Renegotiating acquired rights in the oil and gas industries: Industry and political cycles meet the rule of law

As we experience a so far sustained upwards trend in the price of petroleum and minerals,1 governments of producing countries worldwide are engaged in a fundamental revision of the terms under which international investors originally carried out their investment.2 Changes are most extensive in the cases where contracts with host states (or their state enterprises) were negotiated in times of relatively low oil, gas and mineral prices (in particular between 1985 and 1999); in the cases where a fundamental re-orientation of a host state’s policy towards foreign and private investment has taken place (eg in countries where governments now pursue a policy of anti-Western (in particular anti-USA) resource nationalism); and in the cases where new governments have reversed visibly and significantly the policies of privatization of state-owned operated upstream oil and gas and mining assets carried out in the 1990s. The renegotiation demands are more acute where the original contracts did not provide for a balanced internal adaptation system providing, now, a politically acceptable outcome for the host state. Even an internal adjustment system which responds to changes in profitability and mineral rent (eg with rate-of-return-based financial regimes) may not be able to fully accommodate host state revision demands if its structure reflects unequal bargaining power at the time of negotiation. Contracts concluded with quite inexperienced governments, for example newly independent petroleum states that emerged after the collapse of the Soviet Union have come under pressure, in particular if the explosion in oil prices has not led to a corresponding (and politically visible) increase in government income.3 This is particularly so if production in the early years has not been producing substantial government income; in such cases, it looks as if the resource is extracted and given away for free.4 This is politically not acceptable and least in an unexpected high-price environment. The current high point in the resource price cycle facilitates and enables policies of resource nationalism and re-orientation from private ownership to state control which were largely at bay during the low points of the price cycle (mainly from the late 1980s to approximately 2000). Resource nationalism has raised its head again. Political demands, often dressed in legal concepts, that were last heard of in the ‘NIEO’ (New International Economic Order) period of the 1970s,5 are now again the common currency of resource nationalism. These include arguments that contracts are only valid rebus sic stantibus (ie as long as circumstances remain the same), that governments have a unilateral ‘sovereign’ right to revoke or substantially modify contractual terms and that the rights of investors acquired since the 1980s under the international investment protection treaties are now subject to the overriding jurisdiction of national courts.6 In essence, such views posit that acquired rights are subject to the discretion of governments which is not much different from saying these are mere ‘political understandings’ devoid of a truly legally binding character. The implication of the view of absolute state sovereignty over such ‘state contracts’7 means, in functional and effect terms, that agreements with host states, in particular those with de-facto state control over their national judiciaries, are essentially a temporary political understanding. This would be less problematic if a foreign investment an investment which is only over long of The host state and such and the is as to host state The of international investment in particular of of to international and most and most investment treaties with be as to such unilateral of the to host state after the investment has been and the effect now and the of to such to from political subject to the discretion of the host to contractual that be under a legal system and host state control and and more to be the for This the of as it the political of resource nationalism and the sustained high the of the of in the and in its political and has in the state This of the of with to rights the state is in contracts between the foreign with the host state or with its state in agreements and in in national investment or and to international The of the of investment protection which substantially during the late 1980s in and investment such as the over investment treaties the or the of that the different views the of of at the of the are the that legal be and that acquired rights be to in that not in the terms of a resource investment for an government power to that be as a of the of or terms (eg in particular have been an to a unilateral the government at least a of of the This is more so if a the of such changes to a foreign and changes may under international investment a of the host state to the of the investment in particular if the the of as of the to provide and if is and changes in not and a or an international may a national are not a of producing countries the the or their and system such the profitability of the (and the of the for which is quite to the price such as the to investment in and (eg or in policies at of the as as and political with to or the environment. In such cases, to with an that the and be and much or of the and with the In such of of and and are or in or is less to investors it would be in of high political and politically for investment protection be and in where the political is as high and where such are in to the political and the to the is as low (ie in to it international and investment protection are less less and protection are most where are as In where is a high political and investment protection the (eg at in a in or investors have to their investment the of an and profitability be to in of their investment with in effect as the price to be for political state and of and political of These have a high much in a where legal of investment protection in a of be are often not to subject to and the of (eg international and investment with the and contractual adaptation under the of the upwards of the resource period of resource with an new legal have been to with the the political in the last The current of as a to the and of the ‘NIEO’ period in the and the International Economic As the these more political have not been able to a of contracts in and and have been able to provide protection to international oil in countries such as or where investment protection would have a from the would have been a of assets new and significantly and ownership the of international with of in of an for the This not be to that the investment protection contractual international and not provide protection at that it not provide the and protection for which it for and which from political and international in a would that the and structure is a mere and has effect in or the of the resource the of host states and the political in which the would that the in national international treaties and international from and are an of as a and for and financial to under the that the the terms of such investment and the the original investment that contracts and rights are of and ‘political are to provide to the in the are fully to the of the host state political and to the political of host and The in is more an that is a for in a (or not under the of in a of the with to legal right be acquired and rights are to the power of those control the and of In such countries is of in is a as those in power the of in with the of the in the and the of the are under the and control of those with political power over the of the state. from the the of in the international is a as to it is truly to the originally negotiated and terms for a national to investment or international the and a of or with their and of and the and the is much of the legal such a of that and in has only a the less the more the and the the in political and the of the and political international The of current (in particular in the of oil, gas and is in the upwards (and of the price cycle in the petroleum and mining have been in the and and are not to the upwards cycle in oil, gas and to the ‘political of towards foreign investment with a towards the privatization policies of the 1990s. In those countries with petroleum or mining renegotiation or and foreign investors be as politically and the mineral to the a fundamental of government and political government did the its to not be to a where a between the government in place at the time of investment and the cases out of a of government a of or or a in the circumstances of an The of an investment is that the terms or and in or the of contractual or a are and a International most national not a of government as a to contractual and a The is that the government has of that the of the government of the in or legally investment terms to if a new government and have and power for if such politically is and be to those newly in the foreign the political of to the The of for investors is particularly acute if the new government a different policy towards private and foreign investment in as oil, and The to oil, gas and mineral most of which has been taken over or late the new government to its policies such as investment 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countries to a and in cases changes the political and to the the of the of of oil, gas and mineral an that may have that to most of the to protection of acquired the may a of to acquired rights the of and in the of and at be to and the effect the of and in the in This that the of international investment be much with as with the of the of The changes of government and government The to with a of that in a of and of The raised under in particular under that with The reflects the of state of rights to government is an unexpected the is as if the were an under the it reflects a view of rights the of and which be or governments in This has as the arguments have been in the of a government a privatization The that the of rights is not an for or countries the between private investors and states the of which is not in the oil price and in the of the host state in for the an international oil the oil the of the is under most the host state. 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