Legal Aspects of the Oil & Gas Industry - Essay Example

 Legal Aspects of the Oil & Gas Industry 1. Introduction Expropriation and nationalization of foreign assets are viewed in a synonymous manner as it signify to the method of acquiring foreign owned assets within the public ownership managed by host state (Taking of property, 2000, II A). It may also be related to the transfer of ownership and bestowing control to a third person apart from the state. The policies of nationalization are determined by the host state. Permanent sovereignty (related to authorization and will be discussed later) is an important phenomenon in this case. Intensification of globalization directs towards the development of global economic interactions as prerequisite. In this era of globalization the free flow of goods and services are underlying characteristics (Dike, n.d., pp. 4-5). Free flow of foreign investments is an expected outcome of globalization. After decolonization, many independent states were not in favor of the international entities exploiting their natural resources (Araim, 1991, p.205). So they wanted to authorize their supremacy over these foreign entities. Within the literature of privatization, efficiency in productivity develops through switching to private ownership. Some anecdotal evidences state that in the oil industry the result is even more magnified. The large multinational oil companies owing to their economies of scale as well as proper use of human capital have attained efficiency. But empirical evidences also reveal that nationalization of foreign assets hinders foreign investments and have resulted in drop of output, national income for oil dependant economies (Guriev, Kolotilin & Sonin, 2009, p.2). 2. Background Now with the nationalization of the international oil companies by the host countries many questions arise in the forefront. It can be questioned that whether the government of host countries achieve parity with the international oil companies while exercising their permanent sovereignty over the natural resources by nationalizing the operations of oil Companies who are exploring and exploiting oil and gas resources in their countries and thus bringing about socio-economic growth. The right of the host government for breaching terms of oil and gas transactions contracts between the countries and companies can be done at will which also questions the sanctity of contract in such cases. Libya and Iran are two oil rich countries where nationalization of international oil companies have taken place with various legal problems where the International Court of Justice (ICJ) have intervened and have declared various decisions. The paper will present a judicial precedent in accordance with the decisions taken in the Iranian case and then will discuss in what ways it has affected the Libyan case and nationalization of the international oil corporations thereafter along with addressing the questions as framed above. Now in the subsequent segment the crux of permanent sovereignty will be discussed 3. Expropriation of foreign assets and Permanent Sovereignty The principle of permanent sovereignty over the natural resources is recognized as an important principle within the purview of modern international law (Taylor, 2012). The concept of permanent sovereignty evolved as a principle in the 1950s and was especially applied to hydrocarbon industry. The principle directs that it is the right of the states in which they can freely exploit and their natural resources in any ways possible (Shotton, 2000, p.42). The domestic laws of a large number of countries assert that the foreign business will not be taken over and attaches no international law in this regard. Article 2 of the United Nations Charter of Economic Rights and duties of states executed by the UN General Assembly in 1974 states that, “every state has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities” (Bennet, 1999, p.156). The United Nations supports the agenda that the member states are completely independent for nationalizing or having partial control of over the businesses operating their business units within the frontiers of the member states. 4. Call for economic self determination through permanent sovereignty From the UN charter of 1974, the notion of self determination evolved with respect to permanent sovereignty (Makuch & Pereira, 2012, p.202). The rationale behind rigorous agitation for the economic self determination can be attributed to the unequal economic relations among the developed and the developing world. With the withdrawal of the colonies from several countries there developed several independent states after the Second World War. These states started to realize that they are not being able to properly compete in an economic manner. The options to which they were exposed was that of the concessions as well as other legal arrangements for exploiting the natural resources by the foreign organizations were not feasible and these organizations possessed the potential to retard their economy. They created the notion that the states should vehemently control their natural resources as tool for defense against the “violent reaction by the imperialist to counter their demand for a new economic order” (Schrijver, 2008, p.24). Thus the process of nationalization was deemed to be a way of developing a country’s right to gain economic self determination. In the Latin American countries, in the 1940s and the 1950s there emerged a significant influence of the United States of America within the economic environment of Latin America nationalization of various US companies took place (Dike, n.d., pp. 6-7). 5. Nature of the nationalization of the national assets in 21th century In the wake of the twentieth century, the nationalization procedures included various concessions but with decolonization there arose different changes in the nationalization policies like that the host nation will be retaining title and ownership over the natural resources. The term of agreement occurring for a shorter period of time approximately 20 to 40 years, grants covering a smaller time period of around 20 to 40 years and the grants covering over smaller territorial areas, prior monetary commitments encountered for the purpose of exploration as well as development in the early years by the contractors, the state owned companies are assigned for overseeing or participating in operations with the contractor, more generous compensation paid to the host countries through bonus policies along with vigorous compensation, graduated royalties, taxes on the income of the contractor and so on (Jacobs & Paulson, 2008, p.370). 