Emotive clashes between states and multinational companies over the ‘fair share’ of resource profits are causing some oil, gas and mining companies to rethink their investments, with implications for industry governance and how risk is shared.
Two high profile lawsuits involving extractives companies returned to the news last month: Chevron v Government of Ecuador over responsibility for pollution in the Amazonian rainforest and BP’s battle over compensation claims in the United States. In the most expensive legal case over a spill in history, BP has so far sold off $40 billion of assets and paid out over $25 billion in clean-up costs and damage claims. Chevron’s case has become more a focus on allegations of covert tactics on both sides as the company seeks to prevent enforcement of a $9.5 billion Ecuadorian court award. Although very different, both cases raise the murky issue of liability.
Chevron acquired the Ecuadorian assets when it merged with Texaco in 2000 after the damage had been done under a joint venture between state company PetroEcuador and Texaco subsidiary Texpet going back to the 1960s. In 1998, Texaco’s remediation efforts ended and the then Ecuadorian government officially ‘absolved, liberated and forever freed’ Texaco from ‘any claim or litigation by the Government of Ecuador concerning the obligations acquired by Texpet’. In 2003, a new lawsuit was filed against Chevron on behalf of affected communities under a 1999 environmental act and received support from a new government in 2006.
In BP’s case, the service company Transocean was the owner-operator of the Deepwater Horizon rig in the Gulf of Mexico which suffered a blow out, while another service company, Halliburton, sealed the well casing which was meant to prevent the blowout. This muddied responsibility under what have been described as the ‘patchwork’ of US laws governing oil spill pollution. Moreover, the public response meant that maintaining any sort of case based on the contractual liability cap for ‘no fault’ − which was set at $75 milllion − would have been untenable. Costs for ‘economic losses’ have mounted way beyond expectation.
Both show how cases of environmental damage can become emotive national issues in a way that few banking scandals or tax fraud cases do. They draw attention to the uncomfortable truth that in the case of large extractives projects, the law rarely has the final word. Presidents make statements on them, Hollywood stars get involved, reputations suffer and the legal proceedings themselves can turn into theatres for personal defamation.
They are also expensive for the shareholder. While large multinationals are able to sell assets and use ring-fenced funds for compensation and legal costs, share prices are affected. For smaller companies, mistakes at the wrong time can mean bankruptcy. For example, Finnish nickel mining company Talvivarra now faces court-supervised restructuring or bankruptcy as a result of environmental breaches. Its share price slid by 94 per cent in 2013 as a result of strong public and environmental group protest after leaks of toxic water from its operations in Sotkamo, in central Finland, in 2012, compounded by the dampened price of nickel.
The cases of Chevron and BP also indicate a shift in company investment strategies. Chevron no longer holds any assets in Ecuador and has sold off assets in Nigeria and Egypt in the last 12 months. The pullback from Nigeria follows Shell, ENI and Total (although offshore interest remains). In August, Exxon sold its share in Iraq’s giant West Qurna-1 field to Asian investors which seemed to symbolize this international oil company shift from ‘easy oil, difficult politics’ towards ‘high-tech operations, stable politics’ prospects – for example, those in shale gas and oil, deep-water and Arctic offshore. A similar trend is discernible among some large listed mining companies. BHP Billiton for example has made a conscious decision to reshuffle its portfolio of assets towards politically stable countries.
Meanwhile, the state-backed Asian companies and smaller independents rush in – often in complex joint ventures involving multinational companies (MNCs), asset swaps and larger bilateral development packages. While far from clear cut, these shifts have profound implications for company−government relations, profits, production and reputations. Environmental issues are a case in point.
In developing countries, the withdrawal of the MNCs may leave a ‘governance gap’ as new actors learn old lessons. Some independent companies and state-owned companies have less experience with environmental governance and the ‘package’ development deals often pursued by Asian SOEs may make for less clear accountability in the event of an environmental disaster or human rights breach. The more varied nature of joint ventures may also increase the complexity of liability for damage.
The shift towards more high-tech engineering extraction solutions in developed economies does not avoid these problems, although they play out in different ways. In terms of regulatory frameworks and strategy for the sector, governments are often they are playing catch up with the companies themselves – such as in the case of Arctic offshore drilling. The local backlash against hydraulic fracturing for shale resources in both the US and parts of Europe have taken companies by surprise – and the lack of transparency and questions of who picks up the tab should something go wrong are some of the most pressing concerns for communities.
A new Chatham House report, Conflict and Coexistence in the Extractive Industries, identifies liability as a key issue of dispute between governments and extractive companies. This deserves more attention. Disagreement over what counts as a ‘fair share’ of the bounty between the state-owner of resources and the investing company is at the root of most major company−government disputes in mining, oil and gas. But just as important is the question ‘What is a fair share of the risks?’ In view of the shifting patterns of investment and additional stresses of climate change as well as growing environmental pressures, this will become an even more hotly contested issue.
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