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.”  

Rethinking The "Mining Model"

BUENOS AIRES -- As day two of the Rocky Mountain Mineral Law Foundation International Institute in Buenos Aires got underway it was even clearer that the issue of how the business of mining is conducted with respect to the local communities where it takes place is a huge challenge for the sector.

One of the highlights was a panel entitled, "Resource Development: The Key Role of Law and Institutions."  Adriano Trinidade of Pinheiro Neto Advogados of Brasilia, Brazil, presented a paper written by Elizabeth Bastida of the University of Dundee, describing the traditional assumption in this manner: "Mining per se contributes to development.  The overall development of mining is positive."

  

However, he pointed out that more recent developments -- including community opposition to some mining projects -- has caused many to rethink this assumption.  "Private markets require well-functioning legal systems that provide for stability and predictability.  In addition, the law should support institutions of well-functioning markets," he said.  But this has become more difficult to achieve as private investors have watched several mining projects encounter huge opposition, thus putting investors' money at risk.

Luis Carlos Rodrigo, an internationally recognized mining lawyer from the Lima firm of Estudio Rodrigo, Elias & Medrano, talked about Peru's experience with mining in general and the challenges the industry currently faces.  He began by noting that, "As of 1993 almost all state owned operations have been privitized with great success in terms of production." On the other hand, the success of how companies operate within communities is a more nuanced matter.

Many companies operating in Peru have become leaders in corporate social responsibility, one method of trying to address community relations challenges.  However, he identified some key problems to the long-term well-being of the mining industry in Peru:

• Mining companies are not doing enough to call attention to their community relations efforts; this is a result of many years of maintaining a "low profile" in terms of talking about the mining sector.
• The terrible past of the mining sector; "environmental legacies" in the form of badly polluted and managed sites continue to be "concrete evidence of previous contamination."
• The government has failed to regulate "informal miners," who operate without respect to environmental obligations or standards.  "The government has failed to act because it is a social problem," he said.
• NGOs and "political radicals" have taken advantage of the government's lack of action to oppose mining generally.
• There is an enormous amount of money (collected from the mining companies) waiting to be spent for projects to help the communities in which the mines operate, but the funds have not been spent; the government seems very reluctant to allocate these funds for fear of making one group or another unhappy, he said.

In order to deal with these challenges, the government needs to deal with informal miners while major mining companies need to understand that the media helps set local perceptions and expectations.  There also needs to be a commitment to making sure the benefits of mining are shared with society as a whole.

Finally, he spoke of a crucial element in mining companies' addressing the challenges ahead of them: "Today companies are structured to favor short term decisions and results.  This needs to be changed and bonuses and benefits cannot be based on short term results."  In this regard, companies must understand that it is in the long-term interest of the mining industry to avoid short-term decisions that only result in longer-term problems with the communities in which they operate.

Mining and Oil & Gas Opportunities and Challenges in Latin America

BUENOS AIRES -- The major theme of the first day of the 7th Biannual Rocky Mountain Mineral Law Foundation International Institute in Buenos Aires, Argentina, was marked with a series of presentations about how "community relations" issues are becoming increasingly important in oil and gas and mining development projects.

As one speaker said, "It doesn't matter if you have the legal right to develop and open a facility if the local community doesn't want you there."

Luke Danielson, the principal of Sustainable Development Strategies in Gunnison, Colorado, and a globally known leader in the sustainable development of natural resources arena, gave one of the day's leading presentations.  He pointed out that today's challenges for the natural resources industry are different from yesterday's.  

"There was a time we struggled for safety," he said.  "We seem to have learned a lot and while no amount of accidents can be deemed acceptable, the progress is enormous.  We are in the middle of the road with the environment, but there has been considerable progress.  On the other hand, we are still largely very baffled about how to get along with the communities in which the companies operate.  We lack a clear conceptual framework and a clear understanding of our objectives in terms of working with local communities."

Putting it more bluntly, he said, "This may be the key issue confronting the industry."

Mr. Danielson identified several fundamental questions:

• What is law?  "It doesn’t do any good to comply with the law if at the end of the day you can’t move ahead on projects," he said.
• What is development?  "If the objective is to create sustainable development around mining operations, we have to define what is development."
  
