GROUP THREE

Discuss the notion of Expropriation of Oil and Gas in International Law.

Oil and Gas- JIL 422

Lecturer; Dr. Yemi Oke

July 2011

The period following World War II saw the decolonization process take root and the newly

independent states have sought to develop principles and rules in order to assert themselves and

establish their presence on the international front as well as promote their economic development.

This paper discusses a number of these principles in the Oil and Gas parlance against the backdrop

of the International Laws and Institutions.

INTRODUCTION

Ever since the Treaty of Augsburg (1555) and the Peace of Westphalia (1648)1, the principle

of sovereignty has been the backbone of international law. It has been described as the most

glittering and most controversial notion in history, doctrine and practice of international law2.

As a matter of fact the import of sovereignty is not in the notion but in the consequences of the

notion.

In this paper, the notions that arise as a result of the principle of sovereignty are the subject for

discussion. Their definitions, the circumstances that led to their adoption by nations and their

entrance into the framework of international law3.

Prime in this discussion is the notion of Expropriation. One will come in contact with the other

notions discussed as they relate to expropriation. It is necessary to point out that a full

discussion of the notion of expropriation is beyond the scope of this paper, rather the

qualification for relevance (in the paper) is the nexus between the notion, oil and gas and the

international implications they have had. In addition, distinctions would be made between

expropriation and the other concepts that are incidental to it. They include nationalisation and

confiscation.

Also relevant to this discussion, given the international perspective, is the United Nations

resolution on the concept of permanent sovereignty.

Most importantly, due to the orientation of the writers, in the discussion of every concept

would be found the Nigerian undertone which will come to head as the discussion builds from

the conceptual basis to the practical examples.

KEY TERMS DEFINED

Taking cue from the topic, the key terms are defined:

1 These Peace of Westphalia followed the Thirty Years war. The significance was that the terms of the treaty recognised the sovereignty and independence of each state of the Holy Roman Empire.1iThe Thirty years war was fought between 1618 and 1648. It involved almost every European Nation. It was fought mainly in Germany. It started on religious ground but then blew up into a full fledged political war, the aim being to dose the power of the Holy Roman Empire.2 Nico Schrijver. Sovereignty over natural resources; balancing rights and duties. Cambridge University Press. 1997.3 The resolutions of the United Nations have been instrumental to the promotion of these notions into international for a.

Notion

This refers to an idea or an impression4. With regards to the paper, this refers to the ideas that

the promoters of the concept of expropriation had in mind.

The impression/notion/idea of sovereignty comprises complete control over resources,

freedom from external control among other things. Consequently, when nations which

had been colonised5sought independence it followed that they should regain control over

their resources which had hitherto been in the hands of external governments. It is

necessary to mention that, the writers recognise that the bottom-line of the notion of

expropriation is not gaining independence from external government but it starts there, in

the sense that the control of resources by foreigners is greatly facilitated by the domestic

presence of their home government.

Expropriation

Expropriation is the most common of all the political risks that foreign investors are

vulnerable to in their business engagement in the foreign host territory. Others include

confiscation, nationalization, privatization and “creeping expropriation”.

A deprivation or taking of property may occur under international law through interference

by a state in the use of that property or with the enjoyment of its benefits, even where legal

title to the property is not affected. While assumption of control over property by a

government does not automatically and immediately justify a conclusion that the property has

been taken by the government, thus requiring compensation under international law, such a

conclusion is warranted whenever events demonstrate that the owner was deprived of

fundamental rights of ownership and it appears that this deprivation is not merely ephemeral.

The intent of the government is less important than the effects of the measures on the owner,

and the form of the measures of control or interference is less important than the reality of

their impact6.

The most direct and egregious form of political risk (expropriation) occurs when a host

country seizes a company’s development rights or facilities and its products for the host

country’s own use, usually under the guise of the national interest. Because the

international business community frowns on expropriation by host countries, some

4Microsoft Encarta Dictionary 2007.5 This entails control of government and economy by an external government.6 Statement of the Iran–US Claims Tribunal in the case of Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Eng’rs of Iran, 6 Iran–U.S. Cl. Trib. Rep. 219 (1984) at 225–226

countries move towards their goal of expropriation in small steps through various means, it

is often referred to as Regulatory (or ―indirect) taking, which is popularly known as

―creeping expropriation7- which refers to regulation that negatively affects the

implementation, value or costs and benefits of an investment project to such an extent

that this must be deemed to have been expropriated. Regulation is broadly defined to

include the enactment or implementation of treaties, laws, decrees and other legal

instruments8. This ‘creeping expropriation’ can come in the form of new regulations,

confiscatory taxes, limits on the repatriation of currency, changes in exchange rates and

forced re-negotiation9.

Some countries basically the developing countries have in various forms and patterns

exercised the right of permanent sovereignty even to the extent of taken over the companies

of foreign investors under different disguise. For instance, Venezuela has garnered headlines

for its nationalization and expropriation of oil operations. In February 2007, Hugo Chavez

issued Decree No. 5.200, requiring operators in Venezuela’s Orinoco Belt to agree to new

contracts with the state oil company, Petróleos de Venezuela SA (PDVSA) with a threat to

expropriate their investment if they do not comply with or agree to the new contractual

agreement which obviously was not the earlier agreement they had. Venezuela also seized

foreign-operated facilities belonging to foreign investors10 and ultimately expropriated the

Orinoco Belt properties of ExxonMobil and ConocoPhillips. Exxon however, has responded

with a series of legal actions designed to freeze the assets of PDVSA outside Venezuela.11

Ecuador also has imposed a deadline for the oil companies operating within its territory

to accept new subcontracting agreements, which would cancel existing joint venture

agreements. The new agreements would also prevent oil companies from making appeals

to the International Centre for the Settlement of Investment Disputes (ICSID).12 Ecuador

also created a 50% tax on ‘extraordinary profits’ based on crude oil prices.13 In 2006, Ecuador

7 See Lorenzo Cotula, ―The Regulatory Takings Doctrine online: http://www.iied.org/pubs/pdfs/17014 ED.pdf at page 1.8 Simon Baughen “Expropriation and Environmental Regulation: The Lessons of Nafta Chapter Eleven” (2006) 18 J.Envtl. L. 207–228 at 2099 Hill C, How Investors React to Political Risk, Duke J Comp & Intl Law, 1998;283. (as it was done in Bolivia, Venezuela and Russia)10 Bowman JP, Trending Toward a New Round of Naturalizations: The Bolivian Oil and Gas Sector and Mining Sector Initiatives, Special Institute: International Mining and Oil &Gas Law, Development, and Investment, Rocky Mineral Law Foundation, 200711 Venezuela: Sabre-Rattling, The Economist, 2008 (it is important to note that the chances success of an action of a foreign company that was expropriated by the host company is very slim because the local court will not grant judgment against the host government, neither will the host country recognize or enforce judgment from the home country of the company. Usually, the best practice is to go before and Arbitration Panel that both parties must have agreed to in their contract.12 Ecuador gives IOCs ‘new contract’ deadline, Oil Gas J, 2008;8.13 Zaldumbide J, Nationalization of the Hydrocarbon Industry: Ecuador, Special Institute: International Mining and Oil & Gas Law, Development, and Investment, Rocky Mineral Law Foundation, 2007.

expropriated Occidental Petroleum’s interest in the Block 15 Field. On the 1st of May 2006,

Bolivia issued Supreme Decree No. 28701, which mandated operators in the oil and gas sector

to relinquish control of the production of hydrocarbons to the state oil and gas company,

Yacimientos Petroliferos Fiscales Bolivianos (YPFB).14 Russia, though with a large deposit of

oil and gas resources, used its environmental permitting process to threaten contract

cancellation for projects operated by Total and Exxon Mobil. Russia also forced Shell and BP

to relinquish the Skhalin-2 and Kovykta gas projects to Gazprom and the state-controlled

company Rosneft.15 The Prime Minister of Kazakhstan, alleged that international oil

companies were not abiding by their contractual terms, thus, he threatened to cancel the

contractual agreements and return the fields to the state.16 Kazakhstan’s parliament passed

legislation that authorized the government to unilaterally amend or void oil production

contracts for reasons of ‘national security’. Expropriation does not exclude the nations of

