Chapter 5: Key Socio-Political Determinants of Oil Sector Performance

The oil sector occupies a prominent place in the global economy, ensuring national energy security, fiscal stability, and geopolitical power. For many hydrocarbon-rich countries, oil and gas revenues make up a significant portion of government revenues, export earnings, and foreign exchange reserves. In some cases, notably in Africa, the Middle East and Latin America, these revenues account for more than 50% of total government revenues and more than 80% of export earnings (World Bank, 2023; IMF, 2023). This concentration of economic value within a single sector underscores the importance of the institutional and political context in which it operates.

However, the same characteristics that make the oil sector economically vital (capital-intensive, large-scale infrastructure, complex contractual arrangements, and large revenue streams) also create conditions that are highly vulnerable to governance failures and corruption. This sector often involves long-term contracts spanning several decades, large initial investments and interactions between multinationals, national oil companies and government entities. These factors multiply the points of discretion that, in the absence of strong governance, can foster rent-seeking and corrupt practices.

Political stability, quality of governance, and corruption are therefore not secondary considerations; they are key determinants of the performance, attractiveness of investment, and long-term viability of oil sector projects and programs. A stable policy environment provides predictability and security for investment, while strong governance ensures effective and transparent management of resources. Conversely, weak governance and high levels of corruption can lead to misallocation of resources, reduced investment, operational inefficiencies, and social unrest.

This chapter provides an in-depth analysis of these interrelated factors. It examines the influence of political stability on investments and operations, explores the role of governance structures in sector performance, and analyzes the mechanisms and impacts of corruption along the oil value chain. Drawing on data and analysis from institutions such as the World Bank, Transparency International, the International Energy Agency (IEA) and the Extractive Industries Transparency Initiative (EITI), this chapter aims to provide a detailed and well-informed understanding of the challenges and opportunities related to the management of petroleum resources in complex policy contexts.

5.1-Political stability and its impact on the oil sector

Political stability is an essential condition for the smooth functioning of the oil sector. It depends on a government’s ability to maintain order, uphold the rule of law, and create a predictable political environment. In resource-rich economies, political stability is of particular importance due to the long-term nature and large capital required for oil and gas investments.

The World Bank’s Global Governance Indicators define political stability as the likelihood of political instability and/or politically motivated violence, including terrorism (World Bank, 2024). This definition highlights institutional resilience and the absence of disruptive conflict as essential components of stability. In concrete terms, investors interpret political stability through indicators such as the continuity of government policies, the reliability of legal systems, and the safety of property and personnel.

The link between political stability and investment in the oil sector is well established. Oil and gas exploration and production projects often require multibillion-dollar investments and can take years or even decades to reach production. Therefore, investors need to be assured that tax conditions, contractual arrangements and regulatory frameworks will remain stable over time. Even minor uncertainties can have a significant impact on the profitability of projects, especially in marginal deposits or frontier exploration areas.

Empirical data confirm this correlation. The International Energy Agency (IEA, 2023) indicates that a large majority of global upstream oil and gas investments are concentrated in countries with relatively high political stability and governance. Conversely, politically unstable regions tend to experience lower levels of investment, higher financing costs and reduced participation in tenders. Investors often build political risk premiums into their cost of capital, which can make some projects unprofitable.

Political instability can also have immediate and tangible repercussions on operations. In areas affected by conflict or civil unrest, oil and gas infrastructure can become the target of sabotage or theft. The safety of personnel then becomes a major concern, often requiring the evacuation of the latter or the suspension of operations. Supply chains can be disrupted, leading to delays in drilling campaigns, maintenance activities, and production schedules.

In addition to these operational risks, political instability can lead to abrupt changes in policies and regulatory frameworks. A change of government can result in the renegotiation of contracts, changes in tax conditions, or even the expropriation of assets. Such measures undermine investor confidence and can have lasting consequences on a country’s reputation as an investment destination. The United Nations Conference on Trade and Development (UNCTAD, 2023) notes that foreign direct investment flows can fall significantly following major events of political instability, with some countries experiencing declines of up to 40% in the year following a coup or major political crisis.

5.2- Governance Structures in the Petroleum Sector

Governance in the petroleum sector refers to the systems, institutions, and processes by which resources are managed, regulated, and monetized. Effective governance ensures that petroleum resources are developed in a way that maximizes economic benefits while minimizing environmental and social impacts. It also plays a critical role in ensuring transparent and equitable revenue collection and distribution.

The institutional architecture of the petroleum sector is generally based on multiple entities with distinct roles and responsibilities. Ministries of Energy or Petroleum are usually responsible for policy development and strategic direction. Regulatory authorities oversee licensing, compliance, and technical standards. National oil companies are often directly involved in exploration and production activities, either independently or in partnership with international oil companies. Tax administrations are responsible for the collection of taxes, fees, and other payments.

The effectiveness of these institutions varies considerably from country to country. In effective governance systems, roles and responsibilities are clearly defined, and transparency and accountability are high. Regulatory processes are predictable and decisions are made according to specific criteria. Conversely, weak governance systems are characterized by overlapping mandates, lack of transparency, and significant discretion, all of which can contribute to corruption and inefficiency.

The World Bank’s Governance Indicators provide a useful framework for assessing the quality of governance. Dimensions such as government efficiency, quality of regulation, rule of law, and anti-corruption are particularly relevant to the oil sector. Countries scoring high on these indicators tend to have more efficient and transparent oil sectors, a stable regulatory environment, and strong investor confidence.

