In Bolivia, a populist leader takes power and, with popular support, nationalizes foreign oil holdings in that nation. In Venezuela, a military–backed government raises taxes and royalties on oil production to increase dramatically its share in oil revenues. Later, the Venezuelan government insists on administering the oil operations before nationalizing them outright. In Ecuador, a new government increases royalty and tax rates on petroleum exports and seeks to obtain a majority interest in the key oil concession in the Oriente.
The year in Bolivia was . . . 1937; the leader was David Toro Ruilova; the foreign investor was Standard Oil Corporation. Foreign investors returned to the Bolivian oil sector in the mid–1950s, suffered nationalization again in 1969, and then returned again upon a reopening several years later.
For Venezuela, Peres Alfonso instituted the “50–50 agreement” in the 1940s, which guaranteed 50% of all oil profits to the state. Later, in the 1970s, Carlos Andres Perez dramatically increased Venezuela’s control and percentage share over the oil business before nationalizing the petroleum industry. Not until 1992 – when Venezuela began looking to the oil majors for technical support to strengthen production and develop the Orinoco heavy oil (or tar) belt – was the oil industry again reopened.
And in Ecuador, it was during the 1970’s oil crisis that the government of Rodriguez Lara briefly took a greater share of the oil wealth for his state. Ecuador’s effort, however, was short–lived; by 1975, the Ecuadorian government was moderating its policy.
In 1937, and even in the 1970s, foreign investors had limited remedial options. A basic tenet of Latin American foreign (and domestic) policy insisted that foreign investors should receive no better (and, correlatively, no worse) treatment than domestic investors. Therefore, foreign investors making claims of mistreatment or nationalization were obliged to look primarily to the same local remedies available to nationals.
This principle, articulated in Carlos Calvo’s 1868 treatise Derecho internacional teórico y práctico de Europa y Amèrica and known as the Calvo Doctrine, could leave foreign investors virtually empty–handed in the absence of effective state to state diplomacy. Thus, it is reported that Standard Oil Corporation received nothing in 1937, and was paid about US$ 1.7 million five years later, when Bolivia sought to mend relations with the United States. The 1970 nationalizations in Venezuela were compensated, but accompanied by substantial tax assessments that reportedly left those foreign investors effectively empty–handed.
Today, as widely discussed in the press, the cycle is again repeating itself throughout the world. With commodity prices high, Bolivia, Venezuela, and Ecuador, for example, are claiming a right to a greater share in the profits from their natural resources. Bolivia enacted Hydrocarbons Law 3058 in May 2005, requiring investors to alter their contracts and pay greater revenue taxes.
Then, in May 2006, President Evo Morales issued a Supreme Decree nationalizing the hydrocarbons sector. Immediately, Bolivian troops – to much popular celebration in the streets – occupied 56 energy facilities, including the gas–extraction facilities operated by Petroleo Brasileiro S.A. (“Petrobras”), the Brazilian national gas company. Bolivia has now gone further, nationalizing the telephone company, Empresa Nacional de Telecommunicationes (“Entel”), previously controlled by Italy’s Telecom Italia. President Morales has refused to compensate foreign investors, reportedly stating “If they have recovered their investment, then there is no reason to compensate them whatsoever.”
Venezuela, meanwhile, had issued a new Hydrocarbons Law in November 2001, which prohibited private investors from owning 50% or more of the capital stock in upstream oil activities outside the Orinoco tar belt. In 2005, the government notified Petrobras, its three consortium members, and 21 other companies that they had substantial back tax obligations. Then, the government demanded that the private oil companies operating outside the Orinoco tar belt convert their oil field contracts, by March 2006, into joint venture agreements that complied with the Hydrocarbons Law – in other words, to provide a majority stake in the joint ventures to Venezuela’s state–owned oil company, Petroleos de Venezuela S.A. (“PDVSA”).
The government further mandated, in a clear nod to Carlos Calvo and the Calvo Doctrine, that foreign investors waive any right to international arbitration and commit to resolve future disputes in Venezuelan courts. Faced with the loss of access to one of the world’s largest oil reserves, many foreign oil companies accepted the government’s demands. Eni SpA and Total did not; Exxon Mobil Corp. sold its interest to a partner.
Thereafter, the government announced that the four Orinoco tar belt projects would be subject to the same requirements. Again, while some investors agreed, Exxon Mobil and Conoco refused. During the same time period, the Venezuelan government has nationalized the principal telephone company, CANTV, and the Caracas Power Company, while depriving one broadcast station of its license and imposing various nationalistic operating conditions in other industries.
Ecuador reformed its Hydrocarbons Law in April 2006. Under the amended law, Ecuador introduced the concept of “extraordinary income,” representing the difference between the price of oil at the time foreign investors initially contracted with the state and the price at the time of extraction. The amended law required “at least” 50% of this extraordinary income to be paid to the state. In October 2007, following an electoral win for President Rafael Correa’s proposal for a new assembly to rewrite the national constitution, President Correa issued a decree claiming 99% of the extraordinary income for the state.
The recent events in Bolivia, Venezuela, and Ecuador are not unique. From Alberta to Zimbabwe, and many places in between, governments are looking to increase their share of the profits as natural resource prices rise. In September 2007, Alberta, Canada – a place not particularly known for political risk – announced that royalty rates in the Alberta oil sands were being increased.
In June 2007, Zimbabwe threatened to nationalize uranium, coal, and methane projects. Similarly, in 2005, Yemen expelled a consortium of Hunt Oil Co. and Exxon Mobil Corp. subsidiaries – immediately after negotiating and signing a lease–extension agreement.