Africa notably Equatorial Guinea, Algeria, Angola and even Nigeria17 has at a time

expropriated the investment of the foreign investors while some are substantially increasing

taxes and royalties on oil and gas revenues. The argument usually put forward by the

advocate of expropriation or other political risks as they are called by the foreign

investors, is that the control of important sectors of the economy by foreign nationals

was impeding national economic development18. The enactment of anti- foreign

investment laws together with expropriation was seen by less developed countries,

including Nigeria, who newly gained independence as an instrument for achieving

political-economic objectives19. In Nigeria, it has been rightly observed that these objectives

may also include the achievement of its foreign policy goals such as was in the case of the

expropriation of the assets of the British Petroleum because of its perceived alliance with and

sale of crude oil to the apartheid government of South Africa in contravention of Nigeria‘s

foreign policy.20

EXPROPRIATION AND OTHER RELATED CONCEPTS

14 Rojas Moreno D, Trending Toward a New Round of Nationalizations: The Bolivian Oil and Gas Sector and Mining Sector Initiatives, Special Institute: International Mining and Oil & Gas Law, Development, and Investment, Rocky Mineral Law Foundation, 2007.15 The Rise of Resource Nationalism, Jakarta Post, 2007;716 Kazakhstan Threatens Investors with Naturalization, Ria Oreanda Economic News, 2008.17 Tunde I. Ogowewo, ―The Shift to the Classical Theory of Foreign Investment: Opening up the Nigerian Marke (1995) 4 International and Comparative Law Quarterly 91518 Ibid, at 91519 Stephen J. Kobrin ―Expropriation as an Attempt to Control Foreign Firms in LDCs: Trends from 1960 to 1979 (1984) 28 International Studies Quarterly 329-348 at 32920 Nigeria’s policy at that time was anti-apartheid and there was an oil embargo on South Africa at that time. No exploration and production company in Nigeria was allowed to sell oil to South Africa.

Expropriation and Nationalization

Expropriation has been defined to be the compulsory acquisition of the investment of

foreign investors by the government of the host country for the purpose of national

economic development. Nationalization is clearly described as the evil twin of expropriation,

and occurs when the host country makes an expropriation and hands the property or

development rights over to a national company to manage the company of the foreign

investors. There is but a thin line of difference between the two for in the case of

EXPROPRIATION, the government takes over the control while in the case of

NATIONALISATION, the ownership would be vested in any national company.

There’s an idea that expropriation and nationalisation are viewed differently in international

law. In particular it is pointed out that nationalisation granted broader discretionary powers to

the state. For instance, in a draft submitted to the Chilean Government during the

nationalization of the Chilean Copper Industry there was reference to “nationalisation through

expropriation”21 which suggests that the distinction was not considered of great importance.

Some additional differences between expropriation and nationalisation are that;

NATIONALISATION affects a universal aggregate of goods on a large scale and in an

impersonal manner and reflects changes brought about in the socio-economic structure

of the state. EXPROPRIATION on the other hand, affects only the rights or property of

individuals. Furthermore, the requirement of compensation is different in the two situations.

Expropriation and Confiscation

Confiscation seems to be a punitive measure against illegal act that foreign investors may

be indulging in or intending to carry out. While the investor need not commit any offence

before the expropriation of their assets, there must be a proof of such for there to be

confiscation. Where the government merely expropriate, the investors may be entitled to

compensation but where it is confiscation the issue of compensation will never arise.

Logically, the same reason should apply to insurance of such loss.

Expropriation and Indigenization

21 Francisco Orrego Vicuna. Nationalisation of the Chilean Copper Industry. 719

Under the heading of indigenization, the government takes for the citizens, basically. The

similar element with expropriation is the taking that occurs but the subsequent use of

what is taken is different. The government takes and gives to its indigenes.

REASONS FOR EXPROPRIATION

Indigenous peoples,22 if deprived of the natural resources pertaining to their lands and

territories, would be deprived of meaningful economic and political self-determination, self-

development, and, in many situations, would be effectively deprived of their cultures and the

enjoyment of other human rights by reason of extreme poverty and lack of access to their

means of subsistence.

An economist who carried out a study on expropriation in the oil industry observed that it is

natural that the higher oil prices, the more valuable the oil assets and the stronger the

incentives to expropriate. Thus, he opined that the government is more likely to expropriate a

lucrative oil and gas industry than the one not profitable. He further commented that, given

the costs of expropriation, it is not immediately clear why a government would respond to a

positive oil price shock with expropriation rather than just imposing higher taxes on oil

companies’ rents and at the same time preserving their incentives for investment in new fields

and cost-reducing technologies.

The nationalist are of the view that considering the crucial role the oil and gas industry

plays in their nation, the state should play a major role in the operation and development

of the oil and gas industry since it is the state that can adequately distribute or

redistribute the resources of a nation among the citizens. This view was followed in some

countries in the Latin America and the Middle East which led to domino strategy of

government confiscations of the privately owned oil and gas investment.

Politically, expropriation extends beyond the economic reasons alone to include the

struggle for sovereignty. This was the situation in the case of Nigeria when British

Petroleum was nationalized and renamed African Petroleum which was as a result

political reason and not directly economic or even the nationalist theories.

22 The term indigenous people refers to the people who have been colonised either economically, politically or historically. The import of being colonised is that a foreign entity becomes dominant in the territory of the object of the colonisation.

CONSTITUTION OF EXPROPRIATION

Determining what amounts to expropriation can be a little technical in the sense that not all

actions of the host government to interfere with absolute control by the foreign investors

constitute expropriation. To determine whether there has been expropriation or not there are

certain criteria that has been laid down at the international scene to prove expropriation. The

courts have helped to do justice to this even though there are shades of inconsistencies in the

determination of whether there has been an expropriation or not. Thus in the cases, although

there are some “inconsistencies” in the way some arbitral tribunals have distinguished

legitimate non-compensable regulations having an effect on the economic value of foreign

investments and indirect expropriation requiring compensation, a careful examination reveals

that, in broad terms, they have identified the following criteria:

i) the degree of interference with the property right,

ii) the character of governmental measures, i.e. the purpose and the context of the

governmental measure, and

iii) the interference of the measure with reasonable and investment-backed expectations.23

Thus, most international decisions treat the severity of the economic impact caused by a

government action as an important element in determining whether it rises to the level of an

expropriation requiring compensation. International tribunals have often refused to require

compensation when the governmental action did not remove essentially all or most of the

property’s economic value. There is broad support for the proposition that the interference has

to be substantial in order to constitute expropriation, i.e. when it deprives the foreign investor

of fundamental rights of ownership, or when it interferes with the investment for a significant

period of time. Several international tribunals have found that a regulation may constitute

expropriation when it substantially impairs the investor’s economic rights, i.e. ownership, use,

enjoyment or management of the business, by rendering them useless. Mere restrictions on the

property rights do not constitute takings. The European Court of Human Rights (ECHR) has

found an expropriation where the investor has been definitely and fully deprived of the

ownership of his/her property. If the investor’s rights have not disappeared, but have only

23“ Indirect Expropriation” And “The Right To Regulate“ in International Investment Law; Catherine Yannaca-Small, Legal Advisor presented September 2004

been substantially reduced, and the situation is not “irreversible”, there will be no

“deprivation” under Article 1, Protocol 1 of the European Convention of Human Rights24.

Thus in the case of STARRETT HOUSING25 decided under Iran-United States Claims

Tribunal26 which dealt with the appointment of Iranian managers to an American housing

project. The Tribunal concluded that an expropriation has taken place: “it is recognized by

international law that measures taken by a State can interfere with property rights to such an

extent that these rights are rendered so useless that they must be deemed to have been

expropriated, even thought the State does not purport to have expropriated them and the legal

title to the property formally remains with the original owner”. Also, In the TIPPETTS

CASE27, the Tribunal found an indirect expropriation because of the actions of a government-

appointed manager, rather than because of his appointment per se and equated that deprivation

of property rights with a taking of property. The Tribunal said: “While assumption of control

over property by a government does not automatically and immediately justify a conclusion

that the property has been taken by the government, thus requiring compensation under

international law, such a conclusion is warranted whenever events demonstrate that the owner

was deprived of fundamental rights of ownership and it appears that the deprivation is not

merely ephemeral…”.

