Assessment of Political Risks in Nigerian Oil & Gas Investments

International Journal of Economics and Management Studies

© 2020 by SSRG - IJEMS Journal

Volume 7 Issue 2

Year of Publication : 2020

Authors : Kelechi Ojukwu , Joseph Ajienka , Adewale Dosunmu, Omowumi Iledare , Chidi Ibe

10.14445/23939125/IJEMS-V7I2P112

How to Cite?

Kelechi Ojukwu , Joseph Ajienka , Adewale Dosunmu, Omowumi Iledare , Chidi Ibe, "Assessment of Political Risks in Nigerian Oil & Gas Investments," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 2, pp. 77-83, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I2P112

Abstract:

The oil & Gas business is considered among the riskiest sectors of the African economy. This is because there are several risk factors that are synonymous to oil & gas business, in addition to political influences of the host country’s government, communities, and environment, grouped together as “Political Risk”. Common sources of “Excess” business risks are technical, operational, economic, and commercial in nature. In reality, the effects of political uncertainties areknown to dwarf these other Excess Risk factors combined. Thereason is the success of oil & gas investment hinges on the government’s policies,host communities, and environment more than the economic and technical factors. Unfortunately, investors ignore these Political Risks in their valuation and continue to apply 10%-15% discount rates considered to be too low and not commensurate with the risks involved. This paper focuses on the Nigerian Political Risk and classifies them into relevant components. It also proposes a new approach for estimating the Political Risk Premium of every oil & gas project in Nigeria. This premium can be added to WACC and Excess Risk Premiumswhencomputing a Nominal Discount Rate (NDR) for a Risk-Based Discounted Cashflow (RCF) analysis.

Keywords:

Political Risk, Country Risk, Valuations, Nigeria, Africa, Nominal Discount Rate, Risk Premium, Discounted Cashflow Analysis

References:

[1] J. B. Gustavson, Valuation of Non-US Oil and Gas Properties,  JPT Journal. SPE60223, 52(2) (2000) 56-61.
[2] Multilateral Investment and Guarantee Agency (MIGA), the World Bank., (2010).World Investment and Political Risk. Available: www.miga.org/sites/default/files/archive/Documents/WIPR10ebook.pdf
[3] T. S. Proehl, Comparison between Political and Economic Country Risk Factors, Paper presented at SPE Hydrocarbon Economics and Evaluation Symposium, Dallas, Texas, SPE 25819-MS. (1993).
[4] C. A. Gebelein, C. E. Pearson & M. Silbergh, Assessing Political Risk of Oil Investment Ventures, JPT Journal, 30 (1978) 725.
[5] T. R. Stauffer & U. Georgetown, Political Risk and Overseas Investment, Paper presented at the SPE Symposium on Energy, Finance and Taxation Policies in Washington, D.C. SPE 18514 (1988).
[6] R. J. Rummel& D. A. Heenan, (1978). How Multinationals Manage Political Risk. Available: https://onlinelibrary.wiley.com/doi/pdf/10.1002/tie.5060200214
[7] D. H. Sheldon,  Valuation of Oil Properties, JPT Journal, S 1,.SPE953072-G. (1953) 17-20.
[8] S. J. Kobrin, Political Risk Assessment by International FirmsPolicy Modelling Journal, 3 (1981) 251 -270.
[9] F. J. Westin & T. E. Copeland.Managerial Finance, Eight Edition. NY City: The Dryden Press, (1986)
[10] R. J. Miller & R. Vasquez, Discount Rates, Cost of Capital, and Property Acquisition Evaluations., Paper presented at the SPE Symposium of Energy, Finance, and Taxation Policies, Washington, D.C. (1988).SPE 18509