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Podcast

Managing the new political risks in oil and gas

Geopolcast: Season 1 – Episode 9

June 6, 2024

In this episode of Geopolcast, we focus on political risks in the oil and gas sector and the undeniable struggles this crucial industry is currently facing.
Credit and Political Risk
Geopolitical Risk

In this episode, join host Elisabeth Braw and expert speakers Laura Burns and David Cairns as they focus on the new political risks facing the oil and gas industry. Our speakers explore how industry executives may manage these new risks to the sector, as featured in our latest managing the new political risks in oil and gas report.

This episode also tackles the risk of sabotage of energy installations, attacks on Western-linked merchant vessels, especially oil tankers in the Red Sea, sanctions and the subversion of sanctions. Our speakers consider broader risks, like the prospect of a showdown between China and the West.

Episode 9: Managing new political risks in oil and gas

Transcript:

Geopolcast — EP 9: Managing the new geopolitical risks in the oil and gas industry

DAVID CAIRNS: For many years, people who care about the climate have understood it's a climate emergency, which it is. So I think they're right to push for change and for movement. But I think what we'd like to see is more of a realistic debate there, which is encourage speed, and support the companies that are trying to make that transition. And don't be black and white about no new nothing, because it's not that realistic.

ELISABETH BRAW: Welcome to Geopolcast, the podcast from WTW, exploring geopolitics and its impact. My name is Elisabeth Braw. I'm a senior fellow at the Atlantic Council, where I focus on the intersection between geopolitics and the globalized economy. I'm also the author of Goodbye Globalization.

DAVID CAIRNS: For many years, people who care about the climate have understood it's a climate emergency, which it is. So I think they're right to push for change and for movement. But I think what we'd like to see is more of a realistic debate there, which is encourage speed, and support the companies that are trying to make that transition. And don't be black and white about no new nothing, because it's not that realistic.

ELISABETH BRAW: Welcome to Geopolcast, the podcast from WTW, exploring geopolitics and its impact. My name is Elisabeth Braw. I'm a senior fellow at the Atlantic Council, where I focus on the intersection between geopolitics and the globalized economy. I'm also the author of Goodbye Globalization.

And in each episode, I'm joined by two expert guests with whom I discuss subjects that matter to people in business and, in fact, to everyone in the globalized economy. And today, I'm delighted to be joined by two experts who focus on oil and gas sector that's crucial to modern economies, as we all know, but also has undeniable struggles that it's facing at the moment, and I only need to mention attacks on oil tankers, and, specifically, my two guests are experts in the geopolitics of oil and gas. The oil and gas sector is colliding with geopolitics and lots of different ways. And what are those ways, you may ask. And we'll get to that in a moment.

But first, let me introduce David Cairns, vice president of Political and Public Affairs, Global at Equinor. Before joining the private sector, David was Britain's ambassador to Sweden, and he was also the UK foreign and development officer, as it is these days, it's director of Britain's Nordic Baltic Network. And he has served in numerous other diplomatic postings, including as director of Trade and Investment in Japan.

Laura Burns is senior vice president, political risk product leader, Americas at WTW, where she has worked within political risk for a decade. Before that, she worked in political risk at Marsh and other companies. And as I have learned over the years, there are few people who know as much about political risk as Laura does.

Well, there is, as I may have mentioned, a lot of political risk facing the oil and gas industry. There is the risk of sabotage of energy installations, there are attacks on Western-linked merchant vessels, especially oil tankers in the Red Sea. There are sanctions and subversion of sanctions of the kind the shadow fleet engages in. Then there are the broader risks, like the prospect of a showdown between China and the West. As a new WTW report about political risks in oil and gas shows, industry executives are also worried about the emergence of two global blocs, they're worried about populism, they're worried about polarization and institutional decay, and they are indeed also worried about the showdown with China.

So, David, that brings me to you. Of the many political risks oil and gas companies face at the moment, and will face in the future, which ones concern you the most?

DAVID CAIRNS: Well, first of all, Elisabeth, thanks very much for having me on the podcast, I'm happy to be here. So a couple of points to start with. So obviously, we are an oil and gas company, but we're also broader than that, we are an energy company. So these risks don't just affect oil and gas, it's the whole of the energy scenario. And the second point is that, although, of course, we look ahead at what risks are around, I think we should also sometimes stop and check and see some of the risks that we have managed.