Thus, in MARVIN ROY FELDMAN KARPA (CEMSA) V. UNITED MEXICAN STATES28,

CEMSA, a registered foreign trading company and exporter of cigarettes from Mexico, was

allegedly denied the benefits of the law that allowed certain tax refunds to exporters and

claimed expropriation under NAFTA Article 1110. The Tribunal found that there was no

expropriation since “the regulatory action has not deprived the Claimant of control of his

company, interfered directly in the internal operations of the company or displaced the

Claimant as the controlling shareholder. The Claimant is free to pursue other continuing lines

of business activity….Of course; he was effectively precluded from exporting

Cigarettes…..However, this does not amount to Claimant’s deprivation of control of his

company”. Furthermore, in S.D. MYERS29, a United States company, which operated a PCB

remediation facility in the United States, alleged that Canada violated NAFTA Chapter 11 by 24 It should be noted that some of the regulations are not applicable to Nigeria but due to the nature of oil and gas, international instrument can be employed to explain situations where there are no regulation or instrument to so do in Nigeria.25Starret Housing Corp. v. Iran, 4 Iran-United States CL Trib. Rep. 122, 154 (1983). 26 A Tribunal for Iran and US established by agreement.27 Tippetts v. TAMS-AFFA Consulting Engineers of Iran, 6 Cl. Trib. 219 (1984).28 Case No. ARB(AF)/99/1, Award of 16 December 2002, pp. 39-67 at 59

banning the export of PCB waste to the United States. The Tribunal also distinguished

regulation from expropriation primarily on the basis of the degree of interference with

property rights: “expropriations tend to involve the deprivation of ownership rights;

regulations [are] a lesser interference”30. Another relevant decision is the REVERE COPPER

CASE (1980)31. The case arose from a concession agreement – which was to last for twenty

five years – made by a subsidiary of the Revere Copper company with the government of

Jamaica. The government, despite a stabilization clause in the agreement ensuring that taxes

and other financial liabilities would remain as agreed for the duration of the concession,

increased the royalties. The company found it difficult to continue operations and closed

operations and claimed compensation under its insurance contract. The Arbitral Tribunal32

assuming that the contract was governed by international law, found that there had been a

taking by the government and observed.

“In our view, the effects of the Jamaican Government’s actions in repudiating its long term

commitments to RJA (the subsidiary of RC), have substantially the same impact on effective

control over use and operation as if the properties were themselves conceded by a concession

contract that was repudiated….”

MINIMIZING THE EFFECT OF EXPROPRIATION

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.33 Guarantees are available for investments in countries that are members of MIGA.

MIGA guarantees can be used to protect against expropriation, nationalisation and

confiscation.34 In cases of creeping expropriation or partial confiscation, coverage may

however, be limited. MIGA provides guarantees to manage risks from expropriation and

nationalisation as well as currency inconvertibility and transfer restrictions, war and civil

disturbance and breach of contract. If an investment is completely expropriated, MIGA will

cover the net book value of the investment. If the host country expropriates funds, MIGA will

cover the value of those funds. If MIGA has guaranteed a loan, the lender can recoup the

29 S.D. Myers, Inc. v. Canada, (November 13, 2000) Partial Award, 232. International Legal Materials 408, para.

232. 30 ibid31

Revere Copper & Brass Inc. v. Overseas Private Investment Corporation, 56 International Legal Materials 258.

32 The Tribunal was set up under the American Arbitration Association33 Investment Guarantee Guide, World Bank Group, 2008;334 Investment Guarantee Guide, World Bank Group, 2008;4.

principal and accrued interest. A MIGA guarantee usually has a 15-year term, although the

term can be as long as 20 years35. MIGA will guarantee up to 90% of an equity investment,

and up to 95% if the principal is a loan. In each case, there is additional coverage for earnings

or interest, as the case may be. A guarantee from MIGA can be as much as US$180 million. If

the project requires greater coverage, MIGA can assist with re-insurance to increase the

coverage that will be provided in case of the occurrence of the loss insured against 36. MIGA

also requires a demonstration that the project will be commercially sound37.

There are also some governmental insurance schemes provided by the home countries of the

foreign investors. For instance, the United States has the Overseas Private Investment

Corporation (OPIC), in Japan there is the Nippon Export and Investment Insurance (NEXI)

and also in UK there is the Export Credits Guarantee Department (ECGD) there are other

countries especially the developed countries with similar provision. Their basic function is to

provide insurance for the companies from their countries against political risk when investing

internationally.38

In addition to MIGA and the governmental insurers, some private insurers now offer political

risk policies that include insurance for expropriation39. Chubb, for example, offers

confiscation, expropriation and nationalisation (CEN) Insurance40. The Chubb CEN policy

provides up to US$50 million per country, with a policy period of up to 10 years41. A single

Chubb policy can cover multiple countries.42 Zurich North America also offers political risk

insurance that covers expropriation and creeping expropriation43.

Political risk insurance is not a panacea. It does not cover every political risk, but it can be

used to manage risks such as expropriation, nationalisation and creeping expropriation44.

Companies operating internationally may be able to take advantage of multilateral

investment treaties (MITs) and bilateral investment treaties (BITs), which are designed to

35 Investment Guarantee Guide, World Bank Group, 2008;636 ibid37 Williams SL, Political and Other Risk Insurance: OPIC, MIGA, EXIMBANK and Other Providers, Pace Int’l L Rev, 1993;(5):59.38 Thorn R, Escobar A, Providers of Political Risk Insurance, International Contract Manual, 2008.39 List of political risk insurance providers, www.pri-center.com40 www.chubb.com/business/cci/chubb1146.pdf41 Ibid42 Ibid43 www.zurichna/com44 Hanson KW, Managing Political Risks in Emerging Market Investment, 18 Transactional Lawyer 77, 2004.

provide protection to foreign investors between and among countries45. These treaties are

typically designed to attract investment in the host country by providing protection against

expropriation or nationalisation, among various other risks. The company making the

investment will need to review the applicable treaties for each host country. Examples of this

treatise include New York Convention on the Recognition of Foreign Arbitral Awards

which is administered by the UN Commission on International Trade Law (UNCITRAL). All

countries that are signatory to this convention will at every time always honour the agreement.

The foreign investors can also adopt the means of arbitration. The investors can require

that all disputes should be resolved through international arbitration. The American

Arbitration Association, the International Chamber of Commerce, the London Court of

International Arbitration and other arbitration organizations have rules designed to provide for

the arbitration of disputes between companies from different countries46. International

Arbitration will be very useful for foreign investors especially where they need to enforce

a judgment against the host country. Securing judgment against the host country in the

courts of law of the host country may be an impossible experience since no local court

will go contrary to the act of the executive especially when it is even backed by law or

regulation. Similarly, it will not be possible even at customary international law for the

foreign investors to secure judgment in their countries and seek to enforce it against the

host country in the territory of the host country. Thus, the only option available to the

foreign investors is to patronize the international Arbitration Tribunal where the host

country can be properly challenged and whatever award given can be sure of

implementation. Thus, investors can insist that disputes should be resolved on resolution

under the rules of the International Centre of the Settlement of Investment Disputes

(ICSID) which has about 130 countries as signatories. The ICSID Convention is an

international instrument on the Settlement of Investment Disputes between States and

Nationals of Other States47.However, a host country can require the disputant to exhaust

local remedies before moving to ICSID dispute resolution, which has the potential to

prejudice the outcome and may well delay recovery of damages48. Also, as noted above,

45 Greco MS, Meredith I, Getting to Yes Abroad: Arbitration as a Tool in Effective Commercial and Political Risk Management, Bus Law Today, 2007;23:16.46 Bingham MD, Anderson SW, Ammons DM, International Oil and Gas Law, Petroleum Engineering Handbook, General Engineering, Society of Petroleum Engineers, 2006; 1:17.47 Greco MS, Meredith I, Getting to Yes Abroad: Arbitration as a Tool in Effective Commercial and Political Risk Management, Bus Law Today, 2007;23:16.48 Bingham MD, Anderson SW, Ammons DM, International Oil and Gas Law, Petroleum Engineering Handbook, General Engineering, Society of Petroleum Engineers, 2006; 1:17.

