University of Missouri, St. Louis IRL @ UMSL Dissertations UMSL Graduate Works 5-8-2015 Managing Political and Investment Risk in the International Oil and Gas Industry Steven Alfred Mucci University of Missouri-St. Louis, [email protected] Follow this and additional works at: https://irl.umsl.edu/dissertation Part of the Political Science Commons Recommended Citation Mucci, Steven Alfred, "Managing Political and Investment Risk in the International Oil and Gas Industry" (2015). Dissertations. 187. https://irl.umsl.edu/dissertation/187 This Dissertation is brought to you for free and open access by the UMSL Graduate Works at IRL @ UMSL. It has been accepted for inclusion in Dissertations by an authorized administrator of IRL @ UMSL. For more information, please contact [email protected]. MANAGING POLITICAL AND INVESTMENT RISK IN THE INTERNATIONAL OIL AND GAS INDUSTRY Steven A. Mucci M.A. Political Science, University of Missouri - St. Louis, 2014 M.B.A., Finance and Investments, George Washington University, DC, 1976 B.S., Civil Engineering, University of Missouri-Columbia, 1973 A Dissertation Submitted to the Graduate School at The University of Missouri - St. Louis in partial fulfillment of the requirements for the degree Doctor of Philosophy in Political Science May 2015 Advisory Committee: Kenneth Thomas, Ph.D. Chairperson David Kimball, Ph.D. David Bryan Robertson, Ph.D. Martin Rochester, Ph.D. Acknowledgements I have benefited from the knowledge and experience of the entire faculty of the Department of Political Science at the University of Missouri – St. Louis, but particularly from the guidance given by Professor Kenneth Thomas, Professor David Bryan Robertson, Professor Martin Rochester and Professor David Kimball. I have also benefited from the advice of my fellow graduate students at the University of Missouri – St. Louis. The staff of the Thomas Jefferson Library has been indispensable in acquiring the research materials needed for this dissertation and throughout my years at the University of Missouri – St. Louis. Finally, I appreciate my wife, children and grandchildren allowing me the flexibility and the opportunity to pursue my Ph.D. 2 Table of Contents Acknowledgements …………………………………………………………………….. 2 Table of Contents ………………………………………………………………………. 3 Abstract of Dissertation ………………………………………………………………... 5 List of Tables ……………………………………………………………………………. 6 List of Figures …………………………………………………………………………... 7 Chapter 1 - Introduction 1.1 Statement of the Problem ……………………………………………………………. 8 1.2 Importance of the Problem …………………………………………………………. 9 1.3 Purpose of the Study ………………………………………………………………... 13 1.4 Defining Risk ……………………………………………………………………….. 13 1.5 Foreign Direct Investment and Portfolio Investment ……………………………….. 14 1.6 Plan of the Dissertation ………………………………………………………………14 Chapter 2 - Research Questions 2.1 Central Research Question ………………………………………………………….. 16 2.2 Subsidiary Questions ………………………………………………………………... 16 Chapter 3 - Previous Research 3.1 Institutions and Organizations in Theory …………………………………………… 19 3.2 Institutions in Practice ………………………………………………………………. 21 3.3 Organizations in Practice ……………………………………………………………. 22 3.3.1 National Governments …………………………………………………………….. 22 3.3.2 National Oil Companies …………………………………………………………… 32 3.3.3 International Oil Companies ………………………………………………………. 35 Chapter 4 - Research Design 4.1 Overall Design ………………………………………………………………………. 39 4.2 Unit of Analysis ………………………………………………………………………39 4.3 Time Period Covered by Events …………………………………………………….. 40 4.4 Kinds of Evidence Already Available ………………………………………………. 40 Chapter 5 – Research Methods 5.1 The Process and Adequacy of the Evidence ………………………………………… 42 5.2 Analytical Techniques for Evaluating the Evidence ………………………………… 45 5.3 Objectivity, Reliability, Completeness and Validity ………………………………… 48 Chapter 6 – Research Findings 6.0 Central Research Question……………………………………………………………. 52 6.1 Frequency and Causes of Expropriation (Question #1) ……………………………… 53 6.2 Origins and Resolution of Contract Disputes (Question #2) …………………………. 60 3 6.3 Contract Provisions in Oil and Gas Contracts (Question #3) ………………………... 64 6.4 Provisions in Bilateral Investment Treaties (Question #4) …………………………... 72 6.5 Bilateral Investment Treaties, Legal Systems and Disputes (Question #5) ………….. 79 6.6 Oil Consumption, FDI, Bilateral Investment Treaties (Question #6) ………………... 82 6.7 Financing, Fiscal Regimes and Alliances (Question #7) ……………………………. 87 6.7.1 Sources of Financing ………………………………………………………………. 88 6.7.2 Financing Structures ……………………………………………………………….. 95 6.7.3 Fiscal Regimes ……………………………………………………………………... 99 6.7.4 Alliances …………………………………………………………………………… 103 6.8 Managing Commercial and Non-Commercial Risk (Question #8) …………………. .104 6.9 Financial Reporting and Operational Transparency (Question #9) ………………….. 