So my best example of that actually is what's happened in the last two years since Russia's invasion of Ukraine. Two years ago we were sitting here upset about what had happened, but also fearful about in Europe. Were we going to make it through the first winter without Russian gas? And the reality is we have. Germany has managed, the rest of Europe has managed, not one winter, but two.

So although there are always risks, I think sometimes we should look back and say, actually, we were worried, and we managed it. As Angela Merkel used to say, [SPEAKING GERMAN]. And on the post-Ukraine, Europe has. So although we worry about stuff, we also know that we are resilient and can be ready for the job.

ELISABETH BRAW: And David, if I can interrupt you on that point. So one of the reasons we haven't had those apocalyptic scenarios in continental Europe, and indeed the UK of people freezing during winter and running out of energy in the summer, is the fact that all these countries are importing more energy from Norway, specifically from Equinor. So that puts a bigger onus on Equinor to provide that energy without any disruption, because if energy for Norway were to be disrupted, then we would face real trouble. And the biggest provider of energy to both the continental Europe, or to the EU and the UK at the moment, is Norway.

DAVID CAIRNS: Yes, that's correct. And so last spring, for example, we hosted the Secretary General of NATO and Ursula Von der Leyen on a gas field in Norway, who was saying thank you for your help over the first winter. So, of course, Norway does have a part to play. It's not just Norway, the United States has also done a huge amount with its LNG imports to the EU, and it has been a collective effort.

There have been other geopolitical impacts. So although Europe has managed this by buying, that has an impact in Southeast Asia. So for example, Indonesia had to turn to coal. And it has a knock on other aspects of the energy transition, which I'm sure we'll come onto. So these things do spread. And the question at the beginning of the program was, what are some of our risks. I think some of our risks are worries about, is that consistency in the energy transition still there? Is the road towards it getting bumpier, and if so, how do we manage it?

ELISABETH BRAW: Yes, and Laura, your job is to help companies reduce the risk they face. And so what can somebody like you do when the risks, geopolitically motivated, or geopolitically linked risks are growing so quickly. And we have seen the Russian government seize the Russian assets of several Western companies, most recently an Italian company. And in China, the political risk insurers that have traditionally insured against political risk there are hesitant to write new policies.

And so what does that situation mean for oil and gas companies operating in, let's say, riskier countries. What does it mean with regards to existing risks, and prospective new risks. And if we look, for example, at some African countries that do have energy that they could export to other countries, including Western countries, there is a risk of the Wagner Group and/or its successor simply taking over Western companies operations.

ELISABETH BRAW: Thanks, Elisabeth. I'd say we're noting and horizon scanning several new, I'll put those in quotes, "risks," because in some ways they're rehashing the dimensions of the post-colonial '70s. But we are noting in horizon scanning several of those several risks in these less, I'll call them, high profile countries like Russia and China, but still very concerning for their potential impact on the oil and gas industry. And I'll share why.

If we think about Daniel Yergin right, as a grandfather researcher of this industry, and his previous books, The Prize. And then in 2020, he wrote The New Map. And he detailed the dimensions of the shale revolution, principally, which to David's comment I think is also part of the buoyancy or resilience that we saw in Europe as well.

But I'll say, since 2020, and since we wrote our last report on the political risks in the oil and gas industry, I'll call it The New New Map. And we're seeing, you know, the trend of rising populism, metastasizing around the world, a new coup d'etat belt in Africa, representative of perhaps the cost of living crisis in a sovereign debt crisis.

And post-Ukraine Russia in 2022, arguably a further fractioning of the developing world into camps with Russia and China's deepening friendship. As we have articulated in some of our research about the fractioning of some of the developing world. So I mentioned this. And further there's the technological advances of the use of drones, which makes it easier to reach offshore shore, and other assets.

So why it matters to this audience, and what we see, is that those dimensions are manifesting in places like Nigeria with a concern about non-payment or currency controls in Guyana, with its dispute of Venezuela, and whether certain offshore contracts will be honored or whether those companies operating there will be met with an inability to operate their equipment or some other unrest. Azerbaijan and Armenia disputes, and of course, the Middle East crisis now with potential gray zone aggression. So those are just a few of the risks we see in this, I'll call it The New New Map, which in some ways is more representative of a different era.