Ecuador has attempted to put new contracts in place that will preclude ICSID dispute

resolution.

While there is no perfect shield from host country’s expropriation or nationalisation, the

measures described above can help manage that risk and bring some additional certainty to

investment decisions.

It is interesting to note that expropriation by the host countries is not strange to customary

international laws. Customary international law does not preclude host states from

expropriating foreign investments provided certain conditions are met. These conditions

are: the taking of the investment for a public purpose, as provided by law, in a non-

discriminatory manner and with compensation.49 In 1962, the General Assembly adopted

its Resolution on Permanent Sovereignty over Natural resources which affirmed the

right to nationalize foreign owned property and required only “appropriate

compensation”. This compensation standard was considered an attempt to bridge

differences between developed and developing states.

The issue of compensation is crucial to a lawful expropriation of foreign investment even

on the international scene because it is a well recognized rule in international law that the

property of aliens cannot be taken, whether for public purposes or not, without adequate

compensation.

There are certain causes that often lead to expropriation of foreign investment by the host

government. These causes are not only economical but also political. It also arises from

the concern of the host countries vis-a-vis the attitude of the foreign investors to the host

country and the infrastructural development of the country.

COMPENSATION

The obligation to pay compensation for the taking of an alien’s property is a well established

principle of customary international law. This obligation has been codified even in the

municipal laws of most nations50and has been recognised even by socialist states51.

49“ Indirect Expropriation” And “The Right To Regulate“ in International Investment Law; Catherine Yannaca-Small, Legal Advisor presented September 200450 Sect. 44 of the 1999 Constitution of the Federal Republic of Nigeria51 Drucker. Compensation Treaties between Communist States. 10 Int & Comp L. Q 238 (1961).

Resolution 1803 (XVII) clearly regards this, where it provides that “where the question of

compensation gives rise to controversy, the national jurisdiction shall be exhausted…”52.

.

An Appraisal of Countries with Notable Oil Nationalisations

Venezuela.

Venezuela has 77.2 billion barrels (1.227×1010 m3) of proven conventional oil reserves, the

largest of any country in the Western Hemisphere.53 In 1975-1976, Venezuela nationalised its

oil industry creating the Petroleos de Venezuela S.A., the country’s state run oil and Natural

Gas Company. However in the 1990’s, Venezuela opened its upstream oil sector to private

investment. This facilitated the creation of 32 operating service agreement (OSA) with 22

separate foreign oil companies, including international oil majors like Chevron, BP, Total and

Repsol-YPF.

On February 27, 2007 Venezuela’s President Chavez announced a new law-decree, which

nationalized the last remaining oil production sites that were under foreign company control.

The nationalizations affected oil production in the Orinoco Oil Belt54. He sharply diverged

from previous administrations' economic policies, terminating their practice of extensively

privatising Venezuela's state-owned holdings, such as the oil sector. By May 1st 2007, he had

stripped the world’s biggest oil companies of operational control over the Orinoco crude

projects.

“We are recovering property and management in these strategic areas,” said Chavez. “The

privatization of oil is over in Venezuela. This was the last area that we hadn’t recovered. This

is the true nationalization of the oil. The oil belongs to all Venezuelans.”55

Chavez supporters have long argued that oil was never truly nationalized in Venezuela

because the same management controlled oil production after nationalization and that the oil

industry never really operated under government control until the old management was fired

in the wake of the December 2002 to January 2003 oil industry shutdown. The rationale for

the nationalisation as given by the Chavez government was that nationalisation of the oil

and gas industry was strategic for the country’s development and that leaving these to

foreign investors alone is not sufficient to assure the country’s economic growth.

52 Par.453 This is according to the Oil and Gas Journal (OCJ)54 Oil production in the Orinoco Oil Belt, which is said to contain the world’s largest reserves of extra-heavy oil, is currently being conducted via joint ventures between Venezuela’s state-owned oil company PDVSA and a wide variety of foreign oil companies55 Statement made by the Venezuelan President Hugo Chavez on the 26th of February, 2007.

Bolivia.

On May 1, 2006, newly elected Bolivian president Evo Morales announced plans to

nationalize the country's natural gas industry; foreign-based companies are given six months

to renegotiate their existing contracts through the “Supreme Decree #28701” that establishes

“the nationalization of Bolivian hydrocarbons.” The decree stated that foreign companies,

which have invested almost $4 billion since Bolivia opened up its energy sector in the late

1990s, must hand majority control over to state-owned Yacimientos Petrolíferos Fiscales

Bolivianos (YPFB).

The decree contained the political arguments as well as the legal justification that informed the

decision to nationalise. There are two main political arguments: a recognition of “the historic

struggles (in which) the people paid in blood for the right to return our hydrocarbon wealth to

the nation, for it to be used in benefit of the country,” and a statement that the measure

decreed is inscribed in the contemporary struggle of people all over the world to defend

national sovereignty.

The legal justifications of the new decree allude to the illegal character of the contracts signed

between the Bolivian government and oil companies and ratified by the Constitutional

Tribunal on March 7, 2005. This matter had broadly been debated in Bolivia since 1996.

The political decisions made by Morales have raised a chorus of voices, expressing both

support and dissent. On the one hand, the reactions of neighbouring countries56 whose

economies depend to a certain degree on Bolivian gas to provide energy to industries.

President Morales explained to everyone that Bolivia is simply recovering its property and

assuming its prerogatives of ownership—now once again centralized in the state through

YPFB (by its Spanish initials; which is the state owned oil company) and no longer

camouflaged as isolated and impotent “individual property”—of 49% of shares of all the oil

and gas industry in Bolivia, fragmented in 95-96. It also nationalized an amount corresponding

to 2% of total shares to reach a total of 51% under its control57.

Thus, instead of an obsolete “residual YPFB,” which is what the company had become during

the 90s, now the transnational corporations and governments of other countries with interests

in Bolivian gas are obliged to discuss, negotiate, and reach agreements with a reinforced state-

owned enterprise that is a full partner in all petroleum deals58.56 Foreign investors like Brazil, Spain and Argentina.57 Raquel Gutierrez and Dunia Mokrani, Bolivia; Nationalization without expropriation?58 ibid

Nigeria

Since the British discovered oil in the Niger Delta in the late 1950s, the oil industry has been

marred by political and economic strife largely due to a long history of corrupt military

regimes and complicity of multinational corporations, notably Royal Dutch Shell.

Nigeria's proven oil reserves are estimated by the U.S. United States Energy Information

Administration (EIA) at between 16 and 22 billion barrels (3.5×109 m3), but other sources

claim there could be as much as 35.3 billion barrels (5.61×109 m3). Its reserves make Nigeria

the tenth most petroleum-rich nation, and by the far the most affluent in Africa. In mid-2001

its crude oil production was averaging around 2.2 million barrels (350,000 m³) per day.59

In May 1971 the Nigerian federal government, then under the control of General Yakubu

Gowon, nationalized the oil industry by creating the Nigerian National Oil Corporation60. The

reason given for this was that the government felt it necessary to secure and gain more control

over the oil industry.61

By 1974, participation in the oil industry by the government had increased to 55%. Of

particular importance was the enactment of the Land Use Act by the federal government in

1978 which vested control over state lands in control of military governors appointed by the

federal military regime62, and eventually led to Section 40(3) of the 1979 constitution which

declared all minerals, oil, natural gas, and natural resources found within the bounds of

Nigeria to be legal property of the Nigerian federal government.

