Conflict and Coexistence in the Extractive Industries Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee

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Conflict and Coexistence in the Extractive Industries A Chatham House Report Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee

Chatham House, 10 St James’s Square, London SW1Y 4LE T: +44 (0)20 7957 5700 E: [email protected] www.chathamhouse.org F: +44 (0)20 7957 5710 www.chathamhouse.org Charity Registration Number: 208223

0116 ReporOuterCover-PRINT.indd 1-3 20/11/2013 14:35 Conflict and Coexistence in the Extractive Industries

Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee A Chatham House Report

November 2013

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The material selected for the printing of this report is manufactured from 100% genuine de-inked post-consumer waste by an ISO 14001 certified mill and is Process Chlorine Free. Contents

About the Authors iv Acknowledgments v Acronyms vi Executive Summary and Recommendations vii

1 Introduction 1 1.1 A history of troubled relations 2 1.2 What’s new? 3 1.3 About this report 10

2 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 16 2.1 Arbitration data and patterns of disputes 18 2.2 Received wisdom on drivers of disputes: still relevant? 20 2.3 What does the evidence tell us about the future? 33

3 The Relationship between Host Country and Extractives Company 36 3.1 The flawed contract 38 3.2 Forces of change affecting extractives agreements 42 3.3 Revenue-sharing and taxes: a work in progress 49 3.4 The enduring centrality of revenue-sharing agreements 55

4 A Regional Outlook: Old Problems, Changing Dynamics 58 4.1 Lessons from the Asia-Pacific region 60 4.2 Sub-Saharan Africa: escaping its past? 65 4.3 Russia and Central Asia: the long shadow of the state 71 4.4 Main observations from the case studies 79

5 Prospects for Improving Relations in Extractive Industries through Governance 84 5.1 International good governance initiatives and resources 86 5.2 A growing body of experience of managing state–company 88 relations 5.3 A patchy agenda relative to the scope of the challenges 92

6 The Outlook for Extractives Relations in a Changing Landscape 94 6.1 Unpacking company–government tensions 97 6.2 Outlook for company–government relations 100

7 Recommendations: from Conflict to Coexistence 106

Notes 112 References 114 About the Authors

Lead authors Professor Paul Stevens, Distinguished Fellow, Energy, Chatham House Jaakko Kooroshy, Research Fellow, Resources, Chatham House Glada Lahn, Senior Research Fellow, Energy and Development, Chatham House Bernice Lee, Research Director for Energy, Environment and Resources, Chatham House

Contributing authors Chatham House Africa Programme: Alex Vines, Tom Cargill, Markus Weimer, Ben Shepherd Chatham House Asia Programme: Gareth Price, Rosheen Kabraji Chatham House Russia and Eurasia Programme: Alex Nice Chatham House Energy, Environment, and Resources Department: Felix Preston Laura Wellesley William MacNamara Acknowledgments

This report is the final output of the Chatham House research project Conflict and Coexistence in the Extractive Industries, which examines challenges being faced by state–company relations in ever more complex operating environments in this sector. The project was led by the Energy, Environment and Resources Department at Chatham House with crucial support from the Chatham House Africa Programme, Asia Programme, and Russia and Eurasia Programme.

Chatham House would like to extend its sincere appreciation to Richard Auty (Lancaster University), Gustavo Lagos (Pontificia Universidad Católica de Chile) and Evelyn Dietsche (University of Dundee) for taking the time to review drafts, as well as for their significant and considered insights and comments; and to the participants of the March 2013 expert workshop for generating and clarifying ideas around key issues.

The authors wish to express their gratitude to William MacNamara for his valuable contribution to earlier drafts; Robin Niblett, Gemma Green, Elizabeth Donnelly and James Nixey for their advice throughout the project; Gabriela Flores, Keith Burnet and Francis Grove-White for their help on communications; Jens Hein, Estelle Rouhaud and Patrick England for their valuable research support and assistance; and Beth Stevens, Tim Eaton and James Norman for their contributions to the Chatham House Arbitration Database (CHAD). Thanks also to Margaret May, Paige McClanahan and Kim Mitchell for overseeing the production process and for editorial support.

Last but not least, Chatham House would like to thank BHP Billiton for its financial support for this project, especially Andrew Mackenzie, Caoimhe Buckley and Ruban Yogarajah.

A set of supplementary online materials, including a description and quantitative exploration of the CHAD, several country and regional case studies, and an overview of international governance initiatives for the extractives sector, is available on the Chatham House website at: http://www.chathamhouse.org/conflictandcoexistence. Acronyms

AAR Alfa-Access-Renova AMD Acid mine drainage ANC African National Congress BHP Broken Hill Proprietary Company Ltd. (now part of BHP Billiton) BP British Petroleum BRA Bougainville Revolutionary Army CHAD Chatham House Arbitration Database CNPC Chinese National Petroleum Company DRC Democratic Republic of the Congo EIA Environmental impact assessment EITI Extractive Industries Transparency Initiative FDI Foreign direct investment GDP Gross domestic product IMF International Monetary Fund IOC International oil company IPC Iraq Petroleum Company KMG KazMunaiGas LME London Metal Exchange LSE London Stock Exchange MENA Middle East and North Africa MRRT Mineral Resource Rent Tax NEITI Nigeria Extractive Industry Transparency Initiative NOC National oil company OECD Organisation for Economic Co-operation and Development OPEC Organization of Petroleum Exporting Countries PNG Papua New Guinea PPP Purchasing power parity PSA Production-sharing agreement PWYP Publish What You Pay campaign RSPT Resource Super Profits Tax RWI Revenue Watch Institute SBI Sustainable Budget Index TNK Tyumenskaya Neftyanaya Kompaniya (Tyumen Oil Company) UNCTAD United Nations Conference on Trade and Development UNG UzbekNeftGaz WTO World Trade Organization YPF Yacimientos Petrolíferos Fiscale (Treasury Petroleum Fields) Executive Summary and Recommendations

Clashes over the terms of mineral contracts have become a political lightning rod in many resource-rich countries. A series of bitter disputes in recent years – some ending in lengthy litigation, project cancellation or even expropriation – has unsettled investors and global markets. These disputes call attention to the fragile and complex relationship between companies and their host governments that characterizes the extractives sector.

The economic significance of the sector to producer countries is well known, as is its role in influencing the fate of political leaders. Consequently, it is often subject to intense global scrutiny – whether over revenue transparency or its environmental legacy. Its impact on the national economy or local communities also remains an area of contested rights, responsibilities and benefits.

A decade of high prices and fast-growing global demand has triggered a new generation of mineral mega-investments. Many of these ventures are located in countries with long-established extractive industries, such as Australia, Chile and Canada. But ‘emerging producers’ – such as Mozambique and Mongolia – are also attracting interest from extractive companies, whether private corporations or state-owned enterprises (SOEs).

Today, public anticipation of the benefits of extractives projects is again rising in many countries, with producer governments asserting greater control over their mineral endowments. But these expectations come at a time when the operational and political context for mineral investments is shifting across the world, raising questions about the long-term future of the extractives sector, especially in developing countries.

Mineral and hydrocarbons production increasingly takes place in geologically, ecologically and politically challenging regions, as opportunities for more accessible reserves dwindle. Water scarcity and the increasing frequency of extreme weather events are raising new risks for investors and producers. Heightened concerns over resource security, environmental degradation and climate change will bring further scrutiny and tensions. Other uncertainties also cloud the market outlook. Talk of the end of the commodities super-cycle is prompting some companies to slash investment, undermining the prospects for resource-led development.

The relationship between host country and company in the extractives sector will remain contentious. In many parts of the world conflicts are set to escalate. Future disputes have significant ramifications not only for the economic and political stability of the countries concerned but also for companies’ assets and reputations.

Key findings

The number of disputes is on the rise. Over the last decade, more disputes in the extractives sector have resulted in international arbitration than ever before. Between 2001 and 2010, arbitration cases for oil and gas increased more than tenfold compared with the previous decade, viii Conflict and Coexistence in the Extractive Industries

while those for mining increased nearly fourfold. This dramatic increase reflects escalating tensions among stakeholders involved in the sector, culminating in disputes that have been difficult to resolve in a cooperative manner.

Companies and governments are always competitors when it comes to the distribution of mineral and hydrocarbon revenues and profits, despite their mutual drive to unlock potential wealth. Not so long ago, experts suggested that the worst types of commercial dispute would become a thing of the past. But experience has proved otherwise: three recent expropriations (affecting Repsol in Argentina, Rio Tinto in Guinea and First Quantum Minerals in the Democratic Republic of the Congo) have cost investors some $13 billion.

Figure A: Real oil prices and international arbitration cases in the extractives sector, 1973–2010

120 18 Number of arbitrations Real oil price 16 100 14

12 80

10 60 8 $ (2011) Arbitration cases 6 40

4 20 2

0 0 74 73 76 78 79 97 87 75 77 98 99 96 88 89 90 86 80 19 19 19 19 19 19 19 2007 19 19 2000 2001 2002 2003 2004 2005 2010 2006 2008 2009 1991 1992 1993 1994 1995 1981 1982 1983 1984 1985 19 19 19 19 19 19 19 19

Source: Chatham House Arbitration Database (CHAD).

The higher incidence of arbitrations correlates strongly with the commodity price boom. No country or type of company is immune to such disputes, although they tend to play out in different ways depending on the level of sophistication of the host country’s legal and political system. They range from fights over changing legislation and project revisions to wrangling over liability for environmental damages.

Community-level conflicts, for example, remain frequent in countries with weak environmental protection frameworks, high economic and social inequality, and insecure water rights and land tenure. Reliable statistics on community conflicts and their impact are generally unavailable, but incidental evidence suggests that the number of such conflicts is increasing in many parts of the world. One assessment identified 126 active local conflicts in Peru related to the extractives sector as of mid-2013.

Poorer countries are not necessarily more prone to conflict. Even in long-established producer states, resource governance frameworks are susceptible to political pressures, as shown in the 2010 Australian super-profit tax debate and BP’s ongoing legal battles in the United States over the Gulf of Mexico blowout and oil spill. At the same time, companies from emerging economies confront similar investment risks to those of their Western counterparts. The multi-billion-dollar loss that Vale, the state-backed Brazilian company, faces in Argentina and Guinea is a case in point.

Tensions between foreign investors and host governments are often attributed to resource nationalism. But many analysts fail to distinguish incendiary rhetoric from policies that legitimately address societal concerns. The extreme positions taken by Argentina and Zimbabwe are likely to remain exceptions rather than the rule. Most producer governments remain wary of deterring foreign investment. Where governments have announced new ownership requirements or taxation regimes – in Peru, Mozambique, Mongolia, Zambia or Guinea, for example – these proposals are often watered down or reversed under industry pressure. Executive Summary and Recommendations ix

The contract between government and extractive companies is inherently vulnerable. At the heart of the problem is the absence of a practical formula or a benchmark to determine an equitable distribution of revenues between the state and companies in extractive ventures. Model contracts of the 1990s have by and large failed to weather the commodities price boom. According to the World Bank, more than 30 countries have revised petroleum contracts or entire fiscal regimes between 1999 and 2010. In mining, at least 25 governments (including most major mining countries) announced or implemented tax or royalty increases in 2010 and 2011 alone.

Revenue-sharing is often the frontline of company–government disputes. How to ensure a ‘fair share’ for each party remains an overriding challenge, and perceptions of fairness or equity are heavily shaped not only by the changing domestic and international context, but also by historical experience. Questions of who is in control and who benefits from the resource extraction remain relevant to a company’s presence and operations in a country long after the ink on the contract is dry.

In theory, governments should focus on capturing resource rents in excess of normal profits. In practice, distinguishing objectively between rents and profits is extremely difficult. Revenue-sharing agreements are therefore typically reached after protracted bargaining, while original contracts may be amended or renegotiated several times over many decades. Outcomes in these negotiations depend on the relative bargaining power of each party, including their control of information, market sentiment and prevailing views regarding the role of the state in the sector.

Throughout the lifetime of a project, three sets of structural pressures tend to challenge the contract between parties. First, commodity price cycles can undermine existing contracts and challenge their legitimacy. Second, ideological shifts and transitions of power, especially from dictatorship to democracy, often trigger demands to renegotiate deals. Third, the changing distribution of bargaining power over the project cycle may embolden action by one or other party. For example, companies often hold more bargaining power at the outset of a project, given their access to finance and technical know- how. After the investment costs are sunk, however, the balance of power can shift.

Extractive industries are in a period of flux. The rules by which extractive companies operate in producing countries will be subject to changes, sometimes radical, as markets remain volatile and many resource-rich countries lack a broad national consensus on how their domestic resources should be managed. In several states, particularly in sub-Saharan Africa, generational change will bring new demands on the sector.

Global pressures and new obligations for companies to disclose information concerning their overseas investments are also accelerating. For the extractive industries, greater use of legal measures and penalties relating to transparency and corrupt practices will have ramifications for the ways in which companies operate abroad.

The increasing level of scrutiny from multinational NGOs, and the speed and reach of global communication mean that the spread of ideas and access to information about how projects should be conducted will influence local and national demands. The more varied nature of joint ventures globally, involving combinations of multinational companies, SOEs and smaller independent partners, is likely to increase the complexity of potential conflicts.

Meanwhile, a ‘capital strike’ by major investors – triggered by growing uncertainty about future prices and demand – is now a serious risk for some countries whose budgets rely on a continuing boom in resource investments and exports. This could lead companies to scale back, delay or even cancel flagship projects. Governments may demand that companies adhere to their ambitious development schedules, and companies risk being confronted with ‘use-it-or-lose-it’ arguments. x Conflict and Coexistence in the Extractive Industries

Going forward: recommendations

Even with a strong body of knowledge, lessons learnt and expertise on regulation, tax regimes and good governance, for example, best practices in each of these areas have been unevenly implemented. Despite initiatives such as the Extractive Industries Transparency Initiative, Intergovernmental Forum on Metals, Mining and Sustainable Development or the United Nations Guiding Principles on Business and Human Rights (also known as the Ruggie Framework), relations in the extractives sector worldwide continue to be strained.

Caution is essential for new producers moving into extractives-led development. While economic and political pressure to develop resources quickly will be high, in some countries the best option may be to ‘go slow’. The emphasis should be on building the capacity to regulate companies, generate employment opportunities and manage revenues in tandem with the resource sector. Delaying development could be a preferred option for Afghanistan and Somalia, for example, given the combination of political instability, conflict and environmental stress they are currently facing.

With a greater number of mega projects and the range of new actors involved, it is imperative for stakeholders to persist in their efforts to tackle these governance challenges and invest in processes to enhance dialogue and to defuse future tensions. Recommendations include:

Improving the terms of engagement  Companies and governments should opt for more flexible contractual arrangements with built-in response mechanisms to changing market conditions such as sliding royalty scales, rather than focusing on rigid, ‘watertight’ agreements.

 Governments should simplify tax and regulatory frameworks for investors – including clearer, more concise mining and petroleum laws that standardize licensing frameworks – to reduce the burden of negotiation for individual licences or contracts.

 Companies should conduct regular, open dialogues with civil society, organized labour and the media as well as opposition parties on issues such as the impact of operations; and they should stretch their engagement beyond governments, regulators and affected communities.

Raising standards of governance  Companies should align due diligence, environmental practices and transparency standards with international best practice to ensure their long-term ‘social licence to operate’ and to insulate themselves from risks arising from unanticipated regulatory and political changes.

 Producer countries should make full use of governance-related initiatives (e.g. with respect to revenue transparency, or assistance in training local journalists and community leaders to enhance public understanding of extractives-sector development) to strengthen accountability through capacity development and checks and balances, with the support of donor agencies.

 Governments should clarify and update the risk assessment and liability regimes in accordance with international best practice and stress-test them against a range of scenarios, especially for ‘frontier’ and ‘unconventional’ projects. Executive Summary and Recommendations xi

Planning together and defusing tensions  Governments should undertake a public assessment of national and local capacity to capture development benefits, prior to taking strategic decisions on exploration or development of major deposits. Companies should set out in concrete terms how they can contribute to filling capacity gaps to help manage local expectations.

 Multilateral institutions and donor agencies could support the development of integrated infrastructure plans in developing producer economies to meet not only the needs of the specific projects but also the broader development objectives.

 Public–private partnerships should be established to channel targeted investment in local capacity, including small and medium-sized enterprises, to strengthen forward and backward linkages from the extractives sector to the rest of the economy. Blunt approaches such as unrealistically high local content requirements should be avoided.

 Donor agencies could support the appointment of an independent, high-level ombudsman for the extractives sector, especially in emerging producer countries, to help defuse company–government tensions at an early stage, and to conduct public investigations into allegations of legal breaches. n A decade of high prices has attracted a wave of new investment in subsoil resources. Today, the combined value of global extractive industries is more than $10 trillion, and expectations about the benefits from the sector are running high in many parts of the world. n A series of bitter disputes between extractives companies and host governments in recent years has led to heavy losses for investor for investors, threatening the development the development prospects of many resource-rich countries. n This report aims to provide a clear understanding of the relationship between companies and host governments, and the factors that cause and influence disputes between them. An examination of these underlying drivers could help both sides to find approaches that reduce future tensions. n Disputes between governments and companies in the extractives sector have a long history, but new fault lines are emerging and the stakes are higher. New actors, volatile prices and increased international scrutiny are changing the rules of the game. n New projects are bigger and more expensive and carry greater risks, as companies move into challenging frontier regions. Concerns that the commodities ‘super cycle’ may soon be over – or faces a dip – have raised questions about the viability of some of these greenfield projects. n Mega-projects in the petroleum and the mining sectors are becoming more alike, suggesting new opportunities to share lessons. Introduction 1 1.1 A history of the troubled relations 2 1.2 What's new? 3 1.3 About this report 10 2 Conflict and Coexistence in the Extractive Industries

1 Introduction Chapter 1

A decade of high prices for energy, metals and minerals has generated large profits in the extractive industries and attracted waves of new investments. Today, the combined value of global fossil fuels and mining is more than $10 trillion and expectations about the benefits they can bring to producer countries are high. Yet a series of bitter disputes between extractives companies and host governments in recent years urges caution over the ability of many of these projects to deliver. Going forward, relations in the extractives sector face multiple challenges from more volatile resource markets, harsher operating environments, political shifts in producer countries and mounting environmental stress.

The purpose of the report is to provide both host-country and company stakeholders in the extractives sector with a clearer understanding of the characteristics of the relationship between companies and host governments, and the factors that cause and influence disputes between them. The report re-examines the potential for and likelihood of disputes between resource-owning governments and extractives companies globally. It focuses on the global trends and cycles that drive or influence company–government relations, and how they are shaped by local factors such as institutional frameworks, historical legacies and shifts in the balance of power among national or regional groupings. An examination of the drivers behind disputes, both historical and current, could help both companies and governments to find approaches that reduce the risk of future tension.

1.1 A history of troubled relations

The history of The history of minerals, metals and hydrocarbon extraction is closely intertwined minerals and with experiences of colonization, independence and development. In many parts hydrocarbons of the world, the extractives sector is central to the economy and, as a result, to the political legitimacy of a country’s leaders. extraction is often inseparable from Resource-rich countries, especially those with limited productive capacity, often countries’ experience seek to develop their mineral endowment through foreign direct investments. But of colonization, contracts with extractives companies are not signed in a political vacuum.1 How independence to ensure a ‘fair share’ for each party remains a salient question. The perception of and development. fairness or equity is not only heavily influenced by historical experience but also subject to the vicissitudes of the domestic and international political and economic context. Public expectations and economic dependence on the sector can raise the political stakes of resource development. Questions of who is in control and who benefits from resource extraction continue to be relevant to a company’s presence and operations in a country long after the ink on the contract is dry. Introduction 3

Disputes, in a variety of forms, between the companies extracting resources and the various groups or official institutions of the territory on which they operate are a recurring theme in this history. ‘Disputes’ between extractives companies and host

countries here may be understood to cover everything from low-level wrangling over Chapter 1 the terms of resource rent distribution to outright attacks on assets or expropriation.

In the 1990s, academics and practitioners suggested that serious disputes or Disputes and expropriations in the extractive industries would become increasingly rare. They expropriations in argued that governments’ desire to attract investment and technological know-how extractive industries would make nationalizations less likely in the future. Instead, nationalizations in have returned with extractive industries have returned with a vengeance in the 21st century. Against the backdrop of a fading Washington Consensus and the longest and strongest resource a vengeance in the boom in a century, governments in resource-rich countries have pushed vigorously 21st century. for greater control over their resource endowments and many countries have not shied away from seizing assets or declaring contracts void.

1.2 What’s new?

The stakes, players and rules of the extractives game have changed and this is reshaping relations between governments and companies in the sector. It is also affecting the likelihood and nature of disputes in the industry.

The extractives sector has undergone major expansion over the past decade. On the During the back of growing demand from emerging economies and a boom in commodity prices, commodities boom, oil, gas and mining industries have expanded dramatically. Growth in coal and steel oil and copper did not production between 2000 and 2010 is equivalent to the total of all the growth that experience the same occurred between 1960 and 2000. In the same period, aluminium and zinc production increased by as much as it had in the preceding 25 years. Not all commodities grew at acceleration as steel the same rate: global oil and copper production did not undergo the same acceleration. and coal production.

Figure 1.1: Growth of world mineral supplies, 1960–2010

300

250

200

150 Average additions per decade 1960 - 2000 100

50 Absolute growth in world supply per decade, (1 96 0-2000 average = 100) 0 1960-701970-801980-901990-00 2000-10 Oil Copper Gas Nickel Zinc Aluminium Steel Coal

Sources: Chatham House calculations based on production data from Kelly and Matos (2013), BP (2013) and Nehring (2009). 4 Conflict and Coexistence in the Extractive Industries

Prices for metals and fossil fuels have increased sharply over the past 10 years, after a long period of decline characterized by modest demand growth and overcapacity. Between 2002 and 2008 commodity markets went through the longest and strongest 2

Chapter 1 period of price increases in at least a century. Prices initially plummeted in response to the 2008 financial crisis (see Figure 1.2), but resumed their upward trajectory in 2009 – reaching the pre-crisis highs again in 2011. Since then, resource prices, especially for many metals, have again dropped somewhat, although they are still twice as high as prices in 2002 in real terms.

Figure 1.2: Average annual fuel and metal prices, 1980–2013

250 Metal prices Fuel prices 200

150

100 Index (2005 = 100) Index 50

0 97 87 98 99 96 88 89 90 86 80 2007 19 19 2000 2001 2002 2003 2004 2005 2010 2011 2012 2013 2006 2008 2009 1991 1992 1993 1994 1995 1981 1982 1983 1984 1985 19 19 19 19 19 19 19 19

Source: Chatham House calculations based on the IMF Primary Commodity Prices Database.

Note: Annual averages are calculated from the monthly IMF Metals Price Index (which is based on market prices for copper, aluminium, iron ore, tin, nickel, zinc, lead and uranium) and the Fuel Price Index (which is based on market prices for crude oil (petroleum), natural gas, and on coal price indices). The Fuel Price Index is available only from January 1992 onwards. Before 1992, the IMF Crude Oil Index is used as proxy, which constitutes over 80 per cent of the Fuel Price In- dex. Data and a detailed description of sources are available at http://www.imf.org/external/np/res/commod/index.aspx.

Price swings are Prices have also become considerably more volatile (see Figure 1.3). These price swings driven by shocks to are driven in large part by shocks to demand and supply, but there are exacerbating demand and supply, factors such as the sophistication of trading technologies and the increasing prevalence of commodity-linked securities. Fluctuations in market sentiment are but are exacerbated amplified by the ease with which rumours can travel the globe and then be by sophisticated multiplied by the efficiency of electronic trading systems, which buy or sell trading technologies assets in nanoseconds. Correlation trading has made it commonplace for whole and commodity- asset classes (such as oil futures and copper futures) to be dumped when a tangential linked securities. event (such as monthly Chinese economic data, or a terrorist threat in London) occurs. As result, oil and copper prices may move sharply with little regard for oil and copper fundamentals.

This boom has also created new economic powers and new dependencies. The fortunes of leading mining countries and companies are increasingly tied to the import needs of China, which is now the destination for more than half of all metals exported by Australia, Indonesia and Peru and well over a third of exports from Brazil and Chile. Introduction 5

Figure 1.3: Deviations of the IMF’s monthly energy and metal price, 1980–2013

50 Metal Fuel

40 Chapter 1

20 from annual average 10

Standard deviation of monthly price index 0 87 97 80 86 88 89 90 96 98 99 2007 19 19 2000 2001 2002 2003 2004 2005 2010 2011 2012 2013 1981 1982 1983 1984 1985 1991 1992 1993 1994 1995 2006 2008 2009 19 19 19 19 19 19 19 19

Source: Chatham House calculations based on the IMF Primary Commodity Prices Database.

Note: Standard deviations are calculated using the nominal metal and fuel price indexes from the IMF. Note that measuring volatility is technically challenging and that the standard deviations presented here should be understood as a crude proxy for changing trends in volatility over time, rather than as precise statistical measurement.

50 40 30 20 Thus the actors have changed. Two types of actor have long dominated the story of 10 0 extractives companies’ investments. The first are the large Western companies that are listed on international stock exchanges and operate in several countries. The second are the various types of state-owned companies that operate in their home territory. But the landscape has changed over the past two decades, owing in part to the ‘going out’ strategies in import-dependent Asian countries, above all China. Under such strategies, state-owned extractives enterprises receive government support in order to secure resource production abroad (see Box 1.1).

Emerging economies in particular are not only embracing national champions but also In 2012, 13 of the investing heavily through state-owned enterprises (SOEs) and sovereign wealth funds top 20 corporate in extractive industries abroad. Their investments have been partly responsible for the capital spenders increasing share of energy and mining in global capital expenditure since 2003. Among were energy or Standard & Poor’s list of the top 2,000 corporate capital spenders in the financial year 2012, energy or mining companies make up 13 of the top 20. Five of them can be classed mining companies, as SOEs, including the top two: China’s PetroChina and Brazil’s Petrobras.3 including five state- owned enterprises. These approaches to investment, often referred to as ‘state capitalism’, are challenging the business models of private multinationals. In addition, smaller companies have proliferated in hydrocarbons and mining. Both trends increase the choice of partner for resource-owning countries, bringing new issues and diplomatic realignments. At the same time, the more recent international investors are facing old challenges in terms of how they get along with their host countries.

Companies are richer. The extractives sector is far larger and richer than it was just 10 years ago, whether in terms of revenue, profits or stock market valuations. According to PricewaterhouseCoopers, the world’s 40 largest mining companies, for example, saw more than a fivefold increase in revenues between 2002 and 2012. Their net profits rose more than tenfold, from $6 billion to more than $80 billion per annum (see Figure 1.5). During the metal price spike in 2010–11, profits even jumped to $132 billion. 6 Conflict and Coexistence in the Extractive Industries

Box 1.1: The rise of state-backed foreign investment in the extractives sector

The bulk of foreign direct investment (FDI) by SOEs has gone to the mining, quarrying and petroleum sectors (see

Chapter 1 Figure 1.4). SOEs from China accounted for 27 per cent of total outflows in 2010, up from just 13 per cent in 2003, predominantly in oil, iron ore, aluminium and uranium. Developing countries’ SOEs have also increased the scale of their investments: they completed four of the six FDIs valued at more than $10 billion in 2005–10.a

Figure 1.4: State-owned enterprises – outward FDI by sectors, 2003–2010 % 250 60

50 200

40 150

100 Value in $ billion Value 20

50 10

0 0 2003 2004 2005 20062007 2008 2009 2010

Other Mining, quarrying and petroleum Electricity, gas and water Coke, petroleum and nuclear fuel Food, beverages and tobacco Mining, quarrying and petroleum %

Source: Chatham House based on data from UNCTAD (2011).

a UNCTAD (2011).

The resource boom Although precise data do not exist, the available evidence suggests that the resource of the past decade boom of the past decade has pushed the value of the global extractive industries has pushed the beyond the $10 trillion mark. The value of FTSE 100 mining, oil and gas companies on the London Stock Exchange (LSE), where some of the largest extractives companies value of extractive are listed, increased from £181 billion in 2002 to £519 billion in 2012.4 But the LSE industries beyond the presents only a small share of the global industry. Calculations by Revenue Watch in $10 trillion mark. 2011 showed that the combined value of extractives companies listed on the 35 largest stock exchanges worldwide exceeded $9 trillion.5

Additionally, non-listed companies make up a big part of the industry. Glencore (now Glencore Xstrata), for example, had been a private commodity trading house for more than 30 years until it went public in 2011, valued at $60 billion. The value of these non-listed private companies is dwarfed, however, by national companies such as the China National Petroleum Corporation or Mexico’s Pemex, some of which are listed or partly listed on exchanges. The Russian company Rosneft, of which a majority is government-owned, for example, became the largest publicly traded oil producer in the world when it acquired TNK-BP in March 2013.6 But many others are not listed anywhere. The value of Saudi Aramco alone has been estimated to be between $2.2 trillion and $3.6 trillion, making it the world’s largest company by far.7 Introduction 7

Figure 1.5: Revenue and net profits for the world’s 40 largest mining companies, 2002–2012 % 600 Revenue 50 Net profits 45 Chapter 1 500 Share of net profits in revenues 40

400 35 30 300 25

$ billion 20 200 15

100 10 5 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Chatham House, based on data from PwC (2013), and previous editions.

Recent investments are bigger, more expensive and more risky. Extractive industries spending increased exponentially in the past decade, reflecting both rising costs and the expected growth in global demand. Investors sank more money into the ground in 2012 than they spent in total during the boom years of 2007 to 2008. The financial crisis of 2009 only slightly dented the rise in spending. Citi estimated in 2012 that capital expenditure in the mining industry globally quadrupled from $20 billion in 2004 to an estimated 88 billion in 2012.8

At the same time, the costs of operating mines have risen, creating a new floor for Rising operating the global prices that investors require for commercial success. An in-depth costs for mines act analysis of production costs at Anglo American’s copper division, Rio Tinto’s iron as a new floor for ore division, Xstrata’s coal division and BHP Billiton’s Escondida copper mine global prices. (one of the world’s largest) shows that in all cases, production costs rose by at least 50 per cent between 2007 and 2011.9 These cost increases were driven by a variety of factors (see Table 1.1), with higher input prices an important contributor. Tyres and drill rigs are more expensive, along with the rubber and steel that make them. Power and fuel prices are also rising. Labour costs are driven up by the scarcity of qualified workers.

New projects are also moving to frontier regions with environmentally and Many new projects geologically challenging conditions, driving up project costs too. Some of the push the limits biggest new hydrocarbon projects, for instance, include Kashagan, an offshore oil of extractives field in Kazakhstan, the Santos pre-salt basin in deep water off the coast of Brazil technology and carry and the oil deposits of the Russian Arctic rim. Simandou, an iron ore deposit deep in the interior of Guinea; the Oyu Tolgoi copper project in Mongolia’s Gobi high political risk. desert; the La Granja copper project in the Peruvian Andes; and the Benga coal deposit in northwestern Mozambique all rank among the world’s top ten greenfield mining projects.10 Many of these projects push the limits of extractives technology and carry high political risk. Furthermore, their remoteness requires huge investments in infrastructure such as roads, ports and oil platforms, thereby pushing up ancillary costs. 8 Conflict and Coexistence in the Extractive Industries

Table 1.1: Summary of supply-side drivers of higher mineral prices

Drivers

Chapter 1 Rising marginal costs Higher input prices (e.g. energy, steel, water, machinery) More complex geology Lower-quality deposits

Rising overhead Higher wages and skills shortages Higher taxes and royalties Larger infrastructure investments Tougher environmental standards More frequent delays and disruptions Higher working capital requirement

Higher risk premium Less inventories and more frequent disruptions Increased political risks

Figure 1.6: Higher cost of next-generation copper projects

$’000 10 9 8 7 6 5 4 3 2 1

Real 2008 $ per tonne of copper equivalent 0 All 1985-2008 All 1985-2008 Greenfield Brownfield greenfield brownfield under construction under construction

Source: Xstrata (2011).