ELISABETH BRAW: And David, those risks have already materialized in Russia, and Equinor was one of the first companies, energy companies, indeed first companies altogether to leave Russia. I don't know how much you can share about Equinor's departure. I know every energy company, or indeed every company that left Russia, incurred a substantial loss. But that's better than being stuck in Russia, which is what's facing companies that were slow to decide to leave the country. But what are the lessons you've learned from leaving Russia, and what do you think other companies can learn from that as these scenarios that are detailed, continue to spread.

DAVID CAIRNS: Yeah, so firstly on Russia, we left, as you said, very quickly. And that was a tough decision, but it was a decision that was the right one. We left, I would say, some of our staff behind. So we had great staff from Russia working for us, and they lost their jobs and careers. And that's very sad for them. But it was the right thing to do. And we supporting European security after Russia's invasion.

I think, looking back and then looking ahead, there are other, of course, sometimes actual physical threats to what we do around the world. And those, in a way, they don't change in terms of the risk, but it might change in the vector. And if I look back from my own company, 11 years ago Al-Qaeda attacked one of our facilities from BP in Algeria, and nearly 70 people were killed. So that physical threat is always there. And with business like oil and gas, you absolutely have to be prepared for it.

But then I think to the point about the block and so on, I don't completely agree with the simplicity of the blocks argument, because if I look at our operations, say, in Brazil or Argentina, I don't think they think themselves as part of a block. They're investing, often, in oil and gas for their own energy security, but they're also super investing in renewables for energy transition as well. And so I can see a bit of Russia block. I think beyond that, it would be a slightly more nuanced.

And then the final point on this, if I take one of the countries we work, which is Tanzania, my colleague there, she always reminds me as a wealthy Northern European, don't forget, in Tanzania, less than half of our people have any electricity at all. So we have other priorities and sometimes they're talked about.

LAURA BURNS: Elisabeth, just to converse with David on that point, to be clear in the idea of blocks, if you will, the research that we had done was, yes, that there are these different camps. But actually one of the larger takeaways from the research was that there were many countries who were in, what we called, the neutral category. And that was a dimension where we saw many of the countries not wanting to align, and further to play this great power competition, if you see it that way, off each other for their benefit. So just to add a bit more color to my original comments.

ELISABETH BRAW: Yes, that is indeed the case. I think we're seeing that with India, for example, which is a country that is happy to steer its own course, as it has been doing for decades, sometimes work with Russia, sometimes work with the West, and we will refuse to be put into any category. But, David, considering how dangerous it is becoming for companies to operate for geopolitical reasons, so the kidnappings, that is the bane of existence of any energy company, and businesses are used to dealing with it. But when you then add political interference in major countries, what does that mean for energy companies such as yours. Does it mean you need more armed security guards? Does it mean you need to work more closely with host governments, or does it mean that there are just fewer countries around the world that are viable to operate in?

DAVID CAIRNS: I think it's nuanced, and it's very country-specific. So, of course, where we have to have very serious physical security, we have it. Globally, of course, we also in touch on this, but we have very tough cyber security, because that is a risk that can happen no matter where. And then I think our approach, like many multinationals, is that you have to do your due diligence about what you're getting into and so on.

And actually, in some of our policies and some of our investments, some of the stability, it's not violent stability, but it's definitely political instability, such as issues around directions of energy, transition, and consistency. The businesses, were pretty boring. We want a nice, predictable framework where things don't change too much, so we can put our money in and carry on for the next 20, 25 years. Sadly, the world's not like that.

ELISABETH BRAW: Laura, one interesting aspect in the new report the WTW put out on oil and gas that is energy executives concerned about populism. And that's something that we're seeing right here at home in Western countries, both populism and climate activism. And climate is, so to speak, shifting and not in favor of fossil fuels. And so we've seen populism and rebellion against the global elite, and we are seeing increasing climate activism.

And in London, I walk by Shell's headquarters on a regular basis, and the situation is such that Shell hides its logo. You wouldn't know that it's Shell's headquarters, unless you look very closely. And they have 24-hour security guards outside the doors there.

Now, what does that mean for oil and gas companies, this shifting environment at home. And in addition to the obvious business case, that they should shift towards renewable? Does this increasing trend of populism and climate activism mean that they will need to shift to renewable energy quicker than previously planned?