By 1979, the NNPC had gained 60% participation in the oil industry.

Saudi Arabia

Saudi Arabia is the world’s largest producer of oil; it has the largest proven crude oil reserves

which is about 25% of the world’s proven reserves. The nationalisations which took place in

Saudi Arabia deal mainly with its state owned oil company, Saudi Aramco (Saudi Arabian Oil

Company).

59 http://en.wikipedia.org/wiki/Petroleum_in_Nigeria last visited on the 11th of July, 201160 This was later merged with the Ministry of Petroleum to form the NNPC61 Nationalization of the oil sector was also precipitated by Nigeria's desire to join OPEC, which required that member states acquire 51% stake and become increasingly involved in the oil sector.62 Section 1 of the Land Use Act

It is the state-owned national oil company of Saudi Arabia. It is the world's most valuable

company, with an estimated value in 2010 of 2.2 trillion USD63 to 7 trillion USD64 It is also

the oil corporation with the largest proven crude oil reserves and production.

ARAMCO was formerly the California Arabian Standard Oil Company (CASOC), an

American Company which was granted oil concession to explore and prospect for oil in 1933.

In 1944, CASOC changed its name to Arabian American Oil Company (ARAMCO). In 1950,

King Abdul Aziz Ibn Saud threatened to nationalize his country's oil facilities, thus pressuring

ARAMCO to agree to share profits 50/50. A similar process had taken place with American

oil companies in Venezuela a few years earlier. In 1973, Saudi Arabian government acquired a

25% share of ARAMCO, increased the share to 60% by 1974, and finally acquired full control

of ARAMCO by 1980. In November 1988, the company changed its name from Arabian

American Oil Company to Saudi Arabian Oil Company (or Saudi Aramco)65.

Iraq

Iraq is the country with the world’s second largest proven oil reserves with increasing

exploration expected to enlarge them beyond 200 billion barrels. In 1961 Iraq passed Public

Law 80 whereby Iraq expropriated 95% of the Iraq Petroleum Company's concessions which

the company was formerly granted to explore and prospect for oil, and went on to announce

the intent to form the INOC in 1964.66

The Iraq National Oil Company (INOC) was then founded in 1966 by the Iraqi government. In

1967 and 1968 the company's purview was expanded to include areas expropriated from the

Iraq Petroleum Company.67 The INOC was forbidden from entering into partnerships or

granting concessions to foreign oil companies. The nationalisation was finally completed in

1972.

Iran

Oil was discovered in Iran in 1908, with exploration carried out by the Anglo-Iranian Oil

Company (AIOC) which was founded in 1909. n 1951, Iran nationalized its oil fields initiating

63 Sheridan Titman, McCombs School of Business, March 1, 2010. More Thoughts on the Value of Saudi Aramco http://blogs.mccombs.utexas.edu/titman/2010/03/01/more-thoughts-on-the-value-of-saudi-aramco/64 In 2006, its value was estimated at 781 billion US$ in the Financial Times Non-Public 150 65 http://en.wikipedia.org/wiki/petroleumpolitics/saudiarabia/ last visited on the 11th of July 2011.

66 Falola, Toyin; Ann Genova (2005). The Politics of the Global Oil Industry: An Introduction. Praeger/Greenwood. pp. 61.67 Shwadran, Benjamin (1977). Middle East Oil: Issues and Problems. Transaction Publishers. pp. 30

the Abadan Crisis as well as a number of suits bordering on matters of international law,

public policy as well as discrimination.68

The United States of America and Great Britain thus punished Iran by arranging coup against

its democratically elected prime minister, Mosaddeq, and brought the former Shah's son, a

dictator, to power. In 1953 the US and GB arranged the arrest of the Prime Minister

Mosaddeq69.

Nationalisation has also taken place in countries like Libya, Kuwait, Mexico and so on. It is

apparent that in the 1970’s a lot of nationalisation took place that is why the period is often

referred to as the period of nationalisation. The underlying reason given for nationalisation is

the right of every sovereign state to appropriate its natural resources without interference, said

ownership being vested in them as part of their natural persons.

Permanent Sovereignty

The principle of permanent sovereignty over natural resources is a fundamental principle of

contemporary international law. It emerged in the 1950 during the process of decolonisation as

a basic constituent of the right to self determination and as an essential inherent element of

state sovereignty. The concept70 originated in negotiations over natural resource development

agreements because developing nations wished to avoid the inequitable and onerous

arrangements imposed upon their unwary and vulnerable governments during the colonial

period.

The typical context where permanent sovereignty is invoked concerns the relationship

between host states rich with natural wealth and multinational corporation which are engaged

in or wish to begin the exploitation of such resources- especially when it is in regards to

nationalisation of such foreign enterprises and the question of compensation71

The United Nations is the birthplace and main forum of this principle. The principle took

full shape in 1962. The principle in clear terms is embodied in the resolution 1803 (xvii) that

says;

The right of peoples and nations to permanent sovereignty over their natural wealth and

resources must be exercised in the interest of their national development and of the well-being

68 Amoco Case (US V. Iran) (1988) 27 ILM 131469 http://en.wikipedia.org/wiki/petroleumpolitics/iran/ last visited on the 11th of July 2011.70 There is a difference between the concept and the principle. One was an original economic concept while the latter was the expanded version of the former that included self determination (explained infra).71 Frank Xaver Perrez.. Relationship between Permanent Sovereignty and the Obligation not to cause Transboundary Environmental Damage. 26 Environmental Law. 1190-1211.

of the people of the State concerned...the exploration, development and disposition of such

resources, as well as the import of the foreign capital required for these purposes, should be

in conformity with the rules and conditions which the peoples and nations freely consider to

be necessary or desirable.”

However, there was a build up to 1962 which is key to the understanding of the principle of

permanent sovereignty and the discourse of this paper. The principle of permanent sovereignty

was originally economic72. It was concerned with private investment. It had to do with capital

importing nations exercising sovereignty over their resources in respect of foreign countries

not necessarily acquiring them. At that time capital importing nations entered more into

concession arrangements with the multinationals73.

In 1952, a UN General Assembly resolution contained the proposition, that “the right of

peoples to freely use and exploit their wealth and resources is inherent in their

sovereignty...”74. The atmosphere which this resolution met was quite revolutionary. The

political and economic sectors were just recovering from the effect of World War II,

decolonization was going on and the newly independent nations were seeking to establish

themselves in the international front politically and economically75 . Incidentally, these

preceding events also primed the UN General Assembly to be inclined towards human rights.

For five years, there had been moves in the Human Rights Commission, the Economic and

Social Council and the Assembly to drafts covenants defining human rights76. This made it

easy for the capital importing nations to inject permanent sovereignty over natural wealth into

the discussion on human rights. What was purely economic became a legal-economic

principle77. In clear terms, the principle of permanent sovereignty got injected with the

principle of self- determination, the significance of this being that the principle moved from

being of an economic import to a nationalistic impression.

In 1955, there was the Third Committee Debate78 and they were to discuss how economic

self-determination79 should be dealt with and then to consider the proposal that came from the

1952 General Assembly. It took them 29 sessions to come up with a final text.

72 James N. Hyde. Permanent Sovereignty over Natural Wealth. American Journal on International Law.73 Yinka Omorogbe. Oil and Gas Law in Nigeria. Malthouse Press 2001 39.74 General Assembly Resolution 626 (VII), Dec. 21, 1952.75 Nico Schijver. Permanent Sovereignty over natural resources. Cambridge Press 1997.76 Ibid.77 Ibid.78 The delegates on this committee deal with social and humanitarian affairs, but at this time they dedicated virtually all their time discussing this topic. (James N. Hyde. Ibid)79 The principle of permanent sovereignty injected into the principle of self determination was touted as the principle of Economic Self- Determination. James Hyde described is as a UN jargon.

In this discussion there were two factions; those who were for the inclusion of article of

permanent sovereignty in the right to self determination80 and those who were against it. The

argument for the inclusion of the article was obvious however those who were against it were

against it for unique reasons; the UK was against it for colonial reasons, Denmark wanted the

inclusion to be postponed until the implications of economic self-determination was explored.