6. Iran and IOCs 6.1 Anglo-Iranian case The economy of Iran is widely depended on vast expanse of oil resources and gas sector. But the Iranian economy depends extremely on oil and thus finds problems in the creation of diversified global and integrated economy. The country has also faced phases of economic instability (Mohamedi, 2012). From the year 1959, there developed sentiments for Iran’s nationalization related to the oil industry. In 1949, there was approval of First Development Plan which was established for administering programs which were dedicated to be financed in a large proportion from the oil revenues earned by the country (Oil Nationalization, 2012). In the 1950s the Iranian oil industry was steered by the Anglo-Iranian oil company which later popularly known as the British petroleum. Around 10 to 12 % of the net profit was given to the Iranian government by the company and around 30% was received by the British government by the taxes alone. Low wages were also paid to the Iranians and they were treated poorly along with the optimally expropriating huge resources (Intervention and Exploitation: US and UK Government International Actions Since 1945, n.d.). The Iranians were aware that the British government took away more than proportionate amount as compared to royalties derived by the government. In 1950, the majlis committee headed by Mosaddeq led to the rejection of a draft agreement where the company offered the administration with somewhat better terms but it did not include the terms of fifty-fifty profit sharing provision. The Muslim clerics called for nationalization and the pro British Prime Minister, General Ali Razmara was assassinated in a mosque in the year 1951. Mussadeq claimed that nationalization of oil would be abolishing poverty in Iran with a one big jolt (Cavendish, 2001). 6.2 Judicial decision The case of Anglo-Iranian Oil Company was submitted to the international court of justice by the government of the United Kingdom on May 26, 1951 with the subject of an objection on the grounds of lack of jurisdictions by the government of Iran. With nine votes against five, the decision of the court was that it lacked legal jurisdiction. The judgment was followed up by a separate opinion by Sir Arnold McNair along with his conclusions. On 5th July, 1951 the court indicated of interim measures of protection in association with this case. In the judgment, the court also declared that the order of July was ceased to be operative along with the lapse of provisional measures simultaneously (Anglo-Iranian oil co. case, 1952). The order was passed to prevent damage to the property and the involvement of interests. Great Britain instituted proceedings before the court regarding the injustice they claimed from the nationalization of the oil industry. UK exhibited the prior agreement which was made in April 4, 1933 which provided the company with an exclusive right for extracting and refining petroleum in the Iranian territory and also in its transportation. From the declaration of the court it could be stated that the court has jurisdiction at a time when a dispute relate to the application of treaty accepted by Iran. In this regard Iran stated the jurisdiction was limited to treaties limited to declaration. United Kingdom based on the doctrine of the earlier treaties. The court in this situation has to take a decision which is in harmony with a natural as well as a reasonable way of interpretation with the declaration. The rationale was developed that the treaties subsequent to ratification was taken into consideration. For reaching to a reverse conclusion there was a necessity of clear reason. But that was not produced by the United Kingdom. In this respect it can be stated that the Iran had special reasons for the drafting of her declaration in a restrictive manner and also excluding the previous treaties. At that time Iran has criticized all the treaties with other states related to capitulation regime. Apart from that the Iranian law through which the declaration was adopted before ratification were clear in their intentions as it stated that the “treaties and conventions which come into consideration are those which the Government will have accepted after the ratification” (Anglo-Iranian oil co. case, 1952). The court excluded the early treaties on which UK depended upon. The United Kingdom stated that it maintained a treaty or convention with the company. In 1933 it signed an agreement between the company which was a double charter. The court did not view this as a case. The court stated that United Kingdom was not a party to the contract linking between the two government in anyways that falls within the purview of regulation. In the contract Iran was not able to claim from United Kingdom any rights that it may claim from the company and it cannot be also called to perform towards UK any obligations destined to perform towards the company (Anglo-Iranian oil co. case, 1952). The United Kingdom in the submission of the dispute with Iran to the league of council was guided by the policy of exercising right of diplomatic protection in for of one of its nationals. Great Britain argued that there was a denial of justice under the international law with the failure of Iran to arbitrate in accordance with the terms of agreement of 1933 as to warrant with intervention of Great Britain on behalf of its national who was a corporate person. If the case would have been such then there may arise dispute over the breach of agreement supplemented by a conflict of opinion between two states as to the justice of treatment of a national of one of the states. It was required for Britain to show that there was a dispute between the two states according to the provisions of Article 34. The controversy among states can be nullified only if it is established that the existence of state is for the protection of persons under authority both national as well as corporate in domestic sphere as well as in the foreign territory as well as that an injustice against a national is also treated as against the case. The British oil company owned a majority of British stock and its incorporation took place under the British law. Although the natural law is contrary to the Iranian point of view but the legislation effects on the aliens have no concern to other nations as the disputes coming out of the legislation are not the matters that come under the purview of international jurisdiction. The decision of the court was that the case lacked jurisdiction (Brown, 1952, p.383). 6.3 Aftermath With the nationalization of Anglo-Iranian oil company there was boycott from all the international oil companies and there was staggering of the Iranian economy within the time span of 1952-1953 and showed signs of recovery with the formation of Iranian consortium in which the role of the Anglo-Iranian company was reduced down to around 40 per cent (Luciani, 2008, p.83). 