Oil and Gas Risk for Indonesia, Vietnam

By MarEx 2014-08-20 19:16:00

Indonesia’s climate for investments in the oil and gas sector has weakened significantly due to restrictions on foreign direct investments. Additionally, opportunities in Vietnam remain hampered by the South China Sea dispute, and investors in Egypt are at risk of confusing gradual political risk improvements for newfound, long-term stability according to a new ranking from the Emerging Markets Group of Alliant Insurance Services (www.alliant.com). 

Indonesia’s risk climate has weakened substantially over the past year, off 62 percent from its 2013 ranking. “The downgrade is largely due to the newly imposed restrictions on foreign investments, first in the mining sector, and now in the oil and gas sector,” said Dr Michel Léonard, chief economist with Alliant’s Emerging Markets Group. “We expect this trend to continue regardless of the upcoming presidential elections.”

Indonesia was followed by Vietnam, which saw a 19 percent downgrade due to military tensions in the South China Sea. “Chinese authorities’ decision to move an oil rig into Vietnam’s exclusive economic zone is the most notable of many recent confrontations between China and other countries in the South China Sea,” said Léonard. “In the long term, we expect China’s actions to lead not to territorial expansion, but to China being granted rights to production in the waters it is claiming. Oil and gas companies should be aware of the changes this will bring to any current or future licensing agreements signed in the South China Sea, especially with Vietnam.”

Additional countries in negative territory were Thailand and Malaysia, with Yemen showing no change from 2013.

In Egypt, which received a five percent upgrade, Léonard warns investors to remain cautious of overestimating these improvements. “Egypt has emerged from a long run of political instability and a recent regime change to show some positive movement in our risk models. However, we remain guarded about its long-term prospects and warn investors not to confuse gradual improvements with medium or long-term structural stability,” he says.

Countries showing the greatest improvement included Ecuador (22 percent), Equatorial Guinea (17 percent), and Algeria (12 percent), while Libya, Republic of the Congo (RoC), Gabon, Angola, and Kazakhstan all posted modest gains.

The Frontier Energy Risk Index is based on macroeconomic and political risk loss data assembled through Alliant’s proprietary database and relationships with senior government sources. The rankings provide oil and gas companies and investors with a clear picture of the business risks associated with operations in these 14 countries. A downloadable version of the full rankings can be found here.