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. 1i The 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 companys development rights or facilities and its products for the host countrys own use, usually under the guise of the national interest. Because the international business community frowns on expropriation by host countries, some
4 5

Microsoft Encarta Dictionary 2007. This entails control of government and economy by an external government.

6 Statement of the IranUS Claims Tribunal in the case of Tippetts, Abbett, McCarthy, Stratton v TAMS-

AFFA Consulting Engrs of Iran, 6 IranU.S. Cl. Trib. Rep. 219 (1984) at 225226

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 Venezuelas Orinoco Belt to agree to new contracts with the state oil company, Petrleos 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 8

See Lorenzo Cotula, The Regulatory Takings Doctrine online: http://www.iied.org/pubs/pdfs/17014 ED.pdf at page 1. Simon Baughen Expropriation and Environmental Regulation: The Lessons of Nafta Chapter Eleven (2006) 18 J.Envtl. L. 207228 at 209 9 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, 2007 11 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 Petroleums 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 Kazakhstans 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 Nigerias 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;7 16 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 915 18 Ibid, at 915 19 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 329 20 Nigerias 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. Theres 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 expropriation21 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, selfdevelopment, 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) ii)

the degree of interference with the property right, the character of governmental measures, i.e. the purpose and the context of the governmental measure, and the interference of the measure with reasonable and investment-backed expectations.23

iii)

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 propertys 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 investors 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 investors 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 governmentappointed 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 Claimants deprivation of control of his

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

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 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 interference30. 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 Governments 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

29 S.D. Myers, Inc. v. Canada, (November 13, 2000) Partial Award, 232. International Legal Materials 408, para. 232. 30 ibid 31 Revere Copper & Brass Inc. v. Overseas Private Investment Corporation, 56 International Legal Materials 258.
32
33

The Tribunal was set up under the American Arbitration Association

Investment Guarantee Guide, World Bank Group, 2008;3 34 Investment Guarantee Guide, World Bank Group, 2008;4.

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 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 years 41. A single Chubb policy can cover multiple countries.42 Zurich North America also offers political risk insurance that covers expropriation and creeping expropriation43.

35 36

Investment Guarantee Guide, World Bank Group, 2008;6 ibid 37 Williams SL, Political and Other Risk Insurance: OPIC, MIGA, EXIMBANK and Other Providers, Pace Intl 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.com 40 www.chubb.com/business/cci/chubb1146.pdf 41 Ibid 42 Ibid 43 www.zurichna/com

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 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

44 45

Hanson KW, Managing Political Risks in Emerging Market Investment, 18 Transactional Lawyer 77, 2004. 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.

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, Ecuador has attempted to put new contracts in place that will preclude ICSID dispute resolution. While there is no perfect shield from host countrys 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 nondiscriminatory 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.

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.
49

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

COMPENSATION The obligation to pay compensation for the taking of an aliens property is a well established principle of customary international law. This obligation has been codified even in municipal laws of most nations and has been recognised even by socialist states . Resolution 1803 (XVII) clearly regards this, where it provides that where the question of compensation gives rise to controversy, the national jurisdiction shall be exhausted52. . An Appraisal of Countries with Notable Oil Nationalisations Venezuela. Venezuela has 77.2 billion barrels (1.2271010 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 countrys state run oil and Natural Gas Company. However in the 1990s, 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 Venezuelas 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 Belt 54. 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 worlds 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 hadnt 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
50 51

the

50 51

Sect. 44 of the 1999 Constitution of the Federal Republic of Nigeria Drucker. Compensation Treaties between Communist States. 10 Int & Comp L. Q 238 (1961). 52 Par.4 53 This is according to the Oil and Gas Journal (OCJ) 54 Oil production in the Orinoco Oil Belt, which is said to contain the worlds largest reserves of extra-heavy oil, is currently being conducted via joint ventures between Venezuelas state-owned oil company PDVSA and a wide variety of foreign oil companies 55 Statement made by the Venezuelan President Hugo Chavez on the 26 th of February, 2007.

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 countrys development and that leaving these to foreign investors alone is not sufficient to assure the countrys economic growth.

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 Petrolferos 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 countries 56 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 ownershipnow 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 propertyof 49% of shares of all the oil

56

Foreign investors like Brazil, Spain and Argentina.

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 stateowned enterprise that is a full partner in all petroleum deals58.

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 (3.5109 m3), but other sources claim there could be as much as 35.3 billion barrels (5.61109 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 m) 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
5757 58

Raquel Gutierrez and Dunia Mokrani, Bolivia; Nationalization without expropriation? ibid 59 http://en.wikipedia.org/wiki/Petroleum_in_Nigeria last visited on the 11th of July, 2011 60 This was later merged with the Ministry of Petroleum to form the NNPC 61 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

Saudi Arabia is the worlds largest producer of oil; it has the largest proven crude oil reserves which is about 25% of the worlds proven reserves. The nationalisations which took place in Saudi Arabia deal mainly with its state owned oil company, Saudi Aramco (Saudi Arabian Oil Company). 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 worlds 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.

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

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 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 1970s 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

68 69

Amoco Case (US V. Iran) (1988) 27 ILM 1314 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.

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 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 rights 76. 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.

72 73

James N. Hyde. Permanent Sovereignty over Natural Wealth. American Journal on International Law. 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.

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. 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

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. 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 Vattels 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.

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 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 industry86 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
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). 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.

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 nations 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, 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.

88 89

Frank Xaver Perrez (supra) Ibid. 3.

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 cooperation and international law. Incidental to the limitation of international law is the principle of sovereign equality. 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 countrys 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 clause91 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.

90

(1982) 17 ILM 976 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.
91

On the 19th of September 1977, Kuwait enacted by Decree Law No. 124 that AMINOILs concession should be terminated; that AMINOILs 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 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 AMINOILs 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 Kuwaits 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,
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

LIAMCO was subjected to gradual measures restricting rights granted in the Concession Agreements, ultimately resulting in complete nationalization of all of LIAMCOs 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 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
94

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

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. Findings 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
96 97

Op cit. (1988) 27 ILM 1314

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 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 AMOCOs 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

98 99

The requirement as contained in the United Nations General Assembly Resolution 1803 (XVII) of 1962 (1974) 53 ILR 297

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 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.

APPENDIX100 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 selfdetermination must logically and legally carry with it the essential right of permanent 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
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.

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 InterAmerican 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.