Navigating geopolitics in oil and gas

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:

EY - Interactions between political actors
  • 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:

The EY geopolitics framework
  • Geography
  • Economics
  • Technology

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:

  • Institutions
  • Businesses
  • People

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.

Source: EY

Date: March 2015

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