• What are the alternatives to how business has traditionally been carried out.

His thesis contains three parts. First, natural resource development brings accelerated change to regions with traditional cultures, subsistence livelihoods, and natural ecosystems.  Second, these are often areas with weak local governments and institutions.  And third, there is often a lack of capacity to manage this change to achieve a positive form of development.

Revenues are needed, he said, to compensate for impacts on livelihoods.  They are needed to provide basic services such as public health, security, education, potable water, and electrification.  Above all, revenues are needed to strengthen the institutions that manage this process of change. 

The "essential elements" of any sustainable development effort must be:

• Ability to plan and manage the development process.
  
• Ability to resolve disputes and conflicts.
  
• Ability to respond to community sentiment.
  
• Accountability for success or failure; the people who make decisions are held accountable by the community. 
  

Distilling all of his observations, Mr. Danielson pointed to three challenges:

• Impacts begin long before there are revenues.
  
• The “off again, on again” flow of revenues associated with developed projects.
  
• Impacts continue after the revenues end; a huge social need remains after revenues end. 
  

"These are very difficult challenges and in many places local government is not able to manage them effectively," he said.

 

 

EPA GHG Endangerment Proposal: "A Game Changer"

One day after the U.S. EPA's historic proposed endangerment finding involving greenhouse gases, the sentiment across the country is that the Obama Administration's action has changed the political landscape.

U.S. Rep. Edward Markey, chairman of a U.S. House Energy Committee subcommittee that will begin hearings next week on legislation calling for a GHG cap-and-trade system and a long-time supporter of GHG reductions, characterized the decision as "a game changer," The Wall Street Journal reported today.  "It's now no longer a choice between doing nothing.  It is now a choice between regulation and legislation."

Consequently, a few things are clearer today:

• The U.S. is going to have a GHG emissions reduction scheme either through legislation or regulation.
• Congress is likely to take a more flexible (including, most importantly establishing a cap-and-trade system) approach to reducing GHG emissions; this is largely linked to the fact that the multiple stakeholder groups will have greater influence over elected representatives and senators than the "unelected" regulators in the EPA.
  
• No industry sector will want to be left out of the political discussions; expect increased lobbying of politicians as well as more TV and radio ads by stakeholder groups aiming to frame the overall issue; from past experience industry is well aware that it is easier to have "a seat at the table" during the legislative process as contrasted to the regulatory process.
• Left-wing and right-wing talkers, bloggers and other "self-anointed experts" will attempt to rally their own bases; whether this will add anything to the overall debate is questionable at best; what it will do is give the talkers another issue to ruminate over for the foreseeable future and a good way to increase ratings.  
• The U.S. has increased its global credibility in terms of addressing climate change; but the U.S. is so far behind the European Union that even with an enormous effort this year, the U.S. is unlikely to take the global leadership role away from the Europeans (a role, incidentally, that the Europeans greatly cherish).

To paraphrase former U.K. Prime Minister Winston Churchill, this is not the beginning of the end...rather it is the end of the beginning.

U.S. EPA Issues Proposed Finding That GHGs Pose Threat to Public Health

After years of inaction by the U.S. federal government to address climate change, the tables have suddenly turned. Earlier today the U.S. Environmental Protection Agency issued a "proposed finding" that greenhouse gases (GHGs) contribute to air pollution that may endanger public health or welfare.

The proposed finding now enters a 60 day public comment period, which is the next step in the required deliberation process that EPA must take before issuing a final finding.

EPA Administrator Lisa P. Jackson said, "This finding confirms that greenhouse gas pollution is a serious problem now and for future generations. Fortunately, it follows President Obama's call for a low carbon economy and strong leadership in Congress on clean energy and climate legislation."

Addressing the seriousness of the challenge of climate change, Ms. Jackson said, "In both magnitude and probability, climate change is an enormous problem. The greenhouse gases that are responsible for it endanger public health and welfare within the meaning of the Clean Air Act."

The announcement came two years after the U.S. Supreme Court in Massachusetts v. EPA ordered the agency to determine whether GHGs should be regulated under the Clean Air Act.

