Professional Documents
Culture Documents
oil
resource
nationalism, writes Robert Amsterda m (right), lnternational Lawyer at Amsterdam & Partners.
courage outright seizure
/[ s the world's key energy com/-\ modity, oil has long been the f lfocus of government intervention, while strong demand f rom
industrialising emerging economies is creating new risks of expropriation and
Taking action
There's little debate over the lmportance of resource nationalism (Ernst & Young, for example, has cited it as the number one risk for 2013). The debate is over what responses and remedies
addition
costly, slow, and sometimes disregarded, there are also a number of countries working on the passage of new laws (such as Russia)
where the foreign investor is treated as a domestic business, whose disputes
to being
of
assets. In
disruption. According
report released by the UK think tank Chatham House, the balance of power between the private sector and host
governments is shifting as sustained high commodity prices have led to a series of state interventions, expropriations and aggressive tax regimes. These new government players and state-
to a
recent
The first reaction of most international oil and oil services companies is
are subject
to look to bilateral investment treaties (BlTs). lt is of course possible for the investor to bring an international arbitration case against the State under a
relevant investment treaty, and in some cases, may obtain compensation for
damages or loss of assets. However, arbitration is only the first piece of the puzzle and, in more recent
owned entities are playing under a new set of rules, sometimes acting above the law. ln the past decade, there have been
more than 26 major disputes and expro-
investments across the world, from the seizure of Yukos in Russia in 2004, the
Mobil
in
'Nationalism
of any kind,
can read the law too, and in many cases have prepared ahead of time to escape any liability through methods such as 'creeping expropriation'.
including
expropriated investors. lt was once thought that this would be too high a cost to the Venezuelan authorities, but
sible
the lnternational Centre for Settlement of lnvestment Disputes (lCSlD) in order to avoid having to pay compensation to
panies must first and foremost fulfill political and strategic objectives, and, as a result, may not always pursue busi-
ness decisions
shareholders.
dragged into all sorts of unchecked regulatory liabilities, from human rights abuses to environmental disasters. Instead, the foreign investors need to continued on p22...
Whilst the availability of bank debt continues to recove[ corporate debt markets are at a cyclical high as strong levels of liquidity among yield-focused investors have created extremely favourable conditions for corporate debt markets. These conditions give companies an opportunity not just to lower their cost of capital but also to more thorough restructuring of their debt position to lengthen maturity and manage covenant and
compliance risks.
respondents (79%)who took part in the survey indicated they expect their debtto-capital ratio to decrease or remain constant over the next 12 months. Other key trends included:
50o/o
of additional funding. companies need to be innovative regarding how they fund their developments. Max Petroleum has issued shares in the company to one of its drilling contractors in return for drilling services in Kazakhstan. As a result, companles may find themselves turning toward Iarger, better
absence
undertake
both shareholders and creditors - is now a priority for their company; o 25o/o of respondents reported that
capitalised partners or
Consequently, consolidation
acquirers.
of the AIM
for
o
paying down debt is a primary focus excess cash over the nert 12
months;
14o/o
listed oil and gas companies completing. As a result, capital constrained oil and gas
Although public equity raising has remained challenging, private equity (PE) is increasingly being used as a
source of capital for the mid-cap oil and gas sector. The sector's relative strength
pE
towards upstream producing, midstream, oilfield service or downstream assets and businesses. Private equity investors have, however, been very selective, focusing on those businesses or opportunities with an established management team, a track record of
success
bias
priority. Oil and gas companles, as well as companies in general, are clearly choosing to, where possible, retire debt and deploy capital more cautiously. This provides further evidence that companies are focusing their attention on delever-
stronger balance sheets. Howeve4 those smaller companies with cash flow from producing assets and financed near-term development programmes continue to receive investor support. Similarly, companies with acreage in highly prospective regions, such as East Africa, are also still
able to raise capital. ln summary, there is capital available
for explorers with good acreage and a track record of success and for those with producing assets. The external
financing capital challenge is currently greatest at the development stage of the lifecycle where the returns are lower than for exploration, but the execution risks remain considerable. Whilst those companies with significant internal resources can manage this by applying their own equity, those without such resources may need to pursue a corpo-
cash
flow performance.
lndustry response
ln this global context of changing equity and credit dynamics how is the industry responding? Ernst & Young's most recent Global Oil and Gas Capital Confidence Barometer survey indicated that oil and gas companies are not yet
oriented portfolios. For example. less than 10% of A|M-listed oil and gas companies successfully raised capital in
are
the
ratetransaction-basedapproach. a
to influ-
unexpected places, such as international human rights law, and can apply to injurious treatment of a company's executives or arbitrary application of the law.
The best defence is a good offence. In an environment of rising prices and talk of windfall tax, a company's corporate social responsibility (CSR) programmes
achieve
a greater degree of
control
resource
nationalism, social issues and fair tax regimes in the countries in which they are working. The Australian-owned Perseus Mining, for example, became one of the first mining companies in
of the company.
Needless
to
say, among
establish
to
campaign. Too many media-shy investors have suffered greatly from their preference for discretion. as these
must graduate to the next level to include an actual corporate foreign policy (CFP). Corporate foreign policy refers to the introduction of new practices that uphold a series of principles emphasising the mutual interests being
pursued in the company's business activities that are consistent and reinforcing of the interests of the local community and the host government. Whereas CSR can be limited to a couple of construc-
increases against its own subsidiaries in lvory Coast. ln many emerging markets which feature as major trading partners in the
a number of
that
balances
of a well-designed
industrial agents who continue to thrive despite significant political risk because
CFP
disputes almost always contain an element of news headlines driving legal and regulatory actions. The investor should always prepare for the worst scenarios, even including trumped up criminal charges. There is also a growing body of international law, treaties and forums which sometimes allow for investors to assert
by
tion
projects to build potable water systems in a nearby village, CFR is more about a new mentality that is negotiated in partnership with the state.
media and advocacy strategies, foreign investors facing resource nationalism risk have a much better
Bold steps
Some companies are beginning to take bold steps to jump out in front and
the host government, and file for relief. Sometimes these options are found in
ating position and can survive in the new environment of economic nationalism. a