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Geo-financial risk for GCC industry leaders

Geo-political concerns are rapidly becoming a geo-financial issue for the GCC's oil and gas industry, according to Iain Stewart-Linnhe

Iain Stewart-Linnhe is a specialist in global regulatory policy, risk management and capital markets.
Iain Stewart-Linnhe is a specialist in global regulatory policy, risk management and capital markets.

The geo-political concerns of the GCC oil and gas industry leaders have surely never been more heightened. In terms of risk, this is becoming a geo-financial issue.

In a world where the power nexus is inevitably correlated to the availability of petrochemical resources, the major global power in terms of policy and influence, the United States, is still pre-eminent in terms of capital market volume and development. In terms of tradeable currency, the US dollar stands head and shoulders above other global currencies in terms of scope and influence – with no evident currency hedge available for the current petrochemical currency of choice.

The systematic failure of the Euro over the past decade or so to establish a meaningful footprint in global currency terms has left major oil and gas sovereign states in the highly oil revenue-dependent economies of the GCC very exposed to fluctuations in the US dollar-denominated oil price. When this US pre-eminence is combined with the overriding and extra-territorial enforcement – particularly in the post 9/11 era – oil and gas industry leaders and sovereign state policy-makers need to focus very clearly on the ramifications, as well as other market participants or global bodies that can have influence on a cross-border basis.

The fundamental question for policy-makers and industry leaders alike is how to hedge the impending risk of major policy impact. There is, sadly, very little evidence to support an empirical valuation model that would factor in, or discount, the impact of major policy moves that have extra-territorial impact. The non-nuclear sanctions impact of extra-territorial policy from US OFAC, as it affects the oil and gas industry, cannot be easily extrapolated into meaningful models. This is not least because the very nature of sanctions enforcement means that it is becoming a moving target in valuation terms, due to the highly sensitive nature of policy moves, changes to governments, political bias, and so on.

This has been largely exposed on the US cross-border policy front, which remains a major issue for financial services and commercial initiatives wishing to provide financial support for business initiatives in Iran post the JCPOA, or Iran Nuclear Deal. State-level actors, such as US Secretary of State John Kerry, comment on the accessibility of the Iranian market to European financial institutions (assuming such an entity of any size even exists in the globalised economy, given the broad definition of how non-US firms are impacted by US sanctions). But this is necessarily contradicted by the practical, non-nuclear sanctions guidance provided by US OFAC, which effectively encompasses all commercial activity.

If secondary US sanctions are imposed, a commercial entity designated by the US faces the prospect of being cut off from the entire US financial system. This could occur, for example, as a result of being inadvertently embroiled in a business deal involving a front company acting for the US-designated IRGC.

So what to make of this from an oil and gas perspective? Clearly, the geo-political/geo-financial risk is now very evident for the oil and gas industry with the re-entry of Iran. Already it is clear that OPEC meetings are being interpreted and conducted in a different way due to the re-emergence of a major oil and gas supplier. The industry, for so long well-versed in a necessarily globalised approach to business, needs to refocus on the very clear and present potential danger of major extra-territorial policy shifts in this context.

With so much potential uncertainty on the horizon, as major global powers elect new executive heads at the top of the policy-making tree, and a US presidential election on the horizon in November 2016, it is inevitable that the scope of oil and gas activity will be inherently shaped by those who control the major enforcement agencies in places like the US, which is not afraid to impose sanctions with considerable extra-territorial impact. The role of the Department of Justice in the massive penalties imposed on BP in the aftermath of Deepwater Horizon should leave market participants in no doubt as to their motivations.

It is clear that the Ukraine-related sanctions on Russia have been devastating in economic terms for that country, and coupled with the US dollar restrictions imposed on its financial institutions, the impact on its oil and gas revenue-generating capability, as a result of its inability to trade in US dollars, has been significant.

With Iran embarking on a new role as an increasingly welcome member of the globalised commercial transaction community, there has never been a more important time for industry leaders and policy-makers to pay close attention to the impact of major (non-nuclear) sanctions policies.

Therein lies the rub: in terms of extra-territorial advisory, there are no existing precedents, no existing hierarchy of enforcement or adjudication, and little predictable policy to work from. This means that those advisors who are commonly able to draw from existing, predictable and set standards have little information to go on.

The solution for GCC oil and gas policy-makers and industry leaders is to keep a very close watch on evolving policy moves, and this will require far more than simply following the views of OPEC on an intermittent basis. Inevitably, the oil and gas industry is a major funder of commercial activity, and requires significant funding to conduct its daily business. This brings in the crucial role of the financial institutions – already heavily implicated in the global (US) sanctions regime and, for the major players, highly dependent on the ability to trade globally in US dollars.

Given the current standoff on policy and enforcement on the sanctions front, a great deal of care will need to be taken of exactly how enforcement bodies function and where their priorities lie. Since 9/11, the extra-territorial powers of the US, and the apparent supremacy of international enforcement by the US, have been undeniable. There has never been a more critical moment to come up with the right, smarter response.


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Oil & Gas Middle East - September 2020

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