DEFINITION of Above Ground Risk
Above ground risk refers to non-technical risks such as political, regulatory, environmental and security risks, that can adversely affect energy and mining companies in some of the most unstable parts of the world, as well as in Western countries with pro-business policies, strong governance and efficient legal systems.
BREAKING DOWN Above Ground Risk
Above ground risk is a significant factor in the exploration and production and mining sectors — especially in frontier markets. In fact, the risks above the ground are often greater, and more difficult to mitigate, than operational risks below ground. Even in relatively benign frontier markets such as Tanzania or Sierra Leone, endemic petty corruption can expose international companies to reputational risks, both within their country of operation and home jurisdiction. Managing bribery and corruption risks has historically been a big problem for energy and mining companies.
Above ground risks in trouble spots include corruption, security and armed conflict, in addition to regulatory and political risk. But environmental activists have also increased above ground investment risks in the West as well, whether it be the claims of indigenous people in Canada, protests against the Dakota Access pipeline or anti-fracking opposition in Europe — which has led to moratoriums on fracking in a number of countries.
Some above ground risks, such as labor disputes and tax hikes are to be expected. Perhaps not unreasonably, politicians across Latin America hiked mining royalties when commodity prices spiked after the financial crisis.
But some countries effectively run extortion schemes or simply expropriate assets. Venezuela, for example, has nationalized foreign-owned oil and mining projects — leading to a collapse in investment and oil production capacity, and exposing a number of international oil companies to large losses. In 2018, Chevron evacuated its executives, after two of its employees were imprisoned for not signing a supply contract with state-owned oil company PDVSA.