112 6.9.1 Financial Reporting Quality ……………………………………………………….. 113 6.9.2 Estimating and Valuing Reserves …………………………………………………..117 6.10 Geopolitics and Global Governance (Question #10) ………………………………. 119 6.10.1 Multilateral Treaties ……………………………………………………………… 120 6.10.2 International Energy Forums …………………………………………………….. 121 6.10.3 Financial Reporting ………………………………………………………………. 123 6.10.4 Signature Bonuses ………………………………………………………………... 124 6.10.5 Energy Diplomacy ………………………………………………………………...125 6.10.6 Foreign Direct Investment and National Security ………………………………... 128 Chapter 7 - Case Studies 7.1 Case 1 Frade Field …………………………………………………………………... 129 7.2 Case 2 Gorgon Field …………………………………………………………………135 7.3 Case 3 BTC Pipeline …………………………………………………………………140 7.4 Case 4 Deepwater Horizon Drilling Rig ……………………………………………. 143 7.5 Case 5 Expropriation of Oil and Gas Assets in Venezuela and Argentina …………. 155 7.6 Case 6 TNK-BP Joint Venture and Russian Politics …………………………………164 Chapter 8 – Summary, Conclusions and Next Steps 8.1 Summary and Conclusions ………………………………………………………….. 171 8.2 Next Steps …………………………………………………………………………… 176 Appendices Appendix I - Total Petroleum Liquids Consumptions and Production …………………. 178 Appendix II - Expropriations and the Price of Oil ……………………………………… 181 Appendix III - List of Cases Reported by UNCTAD Related to Oil and Gas ................... 193 Appendix IV - Production Service Agreements and Service Contracts ………………… 202 Appendix V - Financial Reporting Quality Indexes …………………………………….. 206 Appendix VI - Accounting Terminology and Classification ……………………………. 207 Appendix VII - Loans for Oil Agreements ……………………………………………… 209 Appendix VIII - Major Transactions in 2013 …………………………………………… 215 References ………………………………………………………………………………. 220 4 Abstract Many practitioners and academics have argued that the risk of investing in international markets has increased in the last ten years; and that the greater the real or perceived risk of an investment, the less likely it is that a particular investment will be made. The effectiveness with which these risks are managed in the oil and natural gas industry are important for several reasons. First, oil and natural gas are essential for sustaining current economic activity and promoting economic growth. Second, the balance between supply and demand determines the price of oil and natural gas and their impact on the economies of all nations. Therefore the price and availability of oil and natural gas are also matters of national security. Third, the search for a secure supply of oil and natural gas affects the political, military and economic relations between countries. This study addresses four questions. What institutions and strategies are available for managing political and investment risk in the international oil and gas industry? How and when did they develop? In what circumstances is each used? How effective have they been? The institutions available for managing risk include oil and gas exploration contracts, domestic courts, national constitutions, bilateral investment treaties, multilateral investment treaties, governmental and non-governmental regulatory agencies and international energy forums. The organizations that manage uncertainty and risk include international oil companies, oil service companies, national oil companies, and public and private providers of financial capital and insurance. Their strategies include corporate finance, joint ventures, project finance, alliances and energy diplomacy. This study supports the view that existing institutions change and new institutions are created when organizations perceive that a change in the status quo will enhance the profitability of existing projects and make new projects economically feasible. However, the process by which these institutions are created and evolve is easier to describe in theory than it is to explain in practice, because institutional development takes place in small steps; and frequently involves several organizations, some trying to change the existing institutional environment and others trying to preserve it. Finally, the institutions supporting the international oil and gas industry can be arranged in a hierarchy based on their relative importance. Contracts, informal relationships and transparency are the most important institutional mechanisms used by international oil and natural gas companies to manage risk. The second line of defense includes domestic law, bilateral treaties, and international courts and tribunals. A third line of defense includes multilateral treaties and international forums. 5 List of Tables Table 1 - Comparison of the Number of Expropriations and the Price of Oil …………….. 54 Table 2 - Oil and