7. Libya and the IOCs Libya is a North African country which is also abundant in oil resources and many multinational oil companies have settled their establishment here with expropriation of mammoth revenues. Libya also saw nationalization of foreign oil companies in the early 1970s. The three major cases that can be attributed to Libya is that of BP (British Petroleum) Exploration company v Libya, Texaco Overseas Oil Petroleum Co./California Asiatic Oil Co. (TOPCO) v. Government of the Libyan Arab Republic and Libyan American oil company (LAIMCO) v. the government of Libya (Jacobs & Paulson, 2008, p.375). Now we will discuss about the case of Texaco Overseas Oil Petroleum Co./California Asiatic Oil Co. v Libyan government. The vast oil resources of Libyan Desert were in the prime target list of the United States. The two companies signed 14 deeds of concession with government of Libya between 1955 and 1966. The nationalization measures were taken up by the Libyan government in the time span of 1973 and 1974 (Cantegreil, 2011). In the year 1973, around 515 of the properties rights as well as assets related to the Deeds of the concession of the companies and other seven oil companies were nationalized with the help of a decree. In the following year in the month of September it was declared that the rights and assets of the companies of which they were the holders were nationalized. The companies were held liable for all the liabilities as well as debts and obligations rising from the activities of the company. By the decree of 1973, Amoseas which was a company governed by foreign law formed by the companies for being their operating entity in Libya for carrying out activities for the account of the companies to the extent of 49% and the Libyan National oil company to the extent of 51%. The company was turned into a nonprofit organization and the assets of the company were owned completely by the Nigerian oil company with losing its name. The government of Libya did not appoint an arbitrator and the companies requested the President of the International court of justice for designating a sole arbitrator. On December 1974, the President of the international court of justice appointed French law professor René-Jean Dupuy as sole arbitrator. It was argued by the companies that measures of nationalization in 1973 and 1974 were subjected to breach of obligations under the purview of the contracts. The arbitrator after examination stated that both under the international as well as Libyan law the state possess the power in making international commitments with the inclusion of the foreign parties. This type of commitment is regarded as manifestation of sovereignty. The arbitrator also considered that the government of Libya undertook definite commitments that could not be disregarded by the nationalization measures. Libya granted a concession of minimum year duration of 50 years and also to the stabilization clauses. Clause 6 of the law makes such activities invalid as long as the companies are concerned for a certain period of time. The arbitrator viewed that, “The recognition by international law of the right to nationalize is not sufficient ground to empower a State to disregard its commitments, because the same law also recognizes the power of a State to commit itself internationally, especially by accepting the inclusion of stabilization clauses in a contract entered into with a foreign private party” (Texaco Overseas Petroleum Company v. The Government of the Libyan Arab Republic, AD HOC AWARD OF JANUARY 19, 1977). The arbitrator also held that the concession deeds were binding on all the parties and it states that the government of Libya breached the obligations under the deeds of concession. The government was bound legally in performing the deeds according to their terms. The arbitrator concluded that it became an internationalized contract in accordance with the nature of deeds of concession agreement (TEXACO OVERSEAS PETROLEUM CO. V. LIBYA, 1977). The Libyan arbitrations also recognized the sanctity of contracts within the foreign investors and the government with the application of arbitration clause within the concession agreement for permitting distressed investors in seeking remedies through international commercial arbitration. 8. Summary The paper circumscribed around the legal environment associated with nationalization of the international oil companies with special reference to Libya and Iran. Firstly expropriation and nationalization has been discussed thoroughly with the concept of permanent sovereignty. The nationalization of the foreign assets has been legalized with various dimensions of UN and other international legal norms. Especially the developing countries in order to become economically strong possess the right to exploit their natural and also gain self determination. After that the nationalization of the foreign assets taking place in the 21st century is mentioned. Now, considering Iran, the British oil company Anglo-Iranian was not conducive to the nationalization measures by the government. International court of justice decided in favor of the Iranian government but huge economic loss was entailed by the Iranian government with staggering of its economy. In case of Libya in 1977, the case is exactly the reverse where the international arbitration declared in favor of the companies who alleged against the Libyan government. 9. Conclusion The study states that nationalization of foreign assets is indeed a complex phenomenon and it bears significant implications. It can be stated that in the Iranian case, the British company hearing the nationalization process was not willing to enter into the negotiation and were counting on the previous treaties when there was indeed change in the legislative regime in the country. The aftermath of arbitration process led to the economic jeopardy of the nation. In the Libyan case it can be stated that the country led to the breach of contract with the underlying notion of boasting on its vast natural resources and led to forceful nationalization. The international arbitration in the Libyan case withholds the sanctity of the case and it is an utmost necessity for maintaining international norms in clear written manner for successful nationalization of foreign assets. References 1. Anglo-Iranian oil co. case, (1952). Available at, http://www.icj-cij.org/docket/index.php?sum=82&code=uki&p1=3&p2=3&case=16&k=ba&p3=5 (accessed on December 15, 2012) 2. Araim, A,S, (1991), Intergovernmental Commodity Organizations and the New International Economic Order, Greenwood Publishing Group 3. Benet, (1999), International Business, 2/E, Pearson Education India 4. Brown, B, F, (1952), The Juridical Implications of the Anglo-Iranian Oil Company Case, Washington university law review, Vol.1952, issue. 3, pp. 384-397 5. Cavendish, R, (2001). 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