Latin America‘s ‘take it or leave it” approach: how far will it spread?
Sascha van Noort-van Galen and Jojanneke Deelstra, both Legal Counsel at Omni Bridgeway Emerging Markets, look at those countries leading the trend and note the geopolitical influence that this latest enthusiasm for state ownership in national assets is having.
Nationalisation fever has hit Latin America yet again. Arguably the sovereigns involved are creating claims and debts with sovereign liability or responsibility. We begin by looking at Venezuela and Bolivia.
In the past two years, Venezuela’s President Hugo Chavez has raised the corporate income tax for foreign oil companies from 30% to 50% and increased royalties payable to the government up to 33%.
Anglo-Dutch Shell and Great Britain’s British Petroleum (BP) have been hit with huge tax bills. After threats to confiscate their operations elsewhere in Venezuela, 26 foreign oil companies, including BP, Shell, US-based Chevron and Spanish-Argentine Repsol YPF, agreed earlier this year to convert their operations into joint ventures with the state-owned corporation Petríleos de Venezuela SA (PDVSA), in which PDVSA became the major shareholder (holding at least a 51% stake).
Refusals and seizures
Two European firms – Total of France and ENI of Italy – refused, and Chavez promptly expelled them and seized their oilfields. Venezuela’s minister of petroleum, Rafael Ramirez, also president of PDVSA, declared: “We have done nothing less than to snatch the world’s biggest oil reserves from the mouth of imperialism.”
Now, the government is demanding similar concessions regarding the Orinoco Belt Operations, in which Chevron, Exxon Mobil and others have invested about US$17bn: again an increase of PDVSA’s share ownership and release of operational control of the oilfields.
Simultaneously, Venezuela announced that it is significantly boosting trade with Russia, establishing joint ventures ranging from oil to agriculture. A total of 23 Russian oil companies offered services and technological help in areas from drilling to processing of heavy crude deposits.
Venezuela is furthermore setting up joint ventures with China, Brazil, India and Iran. Chavez is clearly spreading Venezuela’s geopolitical risk and influence by diversifying its suppliers of technical support as well as its buyers.
Morales takes it back
On May 1, 2006, the president of Bolivia, Evo Morales, lived up to his promises given in the December 2005 elections by nationalising the hydrocarbon/gas industry. Morales declared: “The nationalisation would not take the form of ‘expropriations’, but rather the negotiations of new contracts that will give ownership to the sate.”
When armed forces occupied the premises of Brazilian national gas company Petroleo Brasileiro (Petrobas), the largest investor in the gas industry in Bolivia, the intentions of Morales were unmistakably clear:
He said: “The looting by the foreign companies has ended. We are not a government of mere promises; we follow through on what we propose and what the people demand. We want to ask (the armed forces) that starting now, they occupy all the energy fields in Bolivia along with battalions of engineers? The time has come, the awaited day, a historic day in which Bolivia retakes absolute control of our natural resources.”
Besides Petrobas also Repsol YPF, BG, BP and Total have large holdings in Bolivia’s energy industry. All of these foreign investors were told to turn their production over to the state company Yacimientos Petroliferos Fiscales Bolivianos (YPFB).
Bolivia gave the foreign gas companies six months (until November 1, 2006) to negotiate new contracts giving the state a greater control over the gas market. Those that refused to obey would have to leave the country.
Although Petrobas and Repsol YPF did protest against these measures of Bolivia, most foreign companies simply agreed to cooperate with the Morales administration. In October 2006, Petrobas announced that it had reached a provisional natural gas price understanding with Bolivia.
Moreover, without even waiting for the completion of this nationalisation round in the gas industry, Morales has already announced plans to introduce new nationalisations in other industries, new tax measures and further seizure of land.
Morales’ nationalisation agenda has been described as another chapter in Latin America’s turn to the left, and fears are rising that the Bolivian leader has fallen into the fold of Venezuela’s Chavez and Cuba’s Fidel Castro. There are signs that this nationalistic fever is spreading even further to countries in and outside the region that are not traditional allies of Venezuela and Bolivia.
One of these non-traditional allies of Venezuela now showing signs of the nationalistic fever is Ecuador. Chavez has encouraged Ecuador’s President, Alfredo Palacio to fight for control over the country’s national resources.
On April 19, 2006, Ecuador modified the National Hydrocarbons Act to establish a 50% minimum state share in oil revenues. Foreign oil companies that have entered into oil production contracts with the Ecuadorian government were directly affected by these changes.
