELN) while driving
himself to a BP oil base where he was working. The kidnappers had demanded
a ransom of more than UK 2 million (Crainey, 2001).
For the victim, the experience can be shocking. For the company, a
kidnapping can have a number of negative consequences: unwelcome media
exposure, management time spent dealing with the incident, protracted
exposure to extortion demands, a negative impact on worker morale, and both
66
ethical and financial considerations about how a company should best protect
its personnel (Wade, 2000).
The high revenues from criminal activities make it difficult to keep guerrillas
out of their business. A Colombian army report estimated that the 15,000strong Revolutionary Armed Forces of Colombia (FARC) and smaller
National Liberation Army (ELN) earned at least US$ 5.3 billion in 1991-1998
- drug-trafficking (US$ 2.3 billion), extortion (US$ 1.8 billion), and
kidnapping (US$ 1.2 billion) (Wade, 2000).
Oil companies remain prime targets of rebel rage because of their high-profile
presence in remote rural areas and the size of their investments. In 1998, the
over land Canio Limon-Covefias oil pipelines were bombed 77 times, in a 10
month period in 1999 the ELN attacked pipeline 64 times. The attacks caused
frequent stoppages of pumping operations from oil fields and considerable
environmental damage from oil spills (Wade, 2000)
There is little indication that the guerrillas will let foreign oil companies
disappear from their sights. Both ELN and FARC have made peace talks
conditional on a revision of current oil policy. The Oil companies negotiated
for peace with the rebel forces in 2000. The negotiations made little progress.
Both groups even refused to call a ceasefire during the negotiations.
The controversial security issue has already created serious reputational
problems for BP. Both international human rights groups and the guerrillas
have drawn international attention to alleged human rights abuses by armed
forces organized to protect BP's property. Other allegations point to army
collaboration with local right-wing paramilitary activity.
The oil companies' de facto involvement in the conflict between government
forces and gorillas is unquestionable, because of alleged links between the
Colombian military that protect oil installations and the paramilitaries. FARC
and ELM use this for justification of their attacks against the oil sector (Wade,
2000).
67
BP is a major shareholder in the Ocensa consortium, which controls the 520mile pipeline from BP's oilfield in the eastern foothills of the Andes to tankers
off the Caribbean coast. The other stakeholders in the pipeline are the
Canadian firms Trans Canada and IPL Enterprises and the French oil company
Total. The pipeline, which is a military target for the guerrillas, has two lines
of defence (Gillard et alii, 1998). First is an internal security department
created and run by a secretive Anglo-American company, Defence Systems
Limited (DSL), which is based in London. DSL and its former SAS soldiers
were initially brought to Colombia by BP to protect its 25 billion oilfields.
Second is a secret agreement with the Colombian defence ministry to provide
protection by counter-guerrilla brigades based near the pipeline. Ocensa's
defence needs are worth millions to the private security industry and the
Colombian military.
In 1996-1998 BP was accused of involvement in the murders of local activists
opposed to its operations and that the company's security contractors
employed members of paramilitary gangs. Early in 1998 a yearlong inquiry by
the Colombian prosecutor cleared BP of involvement but the episode has
generated bad publicity (Lapper, 1999). Gillard et alii (1998) state that: Many
of the tortured and decapitated bodies - community leaders, trade unionists,
church workers, peasant farmers and human rights defenders - are buried in
the land around the pipeline.
It is extremely difficult for oil companies to operate successfully in Colombia.
Most of the oil companies working in Colombia have, to a greater or lesser
degree, experienced security problems. Many continue working profitably
despite these problems and attempt to minimize the risks. There is a typical
attitude of the regional managers of oil companies. Although they warn that
the security situation in Casanare and Bogot has deteriorated sharply in
1998-2000, they would only consider withdrawing from the country for
economic reasons such as a collapse in demand for the company's services. BP
remains firmly committed to its Columbian projects because of their high
profitability (Wade, 2000).
68
Section 3.2 BP and Sakhalin 4 - 5

Sakhalin 4 includes the Astrakhanovsky and Shmidtovsky fields, which are
estimated to hold about 120 million tons of oil and 540 billion cubic meters of
gas. In late 1998 Atlantic Richfield Company (ARCO), which was later
acquired by BP, established a representative office in Yuzhno-Sakhalinsk and
under a cooperation agreement signed in March of that year with
Rosneft/SMNG over the Astrakhan Block of Sakhalin 4 project.
Rosneft/SMNG possesses the exploration license and PSA rights to the
Astrakhan. ARCO had planned to participate with Rosneft/SMNG in drilling
an exploration well during the 2000 drilling season, but issues related to
ARCOs world-wide exploration strategies resulted in ARCO pulling out of
the Astrakhan project just prior to the merger with BP Amoco in January of
2000. During the summer 2000 drilling season Rosneft proceeded on its own
with the appraisal drilling program on the Astrakhan Block.
In February 2001 BP and Rosneft announced that they had agreed to jointly
develop the Sakhalin 5 project with a 51/49 equity split. It has estimated
reserves of 600 million tons of oil and 600 billion cubic meters of gas
(Reuters, 2001).
In June 2001, BP reconsidered its position in regard to Sakhalin 4 and have
signed a protocol of intention to jointly develop, with Rosneft, oil and gas
fields off Russias Sakhalin Island in the Sakhalin 4 project (Reuters, 2001.,
Hueper, 2001). Rosneft holds a 51 per cent stake in both Sakhalin 4 and 5. BP
is also pursuing other long-term opportunities on Sakhalin and is poised to
take equity positions in any other attractive projects that become
commercially available.
69
Conclusion
In the above chapter examples have given of business environments in which
oil majors have to work in different countries on a daily basis. Exxon Mobiles
case has contained the section dedicated to company business strategies. It has
also introduced Exxons involvement in the Chad project and the example of
the situation where the company had to shout down its operations in a foreign
country (Indonesia) because of political-risk-related events there. Exxons
participation in the Sakhalin 1 project has been discussed.
The second case has been dedicated to Royal Dutch Shell. Shells business
practices in Nigeria have been presented. Company participation in the
Sakhalin 2 project has been analysed.
The third case examined British Petroleums operations in Colombia. It has
given a good instance of problematic environments in which oil companies
have to work. BP, involvement in the Sakhalin 4 and Sakhalin 5 has been
introduced.
The overviews of each company participation in the Sakhalin projects has
been given in order to compare the implementation of the strategies of three
oil companies in the same region from the point of business, cultural,
economic and political environment. The benefits of FDI to host country
economies have been reviewed. The examples of environmental issues related
to oil and gas projects faced by both host nations and foreign investors have
been pointed out.
70
Chapter 6: Findings
Chapter 6: Findings
This chapter deals with political risk issues outlined throughout the thesis. The
first part presents and discusses findings from the secondary research
undertaken. Throughout the chapter the findings shall be compared with other
studies. The researcher will highlight differences or similarities between the
findings of this study and other data sources.
Section 1: Political Risk and Oil Companies

