Nationalization of Energy Assets Continues in Venezuela: Oil Rigs Switch From Private to Public Hands

The nationalization of the Venezuelan energy industry continued apace recently as the government nationalized 11 oil rigs owned by Helmerich & Payne, Inc., a Tulsa-based contract drilling company.

As reported by the Financial Times ("Venezuela to Nationalize U.S. Oil Rigs," June 24, 2010), "Battling a fall in oil output and rising inflation, [President Hugo] Chavez's government has been tightening its grip over the economy in recent years -- nationalizing electricity...companies" among other industrial firms. The government's response was that the taking was necessary because Helmerich was not willing to discuss its relationship with the national oil company.

What this event underscores is the importance of keeping close track of national policies as companies look for investment opportunities. On-going vigilance by counsel and consultants is necessary in an age where an investment might be privately owned one day and publicly owned the next.

European Parliament Calls for "Complete Ban on Use of Cyanide Mining Technologies" in European Union and for EU States to Oppose Cyanide Use Elsewhere

The European Parliament's (EP) call to ban the use of cyanide mining technologies throughout the European Union's 27 member states by the end of 2011 and to not support cyanide's use in mining outside the EU has drawn the ire of Mercosur ministers just days ahead of EU-Mercosur meetings on establishing a free trade zone.

Mercosur is a trading bloc that includes Argentina, Brazil, Paraguay, and Uruguay, as well as several associate member countries.

The EP, the "greenest" of all EU institutions, laid the foundation for the dispute when on May 5 it adopted a Resolution of a General Ban of the Use of Cyanide Mining Technologies by a vote of 488 in favor to 48 opposed, which asked the European Commission to propose legislation aimed at banning the use of cyanide in mining in the EU by the end of next year. It also requested the Commission and EU member states to withhold "support for any...projects [that involve cyanide technology] in third countries." The resolution was important since in the EU institutional structure, the Commission has the primary power to propose legislation while the EP generally does not. Thus, without the Commission's action nothing will happen.

The resolution said banning cyanide mining technologies "is the only safe way to protect our water resources and ecosystems against cyanide pollution from mining activities." The preamble to the resolution noted that in the past 25 years "more than 30 major accidents involving cyanide spills have occurred worldwide, the worst taking place 10 years ago when more than 100,000 cubic meters of cyanide-contaminated water were released from a gold mine reservoir into the Tisza-Danube River system..."

The resolution's claim that "alternatives to cyanide mining which could replace cyanide-based technologies do exist" was immediately disputed by the European Association of Mining Industries, which told the BNA International Environment Reporter that gold recovery would be significantly reduced without the use of cyanide ("EU Parliament Wants Cyanide Banned, Alternatives Used for Gold Processing," May 12, 2010).

Mercosur representatives said that approval of legislation along the lines proposed by the EP would have a significant adverse impact on mining in South America. As reported by UPI Energy ("Mercosur Unhappy With EU Mining Rules," June 17, 2010), "Given the latest restrictions sponsored by the EU Parliament which propose impediments to the industrialization and commercialization of products from productive sectors, such as the mining industry of our continent, countries of the region reject such measures which are considered restrictive and harmful for the development of our productive activities."

Concern about this type of legislation also was voiced by two key South American mining law experts, Leonardo G. Rodríguez and Francisco A. Macías of the Buenos Aries-based law firm Marval, O'Farrell & Mairal. In a recent newsletter Mr. Rodríguez, a May 2008 LLM graduate of the Sturm College of Law Environmental and Natural Resources Law & Policy Graduate Program, and Mr. Macía wrote, "The fact that the resolution requests the European Commission and [EU] member states not to 'endorse projects of such nature in third countries' is troublesome." The writers noted that while mining is not a substantial component of the EU economy it is a "pillar" in some other countries. Moreover, they wrote,

"[T]he non-endorsement of projects upheld by the Resolution...affects European mining companies carrying out activities in countries in which cyanide lixiviation technology is applied, this would damage mining development severely in said countries...On-going projects would be destined to fail once left unsupported. Even worse, if the non-endorsement being promoted were to reach financial institutions, it would be practically impossible to obtain European financing for new projects."

Several thoughts are worth bearing in mind about the EP's actions:

• As mentioned above, only the Commission can propose this type of legislation (although the EP can try to "persuade" the Commission to follow its recommendations).
• The EU has a long history of trying to regulate environmental-related matters outside of its boundaries; U.S. firms, in particular, have often chafed at what they claim are the EU's aggressive environmental policies that negatively impact foreign firms. The EU's response is firms are not required to do business in the EU and thus be subject to EU legislation.
• While environmental issues are at the top of the list for European voters, the upper-most environmental issue in the EU is without question climate change, not the regulation of cyanide in mining activities.
• The EP frequently passes resolutions or makes pronouncements that the Commission simply ignores.

The mining industry will no doubt pay close attention to what happens in Brussels, the EU's capital city. But any quick action by the Commission seems unlikely. For the time being, the Eurocrats have plenty on their plates with the not so small matter of the health of the common currency, the Euro, on their minds.

--Don Smith

Minerals-Related "Game Changer" in Afghanistan? If So Will Extraction Firms be Able to Operate in Midst of Turmoil?

Afghanistan may have upwards of $1 trillion in previously unknown deposits of minerals according to a new U.S. government report. According to a recent story in The New York Times, "U.S. Identifies Vast Mineral Riches in Afghanistan" (June 13, 2010), "...Afghanistan could eventually be transformed into one of the most important mining centers in the world..."

