INANCE

The new rules of resource nationalism

lVo one could ever say the

oil

business was boring. From

a

weather patterns to price swings to social unrest, not

day goes by without a new risk to be assessed and

managed by operators in the extractive industries

Unfortunately, howeveL one of the biggest risks to the oil

sector is showing no signs of dissipating

resource

nationalism, writes Robert Amsterda m (right), lnternational Lawyer at Amsterdam & Partners.
courage outright seizure

/[ s the world's key energy com/-\ modity, oil has long been the f lfocus of government intervention, while strong demand f rom
industrialising emerging economies is creating new risks of expropriation and

Taking action
There's little debate over the lmportance of resource nationalism (Ernst & Young, for example, has cited it as the number one risk for 2013). The debate is over what responses and remedies

addition

costly, slow, and sometimes disregarded, there are also a number of countries working on the passage of new laws (such as Russia)
where the foreign investor is treated as a domestic business, whose disputes

to being

of

assets. In

disruption. According

report released by the UK think tank Chatham House, the balance of power between the private sector and host
governments is shifting as sustained high commodity prices have led to a series of state interventions, expropriations and aggressive tax regimes. These new government players and state-

to a

recent

The first reaction of most international oil and oil services companies is

are most effective.

are subject

to local courts instead of international arbitration panels.

Resource nationalism is also no longer

to look to bilateral investment treaties (BlTs). lt is of course possible for the investor to bring an international arbitration case against the State under a
relevant investment treaty, and in some cases, may obtain compensation for
damages or loss of assets. However, arbitration is only the first piece of the puzzle and, in more recent

limited to wholesale expropriation, but

rather can be'creeping'or incredering

BlTs useless

mental, seeking increased shares rather

than wholesale expropriations, renvia proportionality.

The other traditional response to

increasing economic nationalism has been to partner up in joint ventures

owned entities are playing under a new set of rules, sometimes acting above the law. ln the past decade, there have been
more than 26 major disputes and expro-

priations of energy and mining expropriation of

Exxon

years, investors are discovering the shortcomings of relying on these

forums as their sole legal strategy. In addition to the slow procedure and high costs, expropriating governments

with state-owned companies. However; this strategy is beginning to fracture as

well, as a number of joint ventures have disintegrated as the state ownership often has little motivation to uphold standard corporate governance requirements to minority shareholders, resulting in an overall dilution of value - as experienced by BP in Russia. Another disadvantage of partnering with the state is that state-owned com-

investments across the world, from the seizure of Yukos in Russia in 2004, the

Venezuela in 2006, to the seizure of Repsol's 57.4Vo stake in Argentinean

producer YPF in 2012.

Mobil

in

'Nationalism

of any kind,

can read the law too, and in many cases have prepared ahead of time to escape any liability through methods such as 'creeping expropriation'.

including

resource nationalism, requires the iden-

tification of external threats to justify extraordinary measures, a process that

erodes trust and reinforces ideas about the importance of self-interest,' reads the Chatham House report. 'As one

to simply withdraw f rom

Others, such as Venezuela, can choose

analyst tracking the increasing trend towards resource nationalisation has

put it. "even in the age of globalisation, nationalistic mercantilism still lurks deep in the shadows of geopolitics."'

expropriated investors. lt was once thought that this would be too high a cost to the Venezuelan authorities, but
sible

the lnternational Centre for Settlement of lnvestment Disputes (lCSlD) in order to avoid having to pay compensation to

panies must first and foremost fulfill political and strategic objectives, and, as a result, may not always pursue busi-

ness decisions
shareholders.

nario, the foreign investor can

to the benefit of ln the worst case scebe

these assumptions were proven wrong.

Unfortunately, it is no longer posto simply rely on BlTs, which are

dis-

dragged into all sorts of unchecked regulatory liabilities, from human rights abuses to environmental disasters. Instead, the foreign investors need to continued on p22...

traditionally the last safeguard to

there has been a much greater use of

project finance.

Whilst the availability of bank debt continues to recove[ corporate debt markets are at a cyclical high as strong levels of liquidity among yield-focused investors have created extremely favourable conditions for corporate debt markets. These conditions give companies an opportunity not just to lower their cost of capital but also to more thorough restructuring of their debt position to lengthen maturity and manage covenant and
compliance risks.

respondents (79%)who took part in the survey indicated they expect their debtto-capital ratio to decrease or remain constant over the next 12 months. Other key trends included:

taking advantage of improving credit conditions. ln fact, the majority of

50o/o

returning cash to stakeholders

of respondents reported that

of additional funding. companies need to be innovative regarding how they fund their developments. Max Petroleum has issued shares in the company to one of its drilling contractors in return for drilling services in Kazakhstan. As a result, companles may find themselves turning toward Iarger, better
absence

undertake

both shareholders and creditors - is now a priority for their company; o 25o/o of respondents reported that

capitalised partners or
Consequently, consolidation

acquirers.

