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

Abstract

1. The issue: Do the instruments of good governance and the rule of law have any significance when faced with the force of the energy and resource industries cycles? As we experience a so far sustained upwards trend in the price of petroleum and miner-als, 1 governments of producing countries worldwide are engaged in a fundamental revi-sion 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-orien-tation 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 vis-ibly 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 sys-tem 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 nego-tiation. 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 * Dr. iur (Frankfurt), LLM (Harvard), Professor and Jean-Monnet Chair, CEPMLP, University of Dundee; Rechtsanwalt (Frankfurt) and barrister (Essex Court Chambers/Lincoln's Inn (London)). This paper is based on presentations at AIPN (Association of International Petroleum Negotiations) meetings in Calgary (May 2006), Houston (June 2007) and the CEPMLP (Centre for Energy, Petroleum and Mineral Law and Policy)/Dundee 30th Birthday Seminar in London (June 2007). It refers to contributions by Philip Crowson, Peter Cameron and A Elisabeth. Bastida presented at the CEPMLP 30th birthday seminar and included in the forthcoming book (edited by P Andrews-Speed, Dundee University Press 2008) arising out of the seminar. Acknowledgments for helpful comments to M Goldhaber, B Tamanaha and Matthew Stone, for help in editing and finalization to my research assistant, Aloysius Gng and most of all to Tim Martin.