A dispute over oil rigs in Venezuela shows that not all the risks of oil drilling are environmental. On June 24, Reuters reported that the Venezuelan government has seized 11 rigs from Helmerich & Payne, an American drilling services firm. The Texas-based company had stopped production at the rigs and said that Venezuela’s state oil company, PDVSA, owes it about $43 million.
RiskMetrics ESG Analytics Oil & Gas Sector analyst Dana Sasarean says that oil services firms face political and security risks worldwide:
Companies in the oil services sector depend on contracts offered by major oil companies, including state-owned firms. Most of the 28 companies in the sector operate under contracts across all major exploration and production basins, and inevitably in high-risk emerging market areas such as Africa, Middle East, and South America.
Venezuela’s leader, Hugo Chavez, has nationalized many of his nation’s oil facilities since taking power, as Reuters details here. Any company still operating in Venezuela faces some risk of losing assets to the government, but this risk may threaten some firms more than others. Ms. Sasarean explains:
The risk profile of each firm depends on its particular relationship with the PDVSA and the government. Some firms have actively sought growth and committed resources in Venezuela, while other companies are reluctant to put up with the political volatility. Our research has found that Helmerich & Payne faces particular risk in emerging markets, including Venezuela, because of its weaker ESG business practices.
Incidentally, the company has been reducing its exposure to Venezuela. Operations there contributed 3% to Helmerich & Payne’s total revenue in 2009, down from 8% in both 2008 and 2007.
Still, there is more to geopolitical risk mitigation than just reducing exposure. The RiskMetrics IVA profile of Helmerich & Payne summarizes some initiatives that could pay dividends:
“While Venezuela remains a key oil player in the dynamic market of Latin America, caution and significant and meaningful risk mitigation are required, including proactive environmental, local community and human capital initiatives.”
"…[Helmerich & Payne] has failed to adopt best practices and develop an emerging market strategy crafted around human rights training, contribution to local community development through local employment, sourcing, or education, and environmental programs.”
It is difficult to predict when political risks will become material, but the Venezuelan election calendar may provide a clue. From Reuters:
Chavez, who faces legislative elections in September, often pushes ahead with radical plans during election campaigns.
The 55-year-old leader is having a hard time in his 11th year in power. Venezuela's economy is the worst performing in Latin America this year, a problem exacerbated by a drop in oil output since 2008, power outages and soaring inflation.
Dana Sasarean says that Helmerich & Payne could have better prepared for such eventualities. “Sound emerging-market business practices are not just about good relations with fickle governments. International firms can best prepare for political risks by building visible, tangible partnerships with a wider range of stakeholders, including local communities.”