'Geopolitical Risk-Oil Price Paradigm' Will Play Key Role in Success of Oil & Gas Companies

A new report from Deloitte Touche Tohmatsu Limited (DTTL), Emergence of the New Geopolitical Risk-Oil Price Paradigm, suggests that intangibles such as geopolitical risk and economic uncertainty are likely to play an increasingly important role in determining oil prices and therefore will need to be managed effectively by oil and gas companies.


"Oil companies are being challenged in ways that weren't readily apparent even a few years ago," says Adi Karev, DTTL Global Oil & Gas Leader. "In this volatile environment, managing geopolitical risk will emerge as one of the key competitive advantages for oil and gas companies."


According to the report, there are a number of disruptive forces impacting oil prices, including:


    * The quest for better political and economic conditions: Anti-government riots, which have originated in Tunisia and spread across North Africa, the Middle East, and the Arabian Peninsula, have sent both Brent and West Texas Intermediate crude prices higher.
    * A risk premium on "choke points" around the world: The recent unrest in Egypt had the potential for reducing traffic in the Suez Canal—one of the most important waterways in the world for oil and other commodities transport.
    * A shift in operational tactics by pirates: Pirates have stepped up their use of captured merchant vessels from which to launch new attacks. This has increased their range up to 1,500 nautical miles and, as a result, their ability to target oil tankers.
    * The formation of new geographical entities: New governments formed in Iraq and Sudan sit on large oil reserves. Their decisions as to the size of their national crude oil reserves and how to develop those reserves are likely to change the oil production landscape, potentially resulting in production sharing agreements (PSAs) and new drilling permits for future exploration.
    * Game-changing events such as unconventional gas: In 1990, unconventional gas made up about 10 percent of total U.S. production. Today, it is more than half of total production and continues to grow. This rapid development of unconventional gas throws into question the economics of many liquefied natural gas projects.
    * Strategic geographical areas under dispute: The ongoing tensions, particularly in the waters claimed in whole or part by China, the Philippines, Vietnam, Malaysia, Brunei, and Taiwan, continue to threaten the balance of power in this important region.


According to Karev, the ability of the international community to deal with these risks is not as robust as it used to be. "Historically, the world was able to solve many of these crises based on a containment structure that is beginning to erode due to the emergence of a multi-polar world order," he says. "In this uncertain world, the challenges facing oil & gas companies are fast multiplying. One potential strategy for oil & gas companies that want address these risks is the Strategic Flexibility framework, which is an advanced form of scenario planning that helps companies cope with the uncertainty about the future marketplace. This four-stage strategy process allows a company to go forward with those aspects of its strategy that are likely to pay off under any scenario, while holding a portfolio of options on initiatives that become useful if specific developments occur in the international arena."




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