An oil spill being cleaned by individuals with buckets

Capital & Economics

Terrorist Attacks And Political Violence: How Oil Is Impacted  

April 6th, 2017

Overview

We are living in a world where political violence is on the rise. According to Aon’s latest Terrorism & Political Violence map, 2016 brought a 14.2 percent increase in the number of terrorist attacks. Many of these attacks were against the oil and gas industry – the commercial sector most targeted by terrorism worldwide. This is due to its important role in driving government revenues, and the often remote locations of its key infrastructure.

Oil, worth an estimated 4.5-6.5 percent of global GDP, is an industry increasingly under attack because it is such a valuable commodity. For the economies of countries with a large oil and gas sector, terrorist incidents can cause significant disruption across multiple industries, pushing up costs and driving down economic growth. Two such countries, Nigeria and Colombia, were the targets of 74 percent of all attacks on the sector in 2016.

As we move into a new era of global and political uncertainty, understanding the potential impact of terrorist attacks on one of the world’s most valuable commodities is imperative.


In Depth

Terrorist Attacks And The Oil Industry: Impact To Local GDP

In a quiet patch of wetland in the Niger delta, a series of explosions goes off. The explosions are not targeting people – they are intended to destroy infrastructure. In particular, they’re meant for a series of pipelines, carrying thousands of gallons of oil to refineries on the Nigerian coastline. The attacks mean that this oil, instead of heading for export, now lies sinking into the delta mud.

For civil servants and politicians in Nigeria’s capital city of Abuja, the destruction of this oil is bad news – oil accounts for 35 percent of Nigeria’s GDP. The attack means funds for hospitals, schools and roads get scarcer. And with much of the rest of the Nigerian economy dependent on business from the oil industry, other businesses would likely be affected.

The Global Impact Of Oil Industry Attacks

Terrorist attacks on remote infrastructure like oil pipelines are hard to defend against, and are increasingly being seen by violent political regimes as “an opportunity to weaken economies, undermine the authority of governments and exploit local grievances,” according to Bruce Jefferis, CEO, Global Energy, Aon. In 2016, terrorist attacks on oil and gas infrastructure comprised almost 42 percent of all terrorist attacks on commercial interests, and they serve as a good illustration of how disruption to local economic activities can have a significant knock-on cumulative impact.

“When countries rely so much on a single industry, the effects are going to be proportionally higher – there is a considerable financial impact with each attack,” says Scott Bolton, Director, Crisis Management, Aon Risk Solutions. For instance, terrorist attacks on pipelines in Nigeria in 2016 caused oil production to drop by 36 percent, reducing the government’s revenues by 50 percent, according to Aon’s findings, from data from the Risk Advisory Group. These attacks have an immediate impact on local economies – the withdrawal of funding for public works, or the imposition of austerity measures can lead to civil unrest, potentially feeding the ranks of hostile groups carrying out attacks.

But soon these local impacts can begin to spread.

“Oil pipelines in the Niger delta are targeted because they are a massive source of revenue for the country. A lot of that money is then ploughed back into domestic infrastructure or other investment. And many of those projects are developed in partnership with international companies, and financed by international banks,” says Sarah Taylor, Head of Structured Credit and Political Risks, Aon.

If that funding is pulled from such projects, as a result of dwindling support at home, it can then impact contracts between organizations operating in those oil-producing countries and external investors. The threat of assets being compromised in this way can also deter incoming foreign investment in the first place. Why invest in a country with high levels of violence when you can invest more safely elsewhere? This can in turn create a vicious cycle, pushing affected countries further away from global economic and financial networks.

Additionally, for any organizations working in petroleum production, energy, or other industries directly downstream from oil supply (such as plastics), disruption to oil operations can have a direct impact on demand for their products and services, and their ability to supply. This in turn may have a knock-on effect on local inflation, the cost of living, and even employment levels in the country affected.

Again, oil is an extreme example – but the impact of business interruption on any business is clear – it means less output, so less revenue, less money for investing in development, and may lead to cuts in projects or employee headcount. With political instability a growing concern, and with talk of existing trade agreements being renegotiated or scrapped, any change to the smooth functioning of global supply chains could have a significant impact on organizations worldwide.

Lessons In Network Effects From Political Violence

Political violence is on the rise. Terrorist and militia attacks that target the oil industry, or other vulnerable infrastructure that can result in high levels of damage, are likely to continue. As of 2017, only 50.3 percent of countries in the developing world are considered to have negligible or low risk from political violence, according to Aon data; almost half of all countries experience significant risk from the political violence peril.

Only by understanding and modeling the complex, nebulous world of terrorist attacks and understanding how the impact of attacks can interfere with their supply chains can organizations get a full view of their exposure. The threats may not always be obvious – as the fact that Nigeria, Colombia, and to a lesser extent, Venezuela, are the three countries whose oil industries are most affected by terrorism; North African and Middle Eastern producers, while having more extensive impacts from terrorism at a country level, find oil and gas infrastructure targeted less frequently. Such risks shift rapidly with changes in a country’s domestic political and economic situation. Only by understanding both the local and the global nature of such risks can these threats be assessed, anticipated and mitigated.


Talking Points

“In Western countries, these counter-terrorism efforts are working. There have been 16 or 17 disrupted plots in Australia in the past two-and-a-half years and four low-level attacks. In the UK, there was one crude attack and 12 disrupted… You could put in a lot of hardened security but that would limit people’s ability to go about their normal lives. There’s always a risk.” – Jacinta Carroll, Counter Terrorism Director, Australian Strategic Policy Institute

“There are ways to ‘deal with’ political risk. This is not to say it can be completely offset or negated, and political risk does have the potential to wipe out all our gains. Such is the nature of risk. But we need not be simply passive observers of risk, like fishermen watching a storm at sea. We can analyze, understand, and build strategies for dealing with the risk.” – Joe Mitton, former Diplomat and Advisor to U.K. Foreign Secretary Boris Johnson


Further Reading

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