LONDON, 31 May 2006 – Businesses around the globe are continuously looking for their next lucrative investment opportunity but as the recent cases in Bolivia and Ecuador demonstrate, government intervention in the oil and energy sector can have serious implications for foreign investors with assets abroad. 

These latest cases, which many believe could have knock on effects across countries within Latin America and other parts of the world, serve as a harsh reminder to business of the possible losses they face through their foreign investments.  Businesses are often well aware of the more traditional risks facing their operations yet few effectively assess their political risk exposure.

Bolivian President Evo Morales chose May Day to deploy his troops to seize control of 56 energy sites in the country, affecting around 20 foreign investors with assets in Bolivia. This event was closely followed by Bolivia’s neighbouring country, Ecuador taking control of Occidental Petroleum’s operations three days after cancelling the US company’s contract. At the time, Occidental was Ecuador’s largest investor.

It is unlikely that this kind of action will be confined to just the oil and gas sector with other sectors such as utilities and mining also potentially coming under threat. A distinct wave of left wing government activity is taking place within Latin America with other examples of government intervention including the expropriation of foreign land, concessions for foreign water companies being lost and a beef export ban being imposed. 

In the case of property and casualty risk, the losses that arise are covered under traditional insurance packages due to the ability to apply quick repair solutions to these circumstances. Risks such as nationalisation however, can lead to the permanent loss of a company’s foreign investments.

The protectionist policies adopted in Latin America are not confined to that region. The EU has applied restrictions on certain goods from China and the recent proposed management of ports in the US by a Middle Eastern Country was met with outrage. Since the dispute between Ukraine and Russia over oil supplies in early 2005, awareness of the vulnerability of pipelines and the potential impact of supply chain interruption, particularly over oil and gas, has increased. Growing demand in Asia emphasises the dependence on and importance of regular and stable supplies.

Charles Keville, a director in Aon’s crisis management team, commented: “Globalisation continues to increase. At the same time, international businesses are seeking to recover ever greater returns from their investments. As a result, countries with volatile political situations are increasingly becoming part of the commodity supply chain. For businesses with international operations and assets abroad, this means a greater political risk liability and potentially higher losses.

“For the 2006 edition of Aon’s political and economic risk map, which we have produced now for over 10 years, we downgraded Bolivia to reflect our growing concerns over nationalisation in the region. The recent actions of the government in Bolivia and Ecuador are just two examples of how political policy can impact foreign investors and traders. Political risk is unpredictable which underlines the importance of businesses continuously monitoring the markets in which they choose to invest and operate."

About Aon

Aon Corporation  is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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