The boom has also This spending boom has also spurred investments in high-risk, resource-rich spurred investments developing countries. Governments with little experience in iron ore or copper in high-risk, extraction demand multi-million-dollar signature bonuses or substantial equity stakes – and receive them, as Guinea and Mongolia did from Rio Tinto. Their bargaining resource-rich position rises along with the captive investments made in their country, allowing them developing countries. to push for higher upfront tax takes before the oil has flowed or the gold has been mined. Indeed, rising taxes are a further important component of rising costs.

Mounting concerns that the commodities ‘super cycle’ may soon be over – or faces a dip – compound these risks.11 Concerns focus on the slow global recovery and particularly on China, which has accounted for the lion’s share of demand growth for energy and metals. GDP growth in China slowed in 2012 and 2013 and even the National Development Plan targets 7 per cent to 2015, after three decades averaging 10 per cent. New output, including from unconventional sources – particularly shale gas and oil in the US – is also having a moderating effect on expectations of future oil, gas, coal and iron ore prices. Introduction 9

However, while commodity prices as a whole have eased somewhat from their 2008 and 2011 peaks, they have remained volatile with few indications of a clear trend. The resource-intensive processes of urbanization and industrialization still have a

long way to go in many parts of the developing world. Without a radical shift to more Chapter 1 sustainable consumption paths, demand for metals and fossil fuels will continue to escalate in the coming decades. Meeting this demand will require strong price signals and continued long-term investment in future supply.

In any case, the shadow of an uncertain future market has prompted worries among Commodity prices extractives companies about the viability of some of the more expensive and risky have eased from greenfield projects. This has led to shareholder pressure for disciplined capital their 2008 and 2011 deployment and projections of slower or negative growth in expenditure on resource peaks, but remain projects in the coming years.12 By 2013, private investment in mineral and energy resources, which accounts for the bulk of capital expenditure in the sector globally, volatile with few clear showed signs of slowing as companies exhibit more caution in an increasingly uncertain trends. price environment.

The prospect of falling revenue in conjunction with declining foreign investment poses a double threat to producer countries. Several major producers already suffer the impacts of inflation, the decline of productive sectors of the economy and unemployment, and could be hit hard by a prolonged dip in investments and prices for their prime exports. These risks are compounded as many of these countries, new ones especially, lack the capacity and institutions to effectively manage extractive industries and increasingly volatile revenues and foreign investment.

Scrutiny of minerals and fuel production around the world has intensified. Whether owing to considerations of equity and development, competition over water use, corruption, or concerns about climate change, scrutiny of the extractives sector has never been greater. Tackling financial transparency in the sector, for example, remains a key global agenda item, including for the 2013 G8 presidency. The Obama administration’s Wall Street reform package from 2010 (the so-called Dodd-Frank Act) includes requirements for extractives companies listed on US stock exchanges to report annually on their payments to all foreign governments. In April 2013, European leaders reached an agreement to incorporate similar binding disclosure requirements into the EU’s transparency and accounting directives.13

The sector’s prosperity has brought more visibility, and the increasingly public The increasingly nature of extractives companies has magnified the potential impact of disputes over public nature of natural resource rents. Anyone, from a finance ministry clerk in Gabon to an investor in extractives companies New York, can find corporate balance sheets on the internet. A move by the government has magnified the of Kazakhstan to change tax rates, for instance, is now a matter of importance to investors from London to Hong Kong with shares in public Kazakh copper companies. potential impact of disputes. With an increasing number of actors, projects, costs, risks and reporting pressures on extractive industries, new fault lines are emerging in company–government relations. It is imperative for all stakeholders, whether governments, companies or local communities, to consider afresh the dynamics that make extractives investments vulnerable to future disputes. 10 Conflict and Coexistence in the Extractive Industries

1.3 About this report

The focus of the report is on relations between companies investing in and carrying

Chapter 1 out the extraction of subsoil resources and the host governments that have sovereign control over these resources. The report does not examine wider ‘resource conflicts’, the term often used to encapsulate all violent conflict associated with control over valuable territorial resources from minerals to land and water.

Specifically it explores the following fundamental questions:

1) What is the nature of disputes between governments and companies in the extractives sector, where is it occurring and why? 2) Can useful trends be identified by looking at data on international arbitrations and/or at regional and country analyses? 3) What can historical experience tell us about the drivers for current and future disputes? 4) How can companies and governments reduce the risk of future disputes?

Global trends are This report proposes that two factors are at the heart of these challenges: first, a powerful force in the long-standing dilemmas about how mineral wealth should be shared between reshaping bargaining the state, the private companies and the affected communities; and secondly, the appropriate roles and responsibilities of each of those actors. These tensions are by power between no means new, but the stakes have increased and the task of finding answers has companies and reasserted itself with new urgency through the structural changes that are confronting governments. the industry.

The report shows how global trends are a powerful force in reshaping the bargaining power of actors in extractive industries and how they can contribute to the potential for and likelihood of disputes between them. These trends include the effects of changing market prices for extracted commodities; the transmission of events and shocks in one part of the world to another; global initiatives that affect extractives-sector governance and company behaviour; and changing paradigms and normative models in the sector that transcend country boundaries.

In addition, the report emphasizes the key role of local and national contingencies – such as historical legacies, institutional frameworks and capacity, stage of economic development and countries’ legal systems – in determining how different actors choose to respond to such trends. Examining the political economies of different producer countries is indispensable to understanding where disputes are likely to occur and how they are being resolved.

1.3.1 The meaning of ‘disputes’ Table 1.2 defines the scope of disputes covered by the report. It is not exhaustive but rather presents the main contested issues, triggers and forms of action that may be taken by companies and governments. Tensions often involve demands for changes by one of the parties to a contract. But disputes only result if the other party objects to those changes, which is not always the case. There are also obvious overlaps between these different types of disputes. For example, the company may contest additional taxation on the environmental impact of its operations or a new government law Introduction 11

Table 1.2: Scope of disputes between extractives companies and host governments

Locus of dispute z Legitimacy: e.g. legality or constitutionality of original contract, ownership or regulation Chapter 1 z Compliance: adherence of parties to contractual terms

z Change of terms: parties seek to revise contractual terms e.g. distribution of revenues

z Accountability or liability: impacts of company operations not covered by the existing contract, for example activities associated with security and infrastructure

Common triggers z Change of government or political crisis in host country

z Diplomatic tensions between host country government and the extractive company’s country of origin

z Territorial dispute between countries or regions over contested resource-rich territory

z Central and regional government contest revenue-sharing or distribution

z Domestic economic crisis resulting in urgent need to increase government revenues from the sector

z Environmental disaster involving the project

z Project delays or cancellations

z Public outrage e.g. over alleged corruption, environmental cover-ups or human rights violations

Response options z Negotiation or mediation between government and company representatives

z Legal action in local or national courts

z International arbitration

z Revoking or refusing to grant license by competent authorities

z Calls for strikes or popular protest by politicians

z Suspension of operations or cutbacks in investment by companies

z Seizure of assets by government agencies giving a larger stake to a state company because it questions whether such changes are valid under the terms of the original contract. Equally, one form of dispute may lead to another.

Disputes between companies and governments in extractive industries do not only have different triggers, they also can take a variety of forms. Tensions may result in reduced cooperation: companies may, for example, encounter sudden delays in customs clearance for imported equipment, or governments may experience growing tardiness in responses to requests for information. In more extreme cases, disputes can lead to nationalization followed by claims for compensation. Such claims often come from both sides, as evinced for example by the US–Iranian Claims Tribunal at the International Court of Justice in The Hague. In other words, sometimes a dispute may escalate; at other times, it may simply simmer or be resolved, resulting in a lessening of tensions between the parties.

1.3.2 Mining versus oil and gas: divergence and convergence In this report, the ‘extractives sector’ covers both mining and oil and gas. Although Mining, oil and gas there are strong parallels in the challenges facing both industries, there are also industries differ in marked divergences. These involve company size, project economics, social and terms of company environmental footprint and the sector’s national political significance (Box 1.2). It size, social and is important to note these differences at the outset, as they will influence the types of disputes that are more likely to occur in each industry. environmental footprint and political significance. 12 Conflict and Coexistence in the Extractive Industries

Box 1.2: Similarities and differences between mining companies and oil and gas companies

Mining companies operate in smaller and more fragmented markets than oil and gas companies. Petroleum industries

Chapter 1 supply a small number of relatively homogeneous commodities, despite differences in characteristics such as weight and sulphur content.a The Organization of the Petroleum Exporting Countries (OPEC) has historically attempted to set prices by controlling production volumes. The mining sector, by contrast, produces dozens of metals and mineral commodities with their own physical characteristics as well as supply and demand dynamics. Even the global market for iron ore, by far the most important metal, is less than a tenth of the size of the $3 trillion crude oil market.b Large mining companies typically produce a variety of metals, and individual geological deposits are often mined for a combination of co- and by-products. The economics of the two sectors also differ at the project level. Extracting oil, for example, requires early capital; mining demands a longer timeframe for development and continuous investment over a project’s lifespan.c On many occasions, infrastructure needs (such as port facilities, roads, water and power supplies) are more demanding for mining than for petroleum projects.d Once the initial investments are made, margins (at least for conventional hydrocarbons) tend to be considerably larger in the oil and gas industry. Mine production is also more rigid. Oil wells can be easily shut off when demand falls. Mines, on the other hand, are cumbersome and expensive to close down or to reopen. Moreover, the local footprint of a mining operation is typically larger than that of an oil or gas drill site. Mines typically employ more people and have greater linkages with the local economy; hydrocarbon projects tend to exhibit stronger enclave characteristics.e Tensions involving mining often centre on specific operations and their impacts on local livelihoods at the community level. During normal operations, mines tend to have a greater local environmental impact than oil and gas projects. Open-pit mining, a dominant practice, requires extensive overburden removal. It also produces large quantities of waste rock, tailings, airborne dust and other contaminants.f There are marked exceptions, notably in gas flaring and oil spills, but the received wisdom is that petroleum projects can avoid extensive disturbance through their mode of access to the reserves, namely by a small shaft opening at the surface.g A substantial share of oil and gas production is now also taking place offshore (with a different set of risks in the marine environment) while the mining industry remains principally onshore. These divergences in the scale, economics and environmental impacts of the two sectors have given rise to different sets of political dynamics. Traditionally governments and the public attach far greater economic and strategic significance to the petroleum sector thanks to its size and larger resource rents. Oil rents typically provide a much larger fraction of ‘value added’, affording much greater scope for ‘buying’ social stability than most minerals extraction. There is also broad appreciation of the large disruptive potential of oil supply bottlenecks. National oil companies, or partially state-owned oil and gas companies and projects, remain common and are not limited to developing countries or emerging economies. By contrast, state-owned companies make up a relatively small share of the global mining industry, perhaps with the exception of coal. But state-backed mining companies from emerging economies will become much more important producers and financiers in the global industry.

a Barrows (1982). b Economist (2012). c Crowson (2003). d Eggert (1994). e Crowson (1998). f Eggert (2001). g Taverne (1999). Both industries can obviously cause environmental damage in many other ways over the lifetime of a project, be it due to water and soil contamination or, for example, as a result of gas flaring or acid mine drainage. Catastrophic failures such as oil spills or tailings dam failures are further examples of such environmental impacts.

Capital requirements However, some convergence is now taking place. Mega-extractives projects, for mining have whether from the petroleum sector or the mining sector, have become more alike. changed significantly, Greater reliance on unconventional reserves, together with pressure to unlock new resources in remote and challenging operating environments such as the Arctic, increasingly have raised costs rapidly and squeezed the margins of oil and gas companies. These resembling the new projects also require major and lengthy infrastructure development. financing needs of Meanwhile, capital requirements for mining have increased significantly, resembling oil and gas projects. more and more the financing needs of oil and gas projects. This suggests possibilities for the sectors to draw lessons from each other. Introduction 13

1.3.3 Methodology The research supporting this report both analyses the data on historical disputes at the global level, and looks in detail at selected case studies in order to garner conclusions

about the drivers and triggers of such tensions. Chapter 1

The study took as its starting point data on the number of projects that enter Governments and international arbitration – a proxy for measuring tensions between governments the public attach far and foreign companies in extractive industries. Records of arbitrations, which go greater economic and back to the 1970s, provide a useful indication of when, where and how often serious strategic significance disputes have occurred, even if they cannot capture in micro-detail the evolution of company–government relations in all parts of the world. to the petroleum sector, owing to its For this project, the Chatham House Arbitration Database (CHAD) was created. larger resource rents. It is based on records from different arbitration panels, including the International Centre for Settlement of Investment Disputes, which is part of the World Bank Group, and those convened by the International Chamber of Commerce. These records are further verified with desk-based research by regional and sectoral experts. This database identifies 182 cases of international arbitration concerning oil, gas, minerals and electricity ventures from 1973 to 2010.

Two caveats are essential. Many disputes do not reach the international arbitration stage, and so these data are likely to represent only the tip of the iceberg of disputes in the extractives sector. Disagreements are often addressed through bilateral negotiations or trusted intermediates. Many companies see arbitration as an unattractive option of last resort because the chance that they will recover any financial compensation is usually slender and because the process can jeopardize relations with the host government.14

Other factors may also account for the larger number of arbitration cases in Records of recent times. Privatizations in extractive industries in the 1980s and 1990s and international the increased scale of foreign direct investment (FDI) may have increased the arbitrations provide number of disputes going to arbitration. Meanwhile, international arbitration a useful indication clauses in investment contracts have become commonplace compared with colonial- era concessions, which had no mechanism for arbitration. There has also been of when and where a dramatic increase in bilateral investment treaties (BITs) – from fewer than serious disputes 500 in 1990 to 2,500 at the end of 2005. BITs guarantee investors an option of have occurred. recourse to international arbitration even if this has not been stipulated under the original contract.

1.3.4 Structure of the report Chapter 2 presents a short empirical analysis of international arbitration data and discusses the commonly understood drivers of disputes between companies and governments. They include issues related to the resurgence of ‘resource nationalism’, project impacts on the local community and environment and liability issues.

Understanding how disputes in extractive industries will evolve requires a reappraisal of the complex dynamics that drive state–company relationships. Chapter 3 explains the unique character of the government–extractives company relationship, highlighting the central role of revenue-sharing and the difficulties involved in determining how resource rents should be apportioned between governments and operators. The 14 Conflict and Coexistence in the Extractive Industries

inherently vulnerable nature of these agreements contributes to disputes in the sector. Shifts in bargaining power, prices and prevailing ideologies can undermine their stability further over time. Chapter 1 Chapter 4 considers how these recurring global cycles influence the government– company relationship on the ground in three key regions. Extractive industries around the world are connected through global commodity markets and international flows of capital and expertise, but the chapter shows that fundamental differences in terms of industry structures, key actors, institutional frameworks and historical legacies remain. Case studies taken from the Asia-Pacific region, Russia, Central Asia and sub-Saharan Africa provide lessons from the different historical trajectories of extractive industries in different producer countries.

Chapter 5 looks at the prospects for better governance in order to help improve conditions for coexistence in the extractives sector. It outlines the impact of international initiatives and discusses several case studies in which specific approaches to governance appear to lay a more secure grounding for company–country relations.

Chapter 6 summarizes the key conclusions, the outlook for disputes and the specific risk factors. Chapter 7 concludes the report with recommendations for business, governments and other stakeholders. Chapter 1 Disputes in the Extractives Sector: 2 Lessons from Historical Patterns and Conventional Wisdom

2.1 Arbitration data and patterns of disputes 18 2.2 Received wisdom on drivers of disputes 20 2.3 What does the evidence tell us about the future? 33 n Records of international arbitration cases in extractive industries show that tensions between governments and companies have increased in line with higher commodity prices. There were just 12 cases between 1990 and 2000, compared with 87 between 2001 and 2010 — 65 in the oil sector and 22 in the mining sector. n No country is immune to such disputes. Even in advanced economies, resource governance frameworks can become susceptible to political pressures, as the Australian super-profit tax debate shows. n Resource nationalism is often blamed for tensions between governments and companies. But the concept remains hazy, and labelling all forms of tightening regulation or higher taxes in this way obstructs a better understanding of why and how governments are intervening in the sector. n Tensions with local communities and environmental issues typically incur serious financial and reputational liabilities for both parties. Best practices can reduce tensions and mitigate impacts significantly, but many mines and drill sites currently do not benefit from state-of-the-art know-how, management and technology. n Unclear liability regimes and due diligence failures contribute to lengthy, protracted disputes, especially where the government is directly involved as a project partner.

15 Disputes in the in the Disputes 2.1 Arbitration data and patterns of disputes host- and between extractives companies arbitrations international on Records decade the past (see in cases Figure increase over a sharp show country governments sector in the mining arbitration six cases of just were 2000, there 1990 to 2.1). From 65 were there contrast, 2010, by 2001 to From sector. gas six cases and the in oil and in increase significant The 22 cases sector. cases in the mining sector and in the oil tensions of escalation an indicates companies and between states serious disputes more become have disputes that suggests in the sector and between stakeholders manner. in a cooperative difficult resolve to institutional tries and identify the socio-economic to literature empirical extensive An more are investments whichforeign in the countries predict reliably can that factors that concludes example, for Quan, in arbitration. end to or be to expropriated likely 1992, 426 cases between occurred 1960 and carried out expropriation 523 acts of of governments. occurred97 democratic under only and governments autocratic under This chapter looks for patterns and indicators that may help to identify the drivers identify the drivers to help may that indicators and patterns looks for chapter This whether there explore first We disputes. company–government for conditions and disputes to prone identify countries to help can that indicators socio-economic are set based is a new of data on investigation The investors. and between governments extractives companies and governments cases involving arbitration 182 international dynamics and then discusses the factors decades. chapter The four the past over governments. and between companies disputes triggers as of perceived commonly of the impacts local with communities, tensions nationalism’, ‘resource They include liability of questions to relating disputes and the environment on extractives projects useful accounts these how descriptive on comment conclusions The diligence. due and in extractive industries. disputes of patterns future predict to us in enabling are 2 Sector: Extractives from Lessons Patterns Historical and Conventional Wisdom The number of The international arbitration cases between extractives companies and host- country governments has increased sharply over the past decade.

Chapter 2 Chapter 2 Extensive literature exploring expropriation-prone countries has so far robust produced few conclusions.

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

99 19

98 19

97 19

96 19

1995

1994

1993

1992

1991

90 19

89 19

88 19

87 19

86 19 1985 between the inequality connection Examining

16 1984

1983

1982

1981

Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 19 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes 19

79 19

78 19

77 19

76 19

75 19

74 Oil and gas Mining and metals 19

73 19

8 6 4 2 0

18 16 14 12 10 Arbitration cases Arbitration and expropriation, Fails finds that higher levels of inequality increase the risk increase inequality of higher levels finds that Fails expropriation, and they also the that otherwise weaken firms and foreign for expropriation of expropriation. the of risk against political institutions influence of protective But generally, this line of research has produced few robust conclusions that can can that conclusions robust few produced has research of this line generally, But CHAD’s Comparing countries. arbitration-prone or identify expropriation- to help socio-economic and institutional cases a variety of with arbitration evidence on conclusions. reliable few but patterns interesting likewise some yields factors arbitration of number been had the greatest to subject that countries of A group had that countries of group a larger with compared was 40 years the past over claims examined were groups two The time. the same experienced very over claims few income, per capita including dimensions, a variety of across traits common for 2.1). (see Table measures other and rate literacy living, of standard trade balance, as poorer, in the 2000s were claims arbitration in the most involved countries The income capita cases. Per fewer with countries than income, per capita by measured Ecuador, them Argentina, among claims, of number the largest with in the countries however, suggest, also had data the 1980s. The been since sliding Venezuela, and Iran with countries as investors, foreign to a deterrent not were disputes high-profile that the those less the in to 2000s similar of FDI of levels received arbitrations the most details more for material online (see the supplementary countries of group litigious further CHAD). and from findings Source: Chatham House Arbitration Database (CHAD). this period during autocratic were governments more many Of course, than subsequently, which may negate the value of these results. Using quantitative quantitative Using theseresults. of the value negate which may subsequently, than found Jensen industry, the political insurance risk from data qualitative and investors foreign for disputes contract and expropriation of risks that similarly constrain that political institutions democratic of the existence by reduced are countries. in host governments Figure 2.1: Number of arbitration cases in the energy and mining sectors, energy and mining cases in the Number of arbitration Figure 2.1: 1973–2010 20 Conflict and Coexistence in the Extractive Industries

Table 2.1: Variables examined for correlations with arbitration data

Category Variable

Type of economy z GDP per capita based on constant $2005 in purchasing power parity (PPP) terms

z Agriculture’s share of GDP

z Gross fixed capital formation (percentage of GDP)

z Foreign direct investment

Standard of living z Life expectancy

z Mortality rate under 5 Chapter 2 z Literacy rates

Trading position z Exports of goods and services (percentage of GDP)

z Current account balance (percentage of GDP)

Quantitive measures z Membership of OECD

z Membership of WTO

z Ease of doing business

z Level of corruption

z Level of economic freedom

2.2 Received wisdom on drivers of disputes

2.2.1 The impulse towards greater national control of resources In the 1970s, ‘resource nationalism’ became a popular concept to describe the political economy of oil and other natural resources in the midst of decolonization, widespread nationalization of extractive industries and attempts among producer countries to form cartels (see Box 2.3). But as prices declined in the following decades and a wave of privatization swept through resource industries, the concept fell out of fashion among academics and analysts.

In the 1990s, experts suggested that major expropriations in the extractive industries were not likely to resurface.18 The sharp fall in the incidence of expropriations in the late 1980s and the 1990s, the waves of privatizations in resource industries as well as the proliferation of bilateral investment treaties were all held up as empirical evidence confirming this view. The concept of resource nationalism, Edward Morse observed in 1999, had ‘practically disappeared from the discourse of international relations’.19

With the longest and But nationalizations in extractive industries have returned with a vengeance in strongest resource the early 21st century. Against the backdrop of a fading Washington Consensus 20 boom in a century, (see Section 3.2.2) and the longest and strongest resource boom in a century, governments in resource-rich countries have pushed vigorously for greater control governments have over their resource endowments. As commodity prices have soared and investors have pushed for greater scrambled to secure new sources of supply, many countries have not shied away from control over their seizing assets or declaring contracts void, making predictions about the ‘demise of resources. expropriation’ appear premature in retrospect.

In April 2012, for example, Argentina’s government under Cristina Fernández de Kirchner decided to partially nationalize YPF, the country’s largest oil producer.

Chapter 2

2010

09 20

08 20

07 20

06 20

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999

1 25

998 1

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996 1

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986 1

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980 1 arbitration. international threatened and

22 79 19

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Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 21 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes

77 19

76 19

Meanwhile, the Argentinian government recently announced a announced recently government the Argentinian Meanwhile,

75 19 23

Repsol furiously denounced the decision as ‘unconstitutional, ‘unconstitutional, as the decision denounced Repsol furiously

Within a year YPF has become just another example of the type of of example another just become has YPF a year Within

74 19 21

North America Europe South America Sub-Saharan Africa Russia Australia 24

73 19

8 6 4 2 0

20 18 16 14 12 10 Arbitration cases Arbitration Source: Chatham House Arbitration Database (CHAD).

Figure 2.2: Disputes by regions of company origin, 1973–2010 Figure 2.2: Disputes Box 2.1: The country of origin of companies involved in disputes companies involved of origin of country 2.1: The Box Of 155 companies (see Figure 2.2). America and Europe companies from North cases involved Most arbitration Canada, 15 from there were 61 from the US, 10 from and 2010, identified between 1973 involved in arbitrations per cent of for 70 these six countries accounted the UK, 8 from Italy and 6 from Spain. Together 8 from France, owned multinationals are relatively long-lived, privately majority of companies involved in disputes vast arbitration. The are former in many countries and their home governments they operate exchanges; stock listed on international multinational oil, gas or mining company. they represent the typical Western colonial powers. In effect, $1.5 billion compensation payment to Repsol – far short of the $10.5 billion Repsol the $10.5 billion of short Repsol – far to payment compensation $1.5 billion demanding. is Kirchner claimed that Repsol, the Spanish owner of YPF, had failed to make sufficient sufficient make failed to had YPF, of owner the Spanish Repsol, that claimed Kirchner oil foreign of worth $9 billion the buy country to forcing subsidiary, its into investments energy-cum-fiscal an the president the price, pay crisis. Repsol would prompting and important an such of custodian be failed to a responsible the if company argued, asset. national The drama recalled the nationalizations of the 1960s and 1970s. But what is perhaps perhaps is what 1970s. But the 1960s and of recalled the drama nationalizations The shifted has attention international quickly case the YPF how is about noteworthy most protests, Repsol’s Ignoring initialoutcry. the predictable despite thedrama, from away to Chevron with agreement sign a joint-venture to on went YPF the nationalized the Repsol- by discovered was field gas that and oil shale Muerta Vaca the giant develop consortium. YPF The concept has been re-introduced as a tool in the analysis of the political economy of of the political economy of in the analysis a tool as been has re-introduced concept The disputes. state–company growing used explain to regularly now is It resources. natural These recent incidents of increased state intervention in extractive industries have led have in extractive industries intervention state increased of incidents These recent nationalism. resource of the ‘revenge’ or ‘revival’ or a ‘rise’ experts declare to many government expropriation that has recently haunted global extractive industries. haunted recently has that expropriation government discriminatory, and unlawful’ and discriminatory, 22 Conflict and Coexistence in the Extractive Industries

Box 2.2: Defining resource nationalism

Despite growing attention to the phenomenon, resource nationalism remains difficult to define. It is particularly challenging to distinguish resource nationalism from typical forms of government regulation and taxation of the resource sector. The International Energy Forum, for one, simply defines resource nationalism as ‘nations wanting to make the most of their [resource] endowment’. Joffé et al. (2009) describe it as ‘the expression, by states, of their determination to gain maximum national advantage from the exploitation of natural resources’.a In discussing resource nationalism in the oil sector in the Middle East, Stevens (2008) defines the term as consisting of ‘two components – limiting the operations of private international oil companies and asserting a greater national control over natural resource development’.b Bremmer and Johnston have highlighted the wide range of government activities that could be described as resource

Chapter 2 nationalism, arguing that there are at least four variants ‘which differ in the factors motivating the policy and impact on industry and investment patterns’. They draw a distinction between revolutionary and economic resource nationalism. The authors describe the former as more radical in rhetoric and action, noting that it is ‘linked to broader political and social upheaval, not merely directed at the natural-resource sector’. In contrast to this, more common economic resource nationalism is less concerned with ‘[a]ctual political control and ownership’ and more with ‘increasing the host government’s fiscal take’.c What these various definitions have in common is that they all describe resource nationalism as a political doctrine that promotes greater state intervention in the resource sector with the aim of better harnessing domestic resource endowments for national development and welfare goals. As Solomon notes, this is underpinned by the ‘perception that the state can both effectively and efficiently unlock resources, and facilitate a more inclusive and equitable dispensation of [resource] rents’ compared to resource exploitation purely by private companies.d

a Joffé et al. (2009). b Stevens (2008). c Bremmer and Johnston (2008). The other two forms are ‘legacy resource nationalism’, where historical incidents of industry nationalizations have become ‘central to national political and cultural identity’, and ‘soft’ resource nationalism, which is similar to economic resource nationalism but with an emphasis on ‘established regulatory or legislative channels, rather than in arbitrary action’. d Solomon (2012).

Recent incidents In particular, resource nationalism has become a central concern for investors and of increased state companies operating in the extractive industries. For example, it has topped Ernst & Young’s list of business risks for the mining sector for the past two years. intervention have led many experts to However, resource nationalism is a hazy concept, and this limits its usefulness as an declare a ‘revival’ of explanatory factor for growing disputes between states and companies (see Box 2.2). resource nationalism. Governments have clearly broken with the ideological and economic retreat of the state from the resource sector that characterized the 1990s. But simply labelling all forms of tightening regulation or higher taxes as ‘resource nationalism’ obstructs a better understanding of why and how governments are intervening more forcefully in the sector.

As a case in point, calls for direct state participation are motivated by different factors. The aim may be economic development, as South Africa’s controversial ‘State Intervention in the Minerals Sector’ report suggests. The report recommends that a state mining company should develop strategic materials such as iron and coal in order to ‘supply them … to the domestic market at competitive or utility rates’, thereby supporting downstream manufacturers by relieving input costs.26 Or the aim may be strategic. Guinea’s minister of mines has said that state participation rates exceeding 30 per cent were desirable so as to be able to ‘block any decisions and take part in the big decisions the mining sector makes.’27 Chapter 2 Tensions are more Tensions likely to escalate in countries where weak governance frameworks fail to protect the interests of affected communities. Higher prices and rushbigger rents, a of foreign investment and concerns about resource scarcity have strengthened the appeal of a resource-nationalist platform.

Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 23 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes Industry leaders have generally recognized that the ability to maintain cooperative cooperative maintain to the ability recognized that generally leaders have Industry and operational for important is trust local with and communities relationships a social operate’ to licence ‘maintaining rated has & Young Ernst success. commercial the past sector over the mining facing risks six business the top among consistently of the margins from relations community move to attempts despite But years. five models, business extractive industries of the centre to social responsibility corporate 2.2.2 Tensions with local communities 2.2.2 Tensions environmental economic, important have often extractives companies activities of The can This in which they operate. the local social communities for and consequences such issues, a wide variety of country over in the host groups with lead tensions to financial and local employment resettlement, and rights land for compensation as traditional of the undermining or health impacts and benefits, environmental low with in countries escalate to likely more are Theselivelihoods. tensions protect to fail frameworks governance weak legal and where capacity, institutional between disputes those countries, In affected communities. of interests and therights weak environmental from result often local and communities companies foreign insecure or local residents for a political voice of the lack frameworks, protection tenure. land and rights water A resource-nationalist orientation might not cause disputes between between disputes cause not might orientation A resource-nationalist Rather than being seen as a driving force, resource nationalism may be better may nationalism resource being seen force, Rather than a driving as companies. and between governments in disputes end an to a means as understood a legacy by be burdened extraction may resource countries, resource-rich many In rise gives to often a situation grievances. Such historical engrained deeply of from local elites) corrupt (or interests foreign the need prevent to about arguments these grievances mobilize can Politicians riches. natural the country’s exploiting be can this language and rhetoric, resource-nationalist easily through relatively bargaining the government’s trying or improve to political opponents used attack to a rents, bigger and higher prices years, recent In investors. foreign with position strengthened have scarcity resource about concerns and investment foreign rush of domestic and both politicians for platform a resource-nationalist such of the appeal inequality conflict and corruption, where especially in countries audiences, widespread. are difficult more tensions existing certainly makes it but industry, and governments consultation without investment of in the terms changes Sudden resolve. to Populist investors. foreign and will trust undermine between governments it also make decisively power sovereign exercise to governments cries for As compromise. acceptable a mutually towards officials work to state for harder project and arbitrations of number a greater leads to nationalism resource such, creates it as investors, foreign to also can act a powerful deterrent as It cancellations. uncertainty. regulatory Moreover, there may be a clear rationale for producer-governments to try to adjust try to adjust to producer-governments for rationale be clear a may there Moreover, seek to to or environment a high-demand/high-export-price to regimes regulatory by dominated Debates in the past. ignored were that impacts environmental limit state crafted between difficult carefully it distinguish make to nationalism resource squeeze to crude attempts policy and concerns legitimate address that interventions rivals. assets from valuable over control wrest to or cash for investors 24 Conflict and Coexistence in the Extractive Industries

Box 2.3: The original oil nationalizations

The original Middle East oil concessions were granted on terms that were extremely favourable to the international oil companies (IOCs). The contracts were very long-term: in Iran, Iraq, Kuwait and Saudi Arabia, the average lifespan of a contract was 82 years. And the areas covered by the agreements were very large. Mexico nationalized the oil industry in the late 1930s; and by the 1940s, the balance of power between companies and governments had started changing between companies and governments. In 1943, Venezuela pioneered the practice of 50:50 profit-sharing, claiming that 50 per cent of project profits were due to the state, in one of the earliest production-sharing contracts. The use of 50:50 profit-sharing spread from Venezuela to the Middle East, where by 1952 Saudi Arabia, Kuwait and Iraq had all adopted it.