The graphic, from The Times' article, in the left-hand corner of this posting, shows where the minerals are located.

According to the article, Gen. David Patraeus, the Pentagon's lead officer in the region, said, "There is stunning potential here. There are a lot of ifs, of course, but I think potentially it is hugely significant."

Setting aside the enormous problems associated with actually mining the minerals, what could this mean for the country? A recent posting by UCLA Political Science Professor Michael L. Ross on the Foreign Policy blog addresses the political realities of the report's conclusion and considers whether the country will be beset by the "resource curse:"

"Unfortunately, governments that resemble Afghanistan's -- where corruption is high, and the rule of law and government performance are weak -- typically squander a large portion of these [minerals-related] windfalls. Billions have gone missing from the treasuries of Angola, Cameroon, the Congo, Nigeria, and other African countries that have considerable mineral wealth but weak and ineffective governance. Some is lost to corruption, some to political patronage, and some to well-intentioned projects that are poorly planned, poorly built, or poorly maintained."

The minerals include huge deposits of cobalt, copper, gold, and iron.

Currently a firm associated with the Chinese government is developing a copper mine south of Kabal. Having said that, however, no other large projects are currently underway.

This new report raises all types of questions including:

1. What investor-owned firms will be willing to face the political uncertainty and invest in Afghanistan?
2. To what extent will the Chinese government be willing to overlook political uncertainty and invest in any case?
3. What are the strategic consequences for any firm that decides to operate in Afghanistan? Will they have to raise they own militia or security force to protect their interests? Or will NATO forces take that on (if they are still in the country)?
4. If Afghanistan's treasury is filled with mineral-related revenues, will the future course of the country change?

The concept of an extraction company making large investments in a country riddled by on-going war and an unstable government may not be new. But it does raise huge questions about what risks these companies might be willing to take in order to participate in such a huge opportunity. Or will this turn out to be a situation where only companies that are not faced with quarter-to-quarter performance (e.g., Chinese-government related firms) are the only ones who really invest here?

Stay tuned. This could turn out to be an exceptionally fascinating -- if not entirely predictable -- story.

--Don Smith

"Africa Oil & Gas" Special Report Published by the Financial Times

As those of you who read this blog know, I am a huge fan of the Financial Times, the London-based business oriented daily that tracks key stories from across the world. If you are only going to read one world newspaper a day, I would suggest it be the Financial Times.

In any case, the FT recently published a special report "Africa Oil & Gas" on June 17, 2010. To see the special report, please click here.

The special report includes an assortment of stories that are in the "must read" category for anyone interested in oil and gas issues on the continent. Among the stories include coverage of the oil and gas sector in Ghana and China's ambitious plans for developing African oil.

European Union Environmental Law Guest Lecturer Marcus Oscarsson Featured on Sweden's TV4 News Channel

The Sturm College of Law Environmental and Natural Resources Law & Policy Program has benefited greatly over time (and continues to) from the many guest lecturers who speak to DU students. But it seems fair to say that few of these guest lecturers have ever been featured on a European TV channel talking about a royal wedding.

That was until yesterday when Stockholm-based Marcus Oscarsson, a regular guest lecturer about European Union environmental issues, was featured on Sweden's major news channel TV4 where he talked about this past weekend's royal wedding between Sweden's Princess Victoria and Daniel Westling.

Mr. Oscarsson, an official in the Swedish government, writes from time-to-time for the Times of London, one of Europe's major newspapers. In his "reporting" role, Mr. Oscarsson wrote a front-page story about the royal wedding for the Times' Sunday edition. That was followed by a Sunday morning appearance on TV4.

In his "day job," Mr. Oscarsson is involved with Sweden's governmental issues. From July 1, 2009 to December 31, 2009, he was also a member of the Swedish Prime Minister's communications team where he helped with the government's role as president of the European Union. Most recently he was a guest speaker (via video conference) in the "Comparative Environmental Law" course in April 2010 where he spoke to students and responded to questions about the EU's environmental policy. In July he will moderate a discussion board in the "European Union Environmental Law & Policy" course.

Click here to watch the program. But be forewarned that Mr. Oscarsson's comments are all in Swedish. Fortunately for DU students, he also speaks and writes fluently in English!

Ecuadorean Natural Resources Lawyer and DU LLM Graduate Alvaro Ordoñez Quoted in Leading Latin American Legal Publication

Alvaro Ordoñez, an attorney in Quito, Ecuador, was recently quoted in one of Latin America's leading legal publications about proposed changes to Ecuador's water law.

In LatinLawyer ("Ecuadorean Water Law Will Complicate Investment, Say Lawyers," May 17, 2010) Mr. Ordoñez said, "There is no doubt that obtaining water permits will become more complicated with the new water law, which will most likely be modified again." Commenting about the proposed law's requirement for consultation with indigenous groups Mr. Ordoñez made the following observation: "On the other hand, these consultations with indigenous communities are non-binding, so the future of the law is still uncertain."

Mr. Ordoñez, a May 2008 graduate of the Sturm College of Law Environmental and Natural Resources Law & Policy Graduate Program, is an associate attorney with the firm of Tobar and Bustamante. His main areas of practice are mining law, environmental law, and sustainability. Currently his firm is working on a large-scale mining project in Ecuador for Kinross Gold Company.