The statement of Truitt (1974), Kobrin (1981), De la Torre & Nectar (1986),
that an extractive sector is an area of highest political risk has been proven by
case studies. Big money means big risk. On the other hand, the high level of
technology and amount of investment needed, especially for the development
of offshore oil fields, lessen the likelihood of government intervention and
increase the bargaining power of the foreign investor.
The probability that legitimate governments (internal source of risk) will
undertake any extreme actions, which will influence the owners ability to
control and manage investment (Root, 1974) (macro-political risk) seems to
be relatively low at present. While examining secondary sources, the author
did not come across any attempts by governments to do so over the period of
the last twenty years. The calculations of the perceptible benefits for the
countries where the oil fields are located make the likelihood of possible risks
imposed from the legitimate governments low.
There is no information that host governments imposed specific taxes or
barriers on oil companies. Neither can a single government control world oil
prices or market. The heavy oil demand is located in countries other than
those where most oil is explored (Daniels & Radebaugh, 2001).
71
Chapter 6: Findings
However, the probability of actions outside the direct control of legitimate

host governments is high. First, a new confrontation has emerged which
affects the oil industry: the environmental movement. It is an international
phenomenon whose concerns include every environmental danger from the
depletion of the tropical forests to the disposal of waste products.
Second, the conflicts between nations (external sources of risk) are a big
threat at the moment. Changes in international environments cause drastic
changes in profit and other goals of business enterprises. The international
sanctions against Iraq, anti-Toliban movements in the countries surrounding
Afghanistan, Palestine-Israel conflict expose multinationals to the high degree
risk degree, which work there or affect business decisions on entering these or
similar regions.
The oil companies often become victims of the conflict of interest between
local groups and central government. These forces, beyond the control of
central governments (Aceh rebels in Indonesia, Nigerian ethnic groups,
Colombian right-wing rebels), can make a business environment unbearable.
Gilligan (1987) states The best starting point for political risk management is
to recognise that political action against foreign firms is generally the result of
economic and political tension within the country.
The author disagrees with Shapiro (1981) that bigger company - bigger gain
from expropriation, outweighs the loss of confidence and hostile reaction
amongst the worlds financial community. The instances of companies that are
taken as the research sample show that the statement is not relevant to the oil
industry. In the majority, the oil companies are too influential to exercise
expropriation on them. Any attempt to do so may cause not only loss of
confidence but also serious trade and political sanctions against these
countries. Military actions are possible as well.
Exxon Mobile, Royal Dutch Shell and BP do not have identifiable nationality
and neither do many other oil companies; for developing countries they
represent the Western world. Moreover, many projects involve more than one
72
Chapter 6: Findings
company, so they are not subject to the quality relations, which the host
country has with the investors home country (De la Torre & Nectar, 1986)
either. For some companies it can be a problem to operate in both Arabic
countries and Israel, but for companies with BPs degree of
internationalisation (26 countries) or Exxons (200 countries plus two
trademarks - Esso and Mobile used in different countries), it should not be a
problem.
In many instances oil giants can blame themselves for their difficulties in
conducting business. It is not a secret that the oil companies were/ are
involved in bribery scandals. If BP bribed the corrupted governments in
Angola or Shell did in Nigeria, it is very likely that they will be forced to do
so in other third world countries. Once damaged, a reputation can cause
problems for a long time in the future (De la Torre & Nectar, 1986).
Oil companies affiliates are closely tied to the global networks of parent
companies. This fact lowers the risk of expropriation or interference (De la
Torre & Nectar, 1986).
The actual location of affiliate (De la Torre & Nectar, 1986) has been
proven to have influence on the risk factor. The oil companies exploration
sites are mostly located in remote areas. On the one hand, it helps local
governments to develop these areas (roads, communications etc.) and increase
investors contributions in the local economies (lowers risk). On the other, it
makes it easier for guerrillas (rebels, etc.) to attack oil companies.
Section 2: Risk Recognition/ Evaluation in the Oil Industry

More and more oil is found in countries, which are located in historically
unstable regions like Africa, South America and Middle East. Oil companies
have the same business aims as any other business enterprises in any sector of
an economy; e.g. shareholder wealth maximisation. To achieve these goal
companies of Exxons or Shells size, have not many choices between
73
Chapter 6: Findings
conducting business in a stable or not very stable region. They have to

undertake the task with risks and uncertainties.
There is no need for much effort in order to recognise that certain countries /
regions are risky places to conduct business in. The risk in countries like
Nigeria, Chad or Colombia is high due to poverty there, high unemployment,
high dependency on the agricultural sector, widespread corruption, continuous
border disputes, the high level of outstanding debt, long track record of human
rights abuses etc. The data about these countries is widely available in sources
of mass information. (Rating agencies are more useful for organisations which
aim to provide MNEs with insurance against property loss due to the
occurrence of political risk related events; for calculating the rate of insurance
premiums.) The loss of life of an employee or the consequences of kidnapping
cannot be assessed using either internal or external sources or the most
sophisticated tools.
Shell is one of the first companies which developed the company specific
political risk assessment mechanism, ASPRO-SPAIR system (De
Mortanges & Allers, 1996) (see Literature Review). However, as practice
shows, risk assertion / prediction, and dealing with risks in reality, are two
completely different tasks. With the wisdom of hindsight, we know, that in
spite of progress in the development of tools, Shell was not able to avoid the
negative consequences of conflict between ethnic groups and central
government in Nigeria. It is impossible to predict the moves of rebels and
other groups, which are beyond the governments control. So, companies have
to focus on the minimising of political risk exposure.
Section 3: Risk Management

