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Resource nationalism meets the market:
Transcript of Resource nationalism meets the market:
Published in Journal of International Business Studies (2010) University of Plymouth - Plymouth Business School
Module: International Strategic Management
Lecturer: Lynne Butel No rights reserved Price of oil reserve Methods and Models Conclusion Outcome One per cent increase in the institutional investor risk rating is associated with a 1,4%-2,1% rise in value per boe. The coefficient for the institutional investor rating is smaller than the coefficient on the ICRG rating Political risk destroys asset value
Political risk explains up to 50% of reserve value fluctuations
1pt rise of ICRG result in 2.4-2.9% rise in reserve value
Following the model using the ICRG rating, an US oil reserve is worth 58% more than a Russian
The market (oil price) has a significant influence: the higher the oil price, the higher the % risk discount How is the political risk discount applied? Calculation of the political risk discount, ICRG for US is benchmark.
Difference between a country's rating and the US's is then multiplied with the Reserve value coefficient to determine the political risk discount Up to 60% of variations only can be explained by political risk
Other influences can be for example geological risk such as in Japan currently Up to 50% of the market value can be explained by the political risk factors.
Risk of natural desasters
Transportation costs to remote reserves N/A. (2011). ICE Brent Crude. Available: http://markets.ft.com/tearsheets/performance.asp?s=1054972&ss=WSODIssue. Last accessed 16th Mar 2011.
N/A. (2011). International Country Risk Guide. Available: www.prsgroup.com/ICRG_TableDef.aspx. Last accessed 14th Mar 2011.
Click, R Weiner, R. (2010). Resource Nationalism meets the market: Political risk and the value of petroleum reserves. Journal of International Business Studies. 41, 783-803. References Is the political risk discount relevant? Limitations Incredibly complicated table No political risk ratings ICRG Risk ratings Institutional investor ratings Summary Who can benefit from this research? MNE‘s managing existing foreign investments or considering new investment abroad in natural resource industries
Investors and analysts who follow MNE securities
Government policymakers in resource-rich countries who seek to influence the level of investment. Critical points The quantification of the cost of resource nationalism via the discount rates
The demonstration of the link between political risk and market risk What are the main contributions of this research? Oil prices used in the study are not current With dummies The International Country Risk Guide and its fluctuations ICRG Political risk is probably more important in this particular industry due to the rent component implied and because underground resources are often considered national patrimony
Resource nationalism is typically associated with actions against FDI
Many countries are dependent on petroleum
Competition in a world market generates a lot of data What makes this research possible ? No resource
nationalisation Total resource nationalisation Political risk is the likelihood the political events may change the rules of the game.
From the political risk, the researchers determine political risk discounts. How are these questions answered? What is political risk discount? In this study, the US are used as benchmark. The political risk discount reflects how much less (or more) a petroleum reserve is valued on the grounds of political risk. Petroleum reserves cannot be used to examine political risk as they are unobservable
--> The research was based on the reserves market
Population: reserve deals made worldwide
Final sample: 1020 deals of at least $ 10 million made between 2000 and 2006 Using two indexes:
the International Country Risk Guide (ICRG) index
the sovereign risk index published in Institutional Investor magazine How is political risk determined? How are petroleum reserves determined? UK Example: The value of a $50bn UK oil reserve would have increased by $5.8bn or around 12% The study does not include the host countries tax
The Institutional Invester Index is subjective and not exclusive
The cost of political risk may also have positive impact on the country The prices used for the model are out dated: $25/bbl is considered low and $ 40/bbl high
Using the ICRG data, with a barrel trading at $ 25,
the discount on reserves in Russia is 52%It rises to 88% when considering a $ 40 barrel