Eventually, the matter was pushed to a vote and the article of permanent sovereignty over

natural resources was included. Those who were for the article had a stronger premise; they

said that a country cannot exercise self determination without permanent sovereignty over her

natural wealth, while those who were against just sought the deletion or postponement of the

article.

Nonetheless, those who were against the inclusion of the article had certain grounds on which

they stood to make their prayers. They said that the inclusion of the article would be

interpreted by investors as a danger signal81 which will be counterproductive to the basic

objective of maximization of wealth. They also admonished states that wanted private capital

invested in their economy to avoid discriminating against foreign investment82.

It is extremely important to clearly state the nature of the sovereignty being discussed here

because there is a growing trend and positive trend in international and practice to extend the

concept and principle to groups existing within states. So the question that follows is can a

sovereign state exist within another sovereign state?83 In response to this Erica-Irene A. Daes

says that the term of sovereignty in this context is not the abstract and absolute sense of the

term rather it is the exercise of self determination. Thus it does not mean, the supreme

authority of an independent state84 . For the purpose of objectivity, Indigenous people are

people who are colonised in the economic, political and historical sense85

From the issues discussed above, it is seen that an integrated principle, known as the

principle of economic self determination, entails the right in government to take property from

foreigners, among other things. Now there is grey area; these countries that exercise these

rights and take over property are also parties to international agreements and treaties with the

80 Asian-African-Arabs delegates like Saudi Arabia, Afghanistan etc.81 United States delegate, Isador Lubin.82 James N. Hyde (supra) 855.83 In the 16th Century the term sovereignty referred to supreme power within a state without any restraint. However by the time of the influential French jurist Emmerich de Vattel’s The Law of Nations in the early 19th century, the term no longer had this absolute sense. The significance being that a sovereign could exist within another sovereign.84 Indigenous peoples’ permanent sovereignty over natural resources. Final Report of the Special Rapporteur. 2004. This document was submitted and pending approval at the time of its publication, whether or not it has been approved we cannot categorically state.85 Erica-Irene Daes. (Ibid).

home countries of some of these foreign companies. The issue in need of resolution is; what is

the significance of these international agreements as opposed to the power to take, given the

fact that some of these agreements actually make provisions for methods of termination or

settling of terms of the agreement?

Permanent Sovereignty and Expropriation;

“When you cause problems for foreign investors, you cause problems for those who

know how to create and develop the industry”86

The nature of the power of a state to take private property and the obligation of a state to those

whose property is taken are distinct from the broad political question of self determination and

colonialism. Basically it is a distinction between an economic question and a legal one.

In modern times it is commonplace to understand that no nation enjoys unfettered sovereignty.

All States are limited in their sovereignty by treaties and by customary international law. In

fact, it is common practice for States to enter into international agreements that not only

reflect certain limits to their sovereignty, but also acknowledge certain benefits that can be

derived when sovereigns cooperate in their management and use of natural resources. Thus, in

legal principle there is no objection to using the term sovereignty in reference to Indigenous

peoples acting in their governmental capacity. In fact, Indigenous peoples have long been

recognized as being sovereign by many countries in various parts of the world87.

The substance of international law is these treaties and agreement. Consequently, every nation

who is a party to such pacts and agreements is under an obligation to abide by the dictates of

these agreements. However, there arises a conflict between the capital importing nations and

the capital exporting nations which is the crux of the conflict in the implementation of the

principle of permanent sovereignty.

The foreign industrial enterprises insisted that their right to exploit another nation’s natural

resources, already acquired during the colonial period, continued after the new independence

of the formerly colonized nations. In opposition, the developing nations argued that permanent

sovereignty over natural resources is necessary to protect their economic sovereignty. Further,

86 Gal Loft, co-director of the institute for the analysis of Global Security, a consultancy in Washington which studies global energy issues.87 Erica-Irene A.Daes. General Consideration of the Concept of Indigenous People in relation to Permanent Sovereignty over natural resources. Australian Human Rights Commission in a paper presented at the UN.

developing nations claimed that permanent sovereignty includes the right to expropriate

foreign enterprises88.

As a sidebar, pertinent to the discussion of permanent sovereignty and expropriation along the

lines of international law, is how international law is formed. The adoption of a General

Assembly rule “depends upon the number of objecting states, the nature of their objections,

the importance of the interests they seek to protect ... , their geopolitical standing,” and

whether their objections go to the essence of the rule under consideration. Using this analysis,

the Arbitral Tribunal in Texaco Overseas Petroleum Co./California Asiatic Oil Co. v. Libyan

Arab Republic addressed the issue of whether Resolution 3281 (XXIX) - or any other

resolution that omits reference to general rules - can become international law89.

LIMITATIONS TO PERMANENT SOVEREIGNTY

From the above, one can see that nations (indigenous people) can exercise the principle of

permanent sovereignty over their natural wealth. However as can be drawn from the preceding

paragraphs, there is a question as to the effect of treaties and agreements entered into by these

sovereign nations on their permanent sovereignty over natural resources.

In 1966, it became a principle of international law permanent sovereignty, being included in

Common Article 1 of the Covenant on Civil and Political Rights and the Covenant on

Economic, Social and Cultural Rights. Common Article 1 of both covenants says;

1. All peoples have the right of self-determination. By virtue of that right they freely

determine their political status and freely pursue their economic, social and cultural

development.

2. All peoples may, for their own ends, freely dispose of their natural wealth and resources

without prejudice to any obligations arising out of international economic co-operation, based

upon the principle of mutual benefit, and international law. In no case may a people be

deprived of its own means of subsistence." (underlining provided).

Hence, from the above it is clear that the limitations to the exercise of the principle of

permanent sovereignty are, the principles of mutual benefit, international economic co-

operation and international law. Incidental to the limitation of international law is the principle

of sovereign equality.

88 Frank Xaver Perrez (supra)89 Ibid. 3.

So in answer to the question asked at the beginning of this heading, indeed these pacts and

agreements have an impact on the spate of the country’s exercise of permanent sovereignty.

Hence where a nation derogates from the arrangements of these treaties, it will be subject to

the sanctions imposed by same.

APPRAISAL OF THE RELEVANT INTERNATIONAL CASE LAW INVOLVING

EXPROPRIATON.

CASES AND JUDGMENT

The Government of the State of Kuwait v. The American Independent Oil Company

(‘Aminoil Case’)90

Facts

In 1948, the Sheikh of Kuwait granted to AMINOIL, a US company, a 60-year concession for

the exploration and exploitation of oil and gas in a designated territory in Kuwait. The price

for the concession included a down-payment plus a fixed royalty of US$ 2.50 for every ton of

oil recovered subject to a minimum annual royalty of US$ 625,000. The Concession

Agreement contained a ‘stabilization clause’91 that prevented the Sheikh from unilaterally

annulling or altering the terms of the Agreement. In 1954 AMINOIL began commercial

production and exportation of petroleum products.

On the 19th of September 1977, Kuwait enacted by Decree Law No. 124 that AMINOIL’s

concession should be terminated; that AMINOIL’s assets in Kuwait should revert to the state,

and that fair compensation should be paid to AMINOIL, which was to be assessed by a

Kuwait compensation Committee. AMINOIL declined to co- operate with the committee

opting instead to contest the legality of the decree law. The matter was brought before an ad

hoc arbitral tribunal and findings of the tribunal are discussed below.

Findings

Several issues were discussed at the tribunal proceedings like the applicable laws governing,

the standard of compensation and so on. However the crucial issue in the arbitration was

whether or not Decree Law No.124 of 1977 was a valid act of nationalization. The question of

90(1982) 17 ILM 97691 A Stabilisation Clause is said to be contract language which freezes the provisions of a national system of law chosen as the law of the contract as at the date of the contract in order to prevent the application to the contract of any future alterations of this system.

validity turned on the ‘stabilization clause' of the Concession Agreement which prevented the

Sheikh from unilaterally modifying or annulling the concession, apart from certain grounds

laid down in the Agreement.