Chapter 2 In the 1950s, the bargaining power of producer states increased markedly. This was the post-colonial era, in which all forms of nationalism were in the ascendancy as newly independent nations of the ‘Third World’ asserted their sovereignty. State intervention in the economy was increasingly regarded as the norm after the Second World War. For host governments, two drivers were crucial: the rise of ‘permanent sovereignty’ over natural resources and dissatisfaction with the original concession terms. The first full nationalization happened in Iran under Dr Mohammad Mosaddegh in 1951. The United Nations adopted its first resolution on ‘permanent sovereignty over natural resources’ in 1952. A decade later, another resolution recognized the rights of a country to dispose of its natural wealth in accordance with its national interests. Resolution 2158 (1966) was even more explicit: host countries were advised to secure maximum exploitation of natural resources by acquiring full control over production operations, management and marketing. The Organization of the Petroleum Exporting Countries (OPEC), established in 1960 to protect the interests of the producer governments, supported this idea strongly. Radical actions by host governments, however, were severely constrained by the fate of Dr Mosaddegh. Pressure on IOCs to relinquish at least some of their huge concession territories grew. In 1961, Law 80 in Iraq in effect nationalized all the unused acreage of the foreign-owned Iraq Petroleum Company (IPC). The IPC was left its existing producing fields. IOCs in Kuwait and Saudi Arabia quickly began to relinquish acreage ‘voluntarily’. Fiscal terms were changing too. In 1970, Libya, then a new producer, agreed a profit-sharing deal that shattered the 50:50 status quo. Soon Iran and other countries followed, with the split widening to 55:45 and 60:40. ‘Fair share’ was redefined through ratios increasingly favouring the state. The IOCs slowly began to lose managerial autonomy in their licence areas. Meanwhile, governments looked with increasing disfavour on a system that allowed IOCs to be effective ‘states within a state’. As host governments gained confidence and greater capacity in the 1960s, they gradually secured better terms from the IOCs. New oil-production arrangements involved the state in the operation of the assets. The arrangements took the form of joint ventures, production-sharing agreements (PSAs) and service contracts. The seeds of state participation in the sector were planted. However, resource nationalism had reached fever pitch. The PSAs might be considered a compromise, but they failed to address the issue of control. Popular pressure to nationalize the IOCs, which were seen to embody an imperialist past, was intense. These pressures had peaked by June 1967 when Zaki Yamani, Saudi Arabia’s oil minister, proposed a solution to the control problem. He promoted the idea of ‘participation’ as a way to begin the process of seizing control without provoking a political backlash from Western governments affiliated with the IOCs. The October 1972 General Agreement on Participation followed between a number of Gulf States and US multinationals. The agreement gave producers an initial 25 per cent equity stake, projected to rise to 51 per cent by 1982. But in the same year that the agreement was signed, Algeria and Iraq went for nationalization; they had run out of patience with a negotiated settlement. The Western powers failed to retaliate in any serious way against the Algerian and Iraqi nationalizations, hastening the destruction of the General Agreement on Participation and its gradualist approach to state participation. By 1976, the old-style concessions had been swept away. Producer governments now had full control over their oil operations and indeed oil prices. Only in Libya and Abu Dhabi, where officials felt they lacked the capacity to take over complete control of all oil operations, did the government stop short of complete nationalization. Chapter 2 Community-related incurconflicts often andserious financial reputational liabilities for both parties. community Local action is also a of the feature so-called ‘shale revolution’.

32 In Peru, one of the world’s largest largest the world’s of one Peru, In 28 Such conflicts have led to a series led to of conflicts have Such 29 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 25 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes Industry often has not anticipated the force and impact of these of impact and the force anticipated not has often Industry 30 which have led to a sequence of bans and moratoria in several European in several European moratoria and bans of a sequence led to which have 31 Local community action – often linked to other national communities in alliances communities national other linked to – often action Local community which began revolution’ the so called of ‘shale feature also – is growing interest of passed have local governments example, 2000s. For in the early States in the United gas shale fracturing of hydraulic to in response statutes or resolutions of a number Pennsylvania, York, New across which extend (parts shale of in the US Marcellus activities. These restrict company or seek delay to that Virginia) West and Ohio, extraction oil and gas in shale the US success replicate look to governments other As Kingdom, the United as such countries populated densely more in much – often the rise, targeting on are projects of the site at local– protests Poland and Germany These protests their development. championing both the governments industry and security as climate energy and about questions larger of framed in terms often are and government against environment local a clean to of the assertions rights as well interests. corporate deadly clashes and to the suspension and cancellation of several flagship projects, such such several projects, of flagship cancellation and the suspension to and deadly clashes mine. copper Maria Tia the $1 billion and project copper-gold Conga the $4.8 billion as methods – particularly their trust in the companies’ based of a lack often on are used the chemicals in the fracking process of detailed disclosure provide refusal to especially the environment, protect to regulation inadequate about concerns – and resources. water recipients of foreign investment in mining, the government has identified 129 active identified 129 active has the government in mining, investment foreign of recipients industry. in the mining disputes community Demographic pressures, price volatility and strain on water and land resources are are resources land and water on strain and volatility price pressures, Demographic time, the same At communities. and between companies magnify to tensions likely communicate to communities socialenabling technology and media are information democratization of process The audience. a broader to demands and their concerns to responsive more governments making is countries in many decentralization and ain unnoticed go will longer no local from communities dissent their grievances, and Nonetheless, community-related conflicts often incur serious financial and incur conflicts serious financial and often community-related Nonetheless, the tensions of case that both is parties. A well-known for liabilities reputational over Delta in the Niger local and communities Shell between major the oil highly led publicized, to conflict This ultimately abuses. rights human and pollution To be clear, these types of conflict do not necessarily always harm a company’s a company’s harm these always necessarily types conflict do not of be clear, To sometimes governments Box 2.4 demonstrates, As governments. host with relationship in disputes. the community than rather the company even side with the against NGOs local international by and campaigns long-running substantial at schedules, production also can disrupt Local protests multinational. conflict industry in the mining community of the cost on study A recent cost. $10,000 around losses of cause project exploration a larger to disruptions that estimated estimated an to sharply escalate disruptions of the costs mine, a major For per day. per $20 million week. around of value present net many companies still struggle to build good community relations. This is clear from from clear is This relations. still struggle good build community to companies many or been delayed have projects which in high-profile years a series cases recent in of local from communities. resistance because of cancelled protests, countries and the revocations of permits in France and Bulgaria. and permits in France of the revocations and countries 26 Conflict and Coexistence in the Extractive Industries

Box 2.4: The case of Bougainville, Papua New Guinea

Extractive industry-related disputes in Papua New Guinea (PNG), New Caledonia and the Pacific islands have generally been between local communities and international companies, with governments often supporting the companies’ side. Land ownership in these areas is often held in collective trust by communities rather than by individuals. Thus land ownership issues have played a prominent role in extractives disputes in the region. Bougainville Copper Limited, a subsidiary of Rio Tinto, began drilling for copper in 1964 in Panguna, in Bougainville, a part of PNG. The mine soon became the world’s biggest copper mine, and provided the largest single source of revenue, apart from aid, to the PNG government between 1975 and 1988. The central government received 20 per cent of the mine’s profits; Bougainville received between 1.25 per cent and 5 per cent of the government’s share. Few people on the island benefited directly from the mine. Chapter 2 The mine became embroiled in conflict almost from its beginning. In the late 1960s, local landowners complained about inadequate compensation to Australia, which at that time held PNG in trusteeship. The Australian high court found that compensation had indeed been inadequate under Australian law but that PNG was not guaranteed the same standards that applied to mainland Australia. In 1975, the interim provincial government in Bougainville tried, but failed, to secede from PNG and join the Solomon Islands. Tension over the mine re-emerged in the 1980s, this time over concerns that profits from it were not benefiting the island sufficiently. They were reinforced by environmental concerns that tailings from the mine were causing birth defects in the local population. The Panguna Landowners’ Association demanded half the profits that the mine had earned since 1969. Failed negotiations eventually resulted in the formation of the secessionist Bougainville Revolutionary Army (BRA) in 1988. The BRA’s operations crippled the mine, which closed in 1989 and has remained shut ever since. In response to the BRA, the government mobilized the army; between 15,000 and 20,000 people died in the chaos that followed. At one stage the government hired Sandline International, a private military company, to suppress the rebellion. The conflict ended in 1997 following negotiations brokered by New Zealand. A peace agreement in 2000 provided for the establishment of an autonomous government, with the promise of a future referendum on the question of independence. That vote has not yet been held.

company’s home country. The practices of multinational companies are scrutinized ever more closely by shareholders, international NGOs and home governments.

2.2.3 Environmental impacts Environmental The environmental impacts and risks associated with mining and oil and gas issues often lead production can both trigger and exacerbate disputes between companies, governments to delays in major and local communities. Environmental issues are a common feature of disputes, and frequently lead to contract renegotiations and delays in major projects. Environmental projects and contract impact assessments (EIAs) are a critical point of entry for NGOs and other groups renegotiations. opposed to extractives projects.

Principal sources of tension include the direct and indirect impacts of extractive industries on the environment, safety and human health but also questions about who bears the cost of remediation. This cost can be quite high. The EIA for the recently closed Giant Mine in Yellowknife, Canada, for example, estimates clean-up costs of close to $1 billion. The costs in some places, such as Picher in Oklahoma, are considered so high that sites have been abandoned after mining ends in preference to remediation (see Box 2.5). Chapter 2 Stakeholders differ Stakeholders differ in their perception of risk, not least because impacts and can be complex play out over long timescales. 41 35 36

37 34 and mining is to resume in in resume to is mining and 38 33 However, NGOs continue to cite environmental impacts impacts environmental cite to continue NGOs However, 39 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 27 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes Technological improvements have also enabled better environmental environmental better also enabled have improvements Technological 40 and indigenous land access as reasons for restricting industry restricting operations. for reasons as access land indigenous and Bans on uranium mining in Australia were lifted in New South Wales and and Wales South lifted in New were in Australia mining uranium on Bans respectively, 2012 and 2008 in Queensland In Siskiyou, an ecologically diverse region in Oregon, a decade of legal challenges legal a decade challenges of in Oregon, region ecologically an diverse Siskiyou, In instance, 2012, for in 2002. In mining gold on a moratorium the lifting of followed Service violated had the US Forest that found Francisco in San court appeals an the on operations mining approved when it Species Act the federal Endangered 2011. 2005 and from decisions previous reversing River, Klamath As of January 2013, a total of 135 mining projects with a value of $7.5 billion were were $7.5 billion of a value with projects 135 mining of 2013, a total January of As ministry their EIAs. examined while the environment in Peru hold on In Indonesia, a coalition of NGOs has appealed against a decision by the supreme the supreme by decision a against appealed has NGOs of coalition a Indonesia, In 140,000 metric dumping continue to Tenggara Nusa Newmont allow to court the sea. into mines gold and copper Hijau Batu its from per day waste of tonnes Vedanta is seeking to mine a rich seam of bauxite in Orissa in India, but in the but in Orissa in India, bauxite a rich seam mine of seeking is to Vedanta carry failed to had ruled court the company that setback, the supreme recent most would themine how tribe about indigenous an with consultation adequate out site. the proposed affect peak a sacred from 10 kilometres The Ok Tedi mine in Papua New Guinea has seen many years of disputes and and disputes of years seen has many Guinea New in Papua mine Tedi Ok The flow that rock waste and tailings mine of the tonnes 90 million to relating protests stake a majority had which previously BHP, each year. a local system river into its converted in 2002 and withdrew action lawsuit, faced a class and Tedi in Ok against indemnity for in return local development support a fund to into stake damages. environmental Queensland in 2014. Queensland

      The following recent cases show how environmental issues are often involved in involved often are issues environmental how cases show recent following The disputes: mining In recent years, risk-management processes aimed at improving comparability, comparability, improving at aimed processes risk-management years, recent In been have local with stakeholders engaging and scientific processes rigorous applying developed. Stakeholders will naturally differ in their perception of what is an acceptable risk, risk, acceptable an is what of differ in their perception will naturally Stakeholders – not assessment an make which to on even when a solid evidence base available is human or ecological systems on a drill or site a mine of becauseleast the impacts in timescales. Shortcomings long over out play and complex behealth can extremely an often are reporting collection and data transparent and systematic comprehensive, mistrust. and tensions heightened of cause important performance in a range of areas – from minimizing the removal of vegetation and and vegetation of the removal minimizing – from areas of in a range performance Near- treatments. remediation improving to ponds tailings of the resilience increasing flash example, for reflect of, better the dynamics that systems monitoring real-time sampling Traditional available. become have patterns flood drainage subsurface or accurate. always not and labour-intensive costly, are methodsused pollution track to 28 Conflict and Coexistence in the Extractive Industries

Box 2.5: Types of environmental impact from mining

The various stages of a mining project’s life cycle can have different environmental impacts, both direct and indirect. Direct impacts include land clearance (for access roads, exploration and removal of overburden or for waste sites), discharges to bodies of water, land contamination and air pollution from dust and smelter emissions. Secondary impacts, including the social and environmental changes induced by mining operations, are often more complex and harder to identify in the short term.a Pollution from mining activities varies with the mineral being extracted and processed, as well as with the approach and technology used. Whether through water or land contamination or via accumulation in the food chain, toxic metals and organic compounds have had serious impacts on human health in many mining areas. Children in the Rudnaya

Chapter 2 River Valley in Russia and in Kabwe, Nigeria, for example, continue to have high lead levels long after the smelters in both areas have been closed. An assessment in La Oroya, Peru found that 99.7 per cent of children living close to the smelter had dangerously high levels of lead in their systems. Acute neurotoxicity from mercury poisoning is now primarily associated with its use in artisanal gold mining, which is practised in more than 50 countries. The waste from gold mining also often contains high levels of arsenic, another highly toxic metal. Acid mine drainage (AMD), the formation of movement of acidic water rich in toxic metals, can result in acute and chronic toxicity to both human users and the environment and render water unfit for drinking or for agriculture.b In South Africa, for example, AMD has been reported at Witwatersrand Gold Fields, Mpumalanga and KwaZulu-Natal coalfields and the O’Kiep Copper District.c In the eastern US, more than 5,000 miles of streams and rivers have been contaminated via AMD, primarily from coal mining.d Failures in tailings ponds often account for particularly serious incidents, through landslides and toxic contamination of land and water. Although the number of incidents has fallen in recent decades, 20 serious failures of tailings dams were recorded in the 2000s. A dam failure in Hungary on 4 October 2010, for instance, released about 700,000 cubic metres of tailings into a nearby river.e The collapse of a reservoir of waste material at an illegal mine in Taoshi in Shanxi province in China in 2008 led to a mud slide that reportedly killed more than 100 people. The Chinese government aims to close 20,000 illegal and unsafe mines by 2015 in an effort to improve mining safety. Mining also dramatically alters the landscape, ecology and stability of the surrounding area for decades after mines have closed. The US Environmental Protection Agency's National Priorities List, for example, included over a thousand seriously contaminated non-federal hazardous waste sites in 2009, of which 75 are classified under ‘unacceptable human exposure’. Picher, a former lead- and zinc-mining town in the state of Oklahoma, is considered the most toxic place in America, with a contaminated water supply, a high incidence of lead poisoning and geological instability. Mining ceased in 1969, but facing huge clean-up costs, the federal government instead paid people to leave the town, which is now abandoned. (See also Section 4.1 for cases in Asia and the Pacific.) Mining activities can also alter the hydrogeology of an area on account of vegetation removal, changes in soil structure, large dumps of waste material and the build-up of sediment in river beds. Such impacts can lead to increased risk of flooding and landslides, notably during periods of heavy rainfall. For example, waste material from coal mining may have contributed to the 2006 flood in Chandrapur, India.f A combination of logging and mining have been blamed for the flood that hit Jabonga town in the Philippines in 2011g and a regional environmental agency in Indonesia blamed 18 mining companies for the extensive flooding that hit Samboja in 2011.

a ICMM (2012). b Expert Team of the Inter-Ministerial Committee under the Coordination of the Council for Geoscience (2010). c Coetzee et al. (2006); Wade et al. (2002). d EPA (n.d.). e Azam and Li (2010). f Katpatal and Patil (2010). g Mattangkilang (2012). Chapter 2 Only a small part of Only a small drill sites mines and the world around benefit from state- of-the-art know- how and technology for environmental protection. Mining companies are increasingly switching to desalinated seawater to meet Mining companies are increasingly switching a 42 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 29 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes rather than on the geo-physical implications – such as accelerated degradation degradation accelerated as – such implications the geo-physical on than rather 43 Global Water Intelligence (2009). Global Water a Box 2.6: Environmental constraints in Chile’s copper sector – water, ore grades and energy grades ore 2.6: Environmental constraints in Chile’s copper sector – water, Box – takes place in arid regions such A significant share of copper production in Chile – the world’s largest producer Even with significant Desert. Its copper industry consumes around a million tonnes of water a day. as the Atacama the government estimates a 45 per cent increase in water demand by 2020 to improvements in water efficiency, sustain planned capacity expansions. likely shortages. But, with several large operations in the Andean mountains, the seawater needs to be desalinated likely shortages. But, with several large operations in the Andean mountains, the and pumped inland up to a height of 4,000 metres above presents a significant sea level to the mine sites. This in Chile are currently investing more challenge, and mining companies environmental and financial technological, billion to improve water supply to the industry. than $7.5 the mining sector in Chile (as well as Ocean, the ‘water problem’ of of the Pacific Given the relative proximity as large amounts of energy required to can also be understood as an ‘energy problem’, in neighbouring Peru) ore grades in key Chilean copper desalinate and transport water over long distances and to high altitudes. Meanwhile, means that more water and This operations have been declining rapidly after decades of intensive large-scale mining. need to be processed in order to access the energy are needed in mining operations, as larger amounts of host rock the energy intensity of Chile’s red metal. As result, local water scarcity and declines in ore grade are rapidly increasing future growth. Growing energy copper industry – and make availability of energy the key constraint for the sector’s demand will also add substantially both are projected to production costs and to greenhouse gas emissions, which to increase fourfold by 2030, and will make the industry increasingly vulnerable to rising energy prices. Climate change in particular poses a strategic challenge to the extractives sector. To To the extractives sector. to in particular challenge poses change a strategic Climate and regulation been carbon-related has focused of the impact on attention most date, pricing, At the same time, many resource-rich regions are facing a number of environmental environmental of a number facing are regions resource-rich many time, the same At soil erosion deforestation, land, and water of consumption increased as such pressures tensions to increasingly contribute to likely These are weather. volatile more and stakeholders. other and governments between extractivescompanies, There is also a growing risk of disputes as extractive industries are spreading to more more to spreading are extractive industries as disputes of risk also is a growing There mining Arctic gas, and oil with As environments. ecologically sensitive and extreme iron, of deposits large example, for contains, the region set example: beis to a prime the begin to digging at about is ArcelorMittal Arctic, the Canadian In copper. and gold Ellesmere at mines while develop Canada Coal to project plans ore iron Mary River owing accessible increasingly become resources Arctic As islands. Heiberg Axel and and new projects technology, sea modern shipbuilding ice and melting rapidly to follow. to likely are disputes But only a small part of mines and drill sites around the world benefit from state-of- benefit from the world around drill and sites a small mines part of only But environmental and protection, environmental technology for and the-art know-how in extractive industries, disputes trigger of a common remain willimpacts probably this is for reason One applied. are processes and technologies even if best-available at compliance about questions raising time, over tightened often are regulations that will technologies also tracking be and available monitoring that is Another sites. older environmental highlight and who will use measure them to groups, opposition to effectively. more projects of consequences of extraction, transport and energy infrastructure, disruptions of operations, and and operations, of energy disruptions infrastructure, and extraction, transport of (see regions in arid resources water over conflicts local with intensified communities 30 Conflict and Coexistence in the Extractive Industries

Table 2.2: Potential climate change impacts on the mining industry

Climate impacts Implications for mining industry

Average temperature increases z Permafrost thaw will affect Arctic and sub-Arctic mining, creating engineering challenges for construction and for the maintenance of mines and related transport infrastructure. Higher capital expenditure and operating costs are likely.

z There will also be positive impacts, such as increased shipping access to the Arctic region.

Increasing incidence of water stress z To ensure adequate water supply at mine sites, desalination and long-distance water transport will often be required.

z There will be a higher incidence of dust and an increasing need for dust suppression.

Chapter 2 z Greater potential for conflict with local communities over scarce water resources.

Extreme weather events z An increased incidence of floods, heatwaves and extended droughts and a greater variability in weather patterns will pose operational and technical challenges, such as a more variable hydrogeology. Higher capital expenditure will be required.

z More production disruptions and the risk of catastrophic failures, including for tailings dams, will result in higher insurance costs.

z Transport links for the delivery of mine supplies and products may be disrupted more often.

z In some regions, more frequent forest fires will lead to disruptions of operations.

Rising sea level z Mining in coastal areas may be exposed to a higher incidence of floods.

Regulatory changes z Stricter standards and rising costs related to carbon emissions.

z Mandates to develop and implement carbon capture and storage technologies in mining and metal processing.

z Higher costs for water use, tighter water efficiency standards and stricter rules on the quality of water discharge from mine sites, especially in regions with intensifying water stress.

z More restrictions on, and increased costs of, land-use change, including stricter regulations for mine site rehabilitation.

z Stricter engineering norms for mining operations, including, for example, tailings ponds and open-pit design, in order to increase resilience against extreme weather events.

Sources: Chatham House based on Nelson and Schuchard (2011); Hodgkinson et al. (2010); Eskeland and Flottorp (2006); Pearce et al. (2011); Broderick and Hendel-Blackford (2007).

Extreme weather Table 2.2).44 Many climate-related consequences will also affect projects after they have events have been ceased production, bringing new issues of accountability for post-project environmental 45 the leading cause of damage and remediation. Mine site infrastructure, such as tailings dams that have been constructed on the assumption of broadly stable climatic conditions, may be inadequate tailings dam failures in the future. An increased incidence of extreme weather events may also create over the past decade. significant environmental hazards and financial liabilities for companies, either during the lifetime of a mining operation or after a mine’s closure. Extreme weather events, for example, have been the leading cause of tailings dam failures over the past decade.46

Apart from carbon pricing, few have attempted to quantify in a comprehensive manner other commercial, operational and reputational costs and risks associated with climate change. Although a small number of mining companies are starting to address some of these issues, awareness of the significant and multidimensional challenges climate change poses to the mining community remain limited. So far the have been few attempts to develop comprehensive climate-risk management strategies. A 2013 survey of the principal risks facing the mining industry by Ernst & Young put climate change in fifteenth position, one place lower than in 201247 and five places lower than in 2010, when it still was ranked as one of the top ten threats. Chapter 2 Disputes over who Disputes over when is responsible serious failures occur can mar state– company relations for decades. After three years of legal of years three After 49 Since 1993, the dispute has been a series has court to subject of 1993, the dispute Since 51 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 31 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes If a service company were at fault in causing an accident or or accident an causing in fault at were service a If company 50 This created joint responsibilities for testing and for monitoring safety; monitoring for and testing for responsibilities joint created This 48 Unclear or overlapping legal liability regimes can hamper the resolution of liability liability of the resolution hamper can regimes legal liability overlapping or Unclear which legal rules for are environments, particularly offshore is This true for disputes. Several liability. of the attribution complicating heterogeneous, and complex often is there yet shipping, from pollution marine for liability govern regimes international from spills from resulting compensation and liability on agreement international no been dealt have case might Macondo The wellheads. and rigs, pipelines oil offshore example, for Norway, In defined in advance. clearly more were if liabilities faster with caused pollution any for responsible is block a the licensee of that states clearly the law there. operations by proceedings, an end to the case is not yet in sight. yet the case to not end is an proceedings, and the interpretation of those responsibilities is central in determining which party in determining central is those responsibilities of the interpretation and and Halliburton the disaster. followed that claims damage the huge cover to willhave the ‘accident that maintains BP but in charge ultimately was BP that claim Transocean parties’. multiple involving causes, multiple of the result was Questions about whether due diligence was exercised and risks were properly assessed properly were risks and exercised was diligence whether due about Questions started problems when once and who knew what about occurred, and failures before between the dispute The legal battles. the ensuing to central often are surfacing, Mexico of in the Gulf disaster Macondo 2010 in the April partners involved project the of the owner to spills oil for responsibility apportions US law this point. illustrates contracted had BP, licensee, main The discharged. was which the pollution from vessel subsequent and which the blowout from the well for the casing cement to Halliburton owned which built, Transocean, rig from leased it the occurred, Macondo spill and and staffed it. The variety of entities with different mandates, financial capacities and insurance insurance and financial capacities mandates, different with entities variety of The there a breach, of allegation an or contract of a breach in the case of that means limits state legal cases. As prolonged and responsibility of obfuscation both for potential is of partners, the question project or regulators as involved closely often are institutions that accusations occur mutual leads to often when serious failures who responsible is even decades. or years for relations state–company mar can 2.2.4 Disputes related to liabilities and due diligence related to liabilities 2.2.4 Disputes in extractive disputes protracted lead to can issues diligence due and Liability environmental or when disasters ensue often legal battles costly Long, industries. or gas oil, an of occur in the context corruption or violations rights human damage, dollars, of billions of tens in these cases run can claims into Damage project. mining project different legal among fights to subject becomes often who responsible is and or the exploration to the concessionaires include example, for could, partners. This service subcontracted or the operations managing the companies acreage, production activities. support carryingtechnical and out companies Over the lifetime of a project, changes in ownership or shifting responsibilities responsibilities shifting or in ownership changes a project, Over of the lifetime oil from resulting Pollution further. matters partners complicate between project more led to example, for in Ecuador has, rainforests in the Amazon drilling operations PetroEcuador, the state-owned among legal wrangling international of years 20 than which Chevron, and Texaco company parent Texpet’s partner Texpet, joint-venture its in 2000. Texaco acquired pollution, the licensee would still be liable for all damages. After payment, it is up to to up is it payment, After all damages. still the for licensee be would liable pollution, fault. at the service from costs company any the recover licensee to 32 Conflict and Coexistence in the Extractive Industries

cases in both Ecuador and the US. These have been complicated by the fact that over the years, PetroEcuador took an ever-bigger role in conducting and directing the drilling operations.

In 2011, an Ecuadorian court fined Chevron $8.6 billion in damages,52 but an end to the case is not in sight. Chevron has denounced the ruling as corrupt, sued the lawyers of the plaintiffs in the US under the controversial ‘Racketeer Influenced and Corrupt Organizations Act’, appealed against the ruling in Ecuador’s national court and forced Ecuador into international arbitration. The Permanent Court of Arbitration in The Hague has since ruled in favour of Chevron, although the legal basis of this ruling has 53

Chapter 2 been disputed by the Ecuadorian government. In the meantime, the plaintiffs have sued Chevron in Argentina, Brazil and Canada in an effort to force the company to comply with the ruling.54 Chevron’s attempt to obtain an injunction to block those efforts has recently failed in the US Supreme Court.55

The ongoing Simandou case is another instance of how disputes can arise after mergers and acquisitions. Shortly before his death in 2008, Guinea’s long-time ruler Lansana Conté expropriated half the Simandou iron ore deposit from Rio Tinto, claiming that the company was developing the deposit too slowly. He granted the rights to the company of the Israeli mining tycoon Benny Steinmetz.56 Steinmetz’s company BSG Resources (BSGR) invested an estimated $160 million in the development of the mine and then sold 51 per cent of it to the Brazilian miner Vale for $2.5 billion.57 After coming to power in 2010, the current government vowed to review the validity of existing mining concessions with the help of international experts. Vale suspended payments to BSGR after BSGR was warned that it would be expropriated if the allegations the company were substantiated. The case has escalated since the arrest of an associate of BSGR in the US in April 2013 on bribery charges and the surfacing of documents allegedly showing that one of Lansana Conté’s wives was promised millions of dollars in exchange for helping to secure rights to Simandou.58 If the Guinean courts find BSGR’s original acquisition of Simandou to be fraudulent, Vale’s ownership of its share of the Simandou deposit would also be in jeopardy, and an international legal battle will almost certainly ensue.

Even when Finding a lasting solution to such disputes is often difficult: even when settlements settlements are are negotiated, their legitimacy may be challenged by a new government or the negotiated in public. The case of the Ok Tedi copper mine in Papua New Guinea, discussed above, is illustrative. The area around the Ok Tedi has suffered extensive environmental liability disputes, damage as consequence of the dumping of tailings into an adjacent river system, a their legitimacy may practice that began under the former majority shareholder BHP in the 1980s and be challenged by was tolerated by the PNG government in view of the large revenues that the mine a new government generated for the PNG economy.59 Faced with growing international pressure and or the public. mounting concerns about the long-term liabilities that the project could create for the company, BHP Billiton decided to withdraw from the project in 2000. Initially, it suggested closing the mine but eventually agreed to transfer its share of the ownership to a ‘PNG Sustainable Development Programme’ with a mandate to use revenues to support local communities and the sustainable development of the region.60 As part of its exit strategy, BHP signed a number of agreements with the government and affected communities providing it legal protection from any future damage claims. But the immunity deal has been called into question. PNG’s prime minister, Peter O’Neill, recently claimed that BHP Billiton avoided ‘damages and compensation Chapter 2 Disputes between companies and governments in industries extractive are not restricted to one region, level of development or type of economy or government.

61 In 1995, mounting pressure nonetheless forced forced nonetheless pressure 1995, mounting In 62 Disputes in the Extractives Sector: Lessons from Historical Patterns and Conventional Wisdom 33 Wisdom and Conventional Patterns Historical from Sector: Lessons Extractives in the Disputes Resource-nationalist policies come in many different forms and can sometimes be sometimes can and forms different in many policies come Resource-nationalist At compromise. and negotiations through example for accommodated, adequately over control state greater for the impulse for best, a useful the is phrase catch-all in end an to a means of more often is - it rents resource and resources territorial grievances community Similarly, in itself. a cause than disputes company–government also be they ignored may but governments, and between investors triggercan disputes degradation Environmental a company. supporting a government by be countered or opposition local international and low-level and contract, of a breach cause not may Poor investments. affecting a company’s without years many for on go can project a to The survey of four sets of drivers for host country-company disputes presented in this presented disputes country-company host for drivers sets survey of The four of disputes of nature multi-layered and complex the often into insight provides chapter do not these drivers However, companies. and between governments tensions and can when disputes and escalate when tensions for explanation sufficient provide company– of clustering temporal or the spatial for do they account nor be avoided, suggest. to appear data the arbitration that disputes government International arbitration data remain the best-available comparable quantitative quantitative comparable the best-available remain data arbitration International difficulties sizes and in small sample But tensions. company government for proxy these particularly make data does not factors contextual for effectively controlling regressions. multivariate as such analysis, statistical complex more for suitable to appears disputes company–government triggers of and the drivers Understanding analysis. empirical comparative and qualitative a more require Arbitration data clearly show that disputes between companies and governments in governments and between companies disputes that show clearly data Arbitration type or of development of level region, one to restricted not are extractive industries coinciding in arbitrations jump a sudden They also indicate government. or economy our literature, the recent with in line boom. price But commodity the current with on disputes to prone are difficult which countries is predict it to that confirms analysis price commodity type government, as of such indicators set of a narrow the of basis more are levels, GDP declining Certain including trends, income. per capita or levels not are thecorrelations but in arbitrations, involved those countries among prevalent theory. causal a convincing by supported not are and robust 2.3 What does the evidence tell us about does the evidence the future? 2.3 What The above-mentioned legal proceedings against Texpet are another example of of example another are Texpet against legal proceedings above-mentioned The claims. future from effective protection no deals provide sometimes immunity how officially 1992, the in government the project of fulltook control PetroEcuador When environmental been had existing with in line operations Texpet’s that acknowledged industry practices. and regulations claims that would run into billions of dollars’ only because the PNG parliament had had parliament because the PNG only dollars’ of billions run into would that claims deal. the immunity accepting by the people’ to duty in its ‘failed Texaco to agree to invest $40 million in environmental remediation efforts. In In efforts. remediation in environmental $40 million invest to agree to Texaco officially the Ecuadorian government ended efforts and remediation 1998, Texaco’s the by litigation or claim ‘any from Texaco freed’ forever and liberated ‘absolved, these Despite Texpet’. by acquired the obligations Ecuador concerning of Government this day. to claims liability battle to continue Chevron, later and Texaco, assurances, 34 Conflict and Coexistence in the Extractive Industries

due diligence and weak liability regimes are clearly a factor in protracted disputes, but they tell us nothing about when these issues are most likely to arise or the relative strength of the parties involved in a claim.

