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2 J. World Energy L. & Bus. 1 (2009)

handle is hein.journals/jlowdeylw2 and id is 1 raw text is: Journal of World Energy Law & Business, 2009, Vol. 2, No. 1 JWELB Overview A rapid read overview of the articles in this issue: Expropriation of oil and gas investments: Historical, legal and economic perspectives in a new age of resource nationalism (see p 3) George Joffi, Paul Stevens, Tony George, Jonathan Lux, and Carol Searle Expropriation is one of the extreme non- commercial risks faced by investors. The typical threats that the private sector oper- ators face are the expropriation of assets by host states, the tightening of fiscal terms or so-called 'creeping expropriation' and the imposition of restrictions on their opera- tions that may amount to the expropria- tion of their assets. In extreme cases, host governments even opt for outright expropriation. The current wave of high oil prices means that producers are increasingly seek- ing to maximise their returns with the result that the international oil companies (IOCs) face expanding creeping expropria- tion and sometimes even outright expro- priation. This process is cyclical and is likely to recur because the balance of inter- ests between state and private sector in such contracts is dynamic, and relative bar- gaining power between the parties changes over time. Part of the risk that must be evaluated by foreign investors is, therefore, the potential danger of an intensification of resource nationalism during the term of their concession. This can only be properly appreciated if the nature of resource nationalism is understood. This paper evaluates the relationship between resource-rich states, investors and IOCs; examines expropriation from a legal standpoint; considers how expropri- ated assets can be properly valued by set- ting out how past compensation has been determined, and offers a proposal for a possible alternative basis of valuation. Perspectives on the valuation of upstream oil and gas interests: An overview (see p 24) C.R.K. Moore Fair market values (FMV) may be deter- mined by analysing transactions, but their application in directly valuing 'comparable' assets is limited. Discounted cash flow analysis is the preferred starting point for valuations. Issues in its application are reviewed, including the choice of discount rate. Risk adjusted expected present value (EPV) is a widely accepted evaluation met- ric. However, FMV is frequently substan- tially less than EPV, and many working interests acquired are deliberately less than 100 per cent. Both effects are due to risk aversion. Risk adjusted value (RAV) using prefer- ence theory reconciles observed behaviour. It predicts differences between the values to different firms due to different risk toler- ances (RT). The owner's RAV may be sub- stantially different from FMV. RAV and RT are explicitly determined at optimum working interest. Although useful in exploration valuations, this traditional RAV approach ignores the effect of the uncertainty distribution of the underlying 1

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