Risk Management
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Expropriation, Nationalisation and Risk Management
a report by
Scot W Anderson
Davis Graham & Stubbs, LLP
After a period of relative calm, the oil and gas industry has been hit by a
Bolivia issued Supreme Decree No. 28701 on 1 May 2006, which
new wave of action by host countries, imperilling resource development.
required producers to relinquish control of the production of
These actions fall under the broad category of ‘political risk’, which
hydrocarbons to the state oil and gas company, Yacimientos
includes expropriation, currency instability and political violence.
Petroliferos Fiscales Bolivianos (YPFB).7
The most direct and egregious form of political risk (expropriation)
Russia used its environmental permitting process to threaten contract
occurs when a host country seizes a company’s development rights or
cancellation for projects operated by Total and Exxon Mobil.2 Russia
facilities and its products for the host country’s own use, usually under
also forced Shell and BP to relinquish the Skhalin-2 and Kovykta gas
the guise of the national interest. Nationalisation is the evil twin of
projects to Gazprom and the state-controlled company Rosneft.8
expropriation, and occurs when the host country makes an
Kazakhstan’s prime minister, alleging that international oil companies
expropriation and hands the property or development rights over to a
were not abiding by their contracts, threatened to cancel those
national company. Because the international business community
agreements and return the fields to the state.9 Kazakhstan’s parliament
frowns on expropriation by host countries, some countries move
passed legislation that authorised the government to unilaterally
towards their goal of expropriation in small steps. This ‘creeping
amend or void oil production contracts for reasons of ‘national
expropriation’ can come in the form of increased regulations,
security’.10 Many countries – notably Equatorial Guinea, Kazakhstan,
confiscatory taxes, limits on the repatriation of currency, changes in
Algeria, Angola, Ecuador and Russia – are substantially increasing taxes
exchange rates and forced re-negotiation.1
and royalties on oil and gas revenues.2 There have even been rumblings
of expropriation in Newfoundland.11
The new millennium has brought a new era of expropriation and
nationalisation. Venezuela has garnered headlines for its nationalisation
The robust return of the risk of expropriation and nationalisation to
and expropriation of oil operations. In February 2007, Hugo Chavez
international oil and gas development requires international oil and gas
issued Decree No. 5.200, requiring operators in Venezuela’s Orinoco
companies to focus on risk management. Insurance is a common
Belt to agree to new contracts with the state oil company, Petróleos de
method of managing certain types of risks. Natural disasters, injuries to
Venezuela SA (PDVSA). If they did not comply, the companies faced
third parties and even business risks can be covered to some extent by
expropriation. Venezuela also seized foreign-operated facilities,2 and
insurance. As insurance is market-driven, companies can make informed
ultimately expropriated the Orinoco Belt properties of ExxonMobil
and quantifiable decisions about what risks they wish to shift to
and ConocoPhillips. Exxon has responded with a series of legal actions
insurance companies. Governmental and private insurers offer policies
designed to freeze the assets of PDVSA outside Venezuela.
designed to manage political risks, including the risk of expropriation
3
and nationalisation. Many countries have governmental or quasiEcuador has imposed a deadline for oil companies to accept new
governmental entities that provide political risk insurance for companies
subcontracting agreements, which would cancel existing joint
from that country when investing internationally, including:12
venture agreements. The new agreements would also prevent oil
companies from making appeals to the International Center for the
• US – Overseas Private Investment Corporation (OPIC);
Settlement of Disputes (ICSID).4 Ecuador also created a 50% tax on
• Japan – Nippon Export and Investment Insurance (NEXI);
‘extraordinary profits’ based on crude oil prices.5 In 2006, Ecuador
• UK – Export Credits Guarantee Department (ECGD);
expropriated Occidental Petroleum’s interest in the Block 15 Field.
