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The oil and gas sector is undergoing a significant transformation as it responds to various complex challenges arising from increasing political risk, tighter access to debt finance and the need to invest in new technologies.

The impact of political risk, such as the recent events that have become known as the "Arab Spring", have demonstrated the vulnerability of the sector to the rapidly-changing political landscape of the oil and gas producing regions.

In addition, the sector is having to contend with the scarcity of debt financing from banks while, at the same time, trying to finance new technical solutions that are needed for deep water oil exploration and extraction as well as for the development of shale gas exploration.

However, the oil and gas sector has a long track-record of dealing with complex challenges. The many examples of partnerships between international oil and gas companies and government and quasi-government entities in a host country highlight the sector's appetite for innovation.

But partnerships can also pose their own challenges.  In politically unpredictable jurisdictions where the rule of law is susceptible to sudden change and broad interpretation, investors should consider introducing measures, such as stabilisation clauses, in their legal arrangements that set out what should happen in a given set of circumstances.

Investors and their advisers should also conduct extensive due diligence to ensure that a contract clearly identifies who should bear which of the costs involved as well as making sure that they are aware of any bilateral investment treaties and international arbitration options.

"Political risk vs. Oil & Gas Infra investment" was published on 25 August 2011 by the Infrastructure Journal

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