Risk Avoidance was suggested by Root (1968), Haendel (1975) and Shapiro
(1981) as one of the strategies which MNEs can follow when risk is
recognised. But all governments make decisions, which affect or effect the
profitability of business; all investments face some degree of political risk.
74
Chapter 6: Findings
Yes, the degree of risk, which oil companies face, is higher than that which
businesses in other industries face. Political risk is an unavoidable part of the
oil business, so risk avoidance proves to be an inappropriate strategy,
especially for oil business.
The strategy of Negotiating the Environment (Shapiro, 1981) as case studies
prove is the practical one. The oil companies do negotiate the environment. In
most cases the oil companies are the biggest investors in host countries (BP is
the biggest investor in Colombia, Shell in Russia and Nigeria). The host
(developing) country revenues are highly dependent on sources coming from
oil and gas exploration. The oil companies have huge bargaining power over
the host government and they actively use it.
Structuring the Investment is another policy suggested by Shapiro (1981).
There is no information that oil companies locate R&D facilities in
the countries with high risk. Yes, they often own/control the
transportation systems in the host countries (pipelines, shipping).
However, this control can be limited. Controlling the pipeline at
night in the middle of Colombian jungles or in rural areas of
Nigeria is a very challenging task.
Planned Divestiture (Shapiro 1981) seems to be irrelevant to the oil business.
The development of the oil fields is a business which requires huge
investments and an unknown period of time to become profitable due to the
volatility of oil prices and drilling conditions. So, to establish a time when
foreign stake can be sold to the local stakeholders is an unlikely possibility.
Short Term Profit Maximisation (Root, 1968., Robock., 1971., Shapiro, 1981)
also seems to be an inappropriate strategy for risk reduction in the oil business
due to the industry specific factors mentioned in the above paragraph. The
companies use comparatively the same technologies in the development of
Norwegian offshore oil fields and Algerian ones with correction to climate
factors. The geographical location of the oil field, the cost of labour etc. do not
lower expenses. Profit mainly depends on world oil prices.
75
Chapter 6: Findings
Change the Benefit/ Cast Ratio (Shapiro, 1981), strategy that suggests
increasing the benefits to government from of the non-nationalising of MNEs
properties. Host governments benefits count on billions of dollars as a result
of the oil exploration in their countries. In many cases they are the main
source of budget revenues.
Even if a host government decides to implement the worst possible scenario
for oil companies, that of expropriation/ nationalisation, in many cases the
host countries will not be able to develop their oil fields without the help of
foreign expertise. Thus, adaptation (Shapiro, 1981) (entering contractual
agreements under commission arrangements providing technical and
managerial support) can be a relevant alternative plan for oil companies.
The case studies show that one of the most popular crisis management
strategies to reduce political risk exposure among oil companies is to set up a
joint venture with a host government or a local company and to use local
management where possible. The joint venture, with a host partner, creates a
local stakeholder with an incentive to use its influence to shield the FDI from
political risk. A partner can reduce risk for MNE by contributing assets that
are complementary to MNEs assets and by assisting with gaining access to
people responsible for making decisions which can affect a change in the
prospects for the profitability of a given investment in a host country (JVs
between Shell and Nigerian Government, BP- Russian State owned oil
company Rosneft).
Another common way of risk reduction is geographical diversification.
Companies like Exxon, which conduct business in more than 200 countries,
are probably the most diversified around the globe. The share of their
operations concentrated in a single country is insignificant. So even if
negative events occur in one place, the companies are in a pretty secure
position. On the other hand, changes in international environments or an
attitude of one group of countries to another (the US and affiliates versus
Afghanistan and countries neighbouring to it), can badly affect a companys
76
Chapter 6: Findings
prospects, especially if the dominant share of production is located in this

region.
The oil companies actively use the good citizen position to reduce risk
exposure. They build schools, hospitals, run social and educational
programmes.
Political responsiveness approach (De la Torre & Nectar, 1986) is another
move actively used by the companies. They play a very active role in the
political lives of the host countries.
Section 4: Investing in Russia

Both Russia's business environment and its relations with the West have
improved. But that does not necessarily mean there will be multiple upstream
opportunities for foreign oil firms. In spite of the general attitude of foreign
investors in regard to investment climate being optimistic in general, there are
still high bureaucratic barriers and legal uncertainties, which stand in the way
of FDI.
The way MNEs operate in Russia does not differ from the way they work in
other countries or form each others practices. All three companies set up Joint
Ventures there: two out of three have a Russian affiliate - Russian state owned
company (Rosneft). The Western partners brought to JVs financial
contribution, technology and management expertise. The contributions of the
Russian partner are licence, connections and financial capital.
In regard to the Sakhalin projects, the companies are developing the projects
with different success. A single evidence of Exxons problem with the Russian
environmental law (micro-political risk) in developing Sakhalin 1 Project
cannot be taken as a generalisation since the law had been imposed a long
time before Exxon entered Sakhalin island.
77
Chapter 6: Findings
The delays in the enforcement of the PSA legislation do not enhance foreign
investments, but there are signs of positive changes. It is too early to draw
conclusions, but it is obvious that Russia is becoming an investor attractive
place and it needs western money, experience and technologies for developing
such difficult fields as those on Sakhalin island.
Oil companies are the biggest private investors in Russia at the moment.
Their expected benefits to the Russian budget account for billions of dollars.
The vital decisions regarding their investments are made at the highest level
(president, Duma, ministers). As long as Russia is politically stable, the oil
companies are secure.
78
Chapter 7: Conclusions and

