Investment component of production sharing agreements and methodology for its assessment

Currently, there is a lack of sufficient research on risk assessment for mineral extraction.

The lack of a unified methodology deepens theoretical contradictions regarding assessment tools and decisions made on their basis, which provide in-depth insights into investment risk in general.

Chinese scientists Yujing Xiang, Qinli Zhang, Daolin Wang, Shihai Wu published the article «Risk Assessment of Investments in the Mining Industry for Countries Along the Belt and Road Initiative» in which they proposed their approaches to assessment identifiers.

The authors propose to assess the risk of investments in oil, coal, and natural gas through an investment model based on countries such as Brazil and Kazakhstan, Singapore and New Zealand, and Uzbekistan, respectively.

Scholars have also identified oil, coal, and natural gas as energy resources, considering them as a combination of resources for assessing investment risk.

The Chinese have concluded that a combination of resources is more important than a single resource when formulating a micromineral investment strategy.

As an example, the authors analyze the investment experience of the United Arab Emirates and Pakistan.

Thus, a quantitative risk index allows decision-makers to clearly and directly understand its basis.

The one-dimensional quantitative analysis previously used has been superseded in favor of a three-dimensional quantitative analysis (3-D) risk assessment index.

For example, the International Country Risk Guide (ICRG) publishes monthly country risk assessments based on three dimensions: political, economic, and financial risk.

More recently, the 3D scoring system has gradually evolved into a multidimensional (more than three dimensions) system, such as the six-dimensional (6D) approach to risk assessment index, which demonstrates balanced risk assessment results.

The 6D approach is built on a measurement of resource potential, which is viewed in terms of total mineral resources, including ore and metal exports, ore and metal imports, proven natural gas reserves, proven crude oil reserves, proven coal reserves, and mineral resource reserves.

Let's name the main approaches of 6D in risk coordinates:

1) Political risk examines the quality and effectiveness of the country's government resources in solving national problems and maintaining political stability. Lower political risk reduces the likelihood of losing foreign investments.

2) Economic fundamentals measure the long-term stability of a country's investment environment. A country with excellent economic fundamentals has a relatively low risk of foreign investment inflows and a relatively high profitability and security of corporate income from foreign investment.

3) Social risk reflects risk factors caused by the social situation in countries where mining investments are made: the more stable the social level in the country, the more favorable the investment.

4) Resource potential is an important indicator for assessing the feasibility of investing in resource-rich countries. Countries with rich resources and excellent resource potential have extremely high investment value, which is the basis for attracting foreign investment in the mining industry.

5) Environmental risk measures a country's attention to environmental awareness, actions and policies. As for investment in the mining industry, each link in the development of the mining industry depends on environmental management and control by governments of different countries.