Former Bush administration EPA general counsel Roger Martella said, "The proposed endangerment finding marks the official beginning of an era of controlling carbon in the U.S. This means that EPA's mission of environmental protection will burst outside those bounds and place it on the stage as one of the most influential regulators of both energy use and the greater economy in the upcoming year," according to The Washington Post ("EPA Proposes Regulating Greenhouse Gas Emissions," April 17, 2009).

The proposed finding involves six gases:

• Carbon dioxide
• Methane
• Nitrous oxide
• Hydrofluorocarbons
• Perfluorocarbons
• Sulfur hexafluoride
• The proposed finding does not include any proposed regulations; that step would be undertaken only after a "final" finding of endangerment and hearing from stakeholders.
  

The proposed finding does not include proposed regulations. They would be proposed and adopted only after the endangerment finding becomes final.

Meanwhile, legislation -- the American Clean Energy and Security Act of 2009 -- authored by U.S. House Energy Committee Chair Henry Waxman (D-CA) and aimed at establishing a GHG cap-and-trade system, will be considered by the House in the next few weeks.

So which approach is better? Legislative or regulatory? It depends on your position in the overall debate.

Legislative: More flexible, greater stakeholder influence

U.S. Senator Barbara Boxer, chair of the Senate Environment and Public Works Committee, favors the legislative approach. "The best and most flexible way to deal with this serious problem is to enact a market-based cap-and-trade system which will help us to make the transition to clean energy and will bring us innovation and strong economic growth," according to the BNA Daily Environment Report ("EPA Issues Proposes Rules Finding Greenhouse Gases Endanger Health, Welfare," April 17, 2009).

Administrator Jackson has also voiced a preference for legislation.

Business will also prefer this approach now that it is clear that the U.S. will take action on reducing GHGs.  The reason is that the chances of the various industrial sectors having their views taken into account is much greater in the legislative process where they can seek to influence politicians than in the regulatory process where their influence will be considerably less.  This is made all the more important bearing in mind that while Congress is likely to establish a cap-and-trade system, the EPA is likely to mandate what measures industry must take and skip the cap-and-trade system.  For business this is a key issue since they always prefer more flexibility to less flexibility.  

Regulatory: More control by EPA, probably a less flexible reduction system

If it becomes impossible for Congress to enact GHG-related legislation, then the regulatory approach can be undertaken through the authority of the Obama administration acting on its own. If this approach is taken, the likelihood for robust involvement from the various stakeholders, perhaps most importantly those who prefer a very "conservative" approach will be lessened.

More specifically, while EPA must take account of the various stakeholders' positions in the final analysis the agency will do pretty much what it so desires.

This approach, however, is likely to be susceptible to legal challenge but not before the endangerment ruling is finalized.

Cuba's Fertile Oil Reserves

In the wake of the Obama Administration's relaxing of some travel rules regarding Cuba, a growing matter of interest is whether American oil companies will seek more access to Cuban waters (where the oil is located).

In early April, a Cuban official said, "We are open" to possibly doing business with American interests, and noted that oil firms from China and Russia, among others, are negotiating with Cuba about oil concessions, according to Bloomberg.  

Additionally, The Wall Street Journal blog Environmental Capital ("Mambo Kings: What Does Cuba Opening Mean for Energy Firms?" April 14, 2009), reports, "The list of oil companies looking at Cuban waters is actually a little longer -- one consortium planning to drill exploration wells this summer includes Spanish, Brazilian, Norwegian, and Indian companies."

But the American companies are not there yet.  Surely this cannot make sense, with Cuba and the U.S. being a mere 100 miles (or so) apart?

The triumph of foreign policy animosities (even ones that are well past their "sell-buy" date) over economic reality never ceases to amaze.

More Oil Discovered Off Brazilian Coast

Petrobas, the Brazilian state-owned oil company, has announced another major oil find in the deep Santos Basin waters. 

The new site is located about 250 miles east of the state of Sao Paulo at a depth of about 10,000 feet.

A consortium of Petrobas (45% owner), BG Group (30%), and Repsol (25%) were involved in the newest oil discovery.  

Not surprisingly, Petrobas's common shares are trading at 19 times 2009 earnings, according to today's Wall Street Journal ("Petrobas's Preferred Play").

Brazil's position as a major transportation fuel (oil and biofuels) producer seems set to expand, thus making the country's economy an even larger player in the world.