Chapter 7: Conclusions
The objective of this dissertation was to examine political risk in the
international business environment and ways of dealing with it. The reference
to business in Russia has been made. The dissertation is based on three case
studies. The author finds these cases typical and sufficient for achieving the
goal of the dissertation, answering research questions. According to Yin
(1991), the case study approach places emphasis on a full contextual analysis
of fewer events or conditions and their interrelations.
Chapter one has given the authors reason for choosing this topic and has
introduced the structure of the dissertation. The research questions have been
stated. The outline of the dissertation has been pointed out.
Chapter two examined academic literature, which deals with Political Risk.
Subsection one has given an overview of the Theory of Internationalisation
with reference to Foreign Direct Investments, Joint Ventures and Foreign
Direct Investment in the Oil Industry.
The second section of the chapter two has emphasised the difference in terms
between uncertainty and risk. Different types of risks have been introduced.
The third section of the chapter two has dealt with political risk. The
definitions of political risk have been reviewed and the types of political risk
have been described. This section has been divided on three subsections.
Subsection one has discussed the situations which are linked to events
influencing the owners / investors ability to control and manage the
investment (macro-political risk). The differences between expropriation,
nationalisation, confiscation and domestication have been pointed out. The
subsection two has dealt with risk that manifested more frequently and in a
less obvious way, changes in the governments policies (micro-political risk).
79

Subsection three has introduced a strategy of dealing with extreme type of

political risk (expropriation) suggested by Shapiro (1981). The strategy
contains three steps, which the author used as guidance for further
examining the academic literature related to the issue of minimising political
risk exposure. Step One- Risk Recognition / Evaluation, has explained the
importance of political risk assessment for companies involved in
international business. Available sources of information in regard to political
risk assessment have been described. Techniques for risk evaluation have been
analysed. The difference in vulnerability of different industries to political risk
related events has been emphasised. The overall risk assessment of countries
and composite risk factors, which must be monitored by investors, has been
considered.
The section Step Two has dealt with Pre-investing Planning / Crisis
Planning. It has suggested four different policies which investors can follow
when political risk is recognised and evaluated. The policies are 1) risk
avoidance, 2) buying insurance, 3) negotiating an environment and 4)
structuring investment. The possibilities of incorporating into a companys
financial policies changes in its business environment have been discussed.
The Step Three has introduced possible policies in the case when
investment has been made and a company has to deal with political risk,
Post-investment Policies / Crisis Management. Five strategies have been
suggested: 1) the gradual transfer of ownership to the local shareholders
(Planned Divestiture), 2) Short Term Profit Maximisation, 3) Adaptation to the
new environments, 4) Change the Benefit / Cast Ratio and 5) Developing
Local Stakeholder / Joint Ventures. The pros and cons of each strategy have
been analysed.
The final section of the Literature Review has given a short overview of the
trade-off between risk and return. The benefits and flaws of diversification
among markets have been emphasised.
80

Chapter three has discussed the research methodology of this dissertation. It

has given the reader an introduction to the strategy of the case study approach
and the authors reasons for choosing this particular research strategy. The
chapter has stated the sources of data used by the author and their limitations.
The reasons for choosing the cases of Exxon, Shell and BP have been
introduced. The boundaries to case studies have been emphasised. Limitations
of the case study approach have been discussed. In the final subsection of the
chapter, the research objectives have been stated.
Chapter four has introduced background information to the worlds oil
industry with the reference to the Russian oil sector. The profiles of oil
companies chosen for case studies have been examined. The issues related to
Product Sharing Agreements have been discussed. The reader has been
familiarised with an overview of the oil projects on Sakhalin island.
Chapter five has focused on the case studies. Case one has been dedicated to
the largest private oil company in the world Exxon Mobile. The first part of
the case has dealt with issues related to Exxons business. The second part has
discussed instances of Exxons practices in two countries: Chad and
Indonesia. The third part of the case has looked into Exxons involvement in
the Sakhalin 1 project and subjects related to it.
Case two has discussed Shells business in Nigeria and its participation in the
Sakhalin 2 project. Case three has introduced BPs involvement in business in
Colombia. BPs interests in the Sakhalin 4 and Sakhalin 5 have been
represented.
Chapter six has been dedicated to the findings. Throughout the chapter the
findings has been compared with other studies. The differences and
similarities have been introduced.
Chapters two, three, four, five and six contain introduction paragraph(s). It has
been the authors intention to give the reader an overview of the following
chapter or introduce the reader to an instance(s) of the issue described in the
81

chapter. The conclusive subsection of Literature Review (Chapter 2),

Research Methodology (Chapter 3), Background (Chapter 4) and Case Studies
(Chapter 5) have summarised the material.
From the analyses of available sources of academic literature and business
periodicals it is possible to conclude that Foreign Direct Investments allow
MNEs to exploit their unique assets, acquire location advantages (e.g. access
to new fields of raw materials) and allow them to generate larger profits. The
companies gain entry to traditionally inaccessible regions. The less developed
countries possess a huge gas and oil reserves and there are business
opportunities there. Investment in a foreign country entails political risk.
However, in order to achieve longer term growth objectives oil companies
have to undertake the tasks with risk and uncertainty. These regions are vital
for future companies progress. The oil has to be extracted where it is found,
this is as likely to be in a poor country with a high level of various forms of
risk, as well as in a rich, peaceful one.
The host countries are highly dependant on the MNEs continued presence as
they gain new technology and investments to explore and extract raw
materials. The well-off of many third world countries entirely depends on the
revenues from oil exploration. It is not in the interest of legitimate
governments to undertake extreme actions (expropriation, nationalisation etc.)
toward MNEs. Extreme actions of the host government will cause negative
consequences for them, such as lowering their investment rating or cause
sanctions of international bodies. There is also no sign of foreign government
exposing specific taxes or other barriers for oil companies.
The oil companies are more often involved in conflicts with forces out of
government control than with central governments. The oil companies have a
rich experience dealing with rebels, guerrillas, ethnic minorities and similar
groups. These groups use oil companies as a tool for putting pressure on
central governments to gain their benefits.
82

To assess and predict moves of these groups seems impossible. Historical data
of the troubles with such groups does not provide an accurate indicator of the
future. However, the oil giants can blame themselves for many tensions
because of some questionable methods of operations.
In spite of the fact that companies use state of the art political risk assessment
systems, trouble often come out of blue. It is more important to anticipate risk
than predict it. Companies should attempt to anticipate changes in business
environments and integrate into the decision-making process elements
relevant for the companies' operations abroad.
Oil companies are not in a position to push for social change in countries
where they operate as licensees of the existing regime. However,
businesses need to concentrate upon developing good channels of
communication with the host government, as well as a willingness to respect
to the demands that are than placed upon them (Gilligan, 1987).
Developing local stakeholder is the most practical way of minimising political
risk exposure. The strategy increases investors bargaining power over local
governments. It also helps to structure the investment in the way that in the
case of occurring political risk related events, losses will be less than in a
wholly owned foreign enterprise.
It is not possible to predict the next turn in international relations and its
consequences (Israel versus Palestine, the US and the UK versus Iraq). The oil
companies cannot and will not be able to manage future risks by themselves,
and it is up to home governments and international bodies to take on that role.
It is in the interest of home governments to protect their countries from the
disruption of the oil and gas supply system and the confusion over ownership
of oil. Energy security is the subject to the national priorities of the nations.
Today, oil is only one commodity whose doings and controversies are to be
found regularly on the front page of business press. It is still a massive
generator of wealth - for individuals, companies, and whole nations (Yergin,
83

1991). Furthermore, oil is a commodity closely correlated with national

strategies, global policies and power.