Within 45 days foreign oil companies were summoned to comply with the modified National Hydrocarbons Act or leave. No compensation from the government of Ecuador is expected.
Nationalisations in Latin America are not new; we have seen them before. Countries like Bolivia and Venezuela have nationalised their energy sectors several times in the past. The waves of nationalisations seem to have strong links with political and economical changes. When supplies are tight and prices for oil and gas high, foreign investors in the oil and gas industry are naturally willing to do the utmost to secure their positions and concede to radical government pressuring.
Thus, at such times governments unilaterally alter contracts with foreign investors and indeed gamble that investors will accept such changes, often correctly. South America has experienced it before: large energy companies simply stay (and take it), even if this means that they are forced to work under less favourable conditions.
The new waves of nationalisation in Bolivia and Ecuador that took place during 2006 are quite fresh and most foreign investors have not yet announced which (non legal and/or legal) steps they will be taking, if they are taking any steps at all.
After the Venezuelan oil nationalisation (which already started in 2001) we have seen that not many foreign oil companies actually dared to take legal action. Although Venezuela (as with most other Latin American countries) has signed bilateral and multilateral investment treaties which give foreign investors protection against expropriation and other mistreatment of the ‘hosting’s countries, to our knowledge none of the oil companies have started arbitrations under these treaties.
The reason for taking all of this without trying to claim damages is simple and clear: overheads and capital commitments are too large to cut and run. Shell was one of the oil companies that endured sustainable losses in Venezuela. Shell however has chosen not to start arbitration under the UK or Dutch-Venezuelan BITs. Shell was afraid to win the battle but to lose the war. Leaving Venezuela was not an option. In the words of Shell’s regional production manager, Frank Glaviano: “It’s not about being angry, it’s about conducting business.”
The success of Latin America’s ‘take it or leave it approach’s is encouraging other countries outside Latin America to also consider renegotiating their energy contracts. This August we saw the nationalisation fever fly over the Atlantic Ocean to hit the African oil country Chad.
Chad’s president Idriss Déby ordered Chevron and Malaysia’s Petronas to leave the country within 24 hours for the alleged non-payment of taxes – a move apparently aimed at increasing Chad’s control over the country’s oil production.
Chevron and Petronas are two of three members of a consortium that handles the country’s oil production. This move followed Chad’s decision to create a new national oil company. Not surprisingly, President Déby announced that he wishes to renegotiate Chad’s contract signed with the consortium to increase Chad’s share in the oil revenue.
It is said that the new state-owned oil company will be brought into the consortium to hold a majority share.
It must be admitted that by accepting expropriation and mistreatment from investment countries, these countries will continue to try their luck further and by that it will trigger other countries to follow in their footsteps.
Today it is Chad, tomorrow it could well be Russia. While Venezuelan/Russian cooperation accelerates, Russia is also gradually strengthening its control over the oil and gas sector while avoiding outright nationalisation.
For example, under the pretext of environmental concerns, Russia is threatening to halt work on the US$20bn Sakhalin Island energy project run by Shell by revoking an environmental permit. Many commentators agree that this is simply being used by Russia to put pressure on Shell to reconsider the terms of the original agreement to develop the fields and win a portion of the Sakhalin-2 production for Gazprom.
A big concern for the near future is also the implementation of a new subsoil law this year, in which Russia will retain the right to refuse participation of any joint venture in future strategic properties (ie, possibly the most desirable hydrocarbon assets), if the joint venture does not meet the minimum requirement of 51% Russian ownership.
What of course is of interest to the foreign investor touched by nationalisation is what remedies should be sought, if any, as a consequence of the shifting positions.
Commercially if profit remains even on the newly negotiated contracts then the decision may be pragmatic. Notwithstanding the pragmatic ‘take-it-or-leave-it’s approach, losses or profit reduction of a significant magnitude may lead some investors to consider legal recourse.
We note in this regard that the public international right to compensation for confiscation/taking/expropriation by state action remains intact and indeed has been strengthened to the benefit of the foreign investor by the operation of investment treaties.
It will be interesting to see what action the investors and those insuring them choose to take over the coming months either to protect themselves in Latin America or stem the tide of state sponsored taking of assets elsewhere.
IT is clear is that they have some options heavily weighted to their advantage. A favorite of multi-national corporations, for example, is the International Centre for Settlement of Investment Disputes (ICSID). Operating behind closed doors, in Washington, in English, and with both the media and citizens totally excluded from the process, ICSID was designed for global corporations and it works for them well in legal disputes with countries like Bolivia.