No overarching In sum, despite an extensive literature examining company–host country tensions, theory exists to there remains no overarching theory that can help to identify when these issues are identify when issues likely to escalate to company–government disputes. The next chapter attempts to fill this gap by turning to structural factors, namely the nature of the relationship between are likely to escalate extractives companies and host countries and the forces that exert an impact on an to company– impact on this relationship over time.

Chapter 2 government disputes. Chapter 2 The Relationship between Host 3 Country and Extractives Company

3.1 The flawed contract 38 3.2 Forces of change affecting extractives agreements 42 3.3 Revenue-sharing and taxes: a work in progress 49 3.4 T he enduring centrality of revenue-sharing 55 agreements n Governments and companies depend on one another for unlocking resource wealth, but fundamental asymmetries in power, information, capabilities and resources often make for an inherently vulnerable partnership. n Economic theory calls for governments to capture ‘resource rents’, but in practice revenue-sharing agreements are the outcome of often protracted bargaining rather than a simple formula. There is no objective way to establish ex ante what a ‘fair’ distribution of profits between governments and private investors should be. n Extractives projects often stretch over decades, but few revenue-sharing agreements survive that long. Structural pressures from changing bargaining power, ideological shifts and changing global market conditions can lead to demands for tax rules to be adjusted or contracts to be renegotiated. n The upward shift in prices, a fraying Washington Consensus and the perception in producer countries that bargaining power has shifted in their favour have upset company–government relations in recent years. Many governments have been trying to drive a hard bargain, and the laissez-faire approaches that dominated the industry in the 1990s have fallen out of fashion in many parts of the world.

63 All these formal agreements need to navigate tensions between the tensions need navigate to All agreements these formal 64 The Relationship Relationship The government’s and society’s claims on benefits from national resource wealth, on the one the one on wealth, resource national benefits from on claims society’s and government’s formula to distribute ownership, managerial control, revenues and costs between costs the and revenues control, managerial ownership, distribute to formula over extend which can a project, of the lifetime over companies and government (see Box 3.1). remediation and closure to several initial exploration decades from state-owned of forms various of further the involvement by beThey can complicated licensees in or regulators shareholders, act partner, which can as extractives companies, constitutional including the wider legal context, by also shaped are Contracts a project. and mining as specific such and sectoral legislation resources natural on provisions laws. petroleum Contracts can take many different forms, each of which represents a different different a whichrepresents of each forms, different take many can Contracts 3.1 The flawed contract flawed 3.1 The 3.1.1 An asymmetric relationship between parties unable or unwilling often are mineral resources of owners sovereign as Governments necessary are to that resources managerial financial and the technical, mobilize to with agreements into they enter a result, them. As efficiently produce and effectively those resources. exploit and develop explore, to companies private foreign) (often these contracts economies, many for mineral resources of role the important Given the levels. highest at approved signed or often are To improve understanding of how disputes between governments and oil, gas and and gas oil, and between governments disputes how of understanding improve To relationship the state–company of a reappraisal requires will evolve companies mining And relationships? state–company other from different it makes What in the sector. of role the highlights central chapter time? This over stability its challenge can what of nature vulnerable discusses the and inherently in this relationship revenue-sharing which operators, and between governments rents resource apportion that contracts objective no is there that shows It in the sector. disputes the heart of them at puts often explores and risks and revenues of distribution ‘fair’ a determine can that formula undermine ideologies can prevailing and prices power, shifts in bargaining how the companies, resource for tax levels on term. Focusing in the long stability contracts’ in a wide variety result in practice these changes how showing by concludes chapter governments producer many by attempts how and countries in different outcomes of led to 2000s have the early since in global markets structural to changes respond to companies. with tensions growing 3 Host Country between Company and Extractives Each contract Each represents a formula to different distribute ownership, managerial control, revenues and costs between the government and companies.

Chapter 3 Chapter 3 There is no objective There way to predict an appropriate distribution of profits between governments and private investors.

The Relationship between Host Country and Extractives Company 39 Company and Extractives Host Country between The Relationship Another fundamental challenge to managing state–company relationships in in relationships state–company managing to challenge fundamental Another 3.1.2 Dealing with uncertainty: what is a fair share? 3.1.2 Dealing with uncertainty: what the ‘economic seek capture to should the resource of owner as the state theory, In the extractives sector is that contracts need to be written against the background the background against need be to written contracts the extractives that sector is no is There investments. from rewards the and risks about uncertainty inherent of of distribution the appropriate what ex ante establish to distribution appropriate a specific be project. for should investors private and between governments profits conditions market world changing tied including is several to uncertainty factors, This quality theand size about knowledge evolving the extracted commodity, for prices and the change that in technologies advances being and developed is that the deposit of into turn suddenly can enterprises highly extraction. profitable Over of the years, cost goldmines. into turn literally can concessions dormant and businesses loss-making model these to effort deal of spend a great may companies and Both governments margins large to subject guesswork informed they remain ultimately but factors, uncertainty. of the for company the private compensate to and production its with associated rent’ received price between the market the difference is services. its rent of cost Economic which production, full The of cost the production. full and of cost the resource for of rate ‘required’ or the ‘risk-related’ as to also referred profit’, a ‘normal includes In many instances, the role of one entity is perceived to be encroaching on that of the of that on be to encroaching perceived is entity one of the role instances, many In in countries example, For politicized context. a heavily often is what creating other, local infrastructure, housing, provide to the capacity lacks the government where the company the project, support to functions even policing or education health care, because the problematic is This a state’. within a ‘state of the role taking on up end may Conversely, body. a government of will the accountability legitimacy lack or company through negatively operations be seen be may to affecting company the government employees national of uptake a larger obligating by example for intervention, ‘political’ both faced by issues These are unemployment. over pressure public of in the event companies. state-owned and foreign Large extractives companies often have more technical know-how, managerial managerial technical know-how, more have often extractives companies Large This their government. disposal their host than at financialresources and capacity the outside investment cases of most In effective regulation. poses to challenges the will provide government thehost that granted taken for is it extractivessector, to factory have a bank – usually or does not necessary a project infrastructure for national with compliance ensuring the industry, regulate – and roads own its build the to contribution the major that assumed is it token, the same local By and laws. social ‘corporate that and tax revenue and countrywill employment be through the extractives In discretion. the company’s at adopted are initiatives responsibility’ operations of nature high-impact high-risk, and high-tech the high-value, sector, defined. clearly less are these roles that means The ideal is a mutually agreeable interdependence between the two parties. However, between parties. the two However, interdependence agreeable idealThe a mutually is often resources and capabilities information, asymmetries in power, fundamental partnership. vulnerable inherently an for make hand, and providing sufficient incentives for companies to make long-term investments, investments, long-term make to companies for incentives sufficient providing and hand, hand. the other on Profits Profits tax* Yes Yes Yes A fixed return for operators of production No No Yes Yes Royalty Government share Yes Yes Yes No Cost recovery exploration costs repaid by government partner From oil production Concession By the operator from sales revenue Joint ventureProduction-sharing By the operator from sales revenue, but agreements Service contracts From oil production Profits can be taxed in many ways: via generic taxes, such as income taxes, corporate taxes etc., or through taxes specific to extractive industries such as the such extractive industries taxes specific to as income taxes, corporate taxes etc., or through can be taxed in many ways: via generic taxes, such Profits petroleum revenue tax in the UK or the mineral resource tax in Australia. * Table 3.1: Different types of fiscal arrangement for oil and gas Table Most types of revenue-sharing can broadly be classified as one of four types: concessions, joint ventures, production- types: concessions, as one of four can broadly be classified of revenue-sharing Most types 3.1). or service contracts (see Table sharing agreements free rein to operate, subject to health, the licence gives the company relatively Concessions Under a concession, levels as well as the decides on the spending and investment operator requirements. The and environmental safety authority to set the governments retain the legislative and production levels. In most systems speed of development UK, The used this authority. has never for example, this power. they rarely exercise production levels, although and Development Organisation for Economic Co-operation are common in the countries of the Concessions, which (OECD), basis. IOCs the freedom to operate on a commercial give companies concessions, and invariably prefer secure access. In return, governments can in theory when they are the sole way to gain accept alternatives only or commitment of resources. revenue with little effort has limited control over operations other than through control of the A concession means that the government to companies. Also, if a company is driven solely by commercial licensing process that makes acreage available as additional employment or external benefits such get developed and considerations, marginal fields may not infrastructure could be lost to the country. is pursued at the sole risk of the international initial exploration Under most types of JV, (JVs) Joint ventures has been declared, a joint company is created between the company and the Once a commercial discovery investor. government a state-owned company with predetermined equity shares. The government, usually represented through and development costs the JV will meet further exploration expenditure; then repays its share of the exploration might be the same for a concession. to the normal tax rules, which output is sold and subject The jointly. but if commercial discoveries avoids the risks inherent in exploration; advantage of a JV is that the government The development. Not only does this allow governments to retain an ownership are made, it can still participate in their can be valuable when states have to learn from multinationals, which share, it also allows a state-owned company Egyptian a major factor in the development of the was, for example, This in commercial operations. limited experience It also means that the government is directly in control of operations, state oil company in the 1960s and 1970s. is usually the norm. which of the equity of the JV, assuming that it carries 51 per cent or more that the state does not provide a JV except kind of agreement is similar to This agreements Production-sharing and develop the companies explore or operating costs. Private development any resources to cover exploration, share of production in order to cover costs and to generate a return on resource and in return win the right to a investment, with the remaining output going to the government. and development under service contracts. Service contracts Companies are also responsible for funding exploration per through a predetermined fee Instead of gaining a right to a share of the project output, the company is compensated is adjusted automatically to higher prices. In some cases, this fee unit of output that it generates through its ‘services’. Box 3.1: Principal types of revenue-sharing agreements types of revenue-sharing 3.1: Principal Box Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 40 Conflict

Chapter 3 Chapter 3 The Relationship between Host Country and Extractives Company 41 Company and Extractives Host Country between The Relationship Governments choose different types of revenue-sharing mechanism for a variety of reasons. An obvious example is is example of reasons. An obvious for a variety mechanism types of revenue-sharing different choose Governments of its nature and effectiveness influence the will strongly which stability of the country, development and the level of OECD example, operating systems’ ability to manage in their tend to have more confidence countries For institutions. operate within that allow the company freedom to therefore more willing to grant ‘concessions’ companies and are protection, for would not need clauses on environmental concessions often framework. The regulatory the existing many emerging industries. By contrast, instance, because border the extractive to cover regulations already exist regulations that are therefore forced into creating specific this institutional maturity and are producer countries lack part of a production-sharing agreement. as into the contract, for example incorporated explicitly When negotiating contracts, companies and governments will place different weights weights will different place governments and companies contracts, negotiating When return’. of rate difficult ‘required these objective it define which risks, makes to an on Shareholder risk is when the project is real and delivers but for some reason the reason some for but delivers and real is when is the risk project Shareholder be(in may This shareholders. domestic its added to thevalue return cannot company restrictions exchange because foreign or nationalization of cases) the result extreme dividend venture a joint to be due may it or currency, hard of the repatriation forbid the at levels the reinvestment increase to the local partnersqueeze wants whereby dividends. shareholder expense of Operational risk refers to potential problems with operating the project that could could that the project operating with problems potential to refers risk Operational number a be can for This added. value potential its on deliver to fails it that mean military the project, or with infrastructure associated inadequate as such reasons, of the regulatory to changes operate, to meant is the project where civil disturbances or critical manpower of shortages operates, fiscal which the project under or regime political or country causes in one operating third-party whereby risk, and inputs other country. in another operating company the same for problems reputational 3.1.3 Assessing complex risks in extractives projects risks in extractives 3.1.3 Assessing complex An this uncertainty. of driver a key are extractivesprojects facing risks Complex risk, market types risk: three to subject of be can considered in a project investment the the resources the that risk is risk Market risk. shareholder and risk operating either thought, originally be than less to worth out turn seeks produce to project because changes or in the place first exist did not opportunity because the business added Examples embodied value in the the project. potential in effect destroyed when the local economy consumption domestic field a gas for developing include a specific when technological mineral capacity developing or collapses subsequently the mineral redundant. makes change Two essential elements determine the required rate of return: the amount investors investors the amount return: of rate the required determine elements essential Two interest, of the riskless as rate in the bank, known the money leaving earn by would be should premium’ the ‘risk theory, In the project. with the associated risks and their leave or invest whether to about indifferent investors make to high enough just more is projects individual for premiums in the bank. Setting appropriate money may difficult and and quantify to complex difficult often in practice because are risks be fullynot in advance. understood return for the company. This required rate of return denotes the amount that makes makes that the amount denotes return of rate required This the company. for return in the ‘profit’ any include does not but the investor, for worthwhile the investment the term. sense of popular

65 and governments last that long. Any number of factors can change: the political change: can factors of number Any long. that last governments and the parties of involved, power bargaining the relative extraction technologies, climate, All can these the geology the factors project. of of the understanding and costs prices, ultimately can and term, long to the in medium contracts amend to pressure create disputes. or in renegotiations result power – bargaining sections basic three structural describe factors how following The – markets commodity ideologies and state investors, and countries betweenhost agreements. existing undermine to this works how timeand over fluctuate to tend Whatever the outcome of the initial bargaining process, the results are often often are the results process, the initial bargaining of the outcome Whatever typically projects extractives industries of lifetime The in time. challenged struck between companies agreements few decades, but over stretches 3.2 Forces of change affecting extractives agreements extractives affecting of change 3.2 Forces Methods such as the capital asset pricing model and its variations seek to assess risks risks seek assess to variations its model and pricing asset the capital as such Methods performance the share as such based factors on each sector, in projects with associated often in these risks are models in specific Non-systemic sectors. companies of be away. to diversified assumed depletable assets ‘externalities’ and Ignoring in their valuation further complicates mineral resources of nature exhaustible The produced ore of tonne or oil of barrel The governments. and deals between companies be should premium a depletion theory, In tomorrow. be produced cannot today complete the time of at substitute a possible of value based added, the discounted on this however, practice, In resource. the present of the extraction costs less exhaustion be to made have would assumptions tenuous as account, taken into aspect rarely is technology the alternative of the cost and the deposit of depletion of the timing about sources. other be needed would provide to that of a range account take into to fail often in extractive industries contracts Finally, can These costs markets. by priced appropriately not are benefits) that (and costs of the costs to local particulatepollution from impacts the health-related from range to subject is and simple, from far is externalities such Pricing change. global climate to tend often governments and companies their negotiations, In uncertainties. large Costs point. a later them at reconsider to be forced they these may aspects, but ignore if be ignored may peoples, indigenous example for constituencies, domestic by borne they lack political power in the capital. But as locals gain a political voice or as as or localsas a political voice gain But in the capital. they politicalpower lack and Business on Principles the UN Guiding as (such emerge norms international be to met have in 2011), these may endorsed costs widely were that Rights Human (see also Section2.2.4). imperfect using bargain to but choice no have governments and companies practice, In formula revenue-sharing a on agree whichto with asymmetric information often and the and costs operating their initial investments, for companies compensates that to extraction rights and exploration grant typically Governments involved. risks those will exactly rights what be in the worth side knowing either without companies the creating be apart, far often both sides can on assumptions and Expectations future. disputes. and tension for potential Projects typically Projects over decades, stretch contracts but few between struck companies and governments last that long. Contracts in industries extractive often fail to take into account a range of costs (and benefits) that are not appropriately priced by markets. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 42 Conflict

Chapter 3 Chapter 3 The balance of The power in contract negotiations between companies and host countries tends to radically over change the project cycle.

The Relationship between Host Country and Extractives Company 43 Company and Extractives Host Country between The Relationship 66 What is considered a ‘fair share’ often evolves with the ebb and flow of predominant predominant flow of and the ebb with evolves often share’ a ‘fair considered is What of the question is the matter the heart of At orthodoxies. and narratives economic in the extractive industries. play should the state role what 3.2.2 Changing ideologies or the shifting political cycle As these examples illustrate, the balance of power in contract negotiations between negotiations contract in power theof balance illustrate, these examples As cycle. the project radically over change to tends countries host and companies to sets out power bargaining gaining is arise when a party can that Disputes gets position in a weak bargaining a government When terms. contractual renegotiate when the investments seek renegotiate to time and its bide just may a poor deal, it turned. have the been tables and made have Although there are more complex dynamics at play, the Kashagan affair (see affair Section the Kashagan play, at dynamics complex more are there Although prices oil in which rising be bargain the to obsolescing a case of appear 4.3.2) would have investors international once the agreement of revise the terms to the state prompt $18–20 stood oil at signed Contracts of when the price exploration. into sunk costs consolidated it and rose prices as the Kazakh elite by challenged were per barrel, confident. grew more and power The well-documented tensions between states and oil companies in the Middle Eastthe in Middle companies oil and between states tensions well-documented The in the extractive happening is what into insight some Africa provide North and (Aramco), Oil Co. the Arabian-American case involves extreme An today. industries the From concession. Saudi a vast enjoyed (IOC) that company oil international an partners, funded the original Aramco Texaco, California and Oilof Standard 1930s, terms, favourable They enjoyed basins. oil Saudi of the development and exploration the also government’s of but dynamics power colonial-era of only not takingadvantage bargaining But finance. expertise their project technological to on access and reliance split. a 50:50 profit agreed government 1950, when the Saudi shifted by had power paying was infrastructure and oil Saudi a large up built had Aramco this time, By In leverage. thegovernment’s increasing immovable, were investments Their rents. the former retained the first, state At Aramco. nationalized Arabia theSaudi 1970s, the national of the largest Aramco, Saudi is the company Today operators. as owners power their bargaining and stake, equity no have (NOCs). Foreigners companies oil ago. long became obsolete The terms of the initial agreement between a host government and a foreign foreign a and between government a host the initial agreement of terms The the time the parties of at power bargaining the relative determined by are investor because hand the upper have often investors foreign this stage, At negotiation. of 3.2.1 The obsolescing bargain or the shifting bargaining cycle obsolescing bargain 3.2.1 The endowments resource necessary translate to know-how and the capital theycontrol and the necessary made has investments theoperator After actual revenue. into losses, the incurring large without the investment remove to unable becomes of seek a renegotiation which may the government, to swings power bargaining the obsolescing as known is relations power producer–operator modelof This terms. cycle. bargain As a result, all three factors can become a potent force for disputes in the sector. in the sector. disputes for force a potent become can all factors three result, a As in individual these factors of the impact that remember to important is it Nonetheless, factors, local national by and ways will in important be projects shaped and countries chapter. the next of the topic

69 There is clearly a strong ideological component to the role to ideological component a strong clearly is There 68 Joffé et al. (2009) assert that resource-nationalist cycles last for for cycles last resource-nationalist (2009) assert et al. that Joffé 67 that states take in the resource sector and in the operation of the national economy – and economy the national of in the operation sector and take in the resource states that cycle’. describe can the ‘political as one what drive perceptions changing national into translated cycles are and these trends in the way variation much is There for Eastin Asia, policy approaches theeconomic 1990s In strategies. policiesand sub-Saharan in many than statist more be to considerably tended have example, of the role in the thinking globalabout trends Nonetheless, African countries. sector the private and between the state the relationship – and extractive industries policies towards government in shaping factor important an – are broadly more state– of nature the evolving to crucial Because its contribution of investors. foreign this political cycle deserves the world, elaboration. around relationships company War the period between the Second World history, modern economic of terms In economic in national involvement the state’s of expansion an saw 1970s the late and intervene should and could governments view held that widely a was There systems. problems. social economic address to and in order directly intervention. government encouraged be can that identified basic drivers Three market Unfettered accepted. generally was failure’ ‘market of the existence First, society owing for results sub-optimal produce to considered widely was competition the competition, imperfect therefore and power monopoly of the inevitability to goods, whose society benefits to public of the concept and externalities of presence of the problems to solutions Moreover, the market. to leave to too important were and taxes corrective of in the form intervention in government lay failure market ownership. government ultimately and planning controls, price regulation, subsidies, the in the view theory that resulted economic had the legacy Keynesian of Secondly, fullwith employment. coincide necessarily not would employment of level equilibrium force to demand, aggregate of the management by was, government function of The coincide. to the two mobilizing a successful model for as many by up held was Soviet planning Finally, a ‘five-year the UK introduced Even growth. promote to economy an of the resources to things, other among led, these drivers the OECD three theIn in mid-1960s. plan’ of the development part as of industries and utilities public of the nationalization management. economic for instruments Recent literature has emphasized the cyclical pattern of state involvement in the in involvement state of cyclical the pattern emphasized has literature Recent time. over privatization and nationalization of patterns therecurrent sector and resource prices, commodity shifting of the highlights importance example, for (2008), Stevens of appeal in the fluctuating determinants as political fortunes cycles and investment nationalism. resource approximately 20–25 years. approximately For many in the developing world, the justification for state intervention received received intervention state for the justification world, in the developing many For the challenged the global views economy of Structuralist support. additional necessarily would economy market theinternational in participation that assumption economic of lead the convergence to not would forces Market gain. lead mutual to but economics) mainstream by assumed was (as between countries development considered was action between them. State differences aggravate would instead be if this to essential was avoided. Changing perceptions perceptions Changing about that the role take states should drive the ‘political cycle’ in the resource sector. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 44 Conflict

Chapter 3 Chapter 3 In the 1990s, privatization and deregulation came to be seen as indisputable requirements for growth and unlocking development. The Relationship between Host Country and Extractives Company 45 Company and Extractives Host Country between The Relationship were arguing that governments of countries that relied heavily heavily relied that countries of governments that arguing were 70 A less extreme position promoted a ‘big push’ to jump-start development. Its Its development. jump-start to push’ a ‘big promoted position extreme A less the of out needed was break to resources focus of a concerted that argued proponents and investment low savings, low leadsto income low whereby poverty of circle vicious sector the private of underdevelopment The income. low to back leading output, low for resources sufficient marshal could the state only that meant countries in developing time, over that, arguing were economists of a number vein, similar as In a ‘breakout’. prices, relative or trade, of in their terms face a decline would producers commodity manufactures of goods, because the consumption manufactured vis-à-vis of producers (i.e. increase when incomes basic commodities of the consumption than faster grows this so-called of Adherents demand). of elasticity income lower have materials raw thesis Prebisch-Singer During the 1980s, these views coalesced into what became labelled the ‘Washington During the 1980s, these became labelled views the what ‘Washington coalesced into this of the 1980s, the primary crisis of advocates the debt Following Consensus’. powerful in a uniquely themselves Bank, found the World the IMF and position, the Soviet Union When countries. these impose to developing viewsposition on and deregulation privatization, was result The complete. the story appeared collapsed, enterprises State-owned elsewhere. and in extractive industries liberalization general extinction. Privatization to hand a helping requiring be to viewed dinosaurs came as unlocking growth for requirements be to seen came undisputable as deregulation and benefit, as everyone would believing that economists many with development, and society. broader to down’ ‘trickle would eventually growth economic rapid and profits This ideological criticism of government intervention was reinforced in the 1970s by in the 1970s by reinforced was intervention government ideologicalThis of criticism globala in deliver to failing was management macroeconomic that theperception and Supply-side instability. price strong by marked was that downturn economic doctrine macroeconomic the Keynesian of attacked analyses economic monetarist the led to performance economic weakening world, the developing In intervention. government because of up catch to failing were countries developing that conclusion that concern growing was There it. of the lack because of than – rather intervention capitalism’, ‘crony and rent-seeking led to countries in developing intervention state the extractive industries, In those economies. of further the performance undermining poor management and protectionism underinvestment, example, for mean, thiscould the at employment and revenues short-term maximizing local with elites the sector, of competitiveness. and investment long-term expense of These previously unchallenged views of state intervention came under scrutiny in scrutiny under came intervention state views of unchallenged These previously recently three from attack under came underpinnings intellectual theThe 1970s. theory examining politics the economic of analysis: economic of areas developed the behaviour examining choice public theories of politicians; of the behaviour between the interaction examining analysis principal-agent and bureaucrats; of would that identified mechanisms analysis of These areas bureaucrats. and politicians – in the economy intervened if government resources of lead a misallocation to failure’. so-called ‘government In a world where government intervention was viewed as necessary and desirable, viewed was necessary as desirable, and intervention government where a world In of heights the ‘commanding sectors, strategic of the development to paid was attention the mineral sectors. meant this inevitably mineral producers major For the economy’. on commodity exports needed to find ways to diversify their economies – or face a – or their economies diversify to exports needed find commodity to ways on wealth. relative declining steadily of future

Fontanella-Khan (2011). Fontanella-Khan g Ironically, large emerging Ironically, e Vietnam too has imposed Vietnam c Blore and Smillie (2011). f Beijing has used a similar argument to g Price et al. (2008). Price e

In India, the world’s third-largest iron ore exporter, there has been exporter, In India, the world’s third-largest iron ore b

d a ConceptBank (2012). d However, the Washington Consensus as the dominant doctrine on the state’s role role doctrine the state’s on the dominant as Consensus the Washington However, in the economy began to falter at the beginning of the 21st century. century. 21st the of the beginning at falter to began the economy in 1997–98 and financial crisis of Asian this. The to contributed factors of A number the thinking of on impact a profound in 1998 had Russia of collapse the economic all with the policy complied had Bank. Russia the World especially at economists, the same At collapsed. simply it yet Consensus, the Washington of prescriptions strongly, growing were economies developing many although that clear was it time, effect appeared down’ cases. ‘trickle The struggling was alleviation poverty many in be to working. not In energy, experts and policy-makers began to question whether such a strategic sector a strategic whether such experts question policy-makers began to and energy, In with problems growing by view This reinforced was be really left thecould market. to over concerns spectacularly growing most in California in 2002–03, by electric power, and oil rising and emissions gas greenhouse the need control to by and change climate governments, for became in energy respectable again intervention State prices. gas 1960s. in the fervour 1950s and as the same with even if not Platts (2012). c . Both Goa and Karnataka, the most important iron ore producing regions in India, for example, iron ore producing regions in India, for example, the most important . Both Goa and Karnataka, f Price and Nance (2010). Price b Gooday (1993).

In recent years, a number of emerging economies have resorted to export controls as part of a broader move towards controls as part of a to export of emerging economies have resorted In recent years, a number of raw materials, to support domestic processing interventionist industrial policy – for example, and more explicit Since 2004, among mineral product exporters. domestic industries or enforce price discipline subsidize inputs for largest producer. it is the world’s for which quotas and taxes on coking coal exports, China has applied tighter According to the OECD, in 2008 this provided Chinese steel producers to more than 20 with ‘a cost advantage equal market price for carbonper cent of the world steel’. have imposed temporary bans on exports of iron ore to combat illegal mining. have imposed temporary bans on exports restrictions on iron ore, copper and speciality metals. restrictions on iron ore, copper and speciality a There is a long history of various types of export restriction such as taxes, quotas and price disciplines on minerals and price disciplines as taxes, quotas restriction such types of export a long history of various is There of a proposed transaction to be required to submit the details used for example, coal exporters, and metals. Australian last of The could use to enforce price discipline. permit, information the government export when applying for an removed only in the 1990s.these restrictions was Box 3.2: The revival of industry policy and export restrictions on metals and export restrictions of industry policy revival 3.2: The Box a long-running debate about an export ban to support the domestic steel industry. There has also been public debate There a long-running debate about ban to support the domestic steel industry. an export in Brazil and South about taxes. Meanwhile, more than 20 countries have Africa introduction of new iron ore export the scrap that is easily recycled into new steel products. of steel applied restrictions on the export defend its controversial regime of export restrictions on rare earth elements. its controversial regime of export defend Indonesia, a major exporter, has forced companies to submit plans to develop domestic processing capacities in order has forced Indonesia, a major exporter, ore and other unprocessed metals, and it plans to move to a full ban by 2014. licence for nickel to obtain an exporting for coal producers are also being debated. Export taxes and domestic supply requirements economies such as China and India are among those hit hardest by these restrictions, because they are among the main as China and India are economies such economies.importers of metals from other emerging used are also being restrictions. They reason for governments to impose export But industrial policy goals are not the only in the case of uranium); to protect the environment, and combat corruptionto support national security policies (mainly of tin, e.g. for rough diamonds and restrictions on the export controls exist and human rights violations. Extensive export Great Lakes region have recently been introduced to rein in the trade of ‘conflict tantalum and tungsten from the African minerals from the DRC At the beginning At of the 21st century, and policy- experts makers began to question whether strategic sectors could really be left to the market. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 46 Conflict

Chapter 3 Chapter 3 The political cycle has political cycle has The a powerful impact on state intervention and shapes perceptions about what an equitable distribution of mineral wealth looks like. Higher prices increase resource rents, creating powerful incentives for more government intervention.