The United States, meanwhile, aggressively demanded in 2006 that various deepwater leases issued under the Deep Water Royalty Relief Act be renegotiated to require the payments of royalties once certain price thresholds were reached. Throughout the world, the rising value of commodities – oil prime among them – is causing sovereigns to demand a greater share. And in this environment, even those states typically dependent on direct foreign investment can afford to reassert sovereignty over their natural resources.
The consequences of the most recent cycle of resource nationalism remain to be seen. The concept of “permanent sovereignty” – the claimed inherent right of a state to transfer ownership rights over the natural resources within its territory for the benefit of its own citizens, regardless of the expropriatory effect on foreign investors – has been the subject of debate in the United Nations since at least the early 1970s, but has not gained general international acceptance. Meanwhile, the Calvo Doctrine and the protections of sovereign immunity have waned throughout the 1980s and 1990s, as states anxious for foreign investment increasingly accepted direct international obligations to foreign investors.
These new international obligations are found, for example, in the bilateral investment treaties (“BITs”) that now criss–cross the globe. BITs generally guarantee substantive rights, such as the right to prompt and adequate compensation for expropriation, the right to fair and equitable treatment from the host government, and the right to transfer assets freely out of the host state. Moreover, BITs typically empower private investors to protect those substantive rights through a private right of action – with a damages remedy – that is not susceptible to the defense of sovereign immunity and that may be pursued in a neutral international arbitral forum. During the past 20 years, the number of BITs has grown from several hundred to approximately 3,000.
Prior to 1990, neither Bolivia nor Venezuela had signed or ratified any BITs. During the last 15 years, however, each country ratified BITs with 19 other states. In the same period, Ecuador ratified 20 new BITs (adding to the three it had entered into in 1966 (Germany), 1969 (Switzerland), and 1985 (Uruguay)).
Supporting the BIT system, 155 states have signed and ratified the Convention on the Settlement of Investment Disputes Between States and National of Other States of 18 March 1965 – known as the “ICSID Convention” or the “Washington Convention.” The ICSID Convention provides a venue and system for arbitration of disputes between investors and state governments. For example, a final arbitral award under the ICSID Convention is immediately enforceable without any need to homologate it in national courts where assets are located.
By ratifying the ICSID Convention, a state does not agree to arbitrate any particular disputes, but rather agrees that it is willing to follow the ICSID procedures in investment disputes that it has agreed – elsewhere, such as in a BIT – to arbitrate. Bolivia and Venezuela ratified the ICSID Convention in 1995, shortly after their BIT programs began; Ecuador ratified the ICSID Convention in 1986, shortly after entering into its BIT with Uruguay.
In total, ICSID has registered 255 claims arising out of investment disputes since the ICSID Convention came into force in 1966. Of these 255 claims, just 26 were registered between 1966 and 1990: 16 against African nations and just one involving Latin America. By comparison, ICSID has registered 29 claims arising out of investment disputes in 2007, alone – 12 of which are against Latin American states.
Viewed another way, since 2000, ICSID has registered nine claims against just Ecuador, seven claims against just Venezuela, and three more against just Bolivia. Among these claims are ENI Dacion B.V. v. the Bolivarian Republic of Venezuela, arising out of the Venezuelan government’s 2005 decree; Mobil Corporation and others v. the Bolivarian Republic of Venezuela, arising out of the Venezuelan government’s extension of the 2005 decree to the Orinoco tar belt projects; and Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, arising out of Ecuador’s withdrawal of certain contracts. At least some of these 19 recent claims against Ecuador, Venezuela, and Bolivia are publicly reported to seek billions of US dollars in damages.
In a world of $90 per barrel oil, Venezuela and other resource–rich nations are suddenly less dependent on foreign investment. For those nations, not surprisingly, the Calvo Doctrine regains its appeal. On May 2, 2007, Bolivia formally denounced the ICSID Convention, thereby beginning the withdrawal process. On December 4, 2007, Ecuador notified ICSID that it would no longer submit to the jurisdiction of ICSID for disputes relating to the treatment of investments relating to recovery of natural resources such as petroleum, gas and minerals. Venezuela has also threatened to withdraw from ICSID, although it has not done so.
But what of the foreign investors caught in an era of resource nationalism? Foreign investors have many options that may be sequenced or, in some instances, pursued simultaneously. Those options include:
Negotiation – with a respect for, and an appreciation of, all of the political and economic circumstances facing all sides. It may be that an investment agreement can be restructured to give up certain interests while securing certain new ones. Or perhaps, an investment agreement can be restructured to fall outside the new regulatory standards. It may be that sovereign debt instruments or joint venture loan documents contain default provisions that will discourage certain sovereign conduct.
Diplomatic support – with an understanding that such support depends greatly on the credibility and leverage that the home country of the investor holds in the host nation. Although the gunboat diplomacy of the nineteenth century is no longer in play, certain governments are able to bring substantial influence to bear in the right circumstances.
Formal conciliation – through an institution like ICSID or on an ad hoc basis. Particularly where common interests in a continuing relationship genuinely prevail, formal conciliation can bridge important obstacles to the proverbial win–win solution.
Seeking damages – through the pursuit of a clear strategy that may (but in some instances practically or legally cannot) involve local court proceedings as a prelude to international arbitration.
Although the dates and names have changed, today’s resource nationalism is just the most recent swing in a repeating cycle. Whereas gunboat diplomacy in the nineteenth century largely gave way to the Calvo Doctrine and similar principles for much of the twentieth century, the Calvo Doctrine has today largely given way to the web of BITs and the international legal remedies they offer.
When the current tide of resource nationalism ebbs – as inevitably it will – and foreign direct investment flows back – as inevitably it will – the lessons of this cycle will undoubtedly leave behind new measures and countermeasures of protection for both the states and those investing in them. OGFJ
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