Disputes between governments and extractive companies are on the rise. Between 2001 and 2010 some 87 projects went to international arbitration, compared to only 12 during the whole of the 1990s; for oil and gas the increase was tenfold. These are only the tip of the iceberg, with many more expensive legal battles at the national level, such as last year’s high-stakes showdown over the $20bn Los Bronces copper mine between Anglo American and Chilean state-miner Codelco.
Such confrontations often derail projects, adding to operating costs and damaging reputations on both sides. These not only threaten the fortunes of many resource-rich developing countries but also investors. Three recent expropriations (Repsol in Argentina, Rio Tinto in Guinea and First Quantum Minerals in DRC) already cost companies some $13 bn.
RISING PRICES, INCREASED DISPUTES
The rise in these disputes clearly follows the boom of the last decade and evidence** shows that since 1970s there has been a close correlation between commodity prices and the number of arbitration cases (see graph).
As prices for oil, gold, copper and iron ore soared, governments have challenged contracts and raised taxes, pushing for what they consider a ‘fair share’ of the revenues. According to the World Bank, more than 30 countries revised petroleum contracts or entire fiscal regimes between 1999 and 2010, whilst in mining, at least 25 governments announced tax increases between 2010 and 2011 alone.
Companies are left with the choice to acquiesce or seek legal redress, often in countries where the legal system is influenced by national politics and political elites. In May, Barrick Gold and Antofagasta were forced to abandon the construction of a $3.3bn copper-gold mine in southwest Pakistan after successive court rulings challenged their rights to the deposit following disputes over the payments to regional authorities.
Tension will grow as many resource-rich countries suffer from growing economic imbalances and unemployment, exacerbated by increased dependence on the sector. The political fallout of the boom of the past decade will be felt in boardrooms from Beijing to Houston. This is evident from export restrictions on raw ores in Indonesia to increased local content requirements in Zambia.
New pressures are being put on the sector through greater levels of international scrutiny and communication which is also questioning fairness in a range of other areas from land rights in India and PNG to water scarcity in Mongolia and Chile.
Let’s be clear – no country or company is immune from such disputes. Many OECD countries are also vulnerable to such disputes as can be seen from the battle over the Australian super-profit tax on the mining industry in 2010 and the growing community backlash over shale gas operations in the US and Europe.
As a new vanguard of inexperienced producers emerge, public expectations on the sectors increase and prices remain volatile, it is worth returning to the lessons of the past.
IN SEARCH OF A ‘FAIR’ REVENUE DISTRIBUTION
More often than not, fights in the sector are about the ‘fairness’ of the distribution of rent between governments as the owner of the resource and companies who have the capital and expertise to develop it. Where the sector is a key pillar of an economy, this often becomes a highly politicized issue. Questions of who is in control and who benefits from resource extraction remain relevant to a company’s presence in a country long after the ink on the contract is dry.
The inconvenient truth is that no formula for a ‘fair’ distribution of revenues exists. The original government-company agreement will be challenged by cyclical shifts in prices, ideologies and bargaining power. A government will be much more dependent on foreign company expertise to extract its below-ground resources, for example where it lacks know how and capital. Once the investment has been sunk, relative bargaining power swings dramatically in favor of the governments.
HOW TO AVOID CONFLICT?
An array of tools is available to help to avoid conflict or ease tensions at an early stage. This includes guidance on flexible contract terms, best financial and operational practice, company cooperation in sustainable development planning and strengthening of independent institutions such as the judiciary and sector regulator.
But the issue demands greater commitment on all sides. Failure to manage conflict could threaten future supplies of oil, gas and minerals, not least because where cooperation cannot be achieved, there is a case for leaving them in the ground until conditions are more favorable.
*Professor Stevens is a Distinguished Fellow at Chatham House, London.
**’Conflict and Coexistence in the Extractive Industries’ by Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee. Chatham House Report, November 2013.