Resource Nationalism Meets the Market: Political Risk and the Value of Petroleum Reserves

Abstract

This paper investigates the effect of resource nationalism on the value of petroleum (crude oil and natural gas) reserves. We develop a framework for treating resource nationalism as political risk, and utilize data on reserve transactions and political risk ratings for the period 2000-2006. Controlling for other factors that affect reserve value, we demonstrate the value-destruction of political risk, and estimate the political-risk discount for 37 countries. The paper contributes to both the international-business literature and practitioner approaches to political-risk analysis in demonstrating use of publicly-available market data from real-asset transactions to measure the cost of political risk. We also show that the discount depends on market conditions – the higher are expected future petroleum prices, the larger is the discount at any level of political risk. This insight adds a new dimension to analysis of political risk, which is typically measured and examined without regard to market conditions.

Keywords: political risk, petroleum reserves, mergers, acquisitions

JEL Classification: F23, G34, L71, Q34