oil and gas

3Q2012,

of the AIM

for
o

paying down debt is a primary focus excess cash over the nert 12
months;
14o/o

universe accelerated in with the takeovers of three AIM-

listed oil and gas companies completing. As a result, capital constrained oil and gas

Although public equity raising has remained challenging, private equity (PE) is increasingly being used as a
source of capital for the mid-cap oil and gas sector. The sector's relative strength

of respondents reported that buying back stock was now a

companies remain takeover targets of national oil companies (NOC$. majors,

larger independents and listed peers with

and stability has made it attractive to

pE

towards upstream producing, midstream, oilfield service or downstream assets and businesses. Private equity investors have, however, been very selective, focusing on those businesses or opportunities with an established management team, a track record of
success

investors. There is, however,

bias

priority. Oil and gas companles, as well as companies in general, are clearly choosing to, where possible, retire debt and deploy capital more cautiously. This provides further evidence that companies are focusing their attention on delever-

aging and strengthening their balance

sheets against a backdrop of ongoing uncertainty. The combination of challenging equity conditions and easing credit conditions make the challenges facing the smaller and mid-cap oil and gas companies signif

stronger balance sheets. Howeve4 those smaller companies with cash flow from producing assets and financed near-term development programmes continue to receive investor support. Similarly, companies with acreage in highly prospective regions, such as East Africa, are also still
able to raise capital. ln summary, there is capital available

and strong existing or near term

for explorers with good acreage and a track record of success and for those with producing assets. The external
financing capital challenge is currently greatest at the development stage of the lifecycle where the returns are lower than for exploration, but the execution risks remain considerable. Whilst those companies with significant internal resources can manage this by applying their own equity, those without such resources may need to pursue a corpo-

cash

flow performance.

lndustry response
ln this global context of changing equity and credit dynamics how is the industry responding? Ernst & Young's most recent Global Oil and Gas Capital Confidence Barometer survey indicated that oil and gas companies are not yet

exploration and early stage development

icant - particularly those with

oriented portfolios. For example. less than 10% of A|M-listed oil and gas companies successfully raised capital in

3Q2012. Funding challenges

are

of some of these companies. ln

impacting the development programmes

the

ratetransaction-basedapproach. a

... continued from p20

f

irst sign of resource nationalism and work to establish a network of

incentives and pressure points

undertake more proactive actions at the

to influ-

unexpected places, such as international human rights law, and can apply to injurious treatment of a company's executives or arbitrary application of the law.
The best defence is a good offence. In an environment of rising prices and talk of windfall tax, a company's corporate social responsibility (CSR) programmes

over the dialogue about

achieve

a greater degree of

control

resource

the host government and protect the

assets

ence decision making among officials in

nationalism, social issues and fair tax regimes in the countries in which they are working. The Australian-owned Perseus Mining, for example, became one of the first mining companies in

of the company.

history to actually argue for tax

Needless

to

say, among

the first steps

is

to take when the attacks f irst begin

establish

a strong media strategy,

to

campaign. Too many media-shy investors have suffered greatly from their preference for discretion. as these

changing the public narrative through a consistent and determined awareness

must graduate to the next level to include an actual corporate foreign policy (CFP). Corporate foreign policy refers to the introduction of new practices that uphold a series of principles emphasising the mutual interests being
pursued in the company's business activities that are consistent and reinforcing of the interests of the local community and the host government. Whereas CSR can be limited to a couple of construc-

increases against its own subsidiaries in lvory Coast. ln many emerging markets which feature as major trading partners in the

Gulf, we've witnessed

a number of
that
balances

of a well-designed

industrial agents who continue to thrive despite significant political risk because
CFP

their rights against encroachment

disputes almost always contain an element of news headlines driving legal and regulatory actions. The investor should always prepare for the worst scenarios, even including trumped up criminal charges. There is also a growing body of international law, treaties and forums which sometimes allow for investors to assert
by

tration alongside more permanent community leaders. Many other

investors, unfortunately, have not been
so lucky.

interests of key officials in the adminis-

tion

projects to build potable water systems in a nearby village, CFR is more about a new mentality that is negotiated in partnership with the state.

media and advocacy strategies, foreign investors facing resource nationalism risk have a much better

By designing pre-emptive political,

Bold steps
Some companies are beginning to take bold steps to jump out in front and

the host government, and file for relief. Sometimes these options are found in

ating position and can survive in the new environment of economic nationalism. a

chance of achieving a stronger negoti-