Navigating geopolitics in oil and gas
What is geopolitics and why is it important?
Geopolitics is a central concern for the oil and gas sector and can be viewed as a source of both risk and opportunity. The trend toward more nationalistic and aggressive political behavior indicates global instability is on the rise. So it is no coincidence that one of the top risks facing oil and gas companies, as identified by EY in our most recent risk study, was geopolitics.
The term “geopolitics” encompasses a broad range of frequently interconnecting issues, including:
- Diplomacy and security
- Global economics
- Financial and supplier market uncertainty
- Commodity constraints and pricing
- Exchange rate fluctuations
- Civil and workforce disruption
Because geopolitics is complex and volatile, with unpredictable players who have conflicting agendas and disparate motivations, it is tempting to see geopolitics as impossible to prepare for or control. While the fundamental nature of geopolitics is chaotic, there is an opportunity to mitigate the impact of these forces on the industry.
However, when companies are unable to foresee emerging trends or react to rapid, unforeseeable geopolitical change, the potential impacts on corporate and capital project performance can be significant.
Breaking down complexity
As part of our Capital Projects series, this paper seeks to demystify the complexity of geopolitics by highlighting the key constraints on behavior in the international system:
Although the inherent complexity and uncertainty of geopolitics can at times seem impenetrable, it is possible to analyze the various political actors and constraints in great detail while also maintaining a strategic view of larger global trends. The paper introduces a framework to isolate the individual interactions between key political actors:
Breaking down the vast complexity of geopolitics into manageable interactions between political actors provides a method through which oil and gas companies can manage risks and opportunities in a more detailed and comprehensive way when investing in and managing large capital projects.
Understanding underlying global trends is also critical when assessing geopolitical risks, in order to examine the numerous connections between global phenomena. All oil and gas companies should have a deep understanding of how these geopolitical trends and events can destroy value.
Business solutions for geopolitical challenges
A greater appreciation for the underlying dynamics of geopolitics can inform the development of robust strategies and processes, and in turn help oil and gas executives make more informed business decisions.
This paper assesses the potential for improvement in three areas of an oil and gas company, which are all deeply affected by geopolitical change:
- Robust investment and divestment planning through holistic geopolitical risk analysis
- Local content compliance strategy and implementation
- Anti-bribery and corruption controls