While working on the dissertation the author realised that the research sample
of such influential and large companies like Exxon Mobile, Royal Dutch Shell
and British Petroleum is the wrong one. Yes, these companies are subject to
political risk of high degree, but political risk is in the blood of the oil
business. The business is very specific. Yet it provides interesting insight into
more detailed analysis.
The author recommends taking a sample of smaller companies (the medium
size) not too diversified around the world (specialised in a few countries) for
conducting future research.
Most academic literature looks into Political risks imposed by host
governments, rather than dealing with rebels, guerrillas, etc. Conducting
research on the risks, which are imposed by these groups, can be a fascinating
and rewarding task.
84
Appendix I
OLI variables according to Dunning
A. Ownership-specific advantages (O-advantages)
(represent assets vis--vis major competitors)
Size of company and established position in domestic and

international markets
Management and leadership skills
Product know-how
Process technologies, engineering skills, R&D capacity
Monopoly/oligopoly power, allowing exclusive or favoured access to
inputs, e.g. labour, natural resources
Trade marks
Organisational, Marketing systems
B. Internationalisation-specific advantages (I-advantages)
(protect against market failure and enable control of assets)
I-advantages can be developed:

where there is buyer uncertainty about the nature and value of
products and technologies being sold
where the market does not permit the price discrimination
where there is a need for the seller to protect product quality
I-advantages enable:
a reduction in costs related to market research, negotiation and
monitoring
the capture of economies of scale and interdependent activities
compensation for absence of future market
the avoidance or exploitation of government-related barriers (e.g.
quotas, tariffs, price controls, tax differences)
the control of supplies and conditions of sale of inputs (including
technology)
the control of market outlets (including those that might be used by
competitors)
engagement in cross-subsidization and internal pricing strategies so
that profits are shifted to low-tax environments
C. Location-specific advantages (L-advantages)
(may favour home or host countries)
Spatial distribution of inputs and markets

Competitive input prices: labour, energy, raw materials,
components, transport and communications
Political stability, balance of power
Liberal policies: low tariffs, favourable tax rates, FDI incentives,

good climate for investment
Reliable legal system
Developed physical infrastructure: roads, railways, airports, ports,

telecommunications
Socio-cultural proximity: language, history, mentality, business

practices
Long term market potential and size (possible economies of scale)
Source: Fischer (2000)
II
Appendix II
Histories of Companies
Exxon Mobiles History

The history of Exxon and Mobile is that of a truely corporate giant. It
started when John D. Rockefeller and partners formed the Standard Oil
Company (1870). By 1878 Standard Oil controlled 95 per cent of the US
refining capacity. John D. Rockefeller became the richest man in America
(Yergin, 1991).
In 1890 the Sherman Antitrust Act was passed largely in response to
Standard Oil's monopoly. The U.S. Supreme Court finally broke up the
Standard Oil trust in 1911 into 34 different companies. The ownership
group however, stayed largely the same. Two of the spin-off companies
were Jersey Standard and Socony, the chief predecessor companies of
Exxon and Mobil respectively. Over the years the two companies spread
their interests all over the world (Yergin, 1991).
Exxons (at those times Standard Oil of New Jersey) involvement in
exploration in Russia goes back to 1920, when John D. Rockefeller bought
Shells rights for nationalised by Soviets businesses in Baku (Yergin,
1991., Venn, 1986). While other oil companies boycotted buying oil from
the Soviets, in protest against nationalising their properties, Exxon tried to
establish good relationships with the new government. However, due to
the uncertainty of Soviet policies, Exxon left the country very shortly.
Jersey Standard changed its name to Exxon Corporation in 1972 and
established Exxon as a trademark throughout the United States. In other
parts of the world its affiliated companies continued to use the Esso
trademark. Exxon purchased Mobil in 1999 for US$ 83 billion. It was the
largest oil acquisition ever (Business Week, 2001). Many oil industry
analysts highly praised its union with Mobil as a combination of dissimilar
III
but complementary companies. Where Exxon's historic strengths lay in

finance and engineering, Mobil was ranked among the industry's most
proficient dealmakers and marketers (Business Week- online, 2001).
The original Standard oil, which thoroughly dominated the American
petroleum industry by the end of the 19 th century, was among the worlds
first and largest multinational enterprises (Yergin, 1991). It is still in the
same position now.
Royal Dutch Shells History

The Shell Transport and Trading Company was founded in 1892 by
Marcus Samuel, a Jew from the East End of London whose father was a
merchant, importing exotic shells that were then fashionable ornaments
(Mortished, 1997). Shell got its start in the business by shipping 4,000
tonnes of Russian kerosene to Singapore and Bangkok. In a short period of
time Shell began to deliver Russian oil around the world (Lynn, M 2002).
Meanwhile, the company Royal Dutch had been formed in the Netherlands
to develop oil fields in Asia. By 1896 it had its own tanker fleet to compete
with the British. In time, it became obvious that the competing Dutch and
British companies would do better working together. In 1907, the Royal
Dutch/Shell Group of companies was created to incorporate their
operations worldwide (Yergin, 1991).
BPs History
BP's origins go back to May 1901, when a wealthy Englishman, William
Knox D'Arcy, obtained a concession from the Shah of Persia to explore for
the oil resources of the country. D'Arcy employed an engineer, George
Reynolds, to undertake the task. Severe weather, difficult terrain, the
absence of a developed infrastructure, the shortage of skilled local labour
IV
and the problems of dealing with neighbouring tribes in the absence of a