LAURA BURNS: Certainly we're seeing this growing trend of this climate activism, particularly, in a supercycle of social media. One important dimension to raise is something we're seeing in the insurance industry, and not the political risk insurance industry, per se, but the overall energy insurance industry is, this climate activism is causing a lack of capital in the insurance market. And just as an anecdote to share, it's gotten personal.

We had activists build a mock oil derrick outside Evan Greenberg's New York apartment. Evan Greenberg is the CEO of Chubb insurance. And in order to influence him perhaps in not offering insurance to fossil fuel type organizations. And the impact is really to the small and medium-sized businesses, because they're the ones that rely on the insurance. They can't afford the risks that the majors can, which there's a question of could that stifle entrepreneurship in this space.

But I do think in this era, the oil and gas sector perhaps need campaigns with respect to communicating the benefits to society, such as development, and product usage, reliability, et cetera. Because certainly there is these mounting voices. But as I say, it is having a real impact on the insurance capacity, which has an outsized influence, particularly over the small and medium-sized companies in this space unfortunately.

DAVID CAIRNS: On the activism, and so on. So we quite understand it, because I think for many years people who care about the climate have understood it's a climate emergency, which it is, but also renewables are now super cheap, which some of them are, and there's unlimited money to come in behind it. So their position is quite reasonable to say, well, why isn't this just happening faster.

And I actually think what we're seeing, especially in the last two years, post-Ukraine is, it's not as easy as that. And you can make some steps quickly, but other stuff, it takes time. And you're changing the whole fundamental economy from 80, 90% oil and gas towards nothing. That does take time.

So I think they're right to push for change and for movement. But I think what we'd like to see is some more realistic debate there, which is encourage speed and support the companies that are trying to make that transition. And don't be black and white about no new nothing, because it's not realistic. And they it undermines their own credibility by standing by that.

ELISABETH BRAW: David, if I may just continue on that point, oil and gas companies won't be able to convince the public that they're going completely green. But for the ones that are trying to become greener, those companies, include yours, how should they position themselves? Should they invite Fridays For Future to meetings. What should they do to essentially bring across the message that they are still oil and gas companies, but they are trying to move more towards renewable energy?

DAVID CAIRNS: I think we wouldn't describe ourselves as an oil and gas company, we describe ourselves as an energy company. So if you take a different sector, companies like, say, Volkswagen would not describe themselves as diesel and petrol manufacturers, they're providers of transportation. And 10 years ago, it was just diesel and petrol. Today it's a diesel/petrol hybrid and electric. In 10 years time, it'll be much more electric.

So companies like mine are the same. 15 years ago, it was just oil and gas, today it's oil, gas, renewables, solar batteries. And in 10 years time, it'll be more technologies, that's transition. I think, again, it quotes another British businessman called Richard Branson, he always said the key is trying not deny it, accept that we have this challenge, and head towards it. And again, to quote somebody else, which is Greta Thunberg, the Swedish climate activist, she said, if you can't get to 1.5 degrees, get to 1.6, if you can't get to 1.6, get to 1.7. But the more you can do, the better.

ELISABETH BRAW: And thank you for pronouncing her name correctly, that is one of the benefits of having served as ambassador to Sweden. And David, I will continue on a related subject, actually not that related, but another risk, and so that puts you in the hot seat again. There can be no oil and gas conversation, indeed, there can be no energy conversation without mentioning the attacks in the Red Sea, and the emergence of the Houthis as a global disruptor.

And what their emergence as a global disruptor indicates is that, or suggests, is that global shipping is vulnerable to attacks anywhere militia decides to attack them, and especially in chokepoints. And so, David, what has the energy sector, do you think, learned from these attacks, both when it comes to their own cargo of oil in particular, but also when it comes to the vulnerability of the globalized economy. Is the lesson learned just to plan for the unexpected, and if so, how do you plan, or is there a different lesson?

DAVID CAIRNS: You're quite right, so it is a risk. I don't think the Houthi might be a new element to it, but I don't think it's completely new. So just in a small, different way, look, when the evergreen ship was stuck in the Suez Canal, and the effect that had on the world economy. And when I first started this job nearly five years ago, there were Iranian attacks in the Hormuz straight, and we stopped sending ships through there. And that's how we had to react.

I think most globally active companies have this stuff on their radar all the time. They have contingency plans to deal with it. But those plans always come with a cost, and a cost comes in down through society in terms of higher prices of a lot of stuff. And that sadly is where we are. I think, as I said, about the physical attacks, there are always these physical risks that come from different vectors, but you always have to be super alive to them.