The Relationship between Host Country and Extractives Company 47 Company and Extractives Host Country between The Relationship 72 Although there seems to be a correlation between rising prices and disputes between disputes and between prices rising be seems to a correlation there Although thein sector disputes on falling prices of the impact companies, and governments a have to appears prices commodity period low sustained A of complex. more is the late Indeed governments. and between companies effect disputes on dampening companies among optimism a period the mid-1990s was 1980s to widespread of The rising price of commodities in the past decade correlates with higher instances higher with instances decade the in past correlates commodities of price rising The real with in line broadly moved have Arbitrations disputes. company–government of arbitration and prices oil between nominal correlation 3.1); the raw (Figure prices oil be to have these even though statistics a close association, cases 0.72, suggesting is similar found has Other size. research the small sample given caution with treated data. expropriation for prices oil with correlations It is therefore no coincidence that in times of higher commodity prices there is often often is there prices higher commodity in times of that coincidence no therefore is It and in extractive industries involvement state greater for between demands overlap an themselves express typically former The governments. and between investors disputes resource its from derived the profits of share’ ‘fair its the receive country to callsas for is share the current that invariably is demands behindsuch assumption The wealth. blame. to elites domestic corrupt and interests foreign with fair, not 3.2.3 The impact of prices or the shifting commodity cycle 3.2.3 The whether or real scarcity, resource increasing or prices A structural shift in commodity timea at resources over control of lack a about concerns nationalist stir can perceived, also prices increase Higher importance. strategic increasing be to of when they appear in the intervention government more for powerful incentives creating rents, resource power the bargaining strengthen higher prices time, the same At extractive industries. bargaining the obsolescing accelerate which can vis-à-vis investors, governments of describeddynamics earlier. This evolving political cycle is woven through the history of extractive industries. extractive industries. the history of through political woven cycle is evolving This in the sector and intervention state of the degree on a powerful impact has It between mineral wealth of distribution equitable an what about perceptions shapes agreements existing undermine to works This looks like. governments and companies the making political cycle between governments, industry and disputes create can and in the industry. disputes of nature the dynamic understanding to essential The autopsy of the crisis and the fallout from continuing economic malaise, malaise, economic continuing from the fallout the and crisis of autopsy The greater for pressure public increasing to leading the US, are and particularly in Europe a harsh to and markets manage states the way calls overhaul to to transparency, policy The responses politicalelites. and business of the close collaboration of critique they might But be to homogeneous. unlikely are and clear yet not are this pressure to as well as abroad and home at extractives companies for stricter guidelines include governments. for tax returns greater for pressure potentially create jobs. jobs. create This trend is being reinforced by the fallout from the global 2008–09 financial from crisis. the fallout by being reinforced is trend This the financial sector of regulation government and markets of failure dramatic The Box shows, 3.2 As approaches. laissez-faire in confidence further has damaged policy industrial and stronger introduced example, for have, economies emerging to and local markets protect to attempt the sector in an minerals for export controls $ (2011) $

120 100 80 60 40 20 0

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

99 19

98 19

97 19

96 19

1995

1994

1993

1992

1991

90 19

89 19

88 19

87 19

86 19

1985

1984

1983

1982

1981

80 19

79 19

78 19

77 19

76 19

75 19

Number of arbitrations Real oil price 19

73 19

8 6 4 2 0

18 16 14 12 10 Arbitration cases Arbitration that model contracts could produce lasting stability for investors. (See Box 3.3 for an an (See Boxfor 3.3 investors. for stability lasting produce could modelcontracts that collaborative more led to 1980s onward the late from prices oil lower how of example producers.) Eastern Middle oil between many IOCs and relationships in a drop believe that to several reasons are term, there in the least short at But trigger can fiscal in prices crises A drop disputes. exacerbate might prices commodity increased has particularly when the government economies, in resource-dependent during subsidies civil service as such consumption and items wages on spending try shrinking project may their take from increase to Governments the boom years. future deterring running the of risk and companies with tensions to leading revenues, problems economic mounting from pressure public under Governments investment. addition, In political support. up shore to this in order also strategy to resort might in political stability cement to able less will be thus smaller pot’ and the ‘patronage for elites, conflicts among distributional intensify to likely is This states. autocratic authorities. regional and between government the central example disputes. cause can that behaviour company leadto can slumps price Moreover, lead example, for might, expenditure capital and costs operating reduce to Efforts by strike’ a ‘capital Such entirely. cancelled or being curtailed, delayed projects to current for those projects on rely that conflict countries with spark could companies face ‘use- may companies response, In tax revenues. and jobs, investment future and political and unrest face labour or their licences regarding arguments it-or-lose-it’ also lead may costs cut to Attempts operations. existing job losses at limit to pressure of performance the social drive environmental that and in budgets reductions to from resentment growing spark to the potential has that and extractivescompanies, local communities. decades two the given next over commodities many for trend a likely volatility, Price in terms all worlds of in Section the worst outlined potentially 1.2, is the uncertainties governments. and between coexistence extractives companies for the conditions of encourages and premiums risk increases volatility price continuous companies, For view on a 10-to-30-year with capital They commit decisions. in investment caution be cannot it the ground, into they Once sink capital expected returns. and prices Source: Chatham House Arbitration Database (CHAD). Figure 3.1: Real oil prices and extractive industries disputes entering international disputes entering extractive industries Real oil prices and Figure 3.1: rhs: $(2011)) of arbitration cases; (lhs: number 1973–2010 arbitration, As projects are curtailed, delayed, or cancelled, companies may face ‘use-it-or- lose-it’ arguments, labour unrest and political pressure to limit job losses. There is a correlation is a correlation There between rising prices and disputes, but the impact of falling prices on disputes is more complex. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 48 Conflict

Chapter 3 Chapter 3 In practice, tax levels countries in different are surprisingly difficult to compare. They consist of a of They consist 74 This is not only causing causing only not is This 73 The Relationship between Host Country and Extractives Company 49 Company and Extractives Host Country between The Relationship Box 3.3: Impact of falling oil prices in the 1980s of falling oil 3.3: Impact Box on state-company East in the Middle relations North the Middle East and the situation in in the oil industry, state control decades of ever-greater several After (MENA)Africa from 1986. changed revenues, meant that of oil prices, and consequently government collapse The in the MENAmany governments IOC region began to encourage prices with higher entry in an effort to offset lower production levels. MENAchanging to progressive fiscal terms that adjusted oil producers instituted increasingly limited as fiscal system, taxes would be relatively major mining countries. Under a progressive prices, as did some windfall profits, still be able to capture the majority of But host governments would low. long as prices remained 1986, higher prices. After large volumes or by by unexpectedly whether generated all the MENA countries except to encourage the re-entry of the IOCs.Saudi Arabia began both were not always successful. In and Iran, They Kuwait political policies and generally failed. at re-privatization clashed with domestic efforts for example, In practice, however, tax outcomes turn out to be surprisingly difficult to measure difficult be to surprisingly measure to out turn tax outcomes however, practice, In projects. levied individual on are that taxes the variety of to owing 3.3 Revenue-sharing and taxes: a work in progress 3.3 Revenue-sharing and taxes: revenue-sharing of form the main are arrangements, ownership to next Taxes, tax how comparing principle, In in the sector. companies and between governments measure whichto by way one timeprovides over and countries differacross outcomes arrangements revenue-sharing on political forces and economic shifting of the impact in extractive industries. For producing countries, volatility poses economic and political risks related to to political related risks and poses economic volatility countries, producing For cushion to the capacity and extractives sector revenues budgetary dependence on The threat. a double creates investment cancelled fall. Reduced or price a sustained slash to companies mining led major example, for in metal has, prices dip recent programmes. expenditure capital multi-billion-dollar transplanted. With little clarity as to what to expect over the next two or three years, years, three or two the next expect to what over to as clarity little With transplanted. their money deploying focus on decade, the extractives next companies less much in their projects highest-quality the lowest-cost, only They develop conservatively. position. a cash up building and debt down paying focus on or portfolio political difficulties, especially in low-income countries that were promised those promised were that political difficulties,countries especially in low-income constraint supply future for global up markets setting also potentially but investments, spikes. price and combination of general tax rules for companies, for instance corporate taxes, value- taxes, corporate instance for tax companies, rules general of for combination levied on only are specific that as fees exportadded well as tax taxes, and taxes and windfall value-based royalties, them unit-based royalties, among extractive industries, rarely theseare taxes country, one even within But taxes. resource-rent and taxes states or provinces between They vary different only not the sector. across uniform example for cycle, the project of phases or commodities also between different but discrepancies, to also contribute Other variants production. versus exploration or open-pit whether is a mine or offshore or onshore is whether as the project such fixed: than rather progressive are cases in some tax rates Additionally, underground. higher with mineral prices prices, higher commodity sales to or fiscal adjust terms revenue. government greater into translating automatically Molybdenum and cobalt contracts Molybdenum and cobalt a 1995 2000 2005 2010 Benchmark system collapses Benchmark This was intensified by the accusation that they had colluded to inflate the prices This b Humphreys (2011b).

1985 1990 b 0 1980 20 80 60 40

120 100 200 180 160 140 $ per metric tonne, China import, fines import, China tonne, metric per $ Humphreys (2011a).

became available as recently as 2010. Benchmark prices give producers and consumers the advantage of stable, give producers and consumers the advantage prices recently as 2010. Benchmark became available as to respond to immediate opportunities markets offer hence revenues and costs), but spot predictable prices (and markets more volatile in nature. also makes spot This expectations. market changing new customers for a commodity and increased use of the spot-market case of iron ore pricing shows how The ‘Big for iron ore pricing used to be negotiated annually between the Benchmarks alter price behaviour. can quickly seaborne their and Japanese steel-makers, Three’ companies (BHP iron ore-producing and Vale) Billiton, Rio Tinto imports overtook Japan’s in 2003; and by 2008biggest customers. But China’s iron ore they were three times as the same time, spot market for a seat at the negotiating table. At large, leading to demands by Chinese companies for the thousands of smaller steel mills in China that were unable trading became increasingly common, especially continuous upward pressure on prices between 2002 and 2008, spot With to guarantee offtake of large quantities. for smaller producers, spot prices would typically trade at a premium to markets became more attractive, especially prices. benchmark Iron ore miners disagreed about pricing system. as well as the usefulness of prolonging the benchmark the viability saw the potential of higher windfalls for the companies and argued that a in favour of market-based pricing Those with consumer governments compared to the increasingly contentious spot-pricing system could reduce tensions that the benchmark that relied heavily on their revenue from iron ore, felt negotiation rounds. Others, notably those the spot market mining companies from short-term price slumps. When system should be maintained, as it protected crashed in 2008, contracts and bought reneged on their benchmark many Chinese buyers instead at a discount in system ended up losing in both to the benchmark and good who stuck meant that producers the spot market. This between iron ore miners and Chinese steel producers became increasingly bad times. Meanwhile, price negotiations of accepting bribes negotiators on charges sentencing of four Rio Tinto politicized, culminating in the arrest and from Chinese steel mill owners. Source: IMF commodity price tables. (2012) Primary a Figure 3.2: Average monthly iron ore price, 1980–2013Figure 3.2: Average ($ per metric tonne, China import, fines) Historically, international prices for many metals, ores and concentrates were often fixed for specific periods, whether for specific periods, were often fixed ores and concentrates for many metals, international prices Historically, bargaining by producers or determined through levels were either set unilaterally Price for a quarter or a year. the rest of the market. for price formation in a benchmark negotiated price then served as The among key players. systems itself creates nature of these but the inflexible may reduce short-term price volatility pricing systems Such in an environment systems arguably struggle to function and their suppliers, and these tensions between consumers contract is – where the price for an individual delivery fundamentals. Over time, spot pricing of increasingly volatile and become more common. Contracts for aluminium between a buyer and a seller – has negotiated ‘on the spot’ (LME) Metal Exchange in the late 1970s. on the London were introduced nickel Box 3.4: Pricing mechanisms and increasing volatility for iron ore for iron volatility increasing and mechanisms 3.4: Pricing Box of iron ore imports to China. In March 2010, the Big Three eventually abandoned the benchmark system and spot the benchmark eventually abandoned 2010, the Big Three of iron ore imports to China. In March Iron ore prices have since entered negotiations became the dominant pricing mechanism. a period of unprecedented volatility (Figure 3.2). Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 50 Conflict

Chapter 3 Chapter 3 Many contracts for Many contracts are larger projects complicated further by supplementary provisions, such as tax breaks or penalties for late development.

west rate Coal The Relationship between Host Country and Extractives Company 51 Company and Extractives Host Country between The Relationship Gold Highest rate Colombia’s rate Average rate Lo Highest rate Colombia’s rate Average

% 70 20 10 50 40 30 90 80 60 Effective tax rate tax Effective Source: Ernst & Young (2012). Source: Ernst & Young Colombia of the government for undertook exercise a similar & Young 2012, Ernst In international an provide wide as (see 3.2). To be Figure to just the spread found and coal Colombia’s mine, and mine gold a Colombian on the tax burden for comparison Chile, Africa, South those of Peru, against benchmarked was new mineral tax regime the coal forecasts, price long-term Using Australia. Canada and Brazil, Argentina, effective tax bears an coal in Colombia mine a new open-pit that estimated study 33 per cent just and in Indonesia 80 per to cent compares This 74 per cent. of rate a 77 per pay would hand, the other on mine, gold Africa.in South underground An tax rate. cent Figure 3.3: Comparison of Colombian and other countries’ taxationFigure 3.3: Comparison of Colombian of gold and coal mines (%) 3.3.1 The differences in tax regimes across countries and commodities in tax regimes across differences 3.3.1 The is tax regimes compare to attempts previous striking of findings the most of One across only – not produce to appear these systems that outcomes the wide variety of last study a landmark In commodities. types of different also across but countries modelled effectivetax theOtto total James economist the2004, mining in updated lowest The placedcountries. in 25 mine copper hypothetical the same by borne rate in 64 per was cent rate highest The in Sweden. 29 per was cent effective tax rate (see 46 per Table cent at Kazakhstan on centred the Canada; mean province, Ontario oil for than be to lower tends generally projects mining of taxation 3.2). Interestingly, (see unclear Box 3.5). this remain for reasons the precise although gas, and For instance, national or state-level regulations might specify that the government specify the government might that regulations state-level or national instance, For on authorities to rates of the negotiation leave might but a royalty to entitled is also riddled are projects larger for contracts Many basis. a project-by-project future payments, lump-sum tax as breaks, such provisions, supplementary with develop to Commitments development. late penalties for and equity on options relocations for communities compensate and local employment provide infrastructure, Taken stakeholders. other and companies for line furthercan affect the bottom of the distribution alter significantly can agreements these project-level together, profits. and revenues This is complicated further by specific tax arrangements at the project level. level. the project at further specific by tax arrangements complicated is This

76 Total effective Total tax rate (%) 42.7 43.1 45 45.3 46.1 46.1 52.2 54.4 55 62.9 62.4 63.8 Country PNG (2002) Bolivia South Africa Philippines Indonesia Kazakhstan Indonesia (non- contract of work) Ghana Mongolia (2003) Uzbekistan Côte d’Ivoire Ontario (Canada) Deutsche Bank estimates that BHP Billiton, Rio Billiton, BHP that Bank estimates Deutsche 77 Second-lowest taxing quartile Highest taxing quartile Total effective Total tax rate (%) 28.6 36.4 36.6 39.8 40 41.7 46.5 47. 8 49.6 49.9 49.9 50.2 Tinto, Anglo American and Xstrata, four of the largest mining companies, paid $21 paid companies, mining the largest of four Xstrata, and American Anglo Tinto, What these studies show is that with the government take in extractive industries take in extractive industries the government with that is show these studies What rate no is there four-fifths, than more to a third than varying less from projects in their effective benchmark an as companies and serve could that governments even and Colombia, to transferable not model is hydrocarbons Norway’s negotiations. coal tax its formula. from different is tax formula gold Colombia’s both sides. to open is stances negotiating of a wide range a global standard, Without which the the speed commodities, at of quality and the prevalence as such Factors ancillary the desired and social those commodities from a return requires government tax The take. appropriate an view of will influence the government’s investments based on requirements, investment its account take into may meanwhile, company, political in making risk perceived and infrastructure provision geological conditions, take. government total of rates lower the case for Table 3.2: Estimated total 3.2: Estimated effective tax generic copper mine, rates for a Table early 2000s 3.3.2 Understanding recent higher tax rates in their historical context higher uneven, remains extractives companies the global for Although tax landscape growing under theworld around companies put clearly have years in recent prices and revenues with in line increased have receipts higher Tax taxes. pay to pressure regarded have governments many what capture to also reflect but attempts profits, in spike metals price recent During the most rents. structurallyas higher resource to their intention announced or increased 25 countries example, 2011, for 2010 and royalties. and taxes mining increase A World Bank study in 2006 compared ‘total government take’ (a holistic calculation calculation (a holistic take’ government ‘total in 2006 compared Bank study A World in taxes a government to flows paid cash project of the percentage combines that countries. in oil-producing project) in that stake equity the government’s with along and 85 per cent, take around government a with Norway, were ends the extreme At oil. offshore deep-water for 40 per cent approximately of a rate the US, with Source: Otto (2004), p. 17-1, as cited in Otto (2007) p. 36. as cited in Otto (2007) Source: Otto (2004), p. 17-1, Country Sweden Australia Western Chile Zimbabwe Argentina China Peru (2003) Peru Tanzania Poland Arizona (US) Mexico Greenland Lowest taxing quartile Second-highest taxing quartile

Higher commodity prices in recent years have put companies under growing pressure to pay more taxes. Government take varies from less than a third to more than four-fifths, with no benchmark effective for negotiations.

Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 52 Conflict

Chapter 3 Chapter 3 Frameworks for Frameworks taxation have become nearly as volatile as prices, particularly for the mining sector.

80 As a consequence a consequence As 82 The Relationship between Host Country and Extractives Company 53 Company and Extractives Host Country between The Relationship 78

81 83

79 of mounting concerns about declining foreign investment and weakening global weakening and investment foreign declining about concerns mounting of foreign on restrictions revisiting again currently is Mongolia prices, commodity in mining. investment Even when such laws are passed, they may not always be enforced, causing additional additional causing be enforced, always not passed, they may are laws when such Even especially investments, also future to and projects existing to applies This uncertainty. Mongolia Like Zambia, code unclear. the mining is of when the legal framework could the government the new to law, fiscal its According system. overhauled has clarify whether in legal or did not terms it but stake, equity a 34 per to cent take up their share. of the loss for will be compensated companies not This is particularly a problem in countries where taxation has not adjusted to to adjusted not has taxation where in countries particularly is This a problem negotiated are contracts profitable where or profits and prices commodity changing Guinea and (DRC) the Congo officials. of Both corrupt with Republic the Democratic unfavourable weed out to attempt reviewed all in an licences their mining have to licence-holders force to the aim with governments, previous signed by contracts passed a mining producer, ore a new iron Guinea, terms. favourable more to agree option an as well as in all stake projects a 15 per cent the state grants code in 2011 that stake. a 35 per to cent up buy to 3.3.3 Ongoing instability of taxation frameworks 3.3.3 Ongoing instability of taxation their increase to sought have countries resource-rich in many governments As frameworks companies, from resistance fierce against extractivesrevenues of share particularly prices, for commodity as volatile as nearly become have taxation for credible investors offer can today countries resource-rich Few sector. the mining the especially against change, will not framework their investment that assurances copper of the example (see prices Box 3.6 for in commodity volatility of background in Zambia). royalties In historical terms, however, tax rates still remain comparatively low. Investors Investors low. comparatively still remain tax rates however, terms, historical In fallen has extractives companies on the tax burden generally but grabs’, bemoan ‘tax in 46 per cent of tax rates faced income in Australia companies Mining time. over Hogan to according 2008, by 30 per to cent 1991 and by 39 per to cent 1983, which fell over 22 per to cent 38 per cent from dropped the Canada, rate In Goldsworthy. and period.the same billion in taxes in 2010 compared with $9 billion in 2005, amounting to an 18 per cent 18 per an cent to amounting in 2005, $9 billion with in 2010 compared in taxes billion in tax payments. rate growth annual One explanation for this trend is that many of today’s mining fiscal regimes are legacies fiscal mining are regimes today’s of many that is this trend for explanation One Following companies. for power bargaining the a period 1990s, greater from of new producer of number assets in the minerals 1980s, a large of privatizations against competing and investment private hungry for the market entered countries this expansion But Africa South Australia. as and such countries mining established in the metals prices of stagnation occurred the prolonged during market the mining of anaemic an in investors courted countries as taxpolicies followed, Favourable 1990s. revised fiscal which involved terms, prompted competition international This market. that notes similarly Tordo industry, the oil Describing in several countries. rates lower ‘many as rent’ economic the projects’ efficiently capture longer ‘no often governments range.’ in the US$15–18 barrel were designed prices when oil fiscal were systems

a However, several pertinent factors differentiate the economics of oil and mining. First, margins in oil of oil and mining. First, margins the economics pertinent factors differentiate several However, b McPherson (2010).

No single reason explains the differential, and experts on resource taxation are hard pressed to explain why the gap to explain on resource taxation are hard pressed and experts the differential, No single reason explains is so large. a Compared with oil and gas projects, mining projects are generally taxed at appreciably lower rates. In McPherson’s rates. In McPherson’s at appreciably lower are generally taxed mining projects with oil and gas projects, Compared ‘government take’ projects in six countries, the rate of take’ for generic oil and gas mining study of ‘total government range for an oil project per cent. The from 45 to 57 Indonesia, Chile and Botswana would range on a copper mine in at 68–89 higher, or Angola, on the other hand, would be in Ghana, Colombia per cent. Box 3.5: Government take 3.5: Government Box on hydrocarbonsthan on minerals to be higher tends extraction can be much higher than in metal extraction. Therefore the rents available for capture are also higher. In capture are also higher. the rents available for Therefore higher than in metal extraction. much can be extraction of ore to extract than of processing millions of tonnes the lower average cost of drilling a well part this has to do with around leading copper producers were, for example, production costs for two Average metals from the ground. By contrast, the per tonne. that was paying over $7,500 2011 and they were selling to a market $2,000 per tonne in was estimated at $5 per for Saudi Aramco, the world’s biggest producer, average cost of producing a barrel of oil of around $80barrel in 2011 compared with market prices per barrel. argue that the risks associated with mining are greater than those in the oil mining companies frequently Secondly, for companies to justify investments. Exploration tends to be more costly industry and require a higher rate of return When economic metal deposit is lower than that of finding an oil deposit. because the success rate of finding an peak production and take longer to reach often take longer to extract metals deposits are found or acquired, they are in remote locations. than oil deposits, especially when deposits play a role. Mining companies tend to take a majority stake in individual projects, industry structures could also Thirdly, the risk, unlike oil companies: their prevailing consortium structure spreads them to greater financial exposes which through OPEC Cartel price support may also reduce price risks for oil companies and increase risk more widely. to why mining projects are not always able factors may explain These available resource rents compared to mining. bear the 80rates that many oil projects involve. per cent government take tends to be far lower than in oil projects – an additional factor that could state participation in mining projects Finally, in mining. State participation rates of 20 per cent or more are common in contribute to lower total government take per 50 and other oil producers exceed the United Arab Emirates, Venezuela oil-producing countries. Rates in Brunei, cent. National oil companies (NOCs) also commonly found in hydrocarbon-producing are states, from Saudi Aramco Co. But for most and Gazprom (Russia) to the Nigerian National Petroleum (Brazil), Rosneft (Saudi Arabia), Petrobras and in many countries, a minimum metals, state-owned mining companies currently still play a relatively limited role, Chile’s Codelco companies such state-owned mining government stake in mineral projects is not required. Powerful as Brazil’s rather than the rule, and state influence in companies such or China’s Chinalco so far remain the exception and direct. and Rusal is often ambiguous and tacit rather than explicit or Russia’s Norilsk Nickel Vale size and capabilities of state- The In recent years, demands for state participation have grown in the mining sector. in line with the rising economic power owned or state-led miners from emerging economies are likely to grow rapidly as Mongolia or and minerals demand of their home economies. Some countries, such developing resource-rich the ‘frontier’ projects for oil Guinea, have also begun to insist on an equity stake in key mining projects. Meanwhile, waters – have required more tax breaks tar sands and ultra-deep and Arctic from shale rocks, and gas – extraction of greater risk and more expensive or other government incentives in order to attract investment and offset the costs requirements. Over time, these developments could contribute to narrowing the gap in total government technology take between the two sectors. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 54 Conflict

Chapter 3 Chapter 3 Where contracts Where become economically or politically untenable, sovereign power ultimately trumps investor concerns and fiscal stability assurances.

85 The Relationship between Host Country and Extractives Company 55 Company and Extractives Host Country between The Relationship We have come across unreasonable and indeed illegal constraints on on indeed illegal and constraints unreasonable across come have We legislation general its apply to the government of power thesovereign that demand contracts … Typically these to projects. regulation and the of the signature of the point at be set should in stone the law concerned those who were for sympathy some have deal … We operate to impossible is it action, but government arbitrary about in environmental, changes any blocks which effectively a system benefitsthe investor. unless it tax law or social, labour, characterized by public demands for re-regulation and ‘fair’ taxation and the and taxation ‘fair’ and re-regulation for demands public by characterized zeitgeist growing international role of much more statist emerging economies. economies. emerging statist more much of role international growing The revision of government policies is of course not unique to the extractive industries. the extractive industries. to unique not course of policies is government of revision The of be in the context understood the sector must in policy towards changes current The a The extractive industries are clearly in the midst of such a period of upheaval, one one a period such upheaval, of of in the midst clearly are extractive industries The the perception and prices shift in commodity the structural upward triggered by shifted in their favour. has power bargaining that countries producer in many been trying have to governments the boom, many of the most make Determined to policies towards dominated that approaches the laissez-faire and bargain, a hard drive the world. parts of in many fashion of fallen out the sector in the 1990s have In sum, this chapter shows that the revenue-sharing arrangements that are at the at are that arrangements the revenue-sharing that shows this chapter sum, In Even in nature. tenuous inherently are relationships company–government heart of a from structural exist, pressures guarantees investment iron-clad when supposedly global market ideological changing shifts or power, bargaining of distribution changing tax lead changing can to This the agreements. undermine legitimacy can of conditions powerful which are all of renegotiation, for rules demands or rules, new ownership between parties. the two disputes of drivers 3.4 The enduring centrality of revenue-sharing enduring 3.4 The agreements However, as Daniel and Sunley note, a fiscal stability assurance may not be hedge a not may a fiscal assurance stability note, Sunley and Daniel as However, politically untenable. or economically becomes if thecontract change against Many investors insist on fiscal stability agreements in order to ensure that the rulesthat ensure to in order fiscal agreements on stability insist investors Many These double. prices commodity dies or when a president change not do the game of a fixed period, or the five first for often investment freeze of the terms agreements has a government Although theproject. of the lifetime for sometimes and years, ten will governments the logic that time, is tax any policy at change to power sovereign investors. among their reputation protect so to as agreements such honour

Sovereign power ultimately trumps investor concerns. As suggested by the DRC’s vice the DRC’s by suggested As concerns. investor trumps ultimately power Sovereign mines, of minister This repositioning of policies has undoubtedly led to greater tension between tension greater led to undoubtedly policies has of repositioning This increase to likely are which thein extractives sector, governments and companies such But uncertainty. price because of investments back pull further investors as and governments not, than often more and, lead disputes to always do not pressures arbitration without arrangements adjust and find to compromises able are investors why and where Understanding expropriations. or cancellations project panels, be can found solutions agreeable mutually how and where – and escalate disputes individual of conditions the political economic of analysis a careful requires – thus relationships. government–company shape that countries In 2008, copper raising royalties on its fiscal regime, Zambia overhauled rising copper prices, several years of after to capture a greater instituted a 25 per cent windfall tax the country also More controversially, from 0.6 to 3 per cent. mining super-profits. By 2009,share of the copper prices had crashed from a 2008 copper Zambia scrapped peak. the windfall tax in 2009, closures, warned that the tax could lead to mine after multinational mining companies action. and threatened to take legal their investments, affecting for mining investors. But a ‘mini-boom’ windfall tax looked at first like a victory repeal of the The in copper prices doubled the Sata, the new president, share. Michael made another attempt to claim a larger followed, and the state new investments. again warned that this would affect from 3 to 6 per cent. Copper miners royalty on copper mining up in the long run producing countries, and it may end indeed high relative to other base-metal royalty rate is The instrument than the windfall tax. as a more aggressive Box 3.6: Overhauling the fiscal 3.6: Overhauling Zambia copper mining in regime for Box Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 56 Conflict

Chapter 3 Chapter 3 A Regional Outlook: Old Problems, 4 Changing Dynamics

4.1 Lessons from the Asia-Pacific region 60 4.2 Sub-Saharan Africa: escaping its past? 65 4.3 Russia and Central Asia: the long shadow of the state 71 4.4 Main observations from the case studies 79 n Case studies from the Asia-Pacific region, Russia, Eurasia and Africa show the importance of national political and regional power dynamics and perceptions in shaping the investment context. n Shifts in prices, ideologies and bargaining power influence a host government’s propensity to challenge contracts, but are tempered by its need for the company’s investment, technology and managerial know-how. n If high public expectations from the sector are not met – e.g. owing to delayed development or poor revenue management – political pressure often leads to attempts to penalize companies. n Contracts are often challenged at the intersection of different local pressures, e.g. intra-elite competition over resource control, discontent over regional wealth disparities and an outcry over the environmental impacts of a project. n A new bout of Dutch disease is threatening both developed- and developing- country producers, leading to new regulation to insulate other industries and create jobs. A Regional Outlook: Outlook: A Regional The Asia-Pacific region is home to a number of sizeable resource producers, including including producers, resource sizeable of a number to home is region Asia-Pacific The several and Guinea New Papua India, the Philippines, Malaysia, Indonesia, Australia, been high- fewer have there the world, parts of other to Relative states. island Pacific cause arisen, the root theyhave When there. disputes company–government profile partlyis This sector. theprivate seen favour to are that been often contracts has been have cases, some rents In in the region. corruption perceived a reflection of the of the detriment to beneficial most the ruling to elite, are that terms allocated on lax of be a result which may disasters, environmental Frequently, population. larger contracts. of triggered a re-examination have enforcement, law some First, categories. several broad fall into region in the Asia-Pacific Disputes the collapse after revise contracts to desire governments’ of out grown have disputes were Often those contracts the Philippines. and in Indonesia notably dictatorships, of went the benefits frequently involved: the company to generous beto overly assumed in Democratization relatives. or associates his and the dictator to but the state to not 1997–98, which the increased financial of crisis the Asian with coincided Indonesia finances. the government’s re-examine leaders to the incoming on onus alsore-examination a triggered have disasters or degradation environmental Secondly, New arisenthe in tribal has societies Papua of disputes of category third A contracts. of conceptions those cases, In divergent states. island the Pacific of some and Guinea In between companies. locals mining and disputes caused have ownership land of 4.1 Lessons from the Asia-Pacific region the Asia-Pacific from 4.1 Lessons Although extractive industries around the world are connected through global through connected are the world around extractive industries Although expertise, and fundamental capital of flows international and markets commodity institutional industry actors, key structures, concerning remain differences the various been by shaped have legacies. These differences historical and frameworks these – and countries in producer developed have in which extractive industries ways the outlook and relations company–government future shape to likely are histories cases LatinAmericato in and references the frequent between. Given disputes for the politicaleconomy analyses this chapter the text, parts of East theMiddle other in and Central Asia, and Russia the Pacific, and in Asia countries selectedof producer Africa. sub-Saharan 4 Changing Old Problems, Dynamics Disputes involving the mining industry have been more serious than oil- and gas-related disputes in the Asia-Pacific region.

Chapter 4 Chapter 4 In Indonesia, new regulations, accompanied by strong nationalist rhetoric, will restrict ores raw of export the from 2014 onwards.

86 Developed 89 A Regional Outlook: Old Problems, Changing Dynamics 61 Dynamics Changing Old Problems, Outlook: A Regional There is, however, a real possibility for these for possibility a real however, is, There 90

88 According to a World Bank economist for Mongolia, Rogier van den Brink, Rogier van Mongolia, for Bank economist a World to According 87 economies also share this worry about economic imbalance. The deputy governor of of governor deputy The imbalance. economic this worry about also share economies ‘structural the need for acknowledged has Lowe, Philip theReserve Australia, Bank of disease Dutch to falling prey avoid to is if it economy in the Australian adjustment’ (see Box 4.1). policies to backfire. Several Chinese exploration and mining companies have closed have companies mining and Several backfire. policies to Chinese exploration 39 by fell Indonesia from imports 2012, Chinese nickel August offices.In theirJakarta In Indonesia, new regulations, accompanied by strong nationalist rhetoric, are are rhetoric, nationalist strong by accompanied new regulations, Indonesia, In force to threatening are and onwards 2014 from ores raw the exportrestricting of of 10 years half their assets after than more divest to companies mining foreign a downstream of the development stimulate to intended Theserules are production. materials. raw unprocessed cheap, relatively the export of ending industry, processing talked the has of example, for minister, mineral energy resources and deputy The colonized’. being ‘economically of risks 4.1.2 Tougher regulatory frameworks 4.1.2 Tougher the extractives on regulations tighter imposing are governments many Globally, power the balance of redress disease to and Dutch of the threat mitigate both to sector, The tax regimes. revising boom and the in view resource of profits of the sharing and discussed example, such one is the sector in Australia from taxes raise to 2010 attempt in Indonesia, also been implemented have regulations detail in Box 4.1. New in more Guinea. New Papua and the Philippines The resources boom has posed countries in the region challenges as well as as well as challenges posed boom in the region has countries resources The disease’. ‘Dutch of the impact about concern increasing is There opportunities. 4.1.1 Renewed concerns over ‘Dutch disease’ 4.1.1 Renewed concerns over ‘Dutch The price and investment boom of the past decade has led to the rapid growth of of growth the rapid decadeled theto past has boom of investment and price The these of many the future, In the Philippines. to Mongolia extraction, from resource will this boom that of the impacts to related challenges will face complex countries the extractive industries. toward attitudes and of the furthershape development In general, disputes involving the mining industry in the Asia Pacific region have been have region Pacific industry the mining in the Asia involving disputes general, In professionalism reflect greater may This disputes. gas-related and oil- than serious more companies from times stemmed at have disputes Mining gas. and in oil investment and their operations. to approach short-term and amateur a more adopting Indonesia, disputes have also arisen over the division of revenues between central and and between central revenues of the division also arisen over have disputes Indonesia, governments. provincial These worries are especially prevalent in Indonesia, Mongolia and the Philippines. the Philippines. and Mongolia in Indonesia, especially prevalent are These worries the dangers about publicly spoken have Leading political in those figures countries emphasized has Mongolia of minister boom. prime The in the resource inherent besides jobs in industries creates model that balanced growth a more the need for mining. ‘diversifying from resources would be a solution similar to what the Dutch found to to found the Dutch what to similar be a solution would resources from ‘diversifying disease’. the resource combat Indonesia has been particularly vulnerable to Dutch disease. Like Brazil, it was was disease. it Like Brazil, Dutch been to has particularly vulnerable Indonesia economy its of diversification industrial the competitive towards way its on well manufacturing set its back seriously boom began in 2004 and when the commodity high unemployment. already further increasing competitiveness,

a The government The d

b BHP all spoke of the rise of Australian and Xstrata Billiton, Rio Tinto f

c Kevin Rudd’s premiership had already suffered after he had backtracked on a carbon-tax scheme. after he had backtracked Rudd’s premiership had already suffered Kevin g ‘sovereign risk’, a phrase normally associated with Hugo Chávez’s Venezuela or Joseph Kabila’s Democratic Republic or Joseph Kabila’s a phrase normally associated with Hugo Chávez’s Venezuela ‘sovereign risk’, were lost: a profits-based tax of the Congo. In the ensuing mud-slinging fight, two premises of a rational debate royalty system; and the mining sector had never would capture rents more efficiently than Australia’s patchwork objected in principle to higher taxation. indicated that the RSPTPolls was becoming unpopular and endangering Labour’s prospects in the upcoming election. Major arguments about come as a surprise, but the government of a A$9 billion tax hike should not the architecture admitted that although Rudd, the prime minister, seemed to have miscalculated the strength of the opposition. Kevin he had possibly underestimated the impact of the proposal. campaign’, he had anticipated a ‘fear Rumours aboutMay 2010, but the up to the review’s publication in mining tax circulated in the weeks leading a new of the Henry Tax Concurrent with the publication for the political broadside that followed. industry was not prepared the Labour profits tax (RSPT). government proposed a resource super Review, claim The tax would 40 per cent of defined as any profit and above a given threshold, and would apply to all commodities other than oil ‘super-profits’, gas and to all past and future investments. RSPTThe of Labour’s in The estimated A$9 billion became the linchpin fiscal and social reform programme. Australia to return to a budget surplus but also lower the corporate income additional revenue would not only allow superannuation (pension) schemes. tax rate and fund an increase in company In 2010, the Australian government launched an attempt to increase government revenue from the country’s from the country’s government revenue an attempt to increase launched Australian government In 2010, the mining boom Despite a nearly decade-long coal exports, driven by growing iron and burgeoning mining sector. tax system As a comprehensive review of the Australian tax proceeds had risen only marginally. especially to China, have collected a resource taxes and royalties ‘existing noted, then the secretary of the treasury, Henry, by Ken The sector.’ of increasing profitability in the resource return to resources over the recent period declining share of the of 40 ‘uniform resource rent tax … set at a rate recommended that Australia adopt a Review per cent’ in Henry Tax resources’. appropriate return on its non-renewable the Australian community receives an order to ‘ensure that Box 4.1 Australia: the resource super-profits super-profits tax (RSPT) the resource 4.1 Australia: Box Meanwhile, the battle escalated. In June, Xstrata suspended a A$586 on two mining projects, with Meanwhile, the battle escalated. In June, Xstrata expenditure million mining executives and job losses. Twenty and other miners warned of bigger project deferrals to the RSPT, reference signed an open letter stating that ‘Every day the uncertainty over the RSPTallowed to continue, greater damage is occurs to Australia’s national self-interest.’ went on to answer with its own media campaign against what it claimed was ‘misinformation being pushed by some went on to answer with its own media campaign against what it claimed was ‘misinformation parts of the mining industry’. The mining industry reacted with outrage. BHP mining industry reacted with outrage. The the three biggest mining companies and Xstrata, Billiton, Rio Tinto the suggested that it would raise They campaign against the RSPT. investing in Australia, paid for a large advertising endanger jobs and investment. per cent and headline tax rate to 57–58 on the taxation threshold and the fact that the supertax would apply to industry’s opposition focused especially The Mining companies claimed this showed a fundamental misunderstanding all mines – old, new and under construction. expenditures Mines that are profitable are still paying off hefty construction of capital allocation and return profiles. so targeting profits in the middle of a long pay-off cycle would threaten some incurred years or even decades earlier, prices. projects’ economic viability and hit share equivalent to the 10-year exceeding a rate of return was 5.7 per cent at the time, would All profits bond rate, which (PRRT), had a RSPT, the nearest equivalent to the Resource Rent Tax Petroleum Australia’s be subject to the RSPT. per cent. Mining companies protested that the tax was not just on super-profits higher taxation threshold of 11 much on all industry returns abovebut in effect the marketplace. Another complaint was the most risk-free rate of return in the tax had been presented, as a fait accompli, limiting subsequent discussions to ‘implementation the way in which and transition’. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 62 Conflict

Chapter 4 Chapter 4 As cited in Keane As cited in Keane f Should prices i This move This l Compensation for land has become the foremost issue in the mining industry in India.

