Talisman Energy Inc.

Talisman, a self-governing Canadian oil and gas producer, has received substantial criticism for its previous participation in Sudan. The company was charged with multiple offenses, such as worsening the civil conflict, suspecting that the Sudanese government used oil profits to acquire weapons, and being implicated in human rights abuses through its payments of fees and royalties to the government for oil and gas exploration rights.

Now, Talisman faces a decision on whether or not to enter Kurdistan, aware of the potential risks similar to those faced in Sudan. The Kurdistan Regional Government (KRG) demands $220 million in exchange for granting Talisman permission to explore oil reserves. Uncertainty about the KRG’s intentions with the money, whether it is for economic development or acquiring weapons, poses a dilemma for Talisman. The board of directors holds firsthand knowledge of the harm caused to Talisman’s reputation.

With regards to conducting adequate research and regularly reassessing the Kurdistan situation, Talisman Energy Inc. should be able to identify and manage political risks more effectively, thus avoiding potential issues. Problem Statement: Talisman Energy Inc. has previously faced challenges when entering politically unstable markets in different nations. Presently, they must determine whether to enter the oil-rich Kurdistan region of Iraq, despite facing significant risks. It is crucial for them to assess whether they can navigate Kurdistan without encountering the same problems encountered in Sudan.

Talisman’s decision to pursue oil exploration in the Kurdistan region of Iraq was influenced by various factors. Firstly, Kurdistan is believed to possess approximately 39 million barrels of oil reserves. Secondly, Talisman saw a potential for foreign oil companies to access Iraqi oil following the overthrow of Saddam Hussein. Lastly, the Kurdistan area was considered considerably safer than other parts of Iraq. Talisman Energy Inc., a company with experience operating in politically risky countries, was interested in this opportunity.

Political risk in international business can emerge from various factors including conflict and violence, terrorism and kidnapping, property seizure, policy changes, and local content requirements (Wild & Wild, International Business, 2012). Corruption is another significant factor. The Corruption Perception Index (CPI) measures corruption levels across different countries. Higher CPI scores indicate lower corruption levels. Table 1 presents the CPI scores for several countries:

(Remaining table rows omitted for brevity)

Talisman is currently facing the decision of whether or not to enter Kurdistan amidst uncertainty in this unstable region. It is important for them to assess if they have conducted proper due diligence before proceeding into Iraq. Iraq has a high level of political risk, as shown in Exhibit 1 (Wild & Wild, International Business, 2012). Exhibit 1 illustrates the political risk across various regions worldwide. Considering Talisman’s previous entry into Sudan, would it have been a wise choice? Despite being aware of associated risks, Talisman strategically ventured into Sudan and recognized potential rewards while taking a chance. However, they encountered numerous challenges including accusations of influencing the Civil War.

Overcoming these challenges only made the company stronger and more knowledgeable for similar future situations. Talisman learned a great deal from the Sudan experience, leading them to establish a dedicated Corporate Responsibility Group (CR) in response to the events. This group has developed Talisman’s CR policies, procedures, and reporting protocols, which now include government relations and responsibility for assessing risks in new projects, particularly in countries with high political risk.

The company has incorporated the International Code of Ethics for Canadian Business into its current corporate code of ethics (Talisman Energy Inc. : The Decision to Enter Iraq, 2009). To learn more about how Talisman handles its corporate responsibility, refer to Exhibit 2 titled “Talisman Managing Corporate Responsibility.” Talisman’s commitment to corporate responsibility is rooted in their company values, which their employees actively embody every day. Further, their commitment to being a responsible corporate entity is evident in the policies, systems, procedures, and practices they have implemented to continuously enhance their performance.

Their values encompass various aspects:

• Safety: Their primary aim is to ensure working conditions that do not pose any harm to individuals.
• Passion: They inspire others through their demonstrated fervor and dedication towards their work.
• Results: They have a strong inclination towards achieving desired outcomes and taking proactive steps to efficiently accomplish tasks, thereby creating value for their shareholders.
• Respect: They actively consider and appreciate different perspectives while treating the environment with utmost regard.
• Excellence: They continually strive for excellence in both their actions and methods.
• Teamwork: By synergistically working together, they can achieve results that surpass their individual capabilities.

