Assessing the risk of foreign investment within the petroleum sector of South America

Abstract

There is presently a shortage of international oil companies investing in South America, due primarily to political instability associated with high levels of corruption, poor quality of institutions, and demanding fiscal regimes that strip significant amounts of revenue from investors. The purpose of this research is to obtain a comprehensive country ranking for South America in terms of investment risk in the upstream oil sector. The study identifies six risk categories (political risk, macroeconomic risk, technical risk, investment climate, non-renewable energy resources potential, and environmental constraint) and ten sub-indicators associated with these risks. The data are gathered to perform an ‘analytic hierarchy process (AHP)’ to obtain the weight index of the ten sub-indicators. These are then used in a ‘technique for order preference by similarity to ideal solution (TOPSIS)’ to obtain the country-ranking risk arrangement. Results indicate that countries with low-risk investment include Brazil, Colombia and Peru, while high-risk countries include Argentina, Ecuador and Bolivia. Finally, this study suggests that countries whose proportions of government take exceed 75% should modify their fiscal regimes to optimize benefits for all parties or design fiscal systems where the host government and contractor share the risk and reward associated with exploiting oil resources.