Introduction

The base case model, discussed in chapter 11, assumed uniform rates of return across countries but allowed for different rates of return on different categories of investment. Specifically, we assumed that pipeline investments were least risky, followed by LNG regasification and liquefaction terminals, and then by mining projects (or exploration and development). The risk associated with pipeline investment is low as regulation often keeps the costs associated with transporting gas via pipeline quite stable. By contrast, since LNG liquefaction and regasification terminals embody less mature technologies, their costs of construction are likely to be more variable. Some of the risks associated with LNG, however, may be ameliorated by “bankable” contracts for LNG sales that limit variability in returns. The resource-mining projects are most risky because there is substantial geological uncertainty (such as initial reserve assessment, ultimate recoverability, and so forth), as well as economic uncertainty resulting from variation in commodity prices.

Assuming that rates of return on a given category of investment are uniform across countries ignores political factors that can greatly affect the risks of investing in different countries. These differing risks are a major reason that resources in some countries remain undeveloped. The relatively small amount of capital currently invested in such countries should make the return to capital relatively large and attract new investments, but the political risks may more than offset the higher expected return.