Maher and David (2010). e 91 h Kehoe (2010). Kehoe d Crowe (2013).

l A Regional Outlook: Old Problems, Changing Dynamics 63 Dynamics Changing Old Problems, Outlook: A Regional Stevens (2010). c Wilson (2013). Wilson k Guj (2012).

j This compares with a maximum marginal tax rate of 55 per cent under the RSPT. a maximum marginal tax rate of 55 compares with This Hume (2010). j

i Commonwealth of Australia (2010). b Mining corporations, however, have been told to increase their capital investments in have been Mining corporations, however, k Taylor (2010). Taylor

h Shanahan (2010).

g Commonwealth of Australia (2009). (2010).

The MRRTThe appears implementation of the new tax The opposition, but it was not as explosive. set off a new round of newly as it was preceded by two years of consultation and compromise. The to have been more politically palatable, Abbot is seeking to scrap many of the mining taxes in order to ‘reboot’ elected Liberal government under Tony investment in the sector. rebound, however, the government’s take could be much higher. Pietro Guj, a mining tax specialist at the University of Pietro Guj, a mining tax specialist higher. the government’s take could be much rebound, however, rise from 38 rate on a model iron ore mine could calculated that with higher prices, the tax Australia, per cent Western before the MRRT to 45.5 per cent. a With weakening commodity prices, the proceeds from the tax have been substantially below expectations. In the first tax have been substantially below expectations. prices, the proceeds from the weakening commodity With the MRRTsix months of its existence, billion. million instead of the projected A$2 raised just A$126 The Gillard government immediately dropped the RSPT Gillard government The rent tax (MRRT), in favour of an outlined mineral resource of taxation was key concessions: the headline rate new tax included petroleum tax. The modelled on Australia’s reduced from 40 targeted iron and doubling. It also rose, in effect cent to 22.5 per cent and the return threshold per of the RSPT. is often called a watered-down version law, is now MRRT, which The coal projects only. By mid-June, the RSPTBy mid-June, took deputy prime minister, Julia Gillard, the And on 24 June, had become a fiasco. issue factions. party disaffected the support of after receiving over the leadership could reignite debates over cost burdens between Canberra, state governments and the mining industry. could reignite debates over cost burdens order to develop rather than hoard the nation’s resources or risk losing their rights to tap deposits. order to develop rather than hoard the nation’s Compensation for land has also become the foremost issue in the mining industry in the mining issue also has the become foremost land for Compensation would act a new that mining considering currently is government The in India. as the land of times the value four between to two pay to companies mining require The rehabilitation. and resettlement for funds providing to in addition compensation, industry highly mining the most India’s make in the would bill tax included increases ore. iron for 55 per coal cent and for 60 per to cent rising rates with taxed in the world, Papua New Guinea has responded to the mining boom in similar fashion to its its to boomfashion the in similar mining to responded has Guinea New Papua subterranean of control returns that legislation implemented has It neighbours. equitable for their opportunity increasing landowners, the traditional to resources compensation. The Philippines too has implemented new regulations, with the government spurred spurred the government with new regulations, implemented too has Philippines The social and the environmental over concerns provincial of combination a act by to fair its been receiving not has the state a sense that and mining large-scale of impacts according operated companies mining foreign recently, Until profits. mining of share tax excise an tax, exportno tax and whichthey income under no paid thelaw, 1995 to with in line tax laws, mining revised its the recently country has But 2 per cent. just of mining on measures revenue-sharing include to in order IMF recommendation, an in the will country be contracts granted new mining No earnings. gross and contracts law. become have the measures until per cent, marking the third consecutive month of steep declines. In the same three- the same In declines. steep of month consecutive the third marking per cent, that demonstrating doubled, period, the Philippines from Chinese imports month industry mining rather its displacing up end policies may Indonesian heavy-handed sector. processing a downstream into investment large-scale encouraging than

93 Implementation Implementation 94 could be a future be could future a 95 This corporation is supported supported is corporation This 92 by the US government, which is vying for the right to develop Mongolia’s untapped coal untapped Mongolia’s develop to the right vying which is for the US government, by the the Chinese. expense of influence at gain to reserves attempting as well as industry partly in the mining in Burma, foothold important also an China has gained a time when Western at the Burmese with junta engage willingness to its to owing been unpopular deals have its However, new investment. on imposed sanctions countries Chinese Officials influence. counteract being taken to now are measures and in Burma mining deals foreign with major the of destructive impacts reverse to also working are expression of freedom Growing the environment. and local on communities companies the effects Chinese mining. of outcry at in public increase an led to has in Burma of the agreement has stalled as a consequence of worries about the level of Chinese of the level about worries of stalled has a consequence as the agreement of the route. along rights development property to particularly relating involvement, 4.1.4 Power plays in Afghanistan’s mining sector mining plays in Afghanistan’s 4.1.4 Power as metals such gemstones, including mineralresources, rich whichhas Afghanistan, coal, and oil reserves gas, of valuable and iron and gold copper, 4.1.3 Aversion to China 4.1.3 Aversion of the strength is in Asia theextractive industries faced by challenges the major of One demand. of source a major China even though is Chinese dominance towards hostility Mongolia, Laos. In and Mongolia (Myanmar), Burma in apparent most is aversion This near-monopoly a has it influence: economic political and significant has China already of Resentment sovereignty. its on impinging a history of exports and the country’s over election victory in parliamentary in resulted exploitation foreign of also fear China and nationalization The rhetoric. resource-nationalist on who relied candidates 2012 for June a possibility; in the country remains investors foreign by being developed projects some of China awarding resist to government ledthe has Mongolian sentiment anti-Chinese and large its add to thereby and Tolgoi Tavan reserves coal vast at of develop to a contract companies, mining several international from bids instead considering is It portfolio. Energy. Peabody company them the US mining among In July 2012, Laos implemented a four-year moratorium on new mining investments, investments, new mining on moratorium a four-year Laos 2012, implemented July In social large-scale and of impact the environmental over concerns of a result as mainly not begun are not have but been already approved have that Projects projects. mining the moratorium. affected by hotspot for mining in Asia. But the development of the sector depends almost entirely entirely the sector depends almost of the development But Asia. in mining for hotspot the country from troops foreign of withdrawal the planned after political outcomes on woes. economic Afghanistan’s to solution a possible as up held often is in 2014. Mining natural the country’s be the benefits of reversed: should the causation plausibly, More operations mining security around political is stability, if there only will be felt resources This outcry currently focuses on a copper mine at Latpadaung, near Monywa, where Monywa, near Latpadaung, at mine focuses a copper on outcry currently This Barack President of visit recent The been the project. seized for have land of 7,800 acres strengthen to desire also signals a serving the regime’s the by first Obama, US president, industry offset mining to Chinese is The influence. in order powers ties Western with its the Chinese to could reaction Burma’s and approach, this changing part of important an position. in a similar countries regional other be to a model for prove yet October In muted. been sector has mining more in its presence China’s to reaction Laos’s a finance China would a deal agreed whereby minister mining energy and 2012, Laos’s a for in return the Chinese to border, Vientiane the capital link rail from 418-kilometre potash. mainly mineral resources, of per year tonnes 5 million of supply A major challenge A major challenge faced by the Asian industries extractive is the current hostility towards Chinese dominance in the sector. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 64 Conflict

Chapter 4 Chapter 4 Afghanistan could be Afghanistan hotspot for a future But the sector mining. depends on political the outcomes after withdrawal of foreign troops in 2014.

96 98

101 A Regional Outlook: Old Problems, Changing Dynamics 65 Dynamics Changing Old Problems, Outlook: A Regional

97 This contract comes hard on the heels of a ‘strategic partnership’ on on partnership’ a ‘strategic of the heels on hard comes contract This 100 The contract was signed by a consortium of seven Indian companies led by led by companies seven Indian of a consortium signed was by contract The 99 Two major contracts have attracted much attention. Signed with state-backed Chinese state-backed Signed with attention. much attracted have contracts major Two The work. at interests strategic larger reveal may firms, these contracts Indian and the China company, signed a Chinese with stated-owned a 2007 agreement is first at deposit copper largest the country’s develop to Corporation, Group Metallurgical 11 million estimated an Containing Kabul. of south 30 kilometres mine, the Aynak copper the biggest of one is deposit the Aynak $88 billion, at valued copper of tonnes ancient an the discovery of by down been has slowed development Its in the world. sites over concerns by infrastructure and difficulties by in developing site, archaeological 2016. by will commence production that optimism officials express However, security. The post-Cold War ‘governance turn’ has run out of momentum. Many of the of Many momentum. of run has out turn’ ‘governance post-ColdThe War Kagame Paul Uganda, of Museveni – Yoweri the African Renaissance of vanguards Of all the world’s resource-rich regions, Africa has historically been Africa historically the explored least has regions, resource-rich Of all the world’s factors. risk other and business doing the high of cost difficult to accessibility, owing especially sector. in the mining interest, investor huge Africa attracting is however, Today, stage. still is in a transitional the continent on a time when politics at coming is This 4.2 Sub-Saharan escaping its past? Africa: The second contract is a 2011 agreement to develop a world-class deposit of 1.8 billion 1.8 billion of deposit a world-class develop to a 2011 agreement is contract second The of west 100 kilometres province, in Bamiyan mine the Hajigak at ore iron of tonnes Kabul. and transparency in the awarding of mining contracts. At the same time, Afghanistan’s Afghanistan’s time, the same At contracts. mining of in the awarding transparency and 2014. after escalate conflicts, which may regional fuel ethnic could and mineral wealth However, delays by international investors in beginning mining operations suggest suggest operations in beginning mining investors international by delays However, after tenable remains see to whether investment waiting are these companies that the mining support to needed infrastructureis in order in investment Much 2014. to their capital commit to be to reluctant proving are companies foreign and industry, uncertain future. an such has a country that Despite the obvious security risks inherent in extractive industries in Afghanistan, in Afghanistan, in extractive industries security inherent risks the obvious Despite several and companies, mining international from been has decidedthere interest have 108 contracts least At been already awarded. have contracts mining lucrative ill- an that NGOs local international from and been concerns to signed, leading in a poor negotiating Afghanistan put the sectorcould develop rush to prepared causing and corruption they exacerbating risks warn, scenario, a Such position. social and impacts. harmful environmental Criminal mining syndicates already exist: half of all chromite in the border province of of province the in border allchromite half of exist: already syndicates Criminalmining Pakistan. being extractedalready into illegally smuggled is Khost and security, trade and cultural issues signed between India and Afghanistan in the same in the same Afghanistan and signed between issues India cultural trade and security, the deal part is that which fears rung alarm has bells in Pakistan, investment The year. influence in Afghanistan. its reduce to rival India old its by a wider move of the state-owned steel company the Steel Authority of India. The consortium promised promised consortium The India. of Authority the Steel company steel the state-owned plant a power construct to themine, develop to in Afghanistan $11 billion invest to of tonnes six million processing of capable plant a steel build to and railway and per year. steel 4.2.1 Risks, attitudes and incentive structures 4.2.1 Risks, attitudes and incentive are risk, reputational exposed great which to are of many investors, Western Large local with relations strong and citizenship good corporate that more recognizing their of the sustainability to and margins their profit to central are communities departments, government with relations includes This in African countries. operations actors. other among stakeholders, marginalized and localNGOs, communities profitable from away moving increasingly is type investor the same of Conversely, the include Examples risks. operational or reputational large with concessions the decision arguably, and, in Nigeria Delta the Niger parts of exit to Shell by decision in Guinea. project ore iron Nimba try to in the Mount stake sell Billiton to its BHP of in slowdown the economic and prices a fall in commodity Billiton, BHP the case of In a role. also played have China may firms, smaller mining projects, sell in such their stake multinationals large When the buyers. often are companies gas and oil and miners, ‘junior’ as to referred often run much and profile a low keep to tend owned, privately often These companies, risk. for a higher appetite have They generally smaller operations. have enterprises state-owned other NOCs as and such enterprises owned Publicly between act a buffer as increasingly entities Such altogether. profiles risk different which companies, owned privately small and/or and multinationals risk-averse large to miners junior space for create to help can be SOEs NOCs to risk-takers. and tend of Rwanda and Meles Zenawi of Ethiopia among them – have lost their reformist their reformist lost them – have among Ethiopia of Zenawi Meles and Rwanda of 1980s, coupled the 1970s and of disasters development elephant’ zeal. ‘white The left many have states, particularlyresource-producing in corruption, widespread with countries in many Politics political elites. cynical and politics about African populations to irrelevant become simply or lines regional ethnic or along down broken either has widespread generate to be to able unlikely are African governments Thus the majority. basis. a continent-wide on least at sector, the private of a reduction for support public will pattern general The trends. difficult is continent-wide chart it to this juncture, At political individual make African as states differences national and regional of beone choices. economic and predatory exhibit Some regime. government types of different are there Clearly, trajectories and trends The development-inclined. more are others characteristics; officials Leaders and act for negative. the whole, on are, governments predatory of a lack and mismanagement economic and interest, in the public not gain, private public co-opted and nepotistic stagnant, Bloated, the norm. are policyof coherence growth. economic broad-based achieve to ability further sectors governments’ hinder corrupt and misgoverned about stereotypes confirm the worst governments Predatory African countries. seek hand, the other on African governments, development-inclined of majority The domestic benefits from greater reap to strive and mistakes past repeating avoid to mineral and for strategy integrated them, an of many extraction. For resource natural a on embarking and poverty extraction critical reducing is to resource natural other development. equitable and sustainable of path In Africa, regional regional In Africa, and national see will differences states make African political and different economic choices regarding resources. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 66 Conflict

Chapter 4 Chapter 4 In general, companies In general, companies seeking stable investment regimes also contribute positively to the development of regulatory institutions and governance in mechanisms a host country.

A Regional Outlook: Old Problems, Changing Dynamics 67 Dynamics Changing Old Problems, Outlook: A Regional As popular expectations about the benefits of natural resources grow, so do the stakes. grow, resources natural the benefits of about expectations popular As expect to populations and deliver, to pressure increasing under are Governments the need more recognizing are African governments later. than benefit sooner rather not being promulgated is message This their populations. benefits to tangible deliver to be expected, which might governments, leaders and development-orientated by only the Being seen elites. having as and states predatory and autocratic more also by but has that leaders, a consideration for unavoidable heart becoming is at interest’ ‘people’s international of also is a result it Yet uprisings’. the view in ‘Arab acute of more become 4.2.2 Growing public pressure for tangible benefits Unlike large investors, smaller companies often tend to invest over the short term the short over invest to tend often smaller companies investors, large Unlike stable depend on do not election cycle). They generally an to up months six (from They tend do. operators larger that extent the same to institutions independent and Conversely, if stability depends on the rule of a small elite or a single individual, the individual, a single or the rule a small depends elite on of if stability Conversely, about concerns few have that investors of the presence by be strengthened may regime global greater higher mineral as prices, such Global developments legitimacy. public companies’ mining increased Africa have outside profits diminished and competition also expand may factors the same and thecontinent; on investments risky for appetite there. operating risk-takers of the number Large or small, a company’s appetite for risk determines the opportunities that are are that the opportunities determines risk for appetite small, a company’s or Large and legislative (regulatory, also affects the context appetite risk of level The it. to open government where countries In will be invest. willing to otherwise) in which a company partners private-sector of the choice path, a development follow seeking to are entities general, In political institutions. weakening, or strengthening, in be can decisive the to positively contribute also to tend regimes investment seeking stable companies country. in the host mechanisms governance and institutions regulatory of development the depends on affect institutions SOEs NOCs and which foreign to extent The a following is whether the country in question on and the institutions of strength is SOEs NOCs and foreign of the impact contexts, capacity low In path. development politics, by but institutions strong by mitigated not best, is risk as be at to neutral likely The states. by backed are that enterprises to only available tools other deep pockets or External matter. they be can not do bypassed, because institutions that is result net the shaping up end institutions, domestic not considerations, diplomatic political and SOEs. NOCs and taken by decisions investment Enterprises with a marked risk exposure are looking to invest in stable regulatory and and regulatory in stable invest to looking are exposure risk a marked with Enterprises such types partner, other of but institutions, strong have that environments legislative hedge can those or to risks immune largely either are juniors, NOCs/SOEs as and them effectively. against maintain to in order individuals to access preferential links and on instead rely to ultimately may institutions with involvement their low and their operations, them.undermine enter the market, e.g. through so-called ‘farm-outs’. However, this model fails to take to this model fails However, so-called through e.g. ‘farm-outs’. the market, enter quickly change which can profiles, risk corporate of the nature shifting account into and international involving ventures joint of number growing a are whenthere local NOCs/SOEs and enterprises. companies, Western 4.2.3 Structural challenges 4.2.3 Structural challenges type’ the ‘right the need attract to of aware more becoming are governments Although multinationals the Western look upon always does not public the general company, of many Thus their motives. of deep is suspicion cases, some there In favourably. in 2011 was d’Ivoire in Côte intervention the international that convinced are Ivorians proxies of is in the DRC the war of theme the dominant and grab, a disguised resource resources. from profit to in order chaos creating the West for negotiations. influence contract can these dynamics how of a good is example Uganda bolster to a way as nationalism popular encouraged has Museveni Yoweri President in faith little has population the Ugandan IOCs. with But position negotiating his much result, As anyway. the will elite to go revenues most that assumes and politics, concerned been has more It unmoved. relatively remained far thus has the public of the oil by exploitation with than the government against corruption of allegations with ‘street’, the Kampala mobilize can political actor other any or Museveni If companies. radically – industry shift quite could and between government power the balance of so yet. succeeded has in doing one no but trust in the enough have they do not but oil, Uganda’s want companies Foreign key be needed would develop to that the $10 billion invest to government Museveni and national advocacy by international NGOs, donors and civil society groups. This This civil society and groups. donors NGOs, international advocacy by national and or existing and resources natural substantial with in countries especiallyis relevant mounting. quickly are expectations citizens’ where operations, mining imminent the extractive try that to measures ensure to taking many Several are countries These economy. their domestic benefitswider for socio-economic generate industries transactions the benefits of designed capture new to tax regimes include measures unemployment reduce to intended provisions local and content between companies workforce. the indigenous by participation a minimum least at ensure to and Angola instance, For contexts. arise in different may measures innovative more Other, financial industry’s oil all the domestic requires that legislation introduced has to is this legislation of the aims of One be in the to local made transactions currency. of number a larger finance to ability its financial sector and the Angolan strengthen businesses. Angolan attracting many, For partners matter. that aware also more are African governments a is development the country’s to contribute that multinationals responsible and large low- and stable as themselves present to aiming are countries a result, primary As goal. investment their previous highlighting they are do so, To destinations. investment risk At stability. fiscal macroeconomic and and initiatives reform regulatory successes, corporate and theirinternational diversify seeking to are countries time, thesame power. too much has enterprise country single or no that ensure so to as relations and countries too for changing is framework regulatory legaland international The to companies (which requires States in the United Act Dodd-Frank The investors. arguably EU legislation similar and governments) foreign to disclose all payments independent and regimes predictable have that countries well-governed reward destinations. investment as attractive them making even more by institutions The ‘white elephant’ ‘white elephant’ The development disasters of and the 1970s 1980s, coupled with widespread corruption, have left many African populations cynical about politics and political elites. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 68 Conflict

Chapter 4 Chapter 4 Labour relations play an integral part in tensions with foreign investors, and trade unions are becoming increasingly assertive in Zambia, Ghana and South Africa, among others. A Regional Outlook: Old Problems, Changing Dynamics 69 Dynamics Changing Old Problems, Outlook: A Regional Even where locals’ expectations of the resource sector are low, the presence of of the presence low, sector are the resource of expectations locals’ where Even if few, have cases, some citizens In still can lead tensions. to extractive industries specifically receiving and of in general in terms government of expectations any, are extraction operations resource and mining from externalities But rents. resource in resource- especially is rural This nevertheless. the case populations factors risk for a clear evictions are land forced as such impacts acute and Immediate rich areas. local as such contamination issues environmental those and externalities, of example politics national enter These issues too. serious concern of are degradation and local they can political actors; sophisticated increasingly local and through NGOs The partnerships. of the revision and investors foreign of the censure cause ultimately In this context, labour relations play an integral part in populism and in tensions with with in tensions and part in populism integral an play relations labour this context, In are and assertive increasingly are groups labour and unions Trade investors. foreign well as Ghana and Zambia as such policy on in countries impact a growing having unrest labour-related avert to hoping Governments others. Africa, South as among Labour Organization the International as such institutions international look to can as such issues in handling help get to ‘best practice’ of sources other and (ILO) African aids often the ILO instance, For representation. labour and local bargaining and social, the fit domestic economic to laws theirlabour in fine-tuning countries unemployment labour, around also emerging are Other initiatives political context. rights. workers’ and The botched security responses to protests and the empowerment of Malema have have Malema of the empowerment and protests to security botched The responses now risk a real is there and investors, many the country in the eyes of damaged already has in which African the South government way The spiral. downward a continuing of profoundly could the extractive industries for expectations great citizens’ its handled South in work at factors fundamental The thecountry. of future and affect the politics disaffected populations of the raised expectations poverty, Africa are elsewhere and fulfil to and wealth expectations. equitable create to governments of the inability and South Africa is a case in point. The country has seen a series of protests over pay pay over seen country The has AfricaSouth a series protests a case is of in point. the leader of former the populist Malema, Julius sector. in the mining conditions and thedissatisfied of thedefender as himself present to managed League, has Youth ANC been encouraged have may been Malema dashed. whose have expectations workers Zuma, Jacob President oppose that the ANC of certain factions by supported and in the mining workers of the plight to contradictory is lifestyle his ways in many and the real capture and articulate to managed effectively has he Nonetheless, sector. many. grievances of When extractive industries fail to deliver, disputes are possible, especially possible, when their are disputes deliver, to fail extractive industries When scenario This mismanagement. or corruption of allegations with coupled is failure collective or movements populist of the emergence for fertile ground provides fairness probity, on centre inevitably movements such cries rallying The of protests. equality. of lack and assets in the country. They worry that in doing so, they could end up on the wrong the wrong on up they end could so, They in doing worrythat assets in the country. thinking Ugandans, Many leader. unscrupulous an with bargain obsolescing an side of not are regime, his up sales shore oil to from use the revenues would Museveni that also is but rents resource obtain to eager is Museveni As see to either. keen a deal done stasis. is now for the result control, long-term relinquish to unwilling

103

104

102 4.2.4 Increased risk of disputes there production, discovery and exploration, resource natural of higher rates With and areas especially conflicts in border between and states, be a rise in disputes may a result as localized of These conflicts protests take the form could also states. within Africa. South thein case described as They of could expectations, dashed above of environmental degradation in the Niger Delta and associated health problems are a are health problems associated and Delta the in Niger degradation environmental case in point. This new cohort of young people will be reaching adulthood in the next decade; and will decade; adulthood in the next people and be reaching young of newThis cohort This the political debate. of the terms they alter willwhen they fundamentally do, elites, among resources dividing for mechanism a as politics sees formal generation much have political leaders do not that feels and ethnic defined grounds, on often new This population. youth urban increasingly poor and the enormous, to say to from aspirations set of and outlook a very different have will probably generation political expression, tangible found yet not has this pressure So far, their parents. the part be of a central will undoubtedly resources natural of the governance but globalized this is new politics Whether and the continent. throughout political debate relationship Africa’s shape to will help defensive and parochial or outward-looking years. in the coming extractives companies with Corruption and perceptions of it are growing points of grievance for many and and many grievance for of points growing are it of perceptions and Corruption in extractive contracts challenge that movements populist and protests catalyse can or contracts concessions, over influence undue wield often Local can industries. elites operations also of the cost can increase corruption to inefficiencies related and access, risk. reputational greater to exposeand companies new legislation stringent of the advent with and institutions strong of the absence In to risks major influence are elite undue and corruption Act, the Dodd-Frank as such them, but try may control to Governments sector. in the mining notably investors, other high-risk-taking of of firms or the presence be undermined by their may efforts of systems erode that trafficking criminal networks, and transnational as such factors, legality. and accountability African countries, of development and robustness the institutional to regard With shrink budgets aid Western As also policy relevant. are development in trends the budgets, African state of proportion a greater up make mineral resources and the To decline. cooperation development international of impact influence and to and poverty reducing to contributed have partnerships development that extent The factor. risk this a potential is institutions, independent sustaining and building from partners away development existing a shift among and new donors of emergence internal exacerbate could agenda’ ‘prosperity a towards and agenda’ ‘development a outcomes. development jeopardize and tensions which will also the continent, further for challenges create trends Demographic Fund, Population Nations the United to According affect the extractive industries. 275 million approximately from Africa grown has sub-Saharan of the population 2050. by set double is to in 2010 and billion one than more 1960s to in the late Approximately 70 per cent of the population of sub-Saharan Africa are now under 30 under now Africa are sub-Saharan of the population of 70 per cent Approximately 15. of the age under are 41.2 per cent age; of years As Western aid As Western budgets shrink and mineral resources make up a greater proportion of African state budgets, the influence and impact of international development cooperation decline. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 70 Conflict

Chapter 4 Chapter 4 The risk of conflict The increases as more discoveries are made in contested areas. But the possibility of receiving no resource rents at all is also a powerful incentive for cooperation. This This 105 A Regional Outlook: Old Problems, Changing Dynamics 71 Dynamics Changing Old Problems, Outlook: A Regional Another case in which agreement has been has reached case in which agreement Another 106 may breathe new life into some of the existing deals with extractives companies that that deals extractives companies with the existing of some into new life breathe may Simon environments. legislative and regulatory unclear to in effect owing frozen were which we acreage have ‘We that stated Shell, financial officer the chief of Henry, ‘any that and both jurisdictions’ under effectively because it’s been developing haven’t going about discussion that have to us enable would good … is news that agreement us.’ for step a positive ahead. It’s The risk of conflict increases with more discoveries of natural resources in contested in contested resources natural of discoveries conflict more with increases of risk The conflict to extracted owing are in all cases:resources if no truthapplies one and areas, is This opportunity. of a loss all perceive would the contestants cause, another or difficult technically extract to are and that hydrocarbons especially or minerals so for resource no receiving of third-party expertise. possibility real The require therefore have may that countries among cooperation for alla powerful incentive is at rents between the countries especially relations if power regions, in their border resources balanced. less or more are in question is the Joint Development Zone between São Tomé and Príncipe and Nigeria. Nigeria. and Príncipe and between Zone São Tomé Development the Joint is The countries that emerged following the collapse of the Soviet Union are politically, politically, are the Soviet Union of the collapse following emerged that countries The the the communism, fall after of years Twenty geologically diverse. and culturally the post-Soviet of the coherence and political paths divergent on are states successor the Nevertheless, question. being called into increasingly is region a single space as The Eurasian continent is rich in natural resources; they are concentrated in the concentrated they are resources; rich in natural is continent Eurasian The possesses alone the largest East. Russia Far the Russian basin, Siberia and Caspian Saudi after gas exporter of the second-largest is and in the world gas reserves natural of is Turkmenistan and producers, oil also major are Kazakhstan and Azerbaijan Arabia. gas. reservesnatural fifth-largest of the world’s have to estimated 4.3 Russia and Central Asia: the long shadow of the state The case of Zanzibar and mainland Tanzania is relevant too, as national president president national as too, relevant is Tanzania mainland Zanzibar and caseThe of ‘in agreed principle’ Shein Ali Mohamed president Zanzibar’s and Kikwete Jakaya industry. gas and oil own its manage Zanzibar may 25 October 2012 that on In these contexts, resource-rich regions or provinces may seek greater autonomy, autonomy, seek greater may provinces or regions resource-rich these contexts, In will oppose government the central Naturally, independence. and even secession or in be this scenariocan found of example One ensue. may violence and moves such the oil-rich of the independence been has for fighting a movement where Angola, if autonomy, for movement incipient an where decades and for Cabinda enclave for Front The province. Lunda the in diamond-rich brewing is independence, not since independence been has for fighting Cabinda of the Enclave of the Liberation was when oil accelerated independence for the momentum but found, was oil before national and dynamics internal where Nigeria, include Other examples discovered. in the Delta Niger in the oil-rich events determined by extent a large to are politics for fought has Katanga of the province where the DRC, and the country, of south do so again. may and independence also break out between regions of countries. This is especially possible in countries especially is countries in This possible countries. of between regions out alsobreak a reliable lacking and finances, public managing for inimical systems from suffering in the capital. representation local regional and for mechanism

