Risk Evaluation of Foreign Direct Investment in Petroleum Projects in Peru

ABSTRACT

In the coming decades the world economy will continue depending on hydrocarbons. Foreign direct investment (FDI) for oil exploration and exploitation will be important and necessary to meet energy demand. These investments are associated with risks and uncertainties inherent to this sector due to the fact that large amounts of initial investment are required, long periods of recovery of the investment, exhaustibility of oil and natural gas resources, crude oil price volatility, geological risk and socioenvironmental risk. South American countries have significant potential of non-renewable energy resources that need to be exploited to support their development and economic growth after the devastation caused by the COVID-19 crisis. There is currently a shortage of international oil companies (IOC) in this region due to political instability associated with a high rate of corruption, poor-quality institutions, and overestimated rate tax regimes. The purpose of this research is to perform a classification of countries from low risk to high risk within the South American continent;as a favorable place to invest in its upstream sector. Six risk categories were preliminarily identified (political risk, macroeconomic risk, technical risk, investment climate risk, potential risk of oil resources and risk of environmental limitations);and ten indicators associated with these six risks of foreign investment in oil projects. The information of these indicators is collected to carry out the analytical hierarchy process (AHP) and obtain the weighting index of these ten indicators that are later used in the order preference technique by similarity to ideal solution (TOPSIS) in order to obtain the ranking of these countries. Countries with low-risk investments were ranked;as a result, Peru is in third place. Likewise, it is concluded that the countries with the highest amount of proven oil reserves and the lowest percentage of Government Take are the most favorable as a destination for foreign investment. © 2021 Latin American and Caribbean Consortium of Engineering Institutions. All rights reserved.