Wednesday, April 22, 2009

Developments, Trends & Strategies to Address Nationalization of Oil & Gas Interests

BUENOS AIRES -- Key developments, trends, and strategies related to the nationalization of oil and gas enterprises was a featured discussion as part of the three-day Rocky Mountain Mineral Law Foundation International Institute meeting held in Buenos Aires April 20-22. 

This topic was of particular interest to conference attendees in light of recent developments in Bolivia, Ecuador, and Venezuela where the respective governments have taken steps to nationalize key energy-related sectors. 

Carlos Urruita of Brigard & Urruita of Bogota, Columbia, began the presentation with an observation that Columbia has largely avoided nationalizing the energy sector.  Columbia has not experienced the “resource curse” related to the mismanagement of national resources that leaves a resource-rich country less well off than might be expected because the country has not had an abundant supply of hydrocarbons.  He pointed out that in the 1960s foreign oil companies left the country because of government mandated low oil prices.  

Moreover, despite the anti-foreign investor sentiments in many countries, the Columbian public remains largely of the view that foreign capital is need to develop oil and gas reserves, he said.  In addition, the country maintains a long acceptance of the rule of law and democracy and has enjoyed an independent judiciary that is not afraid to rule against the government.  

On the other hand, there is the possibility of nationalization, he said.  The constitution includes a provision providing that private interests must give way to the public interest in some situations. 

A different view of nationalization was provided by Victorino Tejera of Maclead Dixon in Caracas, Venezuela.  His comments were focused on what should be done pre-investment to protect against a possible nationalization.  One important strategy is to channel investments through corporate structures organized in countries that have bi-lateral investment-related treaties with Venezuela.  He mentioned that Venezuela has 24 bilateral treaties in place, although none with the United States.  As a result, U.S.-affiliated companies organize investments through Canadian and Swiss companies.  A second strategy, he pointed out, is to negotiate a provision for offshore international arbitration. 

Brian King of Freshfields Bruckhaus Deringer LLP’s New York office explained potential strategies for situations where a private entity uses provisional remediation measures in the context of arbitration.  He noted that the power to grant provisional measures is broad.  Key elements that must be established include: 

  • A right in need of protection
  • Urgency
  • The measure is necessary to prevent severe harm

Finally, John Bowman of King & Spaulding LLP in Houston explained the newest trends related to state-sanctioned nationalization of oil and gas interests.  The first trend is “away from forced seize of assets to a more nuanced approach which is the forced re-negotiation of contracts.”  The second trend, he asserted, is a developing string of cases that say such an approach violates international norms related to the “fair and equitable treatment standard.”  

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