strong central government - all conspired to make Reynolds' task an very
difficult one. Years passed without oil being discovered in commercial
quantities. Eventually, in May 1908, Reynolds and his collaborators struck
oil in commercial quantities at Masjid-i-Suleiman in southwest Persia. It
was the first commercial oil discovery in the Middle East, signalling the
emergence of that region as an oil producing area. After the discovery had
been made, the Anglo-Persian Oil Company (as BP was first known) was
formed in 1909 to develop the oilfield and work the concession (Yergin,
1991).
Appendix III
World Energy Fuel Shares 1998 2020 (per cent)
1998
2000
2010
2020
Oil
41.3
41.3
40.3
39.2
Gas
22.2
22.4
24.1
26.6
Solids
26.2
26.1
26.3
25.8
Hydro/Nuclear
10.4
10.3
9.3
8.5
Total
100.0
100.0
100.0
100.0
VI
Appendix IV
Map of Sakhalin Island
Source: American Business Centre On Sakhalin Island (ABC) (2001)
VII
Appendix V
Sakhalin Projects
Oil and Gas Projects on Sakhalin Shelf
Sakhalin-1
Estimated
HydroCarbon
reserves
(mmt
equivalent
fuel)
1000
Sakhalin-2
850
Project
Sakhalin-3
Kirin
Block
Sakhalin-3
Ayyash
and
Eastern
Odoptu
Blocks
1500
600
Participants in project
Exxon -30%, Sodeco (Japan)-30%,

SMNG-Shelf - 23%, Rosneft - 17%
Sakhalin Energy consortium
Mitsui - 25%, Royal Dutch Shell
55% and Mitsubishi - 20%
ExxonMobil, Rosneft and Texaco
33% each. (Sakhalin Oil Company
is negotiating for a 5% stake)
ExxonMobil, Rosneft,
Rosneft-SMNG
Est. Total
Investment
US$12
billion
US$10
billion
US$15
billion
US$ 13.5
billion
Sakhalin-4
700
Rosneft 50%, Rosneft-SMNG Not

50%.
defined
Sakhalin-5
600
BP, Rosneft will tender jointly
Not
defined
Rosneft, ExxonMobil and Texaco

will tender jointly. Alfa Group Not
Sakhalin-6 350
(Russia) has offered to develop one defined
field without a PSA.
Source: Sabirova & Allen, 2000
Note: The above reserve data is approximate, based on equivalent fuel
which lumps together all hydrocarbons and is useful only for comparison.
In general data on reserves published in different sources of information
may vary widely. The local office of the Ministry of Natural Resource has
recently published officially-certified reserve figures (prior to 2000
exploration season and Chayvo discoveries), showing total recoverable inplace reserves on Sakhalin shelf approx. 153 mmt oil, 598 bcm gas and 45
mmt condensate (Sabirova & Allen, 2000).
VIII
List of References
Bogatyreva, Oksana (2002), Politics: Mr. President, tear down anti-Russia
trade barriers, The Russia Journal, No.19 (162), 24th May 2002
Bradsher, Keith (2002), China Called Close to Deal To Import Natural Gas,
New York Times; N.Y.; May 22, 2002
Buck, Trevor; Filatotchev, Igor; Nolan, Peter & Wright, Mike (2000),
Different Paths to Economic Reform in Russia and China: Causes and
Consequences, Journal of World Business, Vol. 35, Issue 4, Winter 2000, pp.
379-400
Business Week- On line (2001), Exxon Unleashed: How the world's most
powerful corporation plans to dominate the new age of oil exploration, 9 th
April 2001
Cairncross, Frances (2002), Company of the future, Chief Executive; New
York; Jun 2002
Cooper, Donald R., Schindler, Pamela S. (2001), Business Research Methods,
7th edition, McGraw-Hill Erwin, eds.
Cosset, J.C. and Suret, J.M. (1995), Political risk and the benefits of
international portfolio diversification, Journal of International Business
Studies, 26/2, pp. 301319
Cottel, Robert (2001), "High oil prices lubricate region's biggest economy",
Financial Times, Jul 2, 2001
Crainey, Tom (2001), Oil man held in jungle is finally freed, The Express, 07
July 2001
Czinkota, Michael R., Ronkainen, Ilkka A. and Moffett, Michael H. (2000),
International Business, The Dryden Press: A Division of Harcourt College
Publishers
Danieliants, Tatyana (2002), Main directions of the governments investment
policy, The Russia Journal, Issue 4 (147), 08.02.2002
Daniels, John D. & Radebauch, Lee H. (2001), International Business:
Environment and Operations, 9th edition, Prentice Hall 2001
De la Torre, Jose & Nectar, David H. (1986), Forecasting Political Risks for
international operations, INSEAD, No. 86/08
De Mortanges, Charles Pahud & Allers, Vivian (1996), "Political Risk