• France – Compagnie Franc arise d’Assurance pour le Commerce
6
Extevieure (COFACE);
Scot Anderson is a partner in the Denver, Colorado law
firm of Davis Graham & Stubbs, where his practice
focuses on oil and gas development and mining
projects. He is a member of the bars of Colorado and
the District of Columbia, as well as the courts of the Ute
Indian Tribe of the Uintah and Ouray Reservation. He is
also an active member of the Rocky Mountain Mineral
Law Institute, the Colorado Mining Association, the
International Bar Association and the Association of
International Petroleum Negotiators. Mr Anderson is Past President of the Denver
Chapter of the International Mining Professionals Association. He received his law degree
from the University of Iowa, and also holds a BA from Augustana College in Rock Island,
Illinois, and a PhD in philosophy from the University of Colorado.
• Canada – Export Development Canada (EDC);
• Australia – Export Finance and Insurance Corporation (EXIC); and
• Germany – German State Export Guarantee Scheme, managed
by HERMES.
The Multilateral Investment Guarantee Agency (MIGA) is sponsored by
the World Bank. MIGA offers guarantees of investments where the
applicant is investing outside its home country.13 Guarantees are
available for investments in countries that are members of MIGA.13
MIGA guarantees can be used to protect against expropriation,
nationalisation and confiscation.14 In cases of creeping expropriation or
partial confiscation, coverage may be limited.14
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MIGA provides guarantees to manage risks from expropriation and
In complex transactions, an oil and gas company may combine private
nationalisation as well as currency inconvertibility and transfer
insurance with a policy from a governmental agency or with MIGA.
restrictions, war and civil disturbance and breach of contract. If an
MIGA itself now often syndicates large political risk insurance matters
investment is completely expropriated, MIGA will cover the net book
with private insurers.29 The private market has some advantages over
value of the investment. If the host country expropriates funds, MIGA
OPIC, as coverage terms are not governed by foreign policy
will cover the value of those funds.14 If MIGA has guaranteed a loan,
considerations,30 and a private insurer may be able to be more
the lender can recoup the principal and accrued interest.
A MIGA
responsive.29 Coverage can be more flexible, and some companies
guarantee usually has a 15-year term, although the term can be as long
offer packages combining political and commercial risk coverage.30
14
14
as 20 years. MIGA will guarantee up to 90% of an equity investment,
The US Import–Export Bank now also offers such comprehensive
and up to 95% if the principal is a loan. In each case, there is additional
coverage.31 In more complicated projects, it is common to put
coverage for earnings or interest, as the case may be. A guarantee from
together a package of insurance and re-insurance policies to address
MIGA can be as much as US$180 million. If the project requires greater
political and commercial risks. Political risk insurance is not a panacea.
coverage, MIGA can assist with re-insurance to increase the coverage.
It does not cover every political risk, but it can be used to manage risks
MIGA also requires a demonstration that the project will be
such as expropriation, nationalisation and creeping expropriation.32
15
15
commercially sound.
16
In addition to using insurance to blunt the impact of expropriation or
One of the earliest government-sponsored programmes to offer
nationalisation, companies can bargain for some dispute resolution
political risk insurance was OPIC. OPIC is a US agency established in
measure that may give them a chance to recover losses arising from
1971 to foster foreign investment in foreign countries.17 OPIC coverage
such actions by the host country.
can be used to insure against expropriation, political violence and
the inconvertibility of foreign currency.17 Like MIGA, OPIC provides
Companies operating internationally may be able to take advantage of
political risk insurance for new projects,17 but limits its coverage to US
multilateral investment treaties (MITs) and bilateral investment treaties
companies investing internationally.17 As OPIC is a government agency,
(BITs), which are designed to provide protection to foreign investors
its coverage is limited by some policy considerations.16,18 As a general
between and among countries.33 These treaties are typically designed
rule, the US company must own at least 25% of the equity in a
to attract investment in the host country by providing protection
project,19 and as it is a US agency, OPIC will not provide coverage for
against expropriation or nationalisation, among various other risks. The
investments that would injure the US economy or US employment.
company making the investment will need to review the applicable
treaties for each host country.