The tribunal rejected AMINOIL’s claim that the expropriation did not satisfy international law

requirements of public purpose92 and the principle of non-discrimination. The majority of the

Tribunal refused to read the ‘stabilization clause’ as an outright prohibition of nationalization

that would cover the whole period of concession. It found that due to the changed

circumstances and Kuwait’s development as an independent State, it enjoyed ‘special

advantages’ in the contractual equilibrium. According to the Tribunal, the given stabilization

clause no longer possessed its former absolute character’; rather, the clause impliedly

prohibited nationalizations of ‘confiscatory character’, that is, without ‘proper

indemnification’, but did not rule out nationalization per se. Therefore, the majority of the

Tribunal held that the nationalization was lawful provided that it did not possess any

confiscatory character.

Libyan American Oil Company V. The Libyan Arab Republic (‘Liamco Case’)93

Facts

In 1955, LIAMCO, an American company, entered into a number of Concession Agreements

with the Libyan government for the exploration and production of petroleum. After the

Revolutionary Command Council headed by Colonel el Qadhafi overthrew the government,

LIAMCO was subjected to gradual measures restricting rights granted in the Concession

Agreements, ultimately resulting in complete nationalization of all of LIAMCO’s physical

assets and concession rights in Libya.

In November 1973, LIAMCO initiated arbitration proceedings pursuant to Clause No 28 of

the Concession Agreements. Part of the complaints was that the expropriation of its property

was contrary to the terms of an oil concession contract and had been effected as part of an

overall program of retaliation against the U.S whose policies were contrary to that of the new

Libyan regime and was discriminatory against selected foreign companies. It requested as a

principal relief the restoration of its Concession rights together with all the benefits accruing

from such restoration (restitution in integrum94), and as an alternative relief, the payment of

92 This was in relation to the provisions of the United Nations General Assembly Resolution on Permanent Sovereignty over National Resources Resolution 1803 (XVII) of 1962.93 (1981) 20 ILM 1

adequate damages, in the amount of US$ 207,652,667 plus interest. The pleadings and

hearings were conducted in default of the Respondent.

Findings

Similar to the Aminoil case, questions were posed as to the applicable laws and standard of

compensation. The key issue however was on the legality of the purported expropriation.

Liamco asked the tribunal to pronounce that it was contrary to the principles of the law of

Libya, the principles of international law, the general principles of law as well as contrary to

the express terms and guarantees offered by the Government of Libya in said concession

agreements.

The Tribunal held that the right of property, including incorporeal property of concession

rights, was inviolable in principle, as recognized by both Libyan and international law. The

right of a State to nationalize, however, was held to be sovereign, subject to indemnification

for premature termination of concession agreements. Nationalization of concession rights, if

not discriminatory and not accompanied by a wrongful conduct was not unlawful, but a source

of liability to compensate the concessionaire for said premature termination of the Concession

Agreements.

Texaco Overseas Petroleum Company and California Asietic Oil co. V. Libya (‘Texaco

v. Libya’)95

Facts

The two plaintiff companies were parties to 14 Deeds of Concession granting them certain

petroleum rights in Libya. In 1973 and 1974, Libya nationalized the properties, rights, and

assets of the plaintiff companies under these concessions. Each contract provided that the

contractual rights expressly created by the concession shall not be altered except by mutual

consent of the parties, and that any disputes shall be referred to two arbitrators, or an arbitrator

appointed by the International Court of Justice. The nationalization laws provided for the

payment of compensation (but none was paid). The companies began arbitration proceedings

under the concessions. The Libyan Government did not take part in the proceedings.

Findings94 This is a principle of contract law in which a party is restored to the position that he was previously, i.e. restoration of a party to the status quo ante.95 (1978) 17 ILM 1

The findings of the tribunal are rather remarkable in this case and are going to be treated in

seriatim;

(1) the arbitration was governed by international law, and the concessions (which constituted

binding contracts) were within the domain of international law, being governed, in accordance

with their terms, by principles of Libyan law so far as they were common to principles of

international law, and otherwise by general principles of law including those applied by

international tribunals; (2) that Libya had acted in breach of its obligations under the

concessions; (3) that a State's sovereignty did not justify disregard of its contractual

obligations by an act of nationalization; and (4) that the normal sanction for non-performance

of contractual obligations was restitutio in integrum96 which was inapplicable only to the

extent that restoration of the status quo ante was impossible (of which there was no evidence

in this case), and Libya was therefore legally bound to perform and give full effect to the

concessions.

Amoco International Finance Corporation V. Iran (‘Amoco Case’)97

Facts

The Claimant, AMOCO was a wholly owned subsidiary of standard oil, a U.S company

entered into a joint venture agreement in 1966 with NPC, an Iranian company controlled by

the Iranian movement to form KHEMCO. The aim was to process and sell Iranian natural gas.

The KHEMCO agreement by its terms was valid for 35years KHEMCO was jointly owned

and managed by the contracting companies, each contracting company having250% stake in

the KHEMCO project. In 1980, the KHEMCO agreement was declared null and void by the

Iranian government following the 1979 Iranian revolution and in implementation of an Iranian

legislation that was intended to complete the nationalisation of the Iranian oil industry. The

claimant sought compensation for the loss of its interest in KHEMCO and contended that the

expropriation was unlawful in international law as there was discrimination and absence of

public purpose.

Findings

It is to be noted that in this case the focus was however not so much on whether the purported

expropriation was legal, rather, the focus was on the determination was whether there was the

element of discrimination and the requirement of public policy,98

96 Op cit. 97 (1988) 27 ILM 131498 The requirement as contained in the United Nations General Assembly Resolution 1803 (XVII) of 1962

As regards public policy, the tribunal stated that generally an expropriation, the only purpose

of which would have been to avoid contractual obligations of the state or an entity controlled

by it could not be considered as lawful under international law. That such expropriation would

be contrary to the principles of good faith and to accept it as lawful would run counter to the

well settled rule that a state has the right to commit itself by contract to foreign corporations.

However, that in the instant case, the single Article Act that expropriated KHEMCO was

adopted for a clear public purpose, namely, to complete the nationalisation of the Iranian

industry. The tribunal held therefore that AMOCO’s right and interest under the KHEMCO

Agreement including its shares in KHEMCO were lawfully expropriated by Iran.

British Petroleum Case (U.K V. Libya)99

Facts

In 1971, Libya expropriated the property, rights and assets under an oil concession contract of

British petroleum, a British company in which the British port then held 49%of the shares.

The British government protested to Libya that its action infringed the international law since

it was not for a public purpose, and was not followed by the payment of prompt and adequate

compensation. The reason for the expropriation was the refusal of the U.K to intervene to

prevent Iran from forcibly occupying the Tunb Islands in the Persian Gulf.

Findings

The tribunal held that the British Petroleum nationalisation law, and the actions taken

thereunder by the respondent, do constitute a fundamental breach of the British Petroleum

concession as they amount to total repudiation of the agreement and the obligations of the

respondent thereunder; that the taking by the respondent of the property, rights and interests of

the claimant clearly violates public international law as it was made for purely extraneous

political reasons and was arbitrary and discriminatory in character. Also, the fact that no offer

of compensation has been made after nearly two years since the expropriation indicated that

the taking was also confiscatory.

CONCLUSION

With the discussions that have gone on before now, it is clear that the concept of

Expropriation is a pretty mature concept. Given the dynamics of globalization this concept is

in the twilight of its existence. The reason for this thought is an observation of the way the

world has become one community and the international front is basically “next door” , this has

99 (1974) 53 ILR 297

caused a reorientation of the policies of governments and companies, to the extent that

developing countries have established agencies for Foreign Direct Investment.

As a matter of fact, international think-tanks even rank economies on the basis of Ease of

Doing Business, which is substantially influenced by the reception given to multi-nationals in

the face of policies and economic regimes. Thus it can be said that the objects of nations now

is not to take over entirely the foreign corporations but to benefit maximally and this involves

giving them more space and at best adopting the options of an advantageous fiscal regime and

technology transfer.