Assessment: Theory and the Experience of Dutch Firms", International
Business Review Vol.5, No. 3, pp. 303-318, 1996
Denscombe, Martin (1998), The Good Research Guide, Ch.2, Open University
Dudley, Steven (2001), Mass kidnapping stokes Colombian oilfield worries,
The Guardian, 18 April 2001
Dunning, John H. (1977), Trade, Location of Economic Activity and MNE: A
Search for an Eclectic Approach in The International Allocation of Economic
Activity, Hasselborn and P.M.Wijkman, eds., pp.395-415, London
Dunning, John H. (2000), "The eclectic paradigm as an envelop for economic
and business theories of MNE activity", International Business Review, 9
(2000), pp.163-190
Dyker, David A. (2001), Technology exchange and the foreign business sector
in Russia, Research Policy, Vol.30, Issue 5, pp. 851-868, May 2001
Fey, Carl F., Nordahl, Claes & Zatterstrom, Heike (1999), "Organisational
Culture in Russia: The Secret to Success", Business Horizons, NovemberDecember 1999, pp.47-55
Fischer, Paul (2000), Foreign Direct Investment in Russia: A Strategy for
Industrial Recovery, Macmillan Press Ltd., London, 2000
Fridermann, R., Kim, J (1988), Political Risk and International Marketing,
Colombia Journal of World Business, Winter, pp.63-72
Gethin Howard (2002), Priming the pump on Russias roads, The Russia
Journal, ISSUE No.1 (144), 18th Jan 2002
Gill, Patrick (2000a), Sakhalin island looks to boost its visibility, The Russia
Journal, 27th Mar 2000, ISSUE No.30 (73)
Gill, Patrick (2000b), Shell pledges $5 bln for oil project, The Russia
Journal, ISSUE No.35 (78), 9th Sep 2000
Gillard, Michael., Gomez, Ignacio and Jones, Melissa (1998), BP hands
'tarred in pipeline dirty war', The Guardian, 17 October 1998
Gilligan, Colin (1987), Managing Political Risk in International Marketing,
Marketing Review, Volume 2, 1987
Gorst, Isabel (2000), High-level backing for PSAs, Petroleum Economist;
London; Oct 2000
Gorst, Isabel (2001), Russia's Rosneft finds its feet, Petroleum Economist;
London; Sep 2001
Haendel, Dan, Gerald T. West and Robert G. Meadow (1975), Overseas
Investment and Political Risk, Monograph Series No. 21, Foreign Policy
Research Institute, Philadelphia, 1975
Harvey, Campbell R. (1994), Predicting Risk and Returns in Emerging
Markets, Working Paper Series, Working Paper No.4621, January 1994,
National Bureau of Economic Research Inc., Duke University
Hueper, Paul (2001), Sakhalin projects on the move, Petroleum Economist;
London; Dec 2001
Interfax (2002a), Russian region, Korean firm, Shell discuss natural gas
sales, 28 June 2002
Interfax (2002b), Russia to Receive almost $50 bln from Sakhalin-2, 26 June
2002, Financial Times Information Limited WIRA
International Trade Finance (1998), Due diligence delaying Chad/Cameroon
oilfield project, London; Sep 25, 1998
Ivanov, Vladimir I. (1995), Prospects for Russias Energy Diplomacy in
North-East Asia, Oil and Gas Journal, Special Issue, 13 March 1995, p.49
Jack, Andrew (2001), "Survey- Investing In Central And Eastern Europe:
Decades of dealing in Russia, Financial Times, Jul 2, 2001
Jodice, David A., Sources of Change in Third World Regimes for Foreign
Direct Investment: 1968-1976, International Organisation, Spring 1980, pp.
177-206
Kashlak, Roger (1998), Establishing financial targets for joint ventures in
emerging countries: A conceptual model, Journal of International
Management, 4 (1998), pp. 241-258
Keane, Simon (1993), Emerging Markets- the Relevance of Efficient Market
Theory, Occasional Research Paper No.15 (1993), Department of Accounting
and Finance, Glasgow University
Khartukov, Eugene(2002), Russia's oil majors: Engine for radical change,
Oil & Gas Journal; Tulsa; May 27, 2002
Kozlov, Vladimir (2001), Sakhalin fears lower share in royalties, The
Sakhalin Times (2002), June 20 - July 4, 2002/ No. 27, Yuzhno-Sakhalinsk
Landler, Mark (2001), I.M.F. Will Re-examine Indonesia , New York Times;
N.Y.; Apr 10, 2001
Lapper, Richard (1999), Inside Track: Caught in a cauldron of guerrilla

