Mr. Jaakko Kooroshy

Conflict and Coexistence in the Extractive Industries
Jaakko Kooroshy, Research Fellow, Energy, Environment and Resources
CUEN Annual Energy Conference
Cambridge University, June 9, 2014
Presentation outline
Why do disputes matter?
A brief background to the report
What do we know about the incidence and
causes of disputes?
The outlook for company government relations
What are the possible solutions to alleviate
disputes?
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Host-governments and extractives companies have a long
history of troubled relations
• Conflicts can range from minor
tensions over the interpretation
of contractual clauses all the
way to expropriations of assets
• Major disputes are often difficult to
resolve and highly damaging for the
involved governments and companies
• In the 1990s, it was fashionable to
suggest that such disputes were a thing
of the past…
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In recent years, the extractives sector has once again become
a political lightning-rod in many producer countries
• The list of producer countries where extractive sector
has moved to the centre of national attention is long:
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Australia (super-profit tax)
Indonesia (unprocessed minerals export ban)
South Africa (industrial relations and nationalization)
Iraq (regional division of oil income)
Argentina (slow investment)
Mongolia (investment laws)
Guinea (corruption),
Peru (community resistance)
…
This has led to cases of lengthy litigation, project
cancellations or even expropriations – unsettling
global markets and putting in limbo billions of
investments in resource-rich countries.
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A new generation of controversial mega-projects epitomises these
challenges
Oyu Tolgoi, Copper, $ 10.8 bn
Gorgon LNG, Western Australia, $ 54 bn
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Simandou iron ore, Guinea, $ 20 bn
Kashagan, oil, Kazakhstan, $ 50 bn
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A brief background to the report: the objectives
1. What is the nature of disputes between governments and
companies in the extractives sector, where are disputes
occurring, and why?
2. Can trends and patterns across disputes be identified that
help to predict which countries are particularly prone to
disputes and when they are likely to occur?
3. What can governments and companies do to reduce the risk
of disputes and preventing them from spiralling out of
control?
Results based on over two years of research including:
— Compilation and analysis of the Chatham House Arbitrations Database
(CHAD) covering 1970-2010
— Country, regional, and project case studies drawing on the expertise of
Chatham House regional programmes
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Records on international arbitrations provide a useful starting
point to empirically assess disputes
• It’s not easy to define – or measure – ‘disputes’
between extractives companies and host countries.
• Data on international arbitrations, which go back to the
1970s, provide a proxy for measuring when, where and
how often serious extractives disputes have occurred.
A few caveats on arbitrations data, they
– are the tip of the iceberg (not all disputes end-up in arbitration),
– are likely to suffer somewhat from trending (globalization, BITs),
– often lack detail/context (case details are often kept confidential).
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Arbitrations in extractive industries have escalated sharply since
the start of the century
There were just 12 cases between 1990 and 2000, compared with 87 between 2001
and 2010 — 65 in the oil sector and 22 in the mining sector.
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There are limitations to quantitative approaches for identifying
dispute-prone countries
• We compared resource-rich countries involved in
disputes with those not involved in disputes using a wide
set of variables (see the Supplementary Online
Materials)
• It is not easy to derive
robust results due to
statistical problems
(small number problem,
outliers, quantifying
qualitative issues)
regional specifics
(strong path dependencies and
demonstration effects e.g.
‘Bolivarian Revolutions’)
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What causes disputes I: The revival or revenge of resource
nationalism?
• Tensions in extractive industries are often attributed to
‘resource nationalism’. But the concept remains hazy,
and can obstruct understanding of why and how
governments are intervening in the sector.
• A key problem is that it fails to distinguish incendiary
rhetoric from policies that address legitimate societal
concerns.
• Extreme positions such as taken in Argentina or
Zimbabwe are likely to remain exceptions. Most
governments remain wary of deterring investment and
proposals for new ownership or taxation regimes are
often watered down under industry pressure.
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What causes disputes II: Case studies demonstrate that
environmental and social issues are a key source of tensions
• Tensions with local communities and environmental issues
are a common feature of company-government disputes.
• They typically incur serious financial and reputational
liabilities and can lead to delays or even cancellations of
major projects.
• Best practices can reduce tensions and mitigate impacts
significantly, but few mines and drill sites currently benefit
from state-of-the-art know-how, management and
technology.
• Unclear liability regimes and due diligence failures
contribute to lengthy, protracted disputes, especially where
the government is directly involved as a project partner.
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State-company relations – a reappraisal: The central role of
revenue sharing in an inherently vulnerable partnership
• Governments and companies depend on one another for
unlocking resource wealth, but at the same time remain
competitors when it comes to the distribution of revenues.
• Extractives projects often stretch over decades, but few
revenue-sharing agreements survive that long.
• Asymmetries in power, information, capabilities and
resources make for an inherently vulnerable partnership.
• Contracts need to be written against the background of
inherent uncertainty about investment risks and rewards.
• There is no way to establish ex ante what the appropriate
distribution of profits should be for a specific project –
agreements are the outcome of often protracted bargaining
rather than a simple formula!
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Structural shifts are key to explaining recurring episodes of
escalation in extractives disputes
• Structural pressures can reshape state-company relations:
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(I) bargaining power between host countries and investors (the
obsolescing bargain cycle),
(II) Shifting economic narratives and orthodoxies about the role that
states take in the resource sector (the political cycle)
(III) and changing global market conditions (the commodity cycle).
• These are powerful drivers of disputes as they undermine the
stability and legitimacy of revenue-sharing agreements.
• Extractive industries are clearly in the midst of such a period
of upheaval, triggered by
the structural upward shift in commodity prices,
a fraying Washington Consensus
the perception in producer countries of greater bargaining power.
• Many governments have been trying to drive a hard bargain,
and the laissez-faire approaches that dominated policies
towards the sector in the 1990s have fallen out of fashion.
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The correlation between prices and arbitrations is a powerful
indicator of the impact of such structural shifts
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Outlook for company-government relations
• Key sources of friction:
disaffected new generations, in many producer countries
Decentralisation and revenue-sharing with regions/communities
global environmental pressures – e.g. local competition over water use
and changing rules around carbon pricing
Evolving liability and due diligence regimes
• Disputes involving state-backed companies are likely to
increase creating risks for diplomatic/trade fallout
• High expectations, fragile political systems and elite
contestation in many producer countries mean regulatory
regimes for extractives will remain in flux
• A new bout of ‘resource curse’ effects is threatening
emerging and established producers
• Price volatility and ‘capital strike’ by investors could lead to
‘use-it-or-loose’ arguments
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Possible solutions to alleviate disputes?
1. Need to move beyond sound bites on ‘short-sighted
resource nationalism’ and ‘greedy companies’.
2. Need for both sides to plan together for the longer term
(e.g around multi-use infrastructure, value chain development)
3. Need for contracts that are simpler and more
transparent (shift from ‘transactional’ to more ‘relational’ approach)
4. Need for more flexible and progressive revenue sharing
agreements that anticipate structural change.
5. Need for new producers to rethink the speed of
extractives sector development, especially in
conflict/post-conflict settings.
6. Need for an independent, high-level ombudsman for
dispute management?
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Thank you
For any questions, please email
[email protected]
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