Honest communication is demonstrated through bravery in speaking truthfully and encouraging others to do the same. The potential for Talisman to earn profits upon entering Iraq relies on the accuracy of the U.S. Geological Survey’s estimation that Kurdistan possesses 39 billion barrels of oil reserves. If this estimation proves accurate, Talisman could accumulate a significant amount of wealth by entering Kurdistan. In 2008, the global demand for oil reached 87 million barrels per day, priced at US$130 per barrel (Talisman Energy Inc. : The Decision to Enter Iraq, 2009). Consequently, profits would reach into trillions. With such enormous figures involved, it can be easy for one’s judgment to become clouded when making such a critical decision.

The costs and benefits of Talisman entering Iraq need to be examined. One cost is a 220 million dollar payment to the Kurdistan Regional Government. Talisman’s entry may be seen as supporting the Kurdistan government, similar to their involvement in Sudan, which could lead to opposition from the U.S government that supports the unity of Iraq and its central government. Additionally, there is no agreement yet on revenue sharing (Talisman Energy Inc. : The Decision to Enter Iraq, 2009).

The potential conflicts between the central government and the Kurdistan Regional government may harm Talisman’s reputation, as seen in Sudan. The control of Iraq’s export pipeline system lies with the central government, which would greatly restrict Talisman’s oil exports. Despite this, advantages include access to substantial oil reserves, the possibility of significant financial growth with trillions in profit, chances to invest in Kurdistan, and an overall increase in market share for the company.

Talisman may see a rise in profits by utilizing less expensive labor in comparison to other companies. The following are potential solutions for addressing Talisman’s concerns, highlighting the advantages and disadvantages of each option, as well as their impact on both the company and host country. One possible strategy is to increase engagement in the country where Talisman operates, with the goal of creating a favorable reputation and showcasing dedication towards making a positive impact in Kurdistan region.

Talisman has provided the Kurdistan Regional Government (KRG) with $220 million to initiate negotiations, aiming to ensure that the funds are utilized for development projects such as affordable housing, hospitals, schools, roads, and improved access to drinking water. These areas have been adversely affected due to previous conflicts within the nation. This step further emphasizes that the allocated funds are intended for promoting economic growth in Kurdistan rather than pursuing independence from Iraq.

Despite the financial expense involved, implementing this approach could improve Talisman’s reputation and visibility in Kurdistan while reducing controversy. Another possibility is to regularly evaluate their position in Kurdistan, including assessing potential risks to prevent unexpected issues or exposure. This will allow Talisman to stay informed and proactively manage their presence in the region. Moreover, it will enable them to make well-informed decisions about whether to continue operating or exit at any given time.

The advantage of this approach is having knowledge about the conditions and political/economic landscape in the local area, which would lead to constant risk reassessment to avoid repeating mistakes made in Sudan. However, the downside is the higher cost involved. Additionally, there is a risk of another company taking advantage of the opportunity and gaining control over the oil reserves. As a result, Talisman should regularly receive updates on the situation in Kurdistan.

Recommendation

Talisman Energy Inc. has faced challenges in dealing with politically risky regions, like Sudan, and has gained valuable insights on risk mitigation for investment purposes. A key strategy in reducing risk is consistent evaluation of the business region. Talisman’s extensive experience in Sudan should enable them to approach conducting business in Kurdistan with greater knowledge and confidence.

Talisman Energy Inc. can enhance its ability to recognize political risks in new investment ventures by conducting thorough due diligence and investigating concerns related to politics, law, society, and human rights. This approach will contribute to their success in the Kurdistan region. However, it is crucial to acknowledge that engaging in business activities within a politically volatile area entails significant expenses. If Talisman Energy Inc. decides to enter Kurdistan, it must guarantee transparency and compliance with Extractive Industries Transparency Initiative standards for the $220 million payment made to the Kurdistan Regional Government.

According to The Decision to Enter Iraq, 2009, it is recommended to negotiate a deal with the KRG. The objective is to ensure that funds are allocated towards economic development rather than weapons. This will demonstrate Talisman’s commitment to assisting Kurdistan and enhancing their nation. Additionally, it will establish a productive partnership with the region for successful operation within the oil industry.