OIL AND GAS 2.8 EXPROPRIATION AND NATIONALIZATION

• Isochukwu
• 2
• Oil and Gas II

EXPROPRIATION/NATIONALIZATION.

It is the compulsory legal taking of private property by the state. For our purpose, it can be regarded as the compulsory taking of property of the International Oil Companies by the State. Expropriation may take various forms-Starrett Housing Corp V Iran.

In Union Painting Co V Iran the court noted that the property expropriated may be moveable, immovable, tangible and intangible property[1].

Expropriation was distinguished from regulation in Myers Incorporation V Canada. In determining the distinction, we are to look at the duration, purpose, and nature of action. Where the government action was taken with a view to transfer ownership/deprive the private individuals of ownership right, it may amount to expropriation. Where it merely controls the manner in which property is to be used, it would most likely be a regulation.

 

LEGAL BACKING, BASIS AND REASONS

What gives host states the audacity to expropriate?

1. The various declarations of permanent sovereignty of states over their natural resources give states the power to expropriate. These empowerment can be found for example in; the Resolution on Permanent Sovereignty over Natural Resources 1962: Article 2(C) of the Charter on Economic Rights and Duties of States, Declaration on the Establishment of a New International Economic Order 1974 amongst others. A common feature in these laws is the obligation to compensate.
2. Decolonization and independence of nations: most nations enacted legislations re-buttressing their absolute ownership over oil. In Nigeria, Section 44(3) of the constitution, Section 1 minerals Act, PAct PIB amongst other are instructive to this effect.
3. Alliance among developing countries. Like the OPEC
4. IOC not complying with municipal and international laws and regulations.
5. The need to generate revenue and fund the host states.

 

Now that we have established that the Host States can expropriate, we should however note the Cordell Hull Principle.

The Cordell Hull principle (which has been followed in the various cases discussed below) posits that for expropriation to be lawful:

• It must have been for public purpose. (Same was noted in US V Iran).
• It must not be discriminatory: except such discrimination is necessary in the interest of the public.
• Prompt, adequate and effective compensation must be paid: to prevent unjust enrichment of the host state.

This principle has been adopted by most of the western world. It has been adopted in the World Bank 1992 Guidelines on the Treatment of Foreign Direct Investment[2].

In US V Iran, the court also added that expropriation should not be done in a bid to evade contractual obligations.

There have been various cases of expropriation/nationalization.

In Amoco International Finance Corporation V Iran (US V Iran), in 1980, Standard Oil company entered into a joint venture with the Iranian government (which was to last for 35 years) to form Khemco. Khemco was to process and sell Iranian natural gas. The company held 50 a percent stake. However, following the Iran Evolution and the nationalization of the Iran Oil Industry, the agreement was declared null and void. On arbitration it was found that the company should be compensated based on its 50 percent stake. I.e the value owned by the company in the Joint Venture not only the physical and financial assets or property

• In Texaco V Libya: notwithstanding that the concession agreement provided that it cannot be varied, altered or terminated without the consent of the parties… Libya still expropriated. But it paid compensation.
• In Kuwait V American Independent Oil company (Aminoil case): the concession granted to Aminoil was terminated. Over 179million dollars was awarded in this case.
• Expropriation was also seen in the cases of Uk V Libya, Libyan American Oil V Libya and US V

HOW CAN COMPANIES PROTECT AGAINST EXPROPRIATION.

• They can internationalize the agreement: where the parties elect to make international law (as opposed to local law) govern the dispute, the foreign company can be at an advantage where international law governs their agreement.
• Insert a Stabilization Clause: this clause seeks to make sure that the agreement is not swayed or nullified. Examples include; clause that the parties must submit disputes to arbitration, Clause stating that the agreement cannot be altered, varied or nullified without the consent of the parties and until the agreed time lapses, and so on.
• Inserting an amendment clause: the company can come to a compromise with the government by maybe agreeing to relinquish majority of their percentage stake rather than expropriating all.
• Social responsibility: foreign companies should step up their social responsibility. The host state should feel the presence of the companies. Provision of employment, scholarship, empowerment programmes, facilities and so on thereby leaving a good impact on the community. This would make the government reluctant to expropriate.
• Good Operation Practice: expropriation may occur when the government and people are fed up of the IOCs practices in their country. Therefore the Foreign oil companies should do all they can to not provoke the government.

DISADVANTAGES OF EXPROPRIATION.

1. It scares away foreign investment.
2. States are usually less efficient in managing the expropriated assets and they end up privatizing.

 

[1] This is the same definition adopted by Article 10(7) of the 1961 Harvard Draft Convention.

[2] This guideline adds that the expropriation must be done in good faith.