OPIC will usually insure up to US$250 million per project, but will
increase that cap to US$300 million for offshore oil and gas projects
A company operating internationally also takes on some risk that its
with payments in hard currency.20 That cap can go to US$400 million
contract will not be properly enforced by the local court system,
where the project receives an investment grade credit rating.20 OPIC
especially if the other party to the contract is the host country’s oil and
will insure against expropriation, including creeping expropriation.21 In
gas company. One way to mitigate this risk is to require all disputes to
the oil and gas sector, OPIC will provide coverage for abrogation or
be resolved through international arbitration. The American Arbitration
breach of concessions, production-sharing contracts and similar oil and
Association, the International Chamber of Commerce, the London
gas agreements.
Court of International Arbitration and other arbitration organisations
have rules designed to provide for the arbitration of disputes between
The Export Credits Guarantee Department (ECGD) is another example of
companies from different countries.34
a government-sponsored insurance and guarantee programme. ECGD
provides overseas investment insurance (OII) for UK investors, and covers
International arbitration can be especially helpful if a company needs
a wide range of political risks, including expropriation.22 The OII
to return to the host country to enforce its judgement. About 110
programme can be used for equity investments or loans.22 The OII
countries are signatories to the 1958 New York Convention on the
programme covers direct expropriation as well as creeping expropriation.
Recognition of Foreign Arbitral Awards, administered by the UN
Usually, the expropriation must last for one year to give rise to a claim
Commission on International Trade Law (UNICTRAL), in which host
under the OII policy. As with MIGA and OPIC, ECGD favours coverage
countries agree to enforce arbitration awards. Thus, a judgement
for new investments or significant expansions of existing investments
rendered through international arbitration may be more collectable
through
than one awarded by a US court or any other court outside the host
23
new
capital
infusions,
but
will
not
cover
country. There remains some risk that a host country may apply the
existing projects.24 ECGD will allow recovery for partial expropriation.25
UN Convention or an arbitration award in an unexpected manner.33
In addition to MIGA and the governmental insurers, some private
A US-based oil and gas company might, for example, be inclined to
insurers now offer political risk policies that include insurance for
negotiate a dispute resolution provision requiring that all matters be
expropriation.26 Chubb, for example, offers confiscation, expropriation
heard by the Texas courts. The host country may resist enforcing a
The Chubb CEN policy provides
judgement from the Texas courts, and may indeed have laws on its
up to US$50 million per country, with a policy period of up to 10 years.27
books allowing it to ignore that decision. However, if the host
A single Chubb policy can cover multiple countries.27 Zurich North
country has signed the New York Convention, it is obliged to honour
America also offers political risk insurance that covers expropriation and
and enforce the outcome of an international arbitration. While the
creeping expropriation.28 The Zurich policy can cover up to US$125
company may believe that securing a judgment will be easier in
million per transaction, with a policy term of up to 15 years.28
Texas, enforcing that judgement could be much more difficult.
and nationalisation (CEN) Insurance.
27
22
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Expropriation, Nationalisation and Risk Management
Another useful approach to dispute resolution is to insist on resolution
well delay recovery of damages.34 Also, as noted above, Ecuador has
under the rules of the International Center of the Settlement of
attempted to put new contracts in place that will preclude ICSID
Disputes (ICSID). About 130 countries have signed the ICSID
dispute resolution.
Convention on the Settlement of Investment Disputes between States
and Nationals of Other States.33,35 However, a host country can require
While there is no perfect shield from host country expropriation or
the disputant to exhaust local remedies before moving to ICSID dispute
nationalisation, the measures described above can help manage that
resolution, which has the potential to prejudice the outcome and may
risk and bring some additional certainty to investment decisions. ■
1.
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