APPENDIX 100

ON THE NATURE OF INDIGENOUS PEOPLE

By Erica-Irene Daes a Special Rapporteur for the UN.

…Let me, Mr. Chairman, to refer now to the General Considerations related to the Concept

Indigenous Peoples Permanent Sovereignty. There is a growing and positive trend in

international law and practice to extend the concept and principle of self-determination to

peoples and groups within existing States. While understood to no longer include a right to

secession or independence (except for a few situations or under certain exceptional

conditions), nowadays the right to self-determination contains a range of alternatives including

the right to participate in the governance of the State as well as the right to various forms of

autonomy and self-governance. In order to be meaningful, this modern concept of self-

determination must logically and legally carry with it the essential right of permanent

100 This is an excerpt of the document presented by Mrs Daes before the U.N in 2001. The full document can be found in E/CN. 4/Sub. 2/ 2001/21.

sovereignty over natural resources. The considerations that lie behind this observation must

now be examined.

To begin, it might be useful to examine why the term "sovereignty" can appropriately be used

in reference to Indigenous peoples and their natural resources within independent States. In

this connection, concern was expressed about whether two "sovereigns" can exist within one

State or share in the same resources. The meaning of the term in relation to the principle of

permanent sovereignty over natural resources can be generally stated as legal, governmental

control and management authority over natural resources, particularly as an aspect of the

exercise of the right of self-determination.

In this context, it is apparent that the term "sovereignty" refers not to the abstract and absolute

sense of the term, but rather to governmental control and authority over the resources in the

exercise of self-determination. Thus, it does not mean, the supreme authority of an

independent State. The use of the term in relation to Indigenous peoples does not place them

on the same level as States or place them in conflict with State sovereignty.

In the sixteenth century, the term " sovereignty" referred to the supreme power within a State

without any restriction whatever. However, by the time of the influential French jurist

Emmerich de Vattel's The Law of Nations in the early nineteenth century, the term no longer

had this absolute sense, and it was recognized in international law that a "sovereign" could be

under the protection of another, greater sovereign without losing its "sovereignty."

In modern times it is commonplace to observe that no State enjoys unfettered sovereignty, and

all States are limited in their sovereignty by treaties and by customary international law. In

fact, it is common practice for States to enter into international agreements that not only

reflect certain limits to their sovereignty, but also acknowledge certain benefits that can be

derived when sovereigns cooperate in their management and use of natural resources. Thus, in

legal principle there is no objection to using the term sovereignty in reference to Indigenous

peoples acting in their governmental capacity. In fact, Indigenous peoples have long been

recognized as being sovereign by many countries in various parts of the world.

In the United States, Indian tribes have been recognized as sovereign political entities since

the formative years of the Federal Government. These principles were first completely

expressed in the case Worcester v. Georgia. That case arose when the State of Georgia

imprisoned several missionaries who were living on Cherokee Nation territory in violation of

a state law requiring non-Indians to obtain a license from the governor.

Justice John Marshall set forth what is still the law today in the United States when he found

that Indian nations have always been recognized as "distinct, independent, political

communities" and are, as such, qualified to exercise powers of self- government, not by virtue

of any delegation of powers from the Federal Government, but by reason of their original

tribal sovereignty.

In the recent Case of the Mayagna (Sumo) Community of Awas Tingni v. Nicaragua, the Inter-

American Court of Human Rights, in interpreting the right to property as found in Article 21

of the American Convention on Human Rights, made clear in its judgment that Indigenous

peoples' rights to their lands include rights to the resources there (para. 153) and that these

rights of ownership are held by the community in their collective capacity and according to

their own customary law, values, customs and mores (paras. 148, 151, 153). Though the Court

did not use the term "sovereignty", there is no question that the decision found that

international law protects the governmental or collective right of the community to the land

and resources.

The law of Nicaragua has long provided for autonomy in the Indian regions of the country.

The Constitution of Nicaragua has also clearly recognized Indigenous forms of social

organization as well as the right of Indigenous peoples to manage their local affairs, maintain

their communal forms of ownership, and their right to the use and enjoyment of their lands.

Recently, the Government of Nicaragua passed legislation regarding the demarcation and

titling of Indigenous lands. This new law further recognizes the governance authority of local

Indian communities over their lands, territories and resources along the Atlantic Coast. These

are specific examples of one form of "sovereignty" as that term is used in modern legal

discourse.

In New Zealand, the concept of sovereignty, as applied to the Indigenous Maori peoples is a

part of the accepted legal framework of the State. The Treaty of Waitangi between the British

Crown and Maori is regarded as the fundamental instrument of New Zealand, and this treaty

explicitly and implicitly testifies to the sovereignty of Maori. The concept of Maori

sovereignty is known by a Maori term, tino rangatiratanga". Though the term and its

application are often debated there, the meaning can be roughly given as "chiefly authority".

This is another example of a form of sovereignty on the part of Indigenous peoples that is

recognized and operative within a State.

In Canada, and in many other countries, Indigenous self-government is provided for in the

case of Canada by the Indian Act, including various degrees of control over natural resources.

Such regimes of control over resources by Indigenous governance institutions provide many

more examples of various forms of Indigenous sovereignty over natural resources within

sovereign States.

The International Labour Organization Indigenous and Tribal Peoples Convention No.

169/1989, now ratified by 17 countries, contains important provisions for control over natural

resources by Indigenous peoples in their collective capacity as peoples. In particular, article 15

provides for the rights of "peoples" to their natural resources. Paragraph 1 reads as follows:

"1. The rights of the peoples concerned to the natural resources pertaining to their lands shall

be specifically safeguarded. These rights include the right of these peoples to participate in the

use, management and conservation of these resources."

This limited guarantee of control and management authority on the part of Indigenous and

tribal peoples within States in my opinion, is another form of sovereignty as that term is now

understood. This authority is further recognized in article 7, which guarantees, among other

things:

"1. The peoples concerned shall have the right to decide their own priorities for the process of

development as it affects their lives, beliefs, institutions and spiritual well-being and the lands

they occupy or otherwise use, and to exercise control, to the extent possible, over their own

economic, social and cultural development."

Articles 2, 4, 5 and 6 of the aforementioned Convention, also refer to the "institutions" and

"representative institutions" of Indigenous and tribal peoples. This further reinforces the

understanding that Indigenous and tribal peoples within States ratifying ILO. Convention

No.169 enjoy at least limited forms of sovereignty or management authority.

Thus, I would like to state that the term "sovereignty" may be used in reference to Indigenous

peoples without in the least diminishing or contradicting the "sovereignty" of the State. The

well-established use of the term in many areas of the world, rules out any such implication.

Accordingly, I would suggest that as laws, mechanisms and measures are developed to address

this issue, States and Indigenous peoples should concern themselves less with what the right

might be named, and more with whether Indigenous peoples' ownership of and governing

authority over all their natural resources are adequately recognized and protected.

With an understanding of how the concept of sovereignty is applied to Indigenous peoples, it

becomes further apparent that, when examining their right of self- determination, the principle

of permanent sovereignty over natural resources should also apply to Indigenous peoples.

There are a number of reasons for this. They include the following:

(a) Indigenous peoples are colonized peoples in the economic, political and historical sense;

(b) Indigenous peoples suffer from unfair and unequal economic arrangements typically

suffered by other colonized peoples;

(c) The principle of permanent sovereignty over natural resources is necessary to level the

economic and political playing field and to provide protection against unfair and oppressive

arrangements;

(d) Indigenous peoples have a right to development and actively to participate in the

realization of this right; sovereignty over their natural resources is an essential prerequisite for

this; and

(e) The natural resources original belonged to the Indigenous peoples concerned and were not,

in most situations, freely and fairly given up.

The recently published independent study for the World Bank, the Extractive Industries

Review gave detailed attention to the matter of Indigenous peoples' rights to natural resources

and reached a number of important conclusions relevant to this subject. The crucial

importance of natural resources to Indigenous peoples was one such conclusion.