The Kremlin has also resisted significant significant also has resisted Kremlin The 107 which was purchased by the state corporation corporation the state by purchased which was 108 Rosoboronexport in 2006, the state has not sought to build a national national a build to sought not has the2006, state in Rosoboronexport being avoided mostly date to has Kremlin The sector. in the mining champion drawn into the various corporate disputes between the owners of major mining mining major of between the owners disputes corporate the various into drawn Nickel. Norilsk as assets such nationalization of the mining sector. Except for the titanium-producer the titanium-producer for Except sector. themining of nationalization VSMPO-Avisma, 4.3.1 Changing attitudes in Russia? publicly remains) (and sector remained gas Russia’s the communism, fallAfter of privatized rapidly was contrast, by sector, oil The Gazprom. the monopoly as owned became Russia a result, As investors. international which excluded via closed auctions, largely whichthein sector is state oil-producing anomaly:a major international an energy assets could sell to major the government of readiness The hands. in private control maintain not could it rate, any At weakness. the state’s to be attributed simply hands. in public assets supposedly over TNK-BP, of acquisition recent Rosneft’s and Yukos of the dismemberment With state towards back industry swung oil has Russia’s of structure the ownership industry oil decade in the past Russia’s of partial This renationalization ownership. the as Even capitalism. ideology state of a coherent of been the not consequence has moved has it industry, theoil portion of large a over control consolidated has state gas liberalize to the domestic Moves sector. in the gas direction in the opposite oil Russian and chiefly Novatek producers, independent allowed have market 2011, the In production. domestic of share increasing an capture to companies, 25 for accounted producers independent that reported Gazprom state-owned sales. domestic total of per cent shared Soviet legacy has led to important commonalities in the political economies of of in the political economies commonalities Soviet legacy important led to has shared governance resource for wide implications have that ones states, the successor of many relations. state–business and and extraction companies arisen between international have that disputes The the transition logic of the been institutional determined by largely have governments the independence, of years the early In capitalism. to economy command from weakly enforced institutions, dysfunctional by characterized were post-Soviet states was economy a market to transition The capacity. state low and rights property the sale and regulate to institutions strong of the development by accompanied not A weak rule law of manner. equitable and in a transparent resources of exploitation to industry gas vulnerable was and the oil that meant the region of allin countries the addition, In actors. other and the state policies by predatory and rent-seeking which legitimacy, of problems created privatization of process opaque and chaotic rights. their property defend to ability companies’ compromised that meant economy the socialist and command Soviet power of presence The the oil and gas industries of the region have not followed the classic resource cycle resource the classic followed not have the region of industries gas and the oil at since contexts, post-colonial particularly in many applied, has paradigm that the Russian a part which as of Azerbaijan, of the exception 1970. With least 19th thein latter ventures oil international major the focus of was empire the domestic by developed initially were the USSR of the resources century, little with scratch, virtually from built energy They sectors. were state-controlled external involvement. After the fall of After communism, Russia became an international anomaly: a major oil-producing the state in which sector is largely in private hands. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 72 Conflict

Chapter 4 Chapter 4 Policy towards Policy industries extractive in Russia seems to reflect the struggle for political and economic power among rival elites. A Regional Outlook: Old Problems, Changing Dynamics 73 Dynamics Changing Old Problems, Outlook: A Regional The extractive industries, oil in particular, are perceived as the keystones the keystones as perceived are in particular, oil extractive industries, The 109 Box 4.2: The TNK-BP 4.2: The affair Box company is a joint The the case of the TNK-BP. is well illustrated by Russia’s oil industry politics of complex The venture between BP The Fridman. of powerful businessmen led by Mikhail and Alfa-Access-Renova (AAR), a group but the company has been for 10 per cent of its global profits, accounting profitable for deal has been immensely BP, of the board. partners’ demands for greater control of corporate disputes driven by the Russian plagued by a range In January 2011, BP in the Arctic. with Rosneft to pursue new ventures announced that it was entering a partnership claims that the share swap upheld AAR’s Arbitration Tribunal 2011 after the Stockholm in March deal collapsed The BP a shareholder agreement requiring with Rosneft breached from exclusively to pursue new projects in Russia within the TNK-BP joint venture. BPdeputy prime minister then Rosneft and Igor Sechin, that an alliance with the state-owned had wrongly assumed any objections would give it sufficient clout to neutralize powerful figures in the energy industry, and one of the most latter’s contractual position. But once the disputes came into the open, the from AAR, whatever the strength of the of a foreign investor against the interests of major Russian businessmen, was not willing to fight on behalf Kremlin In June 2012, BPto announced that it had received offers oil company. despite the involvement of a state-owned and in October a deal was concluded to sell its share to Rosneft. its stake in TNK-BP, purchase TNK-BPThe that the state’s interests in the energy sector are neither monolithic nor clearly affair demonstrates the formal categories of state versus private ownership have mattered less than defined. In Russia’s minerals sector, in and commercial actors that are boundthe de facto control of mineral rents and the political up with them. Whether informal contestation between rival elites. This are subject to complex nominally private or state hands, these assets in 2004 and 2005 to merge Rosneft and Gazprom into a single state energy was also illustrated by the failed attempt on account of competing interests within the two companies. merger collapsed The champion. Nevertheless, there are likely to be significant opportunities for international energy international for opportunities be to significant likely are there Nevertheless, in the coming energy companies Russian with partnerships develop to companies fields in giant The changing. is production oil Russia’s of decades. geography The now decades, two the past have for production oil Russia’s of Siberia, the core western in challenging is production oil future Russia’s of source The terminal decline. entered Fields Sakhalin peninsula, Siberia eastern and island. the Yamal as such environments investment estimated The will difficult technically there be and develop. costly to It is therefore unlikely that the return of the state has markedly changed thepolitical changed markedly has thestate of the return that unlikely therefore is It the within still is consensus no There sector. in the oil operators foreign for risks The resources. subsoil of management and ownership of the best form about elite foreign with disputes in flux, and remain to likely this reason, for is, regime regulatory will continue. investors of domestic power, and the difficulties of diversifying Russia’s economy and and economy the difficulties Russia’s and diversifying of power, domestic of time. some be to so for they will that continue suggests institutions its democratizing political competition the focus of extraction will remain resource natural a result, As has hands sector in state the oil of the reconfiguration As conflict betweenand elites. the energy sector remains the industry, to in relation power of settled the matter not the by illustrated as interests, public and private of interplay a complex to subject (see affair TNK-BP Box 4.2). There is little evidence of strategic thinking in Russia’s policy towards its extractive its policy towards thinking in Russia’s strategic evidence of little is There divergent and conflicting decisions of beseems to the product It industries. rival among power reflecting economic philosophies, a struggle political and for elites.

However, However, 114 But the government elite has historically historically has elite the government But 113 110 Reforming the oil industry in order to incentivize incentivize to industry the oil in order Reforming 115

112 111 As Michael Bradshaw observes, there is no reason why Russia cannot in principle principle in cannot Russia why observes, reason no is there Bradshaw Michael As on drawing (PSA) regime agreement sharing effective production an develop development gas and oil frontier support the 1990s to learned from the lessons shelf. in Sakhalin the continental and Similar dynamics are at work in the gas sector. Russia’s energy strategy to 2030 foresees energy 2030 foresees to strategy Russia’s sector. in the gas work at are dynamics Similar reserves gas are established of 40 per cent Around half. by increasing production gas onshore from comes already production gas Russia’s of Much shelf. the continental on technology in order foreign will require Gazprom but shelf the continental on projects reserves develop further. to revolve will thus energy years industry in the coming Russia’s of drama central The IOCs develop with to build companies state-owned that the relationships around in the face levels production struggles maintain to Russia As plays. gas and oil frontier major for opportunity a renewed in principle is there technical challenges, growing of companies. state with theenergyin sectorpartnership in investment newforeign to BP and ExxonMobil alliances with high-profile forming ledRosneft the has way, Eni and Italy’s with agreements also has signed cooperation It shelf. the Arctic develop Statoil. Norway’s required to maintain production to the late 2020s is expected to be double that of the of expected that 2020s is be to double the late to production maintain to required terms. dollar in constant 2010s early to in order innovate rapidly to the global industryWhile been oil has forced maintain production levels, the Russian oil industry has largely relied on legacy on assets relied industry largely oil has the Russian levels, production maintain successfully have companies oil in the developed Sovietinitially period. Russian Siberia western in deposits of the life extend to new extractives techniques adopted the on and new fields offshore develop to theythe technical capacity lack but legacy in the decline investment, capital major need The for shelf. continental are producers foreign and between domestic skills widening a gap and production theinternational to openness greater of the in direction steadily Russia pushing oil industry. investment demands painful readjustments to diminished energy revenues for the for energy diminished to revenues painful readjustments demands investment the vision has regime whether the current unclear is It gains. longer-term sake of in decline. is support particularly its as measures, undertaketo such the capacity or may the elite revenues, and production faced declining with argues, Gustafson As and owners squeezing private by remedies, short-term for reach to be tempted distrusted PSAs, regarding them as iniquitous and unsuitable to a country of Russia’s Russia’s a country of to unsuitable and iniquitous them as regarding PSAs, distrusted ever been signed. have three only a result, As development. of level providing incentives for foreign investment in major new developments will require will require new developments in major investment foreign for incentives providing which is tax system, current The regime. the regulatory of overhaul a substantial does it as investment, on brake strong a is profit, than rather based production on Reform shelf. the continental on in working the involved higher costs for account not the term, reducing medium to in the least short at imply, would the tax system of production. oil take from government’s continuing is oil dependence on Russia’s that is the elite for problem fundamental The account gas Oil and end. an to coming is in Russia easy oil the era of even as grow, to of 40 per cent nearly provides oil GDP; Russia’s of 30 per cent approximately for tax revenues. the government’s A need for investment, decline in production and a widening skills gap are pushing in Russia steadily the direction of greater openness to the international oil industry. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 74 Conflict

Chapter 4 Chapter 4 In recent years, the state has Kazakh used administrative pressure to increase its equity in the major oil and gas projects, at significant cost to IOCs. Russia faces to major challenges increase investment – in its mining sector virtually all its major were mining assets in the explored Soviet period.

117 A Regional Outlook: Old Problems, Changing Dynamics 75 Dynamics Changing Old Problems, Outlook: A Regional 118

116 Russia also faces major challenges to increase investment in its mining sector. It is an an is It sector. mining in its investment increase to challenges also major faces Russia virtually all that climate business and regime regulatory the country’s of indictment in the developed Soviet initially and explored were assets in Russia mining the major mining international major Gold, Kinross as such exceptions, a few period. With partnership in produced paper A white Russia. from virtuallyabsent are companies the lowest has Russia that notes government the Russian Gold for Kinross with country in the world. target mining major any of density exploration In recent years, the response of the state has been to use administrative pressure pressure been has use administrative to the state of the response years, recent In below-market at often projects, gas and oil in the major equity its increase to by their position helped not IOCs IOCs. have to And cost significant at rates, Whatever the merits of the case, the reality is that the environment has grown grown has the environment that is the case, the reality of the merits Whatever expand to IOCs wishing in the extractives sector. investors hostile for more much sceptical and be to a tough will find in Kazakhstan the government production underestimating the time and costs required to implement the various phases of of phases the various implement to required costs the time and underestimating project oil the largest developing the consortium example, 2007, for In production. $27 of estimate original cost its that field, announced the Kashagan in the country, (see Box $60 billion to double than more could production of the stage first for billion could companies Foreign projects. other occurred for have overruns cost 4.3). Similar accurate makes the technicaldifficulty the projects that of justification some with claim costs of the led inflation to have requirements local difficult that content and forecasting On the other subcontractors. by conducted work below-standard to owing delays and the government costs, in projected increase massive and delays themany given hand, on delivering really whether the IOCs were question to entitled is Kazakhstan of large, in managing superiority their supposed advantage, comparative their chief projects. complex In Russia, the Soviet expertise extractionperiod pool of a large Russia, bequeathed in resource In domestic under production managing of still was capable world-class, if not that, Central Asian the casein the resource-rich not thiswas However, ownership. private was in Kazakhstan sectors gas and in the oil investment foreign a result, As states. terms signed IOCs with on were PSAs major of a number high,necessarily and for accounted PSAs Kazakhstan, In energy majors. the foreign to favourable extremely rights greater ‘gave these agreements analyst, one to According output. of 86 per cent era’. the colonial since anything than the investors to 4.3.2 Tough climate in Kazakhstan 4.3.2 Tough The government has made tentative moves to facilitate foreign investment in the investment foreign facilitate to moves tentative made has government The mining sector, such as increasing the share of ‘strategic’ mining assets that can be can assets that mining ‘strategic’ of theshare increasing as such sector, mining foreign Nevertheless, approval. government without investors foreign by acquired This investments. Russian to a high premium risk attach to firmsmining continue and regulatory comprehensive without be to overturned unlikely is perception the Russian who dominate oligarchs the domestic now, for But change. institutional which they facilities, are obsolete and capacity excess by hamstrung sector are mining the harmful social over impacts concern political elites’ to close owing to unable often closures. of minority foreign investors, resulting in another wave of nationalizations and renewed renewed and nationalizations of wave in another resulting investors, foreign minority disputes. company–government

negotiating partner. The state oil company, Kazmunaigaz, which now holds holds which now Kazmunaigaz, company, oil state The partner. negotiating stakes in all three major Caspian energy projects, will, where possible, seek shift to possible, will, where energy projects, Caspian in allstakes major three new investment of approval make may the state partners, and foreign its to costs equity. greater on contingent projects more become IOCs undoubtedly has for environment the administrative Although wholesalea at been has attempt no there that noteworthy is it years, recent hostilein the case was as in nationalization, outright for a bid or terms the PSAs’ of revision somewhat is these agreements of stability The the Sakhalinwith 2 project. Russia signed; the state’s were the PSAs since sharply increased have prices oil surprising: industry; oil domestic its developed has it as stronger grown has position bargaining to stages development and the exploration from moved have projects the major and revision. contract to vulnerable more becoming thus production, nationalism resource on constraints the large underlines survivalThe thePSAs of term. the least medium in at relevant remain to likely which are in Kazakhstan, technically and expensive they reservesare but possesses world-class Kazakhstan reflect Kashagan, especially at overruns, cost and Delays operate. to challenging conditions in harsh projects offshore large the difficulties operating with associated mismanagement operator by been this has compounded but waters, shallow and NOC, (see Box 4.3). Kazakhstan’s subcontractors the part of on incompetence and operate to the technical lacks capacity and financially overburdened is Kazmunaigaz, IOCs remain fractious their occasionally relationship, Despite plays. offshore major revise the comprehensively to attempt Any the Kazakh government. to indispensable the government. be to could ruinous PSAs continues policy It concerns. foreign by further is constrained Kazakh government The Kazakhstan’s hostile. and unstable inherently as environment regional its perceive to seeking policy, foreign multi-vectored crafted a carefully been has pursue to response avoid to and the West and China, Russia of interests balance the influence and to in Kazakhstan’s investment IOCs’ The external actor. any on reliance excessive guarantee a valuable providing this strategy, part of reserves important an is Caspian the US as in importance grow to likely is This engagement. diplomatic Western of Afghanistan. from begins withdraw to with associated risk’ the ‘sovereign mitigate to also likely policy are concerns Foreign ruled who has Kazakhstan Nazarbayev, Nursultan President transition. the leadership will successor any that popularity and authority an enjoys independence, since to process a democratic of the absence term. In in the least short at struggle match, to the as be well perceived may nationalism to appeal an transition, leadership manage an will play actors Foreign successor. the any legitimacy of strenghten to way easiest much this will and afford too, the new administration for role legitimating important investors. foreign major of the interests in protecting help Kazakhstan’s of the emergence boom and price oil an weathered Having particularly nationalization, outright suffer to unlikely NOC, IOCs are energy projects in all a stake major has three (KMG) Kazmunaigas that now which in prevail to likely is equilibrium uneasy an Instead, country. the in employs while the government untouched remain PSA terms the core extract to additional mechanisms informal a variety of and pressure administrative Kazakhstan has Kazakhstan pursued a carefully crafted foreign the balancing policy, influence of China, Russia and the West. IOC is investment an important part of this strategy. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 76 Conflict

Chapter 4 Chapter 4 Environmental Environmental are likely violations an area to remain of great vulnerability for Kazakhstan.

A Regional Outlook: Old Problems, Changing Dynamics 77 Dynamics Changing Old Problems, Outlook: A Regional It sold its stake. The China The stake. sold its It 119

120 In 2009, the Kazakh authorities also started to put pressure on the operators of of theoperators on pressure also put startedto the2009, Kazakh authorities In it. fines for and taxes in unpaid $2.5 billion field, claiming the Karachaganak extraction BG, major Eni and the only is led is by whose consortium Karachaganak, exports, block the to threatened the state When KMG. involve does not that project more for seek to a refund arbitration international using by responded consortium settled was in December dispute The export paid duties. in already $1 billion than paid BG It Eni. from and in the project stake a 10 per cent obtained 2011, when KMG and a further recovery settle cost to 5 per receiving cent 5 per cent, for $1.5 billion loan, a $1 billion partners also provided the IOCs. foreign The against claims other they paid addition, In the acquisition. finance to production, gas and in oil repayable the deal. on in taxes $1 billion National Petroleum Corporation acquired around two-thirds of the project and KMG KMG and the project of two-thirds around acquired Corporation Petroleum National price. a discounted at one-third around 4.3.3 Uzbekistan: the obsolescing bargain at work? sector in the in gas possible are disputes future Uzbekistan, neighbouring In foreign and between state-owned balance in production a shifting of consequence pipeline, gas the China–Central Asia of lines two of the completion With companies. ambitious set has itself leadership the country’s Uzbekistan, whichruns through by the Soviet-erafields operated of exports. gas Most eastward increased for targets the years, the coming In in decline. are (UNG) Uzbekneftegaz company gas the state especially companies, foreign by will fields operated shift to production balance of The dynamics of centre-region relations are also likely to play a greater role in future in future role greater a play to alsolikely are relations centre-region of dynamics The which Mangistau, and Atyrau of regions western The investors. foreign with disputes revenues, budget and production oil the country’s of share the lion’s for account ‘resource in 2008 that Massimov Karim Minister then Prime by the claim Despite to determination the government’s Kazakhstan’, a policy not is for nationalism 2005, IOCs. with In tensions created NOC increasingly has its of the role expand was Basin region, in the Turgai interests with company a Canadian PetroKazakhstan, charges. tax-related and new with environmental hit extraction in the Caspian, such as the high sulphur content, which increase the which increase content, the high as sulphur such extraction in the Caspian, to sought in the past has Kazakhstan of government The pollution. likelihood of unsanctioned for in the air, open sulphur storing IOCs for fines heavy on impose supplies. water harming for flaring and oil by Protests the country. of socially the areas most deprived among are the by suppressed violently in December which 2011, were in Zhanaozen workers elites on these pressure increased underlined asymmetries and have authorities, increase to and employment local maintain to and levels both the national at scope little is there and accrue centrally, rents oil social Kazakhstan’s But spending. are local authorities a result, the localAs level. at mineral rents of taxation for environmental of accusations as such mechanisms, informal to resort to inclined IOCs provide to on pressure put they may or funds raise to in efforts violations, local investment. rents at the fringes of the contract and to influence future negotiations. For For negotiations. future influence to and the contract of the fringes at rents the value defend to battle low-intensity a constant mean to IOCs,this likely is of area an remain to likely are violations Environmental their investments. of oil with associated the technical challenges particularly given vulnerability, great

In October 2012, a The original PSA expires in 2037, in 2037, original PSA expires The b Paxton (2012). Paxton b Gizitdinov (2012).

ConocoPhillips announced that it would sell its 8.4 per cent share in the project. a BP Amoco, ExxonMobil, Shell, TotalFinaElf, Phillips Petroleum Co., Statoil and Inpex Masela. Eni was chosen as the Eni was chosen Masela. Co., Statoil and Inpex Phillips Petroleum BP Shell, TotalFinaElf, Amoco, ExxonMobil, project operator. a series of ambitious day flowing by 2015, the outcome of envisioned 1 million barrels of oil per developers Kashagan’s would come to yield on the eastern section, which first stage, 2002–10, would concentrate The development stages. to 900,000 In 2010–14, production would double to 2041, Kashagan barrels; and from 2014 day. 450,000 barrels per in 2004, when first emerged were met. Problems None of these targets barrels per day. would average 1.2 million for delays in the development schedule. fined the consortium $150 million government Kazakhstan’s extreme, remote environment and its geology requires complex field. It is in an difficult is a technically Kashagan gas back as laws prevented flaring, the developers needed to reinject associated Furthermore, techniques. extraction when freeze in winter, in the shallow waters of the northern Caspian Sea, which had to be done This into the reservoir. the temperature may fall to -40°C.overruns were compounded by environmental regulations that became more Cost Demands for local workers and contractors also increased, pushing up overallstringent over the first years of investment. to underestimate both consortium appeared The the development costs and the political anger they would expenditure. at Eni said that production 2007, In February this national money-maker. incur by delaying the coming on stream of Costs for the first phase, it added, would nearly double, to $19 billion, and total would be delayed until 2010. Kashagan billion to $136 billion. costs would rise from $57 months freezing the project for at least three the environment permit, effectively revoked Kazakhstan In August 2007, later determined that Eni was ‘incapable of fulfilling some of its obligations’ In government while it investigated. The oil a law allowing the government to alter or cancel contracts with foreign the parliament approved September 2007, law did not define what could constitute The to ‘threaten national security’. companies if their actions were deemed clear that the IOCsa national security threat. But the law made were serving at the government’s pleasure, and the performance to date.government was unimpressed with their doubled its share in the consortium to 16.6 per cent, In January 2008, (KMG), Kazmunaigas a state energy company, required billion for its stake, but Kazakhstan KMG paid $1.78 with the other partners’ stakes reduced proportionately. 13 billion barrels of potentially recoverable oil. The original consortium included nine international partners: Eni, BG, consortium included nine international partners: original recoverable oil. The 13 billion barrels of potentially Eni and its IOC of the project. of $3.5 billion over the lifetime partners to pay compensation the initial target of 450,000 further delays. It remains unclear when, if ever, Since then, the first phase has suffered Costs for this phase have also ballooned, to $38 on the second phase is even barrels will be reached. Progress billion. holding company Samruk, confirmed the head of the state investment Kabyldin, In August 2010, Kairgeldy less clear. In May 2011, Shell announced thatthat first production from phase two would be delayed by three years until 2018. Kashagan following the oil ministry’s rejection of its development plans. Cost overruns, it was closing its office in investment from other production delays and political disputes have undermined confidence and held back IOCs. for the second half of 2013, although it is unclear what volumes will Commercial oil production is now scheduled of the project are ongoing, and ExxonMobil and Shell be initially produced. Negotiations regarding future expansion in the venture. have warned that they may quit the project if they are not granted greater control When Kashagan was discovered in 2000, it was hailed as the biggest oil discovery in 30 oil discovery was hailed as the biggest in 2000, it was discovered Kashagan estimated years, with an When Box 4.3 The Kashagan oilfield Kashagan 4.3 The Box and the IOCs enough to recover their costs before expiration. might not be able to develop the second phase quickly As Western investors leave, China’s CNPCAs Western in the project. appears poised to acquire equity may outweigh any investor’s gainsIn the long run, there is a risk that losses from the cumulative impact of project delays in project equity. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 78 Conflict

Chapter 4 Chapter 4 Because the sector extractives is often vital to a country’s economy, the political stakes for controlling it are high. As foreign companies companies As foreign account start to share for a greater the of production, division of revenues is likely to appear ever more inequitable to the Uzbek elite. In the case of the case of In 122 A Regional Outlook: Old Problems, Changing Dynamics 79 Dynamics Changing Old Problems, Outlook: A Regional As foreign companies start to start to companies foreign As 121 Uzbekistan has a poor record of respecting contractual agreements, and the level the level and agreements, contractual respecting of a poor record has Uzbekistan company high. American The quite is in the risk extractive industries sovereign of which Gold, Oxus and mine, gold the Muruntau which operated Mining, Newmont after arbitration international bothsought field, have thedeveloped Amantaytau companies. state-owned and authorities regulatory with disputes account for a greater share of production, the division of resources and revenue is is revenue and resources of the division production, of share a greater for account elite. the Uzbek to inequitable ever more appear to likely the gas sector, pressure on foreign investors is likely to be compounded by a general a general by be to compounded likely is investors foreign on pressure sector, the gas export and production gas future Levels of production. of share in UNG’s decline contractual of form some but available, publicly not least at uncertain, or remain being before authorities the all state sold to is gas As seems very likely. dispute maximize to in order squeeze margins progressively could exported, the government so to terms as the operating of revision even seek a fundamental or export revenue plays. gas in the major equity its increase The chapter demonstrates, for example, the obsolescing bargain at work in Kazakhstan, in Kazakhstan, work at bargain the obsolescing example, for demonstrates, chapter The have projects deal major as a great grown has position bargaining the state’s where there Similarly, production. to stage development and the exploration from moved led to have prices higher global cases of commodity in which expectations many are assume to action government However, revision. contract for pressures increasing by be the sector can constrained from revenues extract to more or control greater policy security and the the foreign deposits, of nature the challenging technically Shifts in prices, ideologies and bargaining power influence the host government’s ideologies in prices, Shifts influence power bargaining and government’s the host need the company its by tempered for are challenge but contracts, to propensity technically development. for and politically, The cases also provide evidence of how, in this context, the cyclical changes in prices, in prices, the cyclical changes in this context, how, evidence of casesThe also provide the conditions prompt 3 can described power in Chapter bargaining ideologies and they also But highlight the very different disputes. in company–government result that the political as power such factors on depending out play can disputes such that ways a countries, their home and companies of perceptions historical configuration, extractive industries. own the country’s of the capacity and security situation changing This discussion of regional examples and causes of disputes reinforces some of the of some reinforces disputes of causes and examples regional of discussion This and between extractives investors disputes for the catalysts about wisdom received a is or Because the economy vital to the extractives often sectorcountries. is host the political for stakes it, those who control for power and wealth of source potential apparent are themes high. interlinked Several often are recurring and it of control in the extractives sector tensions company–government cases of of in the majority in political factions for the impulse are themes prominent most The discussed here. unfairness of perceptions resources, its benefits from seek country to the greater host detrimental and rights land over contention a project, the benefits of of in distribution the local on environment. a project of impacts 4.4 Main observations from the case studies 4.4 Main observations from those run by Russia’s Lukoil at Kandym and Gissar. and Kandym at Lukoil those Russia’s run by 123 In many cases, resource- many In 124 When governments fail to deliver and there are allegations of corruption, this corruption, of allegations are there and deliver to fail governments When radical calling for new governments or movements populist of the chances increases alsoThis the extractivessector. over control more and/or wealth of redistribution been discovered recently have resources natural substantial where countries to applies the case is as in several being made, African countries are investments large-scale or not are expectations high public If Mozambique. and Uganda Tanzania, including the government’s or curtailed or development, delayed to owing example, for – met under come in these countries – governments the revenues of spending inadequate or penalize to companies lead attempts act. could to to This pressure increasing extract higher revenues. action can extreme increase of the risk curse’ The ‘resource in this section, the extractives industry-led covered the countries of many For independent, of the emergence been in inhibiting has path a factor development revenue spending the sector and managing effectively of capable institutions strong those for the sector include regulating for institutions Key sustainably. and equitably decommissioning, and operations investment, for framework the legislative providing penalties, of the enforcement ensuring for capacities, and obligations monitoring for a finally, and, communication and complaints for channels clear providing for to have would there On the financial side, system. justice independent and strong managing for institutions and agencies accounting tax collection and be competent spending, its of the terms fund) and a stabilization example, (for revenue volatile the public delivery of in ensuring involved institutions other of a host with along corruption and incompetence of a combination or services. these institutions of A lack distrust public and resources of distribution inequitable meant often them has within governments. and in companies variously ground well-covered are resources of this maldistribution of causes underlying The theories. state’ ‘rentier or curse’ the rubric ‘resource under concerns of a country (as is the case in Kazakhstan), or a lack of public faith in the faith public of a lack or the case a country is (as in Kazakhstan), of concerns Uganda). in the case (as of regime state with these cycles interact how of the complexity also show examples The sector has in the resources political trend the recent that be argued might It politics. on depend more can ownership of actual patterns but capitalism’, ‘state emphasized control consolidated has the state example, for Russia, In elites. among competition in the gas interests private encouraged has but industry, the oil portion of a large over the point makes This industry. the mining of nationalization avoided has sector and between contestation the informal as here so important not is ownership nominal that benefit. to stand that the rival elites cycle) has (the price years in recent prices oil higher mineral and of phenomenon The societies of the expectations and companies among risk for bothincreased the appetite tax the super-profit over dispute Australian The countries. in resource-producing process a technocratic of the product rarely are regimes taxation resource how shows They revenues. government maximize to and industry incentives optimal create to often imperatives economic between political and compromise ‘a from instead result election’. impending an of maybe in the shadow pressure, colossal under negotiated Resource taxation regimes are rarely the product of a process technocratic to create optimal industry incentives and to maximize government revenues. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 80 Conflict

Chapter 4 Chapter 4 The impacts of The windfall profits in stifling other sectors of the economy are leading to calls across Asia and for better Africa distributive models and stronger state involvement.

