The energy transition is a “nightmare of political risk” for hydrocarbon-dependent countries, according to a new report by Verisk Maplecroft.
The risk advisory service selected Algeria, Iraq and Nigeria as the first victims of change. There will be a “wave of slow political instability” over the next three to 20 years as the energy transition hits, the report said.
The report states that time is running out for countries that have failed to expand their economies beyond fossil fuel exports.
Those who fail to diversify their economy face “political instability and market turmoil,” Veriska Maplecroft analyst Franca Wolf told Energy Voice.
“The weak ability to diversify these countries stems in part from weak political institutions, which already make them more vulnerable to political instability.
“As living standards fall and existing social contracts become pressured, there is a high risk that inadequate channels for expressing social discontent will result in political turmoil – which may or may not be violent, but will certainly be unregulated,” she said.
Problems with transition
Most at-risk countries are in West Africa. These include Chad, Angola, Gabon, Congo Brazzaville, Cameroon and Equatorial Guinea. The six, along with Azerbaijan, are next “in line for trouble” as the energy transition continues, the report said.
The Verisco Maplecroft report also warned that these countries will be at the forefront of major companies looking to risk their portfolio.
Venezuela and Libya have gone through varying degrees of state failure and economic collapse. The two show how bad things can become, the report said.
Three factors determine when, if and how much the storm will disrupt these countries. These are the costs of lack of money, the ability to diversify and political resilience.
Wolf, one of the leading authors, said reducing external irregularities would “require forced economic adjustment,” either by devaluation or by reducing foreign exchange reserves. This would “effectively rebalance import and export accounts to the detriment of living standards.”
That would be “short-sighted” and increase the risk of political instability, she continued.
The lack of diversification stems from a number of economic, political, legal and social factors, Wolf continued, citing Nigeria as an example.
“Added to deep-rooted weaknesses in political institutions, including corruption, it is very unlikely that these countries will move away from the status quo to undergo the necessary reforms.”
Most oil and gas exporters have “become less diversified” since the fall in oil prices in 2014-15. And in 2020, the analyst said.
“Even those countries that we consider more capable of diversification lacked the political will and / or economic capacity to move away from oil,” Wolf said.
Saudi Arabia has launched its Vision 2030 in an attempt to move beyond oil exports. However, the country has actually relied more on exports since 2014.
According to the metrics of Verisco Maplecroft, producers from the Middle East are holding up better than West Africa. The report says these countries could even make progress at some point. Lack of new investment in projects can lead to a time when demand exceeds supply.
However, authoritarian control cannot guarantee long-term political stability, the report said.
The exception to the rule on oil producers is Norway. The Nordic state launched initiatives after the fall of 2014-15. “There have been several reasonable successes in reducing oil dependence,” Wolf said.
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