LEGAL OVERVIEW ON INTERNATIONAL LAW AND THE EXTRACTIVE INDUSTRIES

Hi, my name is Kiiza David Maclaren a Petroleum and Natural Gas Graduate from Amity University Uttar Pradesh and today I'm going to be talking about the role of international law in governance of extractive industries focusing on international investment law. Now, in governance of extractive industries, while domestic law plays a crucial and often the most visible role, it's not the only area of law that governments and domestic stakeholders need to think about. International law, which can override and supplement domestic law, is also important when considering the mix of legal frameworks governing these projects.

Now various aspects of international law can be relevant for shaping the impacts of an extractive industry project. Trade law under the World Trade Organization, for example, can require governments not to restrict exports of natural resources. International conventions on corruption impose obligations on governments to combat those offenses. And international human rights treaties impose obligations on governments to ensure that investments in extractive industries do not violate the human rights of its population. The area of international law that I'm going to focus on is international investment law, a particular area that focuses on the protection of foreign investors and foreign investments. International investment law is made up of about 3,000 treaties that have been concluded by and between governments around the world. And the question is, why does international investment law matter for the governance of extractive industries, and I would say there are two key reasons. First is that international investment law limits the ability of governments to regulate or take other actions impacting investments in extractive industries and other projects. A second reason is that international investment law can move resolution of disputes relating to extractive industry projects away from domestic courts and domestic legal systems and into a more private system of international arbitration where domestic courts, legal systems, and stakeholders can play less of a role. Now to some extent, these are considered the key objectives of international investment law and investment treaties. They're designed to prevent a situation in which after an investor sinks a significant amount of capital in the host country in developing a mining project, for example, and finally begins to reap profits, the government then expropriates the investment and appropriates the value for itself. And in some situations there are concerns that the investor won't be able to secure fair relief in the courts of that jurisdiction and won't be able to secure compensation for its investment. In those situations, investment treaties, which provide protections against expropriation and a neutral forum via arbitration for resolving disputes, are designed to address that issue. And the idea is that by addressing that issue, you can reduce risks for investors of investing in extractive industry projects, and encourage investment that otherwise might not have happened. But investment treaties typically do much more than protect against expropriation and include obligations on governments to provide fair and equitable treatment, to respect the umbrella clause obligation, and in some cases, to refrain from imposing performance requirements on investors, and as a result of these other types of obligations, investors have really used investment treaties to challenge their host governments, the governments in which they invest for a broad range of actions and inactions. So for example, investors have used investment treaties to challenge governments for taking tax enforcement actions or modifying their tax policies. In light of the commodities, the boom in commodities prices, for example when a number of governments imposed windfall profits taxes in order to capture a greater share of the revenues generated from sale of their natural resources, various investors sued governments such as Mongolia and Ecuador for imposing these excess profit taxes. Similarly, investors have used investment treaties to challenge governments for environmental regulation and environmental approvals. In a recent case against Canada for example, an arbitral tribunal determined that Canada violated its treaty obligations when provincial and federal officials determined, after conducting an environmental and social impact review process, that the project should not go ahead. Another area where investors have challenged governments under investment treaties relates to performance requirements. These performance requirements oblige investors to make certain expenditures in the host country and are often designed to generate linkages between the investment and the host country by taking such actions as requiring the investor, incentivizing the investor to invest in research and development or education and training. In another case against Canada, the government was required to pay $17 million to oil companies as a result of imposing such performance requirements. Another area in which investors have used investment treaties to bring challenges relevant for extractive industries is in connection with renegotiation of investor state contracts. When governments have sought renegotiation, investors have alleged that the efforts by governments to renegotiate contracts are efforts to deny investors the benefits of the contracts they had previously negotiated and therefore violate international investment law. Now notably when investors seek to renegotiate investment contracts with states as they might for example in order to increase the time in which they can conduct exploration activities or to decrease their investment commitment, governments can't similarly use investment treaties to protect themselves against investor-initiated renegotiations. So it really is an obligation that just runs one way toward states, preventing them from renegotiating deals that might have been unbalanced or poorly drafted when negotiated. A final example I'll give relates to the issue of expectations. Investors have used investment treaties to lock in assurances and representations given by government officials to, for example, promise that licenses will be forthcoming or that incentives will be provided. Even when these representations or assurances are not necessarily binding or enforceable under domestic law, investors have been able to successfully argue to international tribunals that those representations and assurances generate expectations that are then protected under international investment law. As I mentioned earlier, the treaties typically provide for investors to take these issues directly to international arbitration where they are resolved before a panel of three arbitrators removed from domestic courts, domestic law, and the domestic legal system. And these arbitrations are typically costly. The average cost is now reported to be roughly $8 million, not including the fees and expenses of the arbitrators themselves. In addition to the cost of the proceedings, the outcomes of the disputes are often costly for governments. In 2012, an award was issued against Ecuador in which it was ordered to pay $1.8 billion plus interest as a consequence of violating the investment treaty. In 2014 an award was issued against Russia in which it was ordered to pay $50 billion, and the average award hovers around $76 million. Over time, there has been a rise in these investor-initiated arbitrations. From just a handful roughly twenty years ago, there are now over 600 cases that are known, which in turn triggers greater awareness and concern about these investment treaties and the impact that they have on governance of domestic investments including investments in extractive industries. Indeed there's a particular concern for investments in extractive industries as a significant number of cases actually relate to these types of projects. As a result of the rise in disputes, a number of concerns have been identified about the treaties.

One is that they may too tightly tie the government's hands and prevent them from regulating or taxing investments in the public interest.

A second concern is that the obligations are asymmetrical, that while there are obligations imposed on governments and rights given to investors, there are no corresponding obligations imposed on investors or rights conferred on governments.

A third concern is that the mechanism of private arbitration is ill-suited to resolve the types of issues that are often brought under the treaties.

Moreover, evidence appears weak that investment treaties strongly influence investors' decisions on where to invest, particularly when other factors such as the location and availability of natural resources and the availability of necessary infrastructure are such crucial factors for influencing investment decisions. There are other four important questions about the cost and benefits of investment treaties and whether the benefits, which can be realized through increased investment, outweigh the costs, which can be felt through decreased policy space, increased government liability, and a shift away from the domestic legal system. In response to these questions and concerns, some countries such as Brazil, Africa and the Southern African Development Community, have been developing new models of treaties to replace older traditional models of international investment treaties. For those treaties that are already in force, a number of countries are adopting additional options which include terminating the treaties, amending the treaties, or reshaping the treaties through interpretive tools. Countries such as the United States, Canada, Mexico, Bolivia, the Czech Republic, Italy, and South Africa have taken one or more of these steps. In 2014 for example, a number of countries agreed to reshape their existing treaties by requiring transparency of the arbitrations that are conducted under them. In addition to addressing the treaties themselves, governments are also taking steps to address their impacts in other ways, such as including waivers in investor state contracts of the ability to bring treaty-based claims. Overall, I think the key takeaway is that there are tensions between governance of extractive industries and international investment law, and it is crucial for governments to identify when and if concluding the investment treaties, how to ensure that they achieve their aim of attracting investment while also ensuring that governance of extractive industry is done through a transparent, accountable, and effective processes. Thank you.