violence, Financial Times, 21 September 1999
Lenzner, Robert (2000), Damned If You Do, Forbes; New York; Nov 27,
2000
Liu, Yan & Bjornson, Bruce (1998), Managing Exposure of Direct Foreign
Investment to Political Risk: The Case of Food Businesses in China,
International Food and Agribusiness Management Review, 1(3) 1998, pp. 359372
Lynn, M (2002), Russia's Moves on Oil Capacity May Bring Lower Prices,
Friction with OPEC, Tribune Business News, Jan 20, 2002
Madura, Jeff (2000), International Financial Management, 6th Edition, Florida
Atlantic University, South Western College Publishing 2000
Mortished, Carl (1997), Corporate Profile: Shell, The Times, 27 October
1997
Oetzel, Jennifer M. , Bettis, Richard A. and Zenner Marc (2001), Country
risk measures: how risky are they?, Journal of World Business, 36/2
Summer 2001, pp.128-145
Oliphant, Thomas (2002), Corporate Ethics and Credibility, Boston Globe,
Boston, Apr 7, 2002
Oman, Charles (1984), New Forms of International Investment in Developing
Countries, Development Centre of OECD, Paris 1984
Parfyonov, Dmitry (2002), Oil, gas and major pipe dreams, The Russia
Journal, Issue 11 (154), 29.03.2002
Pirogov, Alexei (2002), Production-sharing agreements, The Russia Journal,
Issue 11 (154), 29.03.2002
Pravda- On-Line Edition (2002), Shell Says 2002 "Crucial" for Russian
Ventures, 17-04-2002
Reuters (2001), Rosneft, BP agree on Sakhalin 4 Expansion, ISSUE No.22
(115), 8th Jun 2001
Robock, Stefen H. (1971), Political Risk: Identification and Assessment,
Columbia Journal of World Business, July- August 1971, pp. 6-20
Root, Franklin R. (1968), US Business Abroad and Political Risk, MSU
Business Topics, Winter 1968, pp. 73-80
Sabirova, Elena & Allen, Michael (2000), Year 2000- Update on Sakhalin Oil
and Gas projects, U.S. & Foreign Commercial Service and U.S. Department
of State Report, American Business Center Yuzno Sakhalinsk, Sakhalin
Island, Russia, Summer 2000
Sabirova, Elena (2001), Sakhalin Oil and Gas update, Summer 2001, U.S. &
Foreign Commercial Service and U.S. Department of State Report, American
Business Center Yuzno Sakhalinsk, Sakhalin Island, Russia, September 2001
Schemo, Diana Jean (1998), Oil Pipeline Blast and Fire in Colombia Kill 45,
Mostly Villagers; Rebels Are Blamed, New York Times; New York; Oct 19,
1998
Schollhammer, H. (1978) Identification, Evaluation and Prediction of Political
Risk from an International Perspective, European Research in International
Business, pp.91-109
Shapiro, Alan C. (1981), Managing Political Risk: Policy Approach,
Columbia Journal of World Business, Fall 1981, pp. 63-70
Sumrow, Mike (2002), Extreme conditions, extended-reach wells govern
land-rig design for Sakhalin, Oil & Gas Journal; Tulsa; Jun 17, 2002
Supyan, Victor (2002), On Russia, U.S. market resolve outpaces political
will, The Russia Journal, Issue 19 (162), 24.05.2002
The Economist (1998e), A dangerous bear-dance, Aug 27th, 1998
The Economist (2000f), Business in Difficult Places, 20 May 2000
The Economist (2001a), "Putin's choice", Jul 19th 2001
The Economist (2001b), "Factsheet", Oct 18th 2001 From the Economist
Intelligence Unit
The Economist (2001c), "State within the state", Jul 19 th 2001
The Economist (US)(1997d), A shot in the arm, Nov 22d, 1997, p.7(1)
The Moscow Times (2002), Oil Industry Healthy Despite PSA Problems, 18
April 2002, European Intelligence Wire WTMT
The New Work Times, Western Companies Warm to Russia, Sabrina
Tavernise, New York, N.Y.; May 30, 2002
The Russia Journal (1999b), Texaco not to join Sakhalin I group, ISSUE
No.30 (30), 20th Sep 1999
The Russia Journal (2001a), Exxon Mobil plans $12 bln investment, ISSUE
No.43 (136), 2nd Nov 2001
Tomlinson, Richard (2001a), In the Line of Fire, Fortune, October 15, 2001
Tomlinson, Richard (2001b), Building an Empire Drop by Drop, Fortune,
October 15, 2001
Truitt, Frederick J. (1974), Expropriation of Private Foreign Investment,
International Business Research Studies, No 3
Turner, Louis (1978), Oil Companies in the International System, The Royal
Institute of International Affairs, George Allen & Unwin (Publishers), London,
1978
Van der Veer, Jaroen (2001), The speech at Russia 2001: 4th Annual Economic
Forum, Shells Press Release, London, UK, 2001
Venn, Fiona (1986), Oil Diplomacy in the Twentieth Century, Macmillan
(Publishers), London, 1986
Vernon, Raymond (1966), International Investment and International Trade in
the Product Cycle, Quarterly Journal of Economics
Wade, John (2000), Violence, crime continue to cast shadow over future oil
investment in Colombia, Oil & Gas Journal; Tulsa; Jan 17, 2000
Welch, Lawrence S. & Luostarinen, Reijo (1988), Internationalization:
Evolution of a Concept, Journal of General Management, Vol. 14, no. 2
(Winter 1988), pp. 34-35
Yergin, Daniel (1991), The Prize: The Epic Quest for Oil, Money and Power,
Simon & Schuster (Publishers), New York, 1991
Ussem, Jerry (2002), Exxons African Adventure, Fortune, April 15, 2002
Zarkada-Frasera, Anna and Fraser, Campbell (2000), Risk perception by UK
firms towards the Russian market, International Journal of Project
Management, 20 (2002), pp. 99-105
List of Websites
http://english.pravda.ru
www.bp.com
www.businessweek.com
www.cia.org
www.commersant.ru
www.deloittetouche.com
www.deloittetouche.ru
www.exxonmobil.com
www.gostomstat.ru
www.fortune.com
www.ifc.org
www.imf.org
www.mckeansey.com
www.metaltorg.ru
www.reuters.com
www.russiajournal.com
www.shell.com
www.sibneft.ru
www.times.com
www.whitehouse.gov
www.worldenergy.org

Political Risk: An Analysis of The Oil Industry Investment Environment by Denis Parfenov (2002)

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Political Risk: An Analysis of The Oil Industry Investment Environment by Denis Parfenov (2002)

Hochgeladen von

Copyright:

Verfügbare Formate

Political Risk: an Analysis of the Oil Industry

A dissertation prepared in partial fulfilment of the requirements for the

The Michael Smurfit Graduate School of Business,

Research Advisor: Dr. John F. Cassidy

Dr. Anne Bourke, thank you for keeping me focused

J. ORourke, for a great time.

Chapter 2: Literature Review

Section 1: Theory of Internationalisation

1.2 Joint Ventures

1.3 FDI in Oil Industry

Section 2: Uncertainty and Risk

Section 3: Political Risk

3.1 Macro Political Risks

3.2 Micro Political Risk

3.3. Managing/ Minimizing Political Risks

Step1: Risk Recognition/Evaluation

1.1 Sources of Information (Internal and External)

1.2 Technique to Assess Political Risks

1.3 Industry Associated / Project Associated Risks

1.4 Country Associated Risk

Step 2: Developing Pre-investing Planning/

Step 3: Post-investment Policies/

Section 4: Risk/ Return Trade-off

Chapter 3: Research Methodology

Section 2: The Case Study Approach as a Research Strategy

Section 3: Sources of Data for This Study and Their Limitations

Section 4: The Selection of Cases

Section 6: Boundaries to Case Studies

Section 7: Limitations of the Case Studies Approach

Section 8: Research Objectives

Chapter 4: Background- Global Oil & Russia

1.1 Uses of Cruel Oil

Section 2: Exxon Mobiles Profile

Section 3: Royal Dutch Shells Profile

Section 4: British Petroleums Profile

Section 5: Russian Oil and Gas Sector

Section 6: Product Sharing Agreements

Section 7: Sakhalin Projects

Chapter 5: Case Studies

Case One: Exxon Mobile

1.2 Exxon, Chad and Indonesia

1.3 Exxon and Sakhalin 1

Case Two: Royal Dutch Shell Group

2.2 Shell and Sakhalin 2

Case Three: British Petroleum PLC

3.1 BP and Colombian Oil

3.2 BP and Sakhalin 4-5

Section 2: Risk Recognition/ Evaluation in the Oil Industry

Section 3: Risk Management

Section 4: Investing in Russia

Future Research Direction

Appendix I: OLI variables according to Dunning

Appendix II: Histories of Companies

Appendix III: World Energy Fuel Shares 1998 2020

Appendix IV: Map of Sakhalin Island

Comparing a case with others of its type

Which countries have the worlds largest

Which countries produce the most oil

Patterns of Political Intervention

Four types of risk

Rate of oil reserve renewal, 1990-1999 by country

Glossary of Terms & List of Abbreviations

Barrel - Crude oil is measured in barrels. One barrel equals 42 US gallons,