Norway is often cited as an example of good governance in the oil sector. The country has a strong institutional framework in place that separates policy-making, regulatory and trade activities. Revenues from the oil sector are managed through the Global Public Pension Fund, which operates under strict transparency and accountability requirements (IMF, 2023). This model has enabled Norway to avoid many of the governance challenges of resource-rich economies.

Conversely, many resource-rich countries face governance issues that limit the benefits of their oil resources. The “resource curse” theory suggests that countries with abundant natural resources often experience lower economic performance and institutional development. This paradox is largely attributed to governance failures, including poor revenue management, lack of diversification, and high levels of corruption (Sachs & Warner, 1995; NRGI, 2022).

5.3- Corruption in the oil sector

Corruption is one of the major challenges in the oil sector. It can manifest itself at different levels of the value chain and take many forms, ranging from corruption and embezzlement to more complex systems involving public procurement fraud and mismanagement of revenues. The scale and complexity of the sector, combined with the high value of transactions, make it particularly vulnerable to corrupt practices.

Transparency International consistently ranks the extractive industries among the sectors most exposed to corruption risks (Transparency International, 2024). One of the main areas of concern is the allocation of exploration and production licences. The procedures for granting these permits often leave significant room for manoeuvre, especially in jurisdictions where regulatory frameworks are weak or poorly enforced. This promotes corruption, favoritism, and a lack of transparency in decision-making.

Procurement procedures also present significant risks of corruption. The oil sector relies on an extensive network of contractors and suppliers, creating opportunities for over-invoicing, bribery and collusion. The World Bank (2021) estimates that corruption in public procurement can increase project costs by 10% to 30%, severely undermining their economic viability.

Operational corruption is another major problem, particularly in land areas. It encompasses activities such as oil theft, illegal production, and manipulation of production data. In some regions, organized criminal networks are involved in the large-scale theft of crude oil, resulting in considerable revenue losses. For example, Nigeria has suffered significant losses due to oil theft, estimated at several hundred thousand barrels per day during peak periods (NNPC, 2022).

Revenue management is arguably the most consequential area of corruption in the oil sector. Poor revenue management can undermine the economic benefits of resource extraction and contribute to social and political instability. Problems such as off-budget spending, lack of transparency of sovereign wealth funds, and misappropriation of funds are common in poorly governed systems. Initiatives like the Extractive Industries Transparency Initiative (EITI) aim to address these challenges by promoting transparency and accountability in revenue reporting.

5.4- Interrelationship between stability, governance and corruption

Political stability, governance and corruption are closely linked and often feed into each other through complex feedback mechanisms. Weak governance structures foster corruption, which in turn undermines effective institutions and public trust. This erosion of trust can lead to political instability, further weakening governance and creating a vicious cycle that is difficult to break.

Empirical data confirm this correlation. Countries with high levels of corruption tend to have less political stability and weaker governance institutions. Transparency International’s Corruption Perceptions Index shows that countries with a low score often face greater political risks and economic volatility (Transparency International, 2024). In the oil sector, this translates into disruptions in production, lower investment and lower tax revenues.

Conversely, countries that have been successful in strengthening governance and reducing corruption tend to experience greater political stability and more effective resource management. This underlines the importance of integrated approaches that simultaneously take into account these three dimensions.

5.5- Stakeholder Risk Mitigation Strategies

5.5.1- Roles of operators

Oil operators have to deal with complex political and governance environments. Effective risk management strategies are therefore essential. These include the use of political risk insurance, diversification of assets across multiple jurisdictions, and active dialogue with host governments and local stakeholders.

Compliance with international anti-corruption frameworks is also essential. Companies are increasingly adopting rigorous compliance programs, aligned with regulations such as the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA). These programs typically include measures such as third-party due diligence, internal audits, and employee training.

Digital technologies are also playing an increasingly important role in reducing the risks of corruption. Tools such as blockchain and digital purchasing platforms can improve transparency and traceability, limiting opportunities for discretionary decision-making.

5.5.2 - Responsibilities of States

In order to mitigate the risks of corruption and political instability, governments and policymakers have a responsibility to strengthen or establish oil sector governance institutions, a policy and a legislative and regulatory framework that guarantees transparency and equitable management of resources for the benefit of all my people. This implies the need to put in place tools for the control and monitoring of all phases of oil operations, to encourage national participation and to ensure better management of oil activities in terms of the environment, safety and health.

5.5.3- Roles of international institutions

International institutions play a key role in promoting good governance and reducing corruption in the oil sector. The EITI, for example, requires participating countries to publish information on payments and revenues, promoting transparency and accountability. As of 2024, more than 50 countries were implementing the EITI Standard.

The World Bank and the International Monetary Fund are providing technical assistance and support for governance reforms, including the development of tax frameworks and regulatory systems. The OECD Anti-Bribery Convention sets international standards to combat bribery of foreign public officials.

5.6-Future trends and emerging risks

The global energy transition presents both challenges and opportunities for the governance of the oil sector. As demand for fossil fuels evolves, fossil fuel-dependent economies could experience lower revenues, reinforcing the importance of effective governance and diversification strategies.

At the same time, advances in digital technologies are improving transparency and accountability. However, these developments also require strong institutional capacities and strengthened cybersecurity measures.

Environmental, social and governance (ESG) criteria are becoming increasingly important to investors. Companies operating in jurisdictions with weak governance or high corruption may face higher financing costs or reduced access to capital.