ELISABETH BRAW: And Laura, you are extremely alive to risks. And you also have to essentially be among the first to spot emerging risks so that you can advise your clients about them and help them ideally avoid those risks, or reduce the impact of the harm that those risks can pose. And it's not a pretty picture. What other developments would you advise oil and gas companies, and energy companies, more widely, to plan for both in geopolitics and its purest form, so involving hostile governments, but also involving disruptors that can range from militias like the Houthis to protesters at home.

LAURA BURNS: I guess one element to mention, another effect of the Houthi attacks, and I guess really stemming back to, I would say, Russia, Ukraine in 2022, and the concern about the Red Sea, and the shipping industry, was that the marine insurance market became, and by extension, the energy insurance market, if there's vessels involved, became more concerned about this, about these growing issues, the Black Sea, Houthis, et cetera. And so, or in some cases, they have curtailed the cancelation period of time, that notice period. So in other words, in a policy, if they're offering some war coverage within an energy package for vessels, that coverage is cancelable. And the notice period of cancelation used to be seven days. And in various instances that's now been curtailed to 48 hours.

ELISABETH BRAW: 48 hours, that is quick.

LAURA BURNS: Exactly. And so understandably, even for those companies who may have offshore oil rigs and may be able to float away, 48 hours is not very long. And so we are seeing more instances of companies wishing to supplement that, and come into the plug that gap by covering political perils. It might it be physical damage and/or revocation of concessions, or outright expropriations, or currency issues. So that is one dynamic.

And I would say the other relates to the economics of some of these circumstances that these, whether it's the polar vortex in Texas and the bankruptcies there, or geopolitical that these events can happen in a very short span of time. And we did see cases of companies that went bankrupt, they went from, you know, investor grade to much less extremely quickly, and often is outside the control, or can be a challenge to mitigate.

So one area that we're seeing increased focus on are the trade risks, or the credit risks, I'll say, of just counterparty risk, sale to the state-owned enterprises and their ability to honor a contract, if you think about the wave of emerging market debt. And even seeing today, looking like interest rates are not going to fall, which causes a crunch for emerging markets. And that several companies will not look at a subsidiary as the same credit as the parent.

So we do see instances of using something called trade credit insurance in which they can look at the parent company's financials. And that means that they're able to offer suppliers larger volumes without asking for collateral. So certainly there's the geopolitical element, there's the overall insurance capital element, and there's this credit element, I think, happening in today's marketplace.

ELISABETH BRAW: Extraordinary developments. And the 48-hour notice period. That is extraordinary. And we will be returning to this subject, without a doubt. But in the meantime, I think we can be pleased, those of us in Western Europe, that when the Ukraine war broke out, when Russia invaded Ukraine, we had a country in our midst that happens to have a lot of energy resources. What would have happened otherwise, that is a fascinating counterfactual to discuss.

But thank you. David Cairns of Equinor, thank you. Laura burns of WTW. It was, should say enlightening, and in some cases frightening observations that we will have to follow up on, and above. Thank you all for listening to Geopolcast.

In upcoming episodes, we'll examine current highs and lows in aviation, so to speak, we'll cover climate risk, and we will cover terrorism, and much else. To get the episodes as soon as they are released, make sure to subscribe to Geopolcast. You can find us via your usual podcast players. And please recommend us to your friends and colleagues. And see you next time.

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Podcast host

Elisabeth Braw
Senior fellow at the Atlantic Council

Elisabeth is a Geopolitics expert who has been consulting with the WTW Research Network since 2019, specifically exploring grayzone aggression and looking at its implications for risk managers. This work forms part of a wider research programme on geopolitical risk, including the importance of China and security impacts of climate change.

Elisabeth is also the author of Goodbye Globalization, which was published by Yale University Press in February, 2024.


Podcast guests

David Cairns
Vice president of Political and Public Affairs, Global at Equinor

Before joining the private sector, David was Britain's ambassador to Sweden, and the UK foreign and development officer. David also served in numerous other diplomatic postings, including as director of Trade and Investment in Japan.


Senior Vice President, Political Risk, Americas,
WTW

Laura leads WTW’s political risk solutions in the America’s with over a decade of experience in political risk.


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