A Regional Outlook: Old Problems, Changing Dynamics 81 Dynamics Changing Old Problems, Outlook: A Regional Changes to laws concerning land rights and compensation for land use, as discussed as use, land for compensation and rights land concerning laws to Changes to or address to way another are India, and Guinea New Papua to relation in above experience. past viewin of projects mining to objections local community forestall end front the capital-intensive at rent more capture to also beThey intended may A new wave of regulation, especially in East Asia, South Asia and sub-Saharan Africa, sub-Saharan and especially Asia South East in Asia, regulation, of A new wave the economy. of the rest sector strengthens the resource that ensure seekingis to address necessarily will not projects from revenue of share a greater gaining Simply managed and be spent cannot the revenue where it exacerbate may and this issue, and ‘backward’ strengthen to instead looking are countries Developing sustainably. pertain linkages the output to Forward the extractives with sector. linkages ‘forward’ and oil an example, For the economy. of the rest to input acting an as the project of supply case, ores in Indonesia’s and sectors; energy other to supply can project gas used in are that sectors other of the output are linkages Backward industry. domestic local providing and nationals for employment generating includes This the project. in the many manifest is This the project. with associated chain the supply for inputs in extractivesprojects to applying law local to content changes planned or changes example. Africa, for The impacts of windfall profits in stifling other sectors of the economy are leading leading are the economy of sectors in stifling other windfall profits of impacts The hand state a stronger and models distributive better for countries callsto many in regulations Indonesia’s as such measures, Some creation. value national in ensuring mining with disputes caused already have autonomy companies’ foreign restricting serious to response in come actions similar these and But there. operating companies competitiveness. jobs and about worries public Negative impacts of the recent boom are informing changing terms in the sector. in the sector. terms changing informing boom the recent impacts are of Negative Although this model of governance may not be desirable from the perspective of social the perspective of from be desirable not may governance this model of Although and can investments and investors; deter certainly does it not rights, human or equity entrenched of conditions under disputes company–government without do continue be can a there comes, periods. when change long But for corruption and power and regulatory to recourse the sector without action disrupting extreme of risk great the include may Risks relations. company–government mediate to legal institutions frustrations when public legal overhauls and institutional and rebellion for potential the of the mistakes avoid to A desire faction seizes control. a contesting or boil over transparency and good governance on initiatives international of a range and past particular. in new producers these for hope ills offer focused avoiding on projects. of poor countries have evolved governments with more representative institutions institutions representative more with governments evolved have poor countries productive of range a diverse from taxation dependence on their economic to owing contrast, By interest. public act to in the broader likely more they are thus and sectors, be to extracted, being or resources hydrocarbon mineral or large are there where those rents of capture The rents. resource benefit from to tend in power small groups distribution. wealth of patterns allocative and certain groups of the power entrenches meritocracy and competition discourage that networks patronage creates in turn This corruption. encourage and

Contracts are shaped by national history challenged in the balance and shaped changes national Contracts by by are power. of will reflect a contract of the terms that emphasize in this cases study The examined political The and the specific country. legacy the experiences host historical of and Balances signed is in which a particular will change. contract circumstances economic the and fortunes economic force, into come can shift, new can regulations power of almost is This change. can in the economy the extractive industries of role perceived investments. hydrocarbons and mining of nature the decades-long given inevitable new contracts, of the terms to modifications and the original terms, to challenges And these with changes. come often deals whereby phenomenon post-dictatorship or the post-colonial is prominent Most especiallytheif unfair, willimbalance considered be widely power a under negotiated and Indonesia in power. longer no are wealth that benefited from which have elites cases in also numerous are There this phenomenon. of instances are the Philippines favour political balance in its the tilt domestic to political faction wants which one local grievances. genuine to appealing and card the ‘resource-nationalist’ playing by in Malema the story part the Joseph least in the rise case of of beof at may This South Africa.South pressures. different of the intersection arise at often Disputes disputes, company–host-country triggers for common identifiable are there Although pressure arise when various often disputes that cases show individual of the nuances such socio-political of change, processes incremental Overlapping coincide. factors the over regions and between the capital tension escalating and democratization as accident company a e.g. event, adverse an with conjunction in wealth, of distribution often corruption, and enforcement poor law of area in an breach environmental an or were that examples of a number Box 4.4 provides disputes. for the context ripest create be which can found of (the full versions countries of identified in the case studies growing and issues unresolved such where materials) online in the supplementary investors. foreign with disputes future to contribute could tensions also is evidence there the world, parts of in many disputes of the threat of spite In to opportunities considerable have countries resource-rich in many governments that recent from and good governance on peer experience, past lessons from benefit from capacity institutional build to help that programmes and initiatives international these considers chapter next The sector management. on guidance provide to and improve and disputes avoid to they help discusses can how and lessons, and initiatives relations. company–government Although there are common triggers for company–host- country disputes, they often arise when various pressure factors coincide. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 82 Conflict

Chapter 4 Chapter 4 A Regional Outlook: Old Problems, Changing Dynamics 83 Dynamics Changing Old Problems, Outlook: A Regional The risk of a downward spiral of governance in South risk of a downward spiral of governance where public attention focuses increasingly on The Africa sector. extractives ownership and distribution of rents in the could undermine particularly oil and gas investments. countries, which disputes in several African Territorial Examples include Sudan and South the Corisco Bay (Equatorial Guinea–Gabon) Sudan, and Lake Albert (Uganda–DRC). Generational change in sub-Saharan to government and Generational change leading to potentially radical challenges Africa Growing public pressure is informed by a deep cynicism aboutcontractual relations with foreign investors. aspiration to alleviate poverty and ethnic inequalities – particularly in government leaders and their declared unemployment and the fallout from the Arab Spring. Governments will of rapid demographic, high the context legal and tax environment could entail a changing which interest’, increasingly try to appear to act ‘in the people’s sector in several countries. for the extractives The dynamics of centre–region relations in which there are large variations in development between resource- in which dynamics of centre–region relations The identified above be Kazakhstan, but similar observations could also and resource-poor regions. An example is rich made about others. India, Iraq or Nigeria, among As foreign companies, and foreign companies in Uzbekistan’s gas sector. of inequity between state Perceptions for a greater share of production, the Uzbek elite may seek to revise particularly Russian ones, begin to account the operating terms in its favour. The interplay of rival elite factions vying for control of the hydrocarbons elite factions vying for control of the interplay of rival The dependence on sector in Russia. Russia’s provoke elites revenues will decline and that may but if adequate reforms are not made, oil is continuing to grow more from private investors. to seek to extract extractives-sector bargaining power in negotiations over Kazakhstan with enhanced An increasingly self-confident battle between the government and is likely to result in a low-intensity confidence deals. This IOCsKazakhstan as seeks additional rent. Burma’s reaction to Chinese investment. Anti-China feeling is rife in many parts of Asia. Where Chinese Chinese Anti-China to Chinese investment. Burma’s reaction Asia. Where in many parts of is rife feeling change their investments in the past, regime seen to support autocratic regimes through companies have been sentiment against them. may unleash public effective lacks which situation in Afghanistan, made in a shifting political and security Contracts are being corruption. potential for and has much regulation and enforcement z z z z z z z z z Box 4.4: Examples of potential regional flashpoints identified in the identified in flashpoints regional of potential 4.4: Examples studies case Box z z z z z z z z z Prospects for Improving Relations 5 in Extractive Industries through Governance

5.1 International good governance initiatives 86 and resources 5.2 A growing body of experience of managing 88 state–company relations 5.3 A patchy agenda relative to the scope 92 of the challenges n Global initiatives to improve governance, especially with regard to payment disclosure and revenue transparency have made remarkable progress over the last decade, but the governance agenda for extractive industries remains patchy and inadequate relative to the scope of the challenges facing the sector. n Some countries have succeeded in establishing checks and balances that help to avoid damaging disputes and provides a stable investment climate. Some striking ‘good examples’ in the last few years point to innovative strategies and new avenues for governments and companies to work better together. n A strong, independent judiciary can, for example, play a key role in defusing tensions between the government and companies and can help to push both parties to negotiate a mutually acceptable settlement. n Similarly, public private partnerships can help local companies to upgrade skills and technologies, enabling them to participate in the value chains of extractives companies. This can be a more effective tool for creating links with the rest of the economy than blunter instruments such as export restrictions or high local content requirements.

Prospects for for Prospects 5.1 International good governance initiatives and resources 5.1 International good governance flows revenue of the transparency been improve to made have efforts Important transparency. of lack its criticized for often which is the extractives sector, from difficult experts, often determine is to it even for and public, the broader For are extractive industries from the revenues how and betweenwhom precisely lead can to mechanisms revenue-sharing complex overly Opaque and distributed. distrust local They also populations’ engender disputes. and inefficiencies, corruption companies. international of onto extractives-sector transparency greater propelled have These concerns Several international initiatives launched in this century focus on improving extractives- improving in this century focus on launched initiatives Several international in the supplementary be can found initiatives overview such (an of sector governance coexistence of examples practice’ also is ‘good a body There of materials). online Together, below. noted which is a selection of companies, and between countries host sources the old of some reduce which to on a basis provide can examples these positive global evolving and been created have that institutions international The tension. of in role increasing an play will undoubtedly extractives-sector governance on norms concerns companies’ Meanwhile, the world. around relations government–company be rules a the same may by playing all are not a field in where competitiveness about contention. of area growing the Extractive as – such initiatives of the global policy A number agenda. and (RWI) Institute Watch (EITI), the Revenue Initiative Transparency Industries convince to sought have (see– below) (PWYP) campaign Pay You What thePublish receipts and their payments of records make to companies and governments available. publicly the reconciling allows that standard a reporting developed has example, EITI, for The with (‘payments’) governments to extractives-sector companies from remittances of These records (‘revenues’). extractive industries from governments of the receipts which have in the past extractives-sector proceeds, of scrutiny public greater for allow receipts and been between very payments discrepancies difficult Identifying track. to 5 Relations Improving Industries in Extractive Governance through Opaque and overly complex revenue-sharing can mechanisms lead to inefficiencies, corruption and also disputes. They engender local populations’ distrust of international companies.

Chapter 5 Chapter 5 Transparency is Transparency necessary but insufficient in itself to drive good governance and more equitable revenue- sharing in the sector.

125 Prospects for Improving Relations in Extractive Industries through Governance 87 through Governance Industries Extractive in Relations for Improving Prospects Transparency is necessary but insufficient in itself to drive good governance and more more and good drive governance to in itself insufficient necessary is but Transparency observers, most by made repeatedly in the sector – a point revenue-sharing equitable also can countries producer in local elites Predatory civilsociety groups. notably for government, Angolan The in the sector. transparency improve to initiatives blunt without data operational its published the company after heavily BP censured example, all to letter open an sent officials. government The state from securing approval prior that ensuring and out BP throw to territory threatening its on operating companies oil after data published company other No in charge. who understood was all involved Asian on research House NOC. Chatham the Angolan Sonangol, except this incident of in a number further elites evidence that provides Angola and NOCs in Nigeria external parties. with the relationship of firmly often in control are African countries These complementary initiatives contribute to making revenue-sharing in extractive revenue-sharing making to contribute initiatives These complementary countries. producer of number expanding in an transparent more industries This global transparency agenda has been supported by federal legislation in the federal legislation by been has supported agenda globalThis transparency to disclose theirpayments to extractives companies which forces States, United requires Act the Dodd-Frank 2010 of Provision Cardin-Lugar This governments. disclose to publicly exchanges US stock on registered or listed extractives companies all to stages applies It country. in any governments $100,000 to above all payments extraction and exploration from process, development gas and oil the mineral, of mining and gas oil, operating internationally most export. As and processing to a is law, a national although Provision, the Cardin-Lugar US-listed, are companies beyond implications the wide-ranging sector with for development regulatory major will in extractive industries disclosure payment for pressure Legislative US borders. in Brussels. being negotiated is that furtherincrease EU directive a similar through The EITI has received growing international support: it is now being implemented in being implemented now is it support: international growing received has EITI The companies. mining and gas oil, major the world’s 70 of by supported is and 37 countries built has in which theinitiative Nigeria and East Timor of below (Seethe examples is transparency flows.) Revenue revenue for accounting for localsignificant capacity a global the PWYP, as such programmes, other of a number by also being supported a the RWI, and members, 650 than more with civilsociety of organizations network countries. in 30 operating organization grant-making and policy institute non-profit can also be an effective means of combating the corruption that is often associated associated often is that the corruption combating of alsocan be effective means an countries. in producer rents resource with As a result, there have been a growing number of initiatives, including some not not some including initiatives, of number been a growing have there a result, As guidelines with companies provide to focused the extractive industries, on exclusively the environment protect corruption, prevent to help practices that business on Guidelines OECD updated the recently They include rights. human uphold and But African states and societies are not static. As in other parts of the world, African the world, parts of in other As static. societies not and are African states But better with Citizens account. to more their governments holding are populations government critical of more news are international and information to access revolutions The basic services of lack inequality. corruption, and mismanagement, permanent) powerful and (if less similar but cases Africa in point, are in North been seen Africa, in South have Mozambique, dissatisfaction popular of manifestations elsewhere. and Uganda Malawi, 5.2 A growing body of managing state– of experience company relations climate a stable in establishing others than better managed have countries Some few in the last examples’ been striking ‘good some have there and investment for to support international better been provide to made have efforts Nascent years. for the in extractives sector, governance in improving countries producer developing Book, Source the Canadian-led the Extractive as Industries such initiatives example, Development, Sustainable and Metals Minerals, Mining, on Forum Intergovernmental best-practice examples, on draw to They tend Charter. Resource the Natural and The between the parties involved. behaviour and understanding better promoting maintaining and selected in building casesfactors key identify some following for Multinational Enterprises; the 10 principles of the UN Global Compact; the the Global UN Compact; of the 10 principles Enterprises; Multinational for the and Framework); (the Ruggie Rights Human and Business on Principles Guiding also for exist initiatives Similar Rights. Security Human on and Principles Voluntary them are Among the extractives sector. for funding provide that financialinstitutions Principles. the Equator and Investment Responsible for the Principles and in nature voluntary they are that in common have principles and These guidelines they though even And mechanisms. enforcement and monitoring strong lack mostly the social of environmental and awareness in raising role important an played have nature law’ their ‘soft actors, private-sector among extractives companies of impact behaviour. effect those difficult companies’ on their tangible it assess makes to in also emerged have initiatives international commodity-related of A number conflicts. been violent linkedto directly have chains specific caseswhere supply a series initiatives and of Process Kimberley the diamonds-focused They include and chiefly tin, tantalum the DRC, eastern from minerals’ ‘conflict with concerned been used to have these commodities of artisanal mining from Proceeds tungsten. rights human egregious and in conflicts widespread with groups combatant finance in Angola, the these civil wars conflicts include diamonds, the case of In violations. tungsten, and tin, tantalum 2000s. For early Liberia in the Sierra Leone 1990s and and those the use metals of in financing by been motivated have initiatives supply-chain the mid-1990s. since the DRC eastern devastated have the series conflicts that of approaches conflict governance minerals, the DRC-linked and both diamonds For diligence due certification and international developing on concentrated have entering from conflict-affected in sourced regions materials raw prevent that schemes and NGOs international from pressure intense Under chains. supply international and monitoring extensive Global Witness, as such organizations campaigning both intergovernmental including been established, have mechanisms enforcement these efforts the DRC, conflict the case from minerals of In efforts. intra-industry and strict which imposes been Section boosted Act, the US Dodd-Frank by have 1502 of the tin, of status the ‘conflict-free’ establish to companies US-listed on requirements with been credited These have efforts used theirin products. tungsten and tantalum conflict regions, from those in the commodities flow of reduction a marked achieving livelihoods better to contributing and tensions reducing of in terms their impact but debated. hotly remains in conflict-affected areas Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 88 Conflict

Chapter 5 Chapter 5 A strong, independent independent A strong, a judiciary played in key role in Chile the defusing one of most serious disputes in decades and pushing both parties to a settlement.

126 Prospects for Improving Relations in Extractive Industries through Governance 89 through Governance Industries Extractive in Relations for Improving Prospects As discussed in Chapter 4, the commodity price boom of the past decade the led past boom to has price of 4, the commodity discussedAs in Chapter sectors gas and oil the mining, from revenues volatile dependence on even greater Brazil and others: stakeholder cooperation to strengthen economic linkages strengthen to stakeholder cooperation others: Brazil and In 1978, the small Chilean state-miner Enami sold a set of copper assets that assets that copper sold a set of Enami 1978, the small Chilean state-miner In public countries, other many in Chilean In courts. ensued legal dispute A bitter assets American’s Anglo of in expropriation resulted have probably would pressure tradition Chile’s But panels. arbitration in international battle a long-running and meant courts independent fiercely its and rights investors’ foreign protecting of legal proceedings. the complex the from winner as emerge side could either that American Anglo in the high-stakes legal battle, defeat a bruising risk to Unwilling a face- negotiate and the legal decided proceedings halt to Codelcoand reluctantly begun,had the dispute after year a than less 2012, August In compromise. saving even less for wanted) it what (half of the project of Codelco 24.5 per cent acquired to able was and the project of control retained American Anglo price. the option than sale and the Mitsubishi option, Codelco its letting with exercise compared that claim billions. Codelco it with saved had compromise In 2012, Chile became embroiled in one of the most serious disputes in decades with serious disputes the most of in one 2012, Chile became embroiled In judiciary played independent A strong sector. thriving mining in its investors foreign a both parties negotiate to pushing and rapidly the dispute in defusing role a key settlement. acceptable mutually 2012 in January the option exercise would it October that 2011, CodelcoIn announced value. market the estimated below far $6.75 billion, at themine of 49 per cent buy and flagship its of chunk sell to a large have would it that fearing surprise and by Taken that announcing by in November responded American Anglo the cheap, on projects American Anglo Mitsubishi. to $5.4 billion for the project of sold 24.5 per had cent it but in January price the agreed at option Codelco its still that could exercise claimed smaller a public led asset. This to much the now half of settle for to have would it that their accused was of outcry in Chile:trying Chileans American Anglo of cheat to illegal as Codelco the deal officials Mitsubishi with Furious declared riches. copper in court. it challenge to promised and Chile: independent an judiciary of The role an retained it but Minerals, Exxon to complex theSur as became known later to not whether or window a one-month during later decide years three to option a formula be determined by would price The the project. of 49 per back cent buy sold the later Enami years. five the past over the company of based the profits on sold the Mobil Exxon $175 million. Codelco for state-miner fellow its to option its with complex, Sur in 2002. The $1.3 billion for American Anglo to complex Sur 2011, a $2.8 billion In project. a coveted into developed mine, Losflagship Bronces largest the world’s of one become to track on it put American Anglo by investment mines. copper the conditions for successful company–government relations and indicate where where indicate and relations successful company–government for the conditions provide to helping the sector are of governance better support to efforts international relations. future better for the groundwork

Its Its 127 128 ). This has led to a renewed emphasis emphasis a renewed led to has ). This success is also due in part to the nature of the diamond trade. There has long been long has There trade. the diamond of in part the also nature is to due success (generally stable a relatively seller (De Beers), for allowed which has a monopoly Botswana’s of years in the early important quite was This in prices. trend upward) De with partnership country The alsoindependence. a public–private developed share. a 15 per cent owns now company Beers in whichthe national (in Brazil the phenomenon of countries returning to greater dependence on the dependence on greater to returning countries of the phenomenon (in Brazil primarybeen sector has termed reprimarização on creating stronger links between extractive industries and other sectors of the of sectors other links and between extractive industries stronger creating on policy-makers aim Many countries. producer many goalfor long-standing a economy, and gas oil, activitiesfor support provide that companies of the growth stimulate to in the country. processing downstream greater encourage to and companies mining the jobs than more create to linkages forward and these backward idea for The is associated the wealth of more retain to help extractives industry and capital-intensive in the country. production resource with primary sector, large its on dependent increasingly become has economy Brazil’s gas and oil growing its sector for thriving supply a create to also has managed but share The the economy. to annually $10 billion nearly contributes This industries. 75 up makes now and steadily increased has local by companies offered supplies of government, of coalition A broad sectors. gas and theoil for supplies of percent companies gas and oil and organizations local banks, non-profit associations, business investment- preventing in the sector and been growth has crucial sustaining to the the skillsof been increasing activities has on its focusof The disputes. damaging the stimulate to in order local to finance companies providing and local workforce necessary investment. strong in developing a critical role played has cooperation Close stakeholder tradition a long Finland, In too. countries in other linkages forward and backward a thriving created has government and universities between industry, cooperation of in advanced the most among is sector that support mining export-orientated the world, even though until recently the actual mining industry the actual developed mining has recently until even though the world, relatively slowly. copper thriving its with linkages strong struggledhas Chile,a country create that to In A results. beginning show is to cooperation stakeholder on emphasis a greater sector, than close ties more with Codelco and forged has Billiton BHP by programme joint their upgrade to is the aim and Chilean medium-sized enterprises, 60 smaller and a stronger they will play this to way be In able capacity. wider business and innovation themselves also Chile in orientate to and companies mining the two in supporting role export markets. international towards more conservative management revenue others: Botswana and but industry, the diamond on entirely depends almost export revenue Botswana’s afflicting other volatility revenue of the problems of many avoid to managed has it observers, some to According African mineral-exporting countries. sub-Saharan political stable and broad of the development to chiefly is attributed success Botswana’s high a consequence, As independence. decade first of its during formed coalitions maximize to in order forged were policy institutions pro-growth and capacity state management. resource prudent sector through the diamond from the returns Brazil’s economy has Brazil’s economy become increasingly dependent on its large primary sector, but has also managed to create a thriving supply sector for its growing oil and gas industries. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 90 Conflict

Chapter 5 Chapter 5 Building cooperative relations with communities requires a broad engagement that does not focus only on bargaining over rights, compensation and benefits.

Prospects for Improving Relations in Extractive Industries through Governance 91 through Governance Industries Extractive in Relations for Improving Prospects Papua New Guinea has a long and difficult track record of tensions over mining mining over tensions of difficult and record track a long has Guinea New Papua (see mine Section the negotiation 2.2.4). But Tedi the Ok at least not projects, Building cooperative relations with communities affected by extractives projects extractives projects affected by communities with relations cooperative Building rights, over bargaining on focus only does not that engagement a broad requires inequality, persistent with difficult is benefits. This and in regions compensation large are needs, there as development extensive and structures weak governance partners. asymmetries between power negotiation and information Papua New Guinea: investments with local Guinea: New investments communities Papua the But the facilitators. men, only comprised initially localThe representatives to managed observers the independent eventually and representatives company process in the negotiation formally women include leaders to community convince The negotiations. take part to in the top-level representative female one allow to and governance all relevant on be represented would Women substantial. was impact to be awarded would scholarships half the educational the agreement, for committees than (rather bank accounts family to made were compensations cash girls, and women Other countries with conservative spending and investment strategies such as Chile, as such strategies investment and spending conservative with Other countries from savings large also generate to been able (see have below) East Timor and Norway of the impact against buffer a strong These provide revenues. extractive-industries climate. investment a stable support thus and fluctuations price the local to damage extensive and disputes protracted of the background Against is government which the PNG of mine, Tedi the Ok of the operator environment, of in the negotiation resources significant decided invest to shareholder, the main the 156 of elected with representatives agreements continuation mine community selected local and facilitators international Independent the project. villages affected by environmental legal, independent free and and both parties ledby the negotiations, Additionally, negotiators. the local to community provided was advice accounting and observer independent an as engaged was court thesupreme of justice chief former a the by covered million, $3.4 of a cost at 18 months for which lasted theprocess, of company. mining investment environment and mutual trust between company and government. government. and trust between company mutual and environment investment fiscal a steady and sustain to surpluses managed has government Botswana’s health and infrastructure, as such in areas investment public productive of stream economic fiscaland balance maintain to help Several mechanisms education. share a large channelling by achieved is stabilization of A measure diversification. investment long-term a into sales generate diamond reserves that the exchange of the was management revenue prudent of ingredient important Another fund. used is SBI thein mid-1990s. The (SBI) index budget sustainable a of development in the investment productive the between balance and assess spending to spend to the day of the government of restricts the ability it budget; government petwindfalls projects. on offer 2007 may and in 2006 Tedi locals Ok with affected by agreements of the into society of be sectors can integrated marginalized how about lessons process. bargaining Taking the route of democracy and the rule of law has meant a more stable stable a more meant has democracy the rule of law and of the route Taking All the same, the NEITI reports have made important important made have the NEITI reports All the same, 129 contributions to increasing transparency at the federal level and have increased increased have and the federal level at transparency increasing to contributions detail. in greater their revenues for account to states petroleum-rich on pressure 5.3 A patchy agenda relative to the scope of the challenges agenda relative to the scope 5.3 A patchy in challenges governance targeting and in identifying been has progress There Particularly years. in recent tools and initiatives of array an with extractive industries funds, stabilization and transparency revenue disclosure, payment to regard with the international benefiting from countries of examples remarkable some are there the UN as such initiatives That offer. on frameworks of guidance and assistance gained have and the EITI exist or Rights Human and Business on Principles Guiding achievement. impressive an is acceptance growing robust of the importance demonstrate others Chile, and cases Botswana The of resolve to and revenue manage to in the sector, operations govern to institutions to male clan leaders) and 10 per cent of the compensation payments would be directly would payments the compensation of 10 per cent leaders) and male clan to women. of groups by administrated company and community by a success as perceived widely were agreements The subsequently has effort less observers. However, independent by and representatives goals its of many and theagreement, of theimplementation been support to made the negotiations. since been in the achieved years not have transparency revenue on political sustained Nigeria: and attention East Timor in role important an played has the political highest level by attention Sustained achieving After extractives-sector revenues. for initiatives transparency pioneering in a crucial role Alkatiri played Mari minister in 2002, the thenindependence prime institutions accountable and transparent build to efforts East Timor’s championing Those have efforts resources. rich hydrocarbon its from therevenues managing for candidate EITI became an East Timor governments: subsequent by been maintained country in 2010. EITI-compliant the third in 2007 and to resources natural from revenues all state 2005 requires of Act Fund Petroleum The of up made board independent an by overseen is This fund. be in a discrete deposited political from and government of branches different from high-level representatives the fund’s for account must reports annual and Quarterly civil society. parties and government The revenues. of breakdown a company–by-company activities, including the fund each year, from withdraw can it the amounts of faces strict in terms limits the fund a result, As the parliament. by be approved must withdrawals additional and the by $12 billion nearly in 2005 to $250 million of initial deposit an from grown had collateral. the debt fund as using from also is prohibited government 2012. The of end disclosed. be publicly must contracts gas all and new oil that requires law A related in Nigeria’s role a leading played Olesegun Obasanjo president the late too, Nigeria In the Nigeria established that a law of the passing the EITI and of endorsement state Especially the (NEITI). important at Initiative Extractive Transparency Industry use of accountable and the transparent from way still is a long today Nigeria level, revenues. petroleum vast its Sustained attention Sustained attention at the highest political level has played an important role in pioneering transparency initiatives for extractives-sector revenues in East and Nigeria. Timor Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 92 Conflict

Chapter 5 Chapter 5 Escalating tensions Escalating tensions between companies and producer governments are often ignored by the international community. State-backed companies are increasingly subject to the same reputational and political pressures that have led Western multinationals to accept tighter regulation. Prospects for Improving Relations in Extractive Industries through Governance 93 through Governance Industries Extractive in Relations for Improving Prospects state-backed competitors from emerging economies, which are not subject to the to subject not which are economies, emerging from competitors state-backed Sustained attention to better governance and development goals on both sides of the both sides of on goals development and governance better to attention Sustained create to efforts part of be important an should relationship company–government conditions. investment stable maintain and disputes damaging trust, avoid same rules. Refusing to pay bribes and being obligated to disclose payments makes makes disclose to payments being obligated and bribes rules.same pay to Refusing underplay often These views, however, countries. in many complex more business a resilient social in maintaining and performance environmental strong of the role state- major as the fact that They also ignore operate’. to licence ‘social long-term rapidly activities, they are their overseas expanding are extractives companies backed led have that political pressures and reputational the same to subject becoming regulation. and scrutiny tighter accept to multinationals Western In company boardrooms too, there is not always sufficient attention to the imperative the imperative to attention sufficient always not is there too, boardrooms company In signed have players major whichmany to principles and the pledges implementing of that concerns voiced have multinationals leaders in Western business Some up. vis-à- a disadvantage them at put could regulations and norms international growing vis Yet this brief survey also indicates that much more could be done. The global The be could done. more much survey this brief that also indicates Yet relative inadequate and patchy remains extractive industries for agenda governance repeatedly have chapters previous The the sector. facing the challenges the scopeto of countries resource-rich social the political and to many fragility of attention drawn Escalating generally. the sector more governing institutions the fragility of and the by ignored often are governments producer and between companies tensions the stability undermine could cases, those some tensions In community. international countries producer of which a number from in good governance progress and for still support lack countries new producer Many years. benefited in recent have rapidly of deal to the challenges with mechanisms effective regulatory developing foreign influx of a large and streams revenue volatile extractive industries, growing in the sector. investment disputes in a cooperative way. Effective governance of extractive industries and and extractive industries of Effective governance way. in a cooperative disputes – possible in the clearly sector is relations state–company cooperative maintaining the Natural as such Initiatives curse’. the ‘resource about inevitable nothing is there a are countries producer learned among lessons share to aim that Charter Resource direction. in the right step The Outlook for Extractives 6 Relations in a Changing Landscape

6.1 Unpacking company–government tensions 97 6.2 Outlook for company–government relations 100 n Solutions will have to be found at a time when the political status quo in many producer countries is being undermined by profound social and economic change. The lack of a national consensus on how subsoil resources should best be managed, and the fragility of political systems are likely to contribute to regulatory instability and tensions with investors. n New producer countries, in particular, are at risk. Although political leaders in these countries are generally well aware of the pitfalls of extractives- led development, they still are at peril of repeating the damaging mistakes of others. n The extent to which the extractives sector is able to develop more effective responses to intensifying global environmental pressures is an increasingly salient issue for company–government relations. From water scarcity to climate change, environmental stress is likely to become a greater source of tensions in the sector over the next two decades. n State-backed investors and companies face an increasingly similar set of operational and investment risks to those of their private-sector counterparts. Growing overseas investment by state-backed companies from emerging economies is likely to subject them to the same fundamental dynamics that have been shaping relations between host governments and Western multinationals for a long time.

The Outlook for Outlook The This report has focused on the relationship between extractives companies and the and between extractives companies focused the has relationship report This on and of the drivers examined has and in which they invest countries of governments between them. disputes for conditions 2, are in Chapter summarized in the extractive sector, tensions Company-government has answers finding the of task and increased have the stakes But new. means no by confronting structural of challenges list The urgency. renewed with reasserted itself global in commodity volatility price unprecedented includes and the industrylong is companies, resource and investors state-backed of global role the growing markets, change climate of a consequence as notably pressures, environmental mounting and mismatched of risk also is a growing There resources. water for competition and boom an faces commodities the decade-long as hopes, dashed and expectations limbo. into been put have investments future of dollars of billions and uncertain future approaches statistical nor disputes of causes understood conventionally Neither where of indications reliable offer alone can countries dispute-prone predicting for evidence the available Indeed, erupt. may tensions serious company–government type country no or that shows case studies and records arbitration international from the extractives sector in of role unique The theseto disputes. immune is company of asymmetries in the power with combined producers most of the political economy inherently the in industry are contracts that mean relationship company–government tensions. with fraught fragile often and in many quo a time when the political status at be to found will have Solutions change. social economic and profound being undermined is by countries producer to pressure public intense under are extractives companies and Governments are endowments whose to benefit resource and how about accountable more become which speed at the increasing by reinforced often is pressure That being developed. extractives- of scrutiny international the intensifying globally and travels information governance. and sector investments extractives investment of the context change fundamentally these factors Together, development, the sector’s about decisions in strategic adaptation require and the way and issues, wider development to approaches investor regulated, is it how 6 Relations Extractives in a Changing Landscape There is a growing There risk of mismatched as the expectations commodities boom faces an uncertain future.

Chapter 6 Chapter 6 Host governments Host governments harbour suspicions try to that companies unduly profit from a country’s resources, while companies worry that sovereign power could override contracts.

The Outlook for Extractives Relations in a Changing Landscape 97 Landscape in a Changing Relations Extractives for The Outlook

are more likely in undemocratic countries and that greater income inequality inequality income greater that and countries in undemocratic likely more are 4. in Chapter case studies by reinforced is This disputes. the of risk increases with politicalin countries risk to vulnerability They highlight a company’s the absence In ruled elites. a set of by are that institutions weak state sometimes may resources of control national greater processes, democratic of legitimacy of the domestic strengthen to the way easiest as be perceived challenged often are contracts that 4 also shows Chapter However, a regime. particularly and in political affairs voice the wideras society a stronger gains Several previous studies have made the case that expropriations of company assets company of expropriations the case made that have studies Several previous Despite much research, it remains unclear of precisely how political and economic economic political and how precisely of unclear remains it research, much Despite the and the CHAD of Analysis the disputes. likelihood on of impact characteristics disputes government–company that cases discussedvariety of shows in this report over legal battle occur BP’s can settings. in a widein extractive industries variety of gas shale over lawsuits and Mexico of in the Gulf spill the oil for compensation out played types disputes of common of illustrations are States in the United royalties legal contexts. political and sophisticated within 6.1.2 No country or company type is immune to disputes However, these imbalances also often set the context for disputes. The host host The disputes. for set context the also often these imbalances However, will expertise use its unduly to the company that suspicions harbour may government power sovereign that worries the company wealth; resource a country’s from profit be concerned part, may its for Civil society, contract. the commercial override could producer in a state’ within a ‘state become could powerful extractives companies that feel may the company Conversely, institutions. regulatory inadequate with countries – from remit commercial its beyond implications with responsibilities by burdened between rival political elites. in disputes up being caught to schools building The fundamental asymmetry between the resource ‘owner’ and the resource ‘producer’ ‘producer’ the resource and asymmetry ‘owner’ fundamental The between the resource and between usually is company a contract The the relationship. furthercomplicates knowledge, unequal vastly has each party yet often government, of institution an a mutually to these work imbalances Ideally, political power. act to and capacity the of development the economic supports the company interdependence: agreeable provides while the government resources its from income generating country by host resources. subsoil valuable to access with investors The high stakes involved in extractives projects often make them subject to political to them subject make often in extractives projects highThe involved stakes the of government thehome and government both thehost-country by intervention, historical and current by coloured often are These relationships company. investing will bring the project that dividends of expectations by or between countries relations country. in the host groups and citizens to 6.1.1 Company–government relations in the extractives sector are innately sector relations in the extractives 6.1.1 Company–government fragile and vulnerable these challenges. tensions company–government 6.1 Unpacking in which contracts are drawn up. Enhanced international cooperation and joint joint and cooperation international Enhanced up. drawn are in which contracts crucial address to are agencies development and companies governments, by efforts 6.1.3 What constitutes a ‘fair deal’ is subject to change over time constitutes a ‘fair deal’ is subject to change 6.1.3 What a project from obtains a government revenues of the share 3 shows, Chapter As project. to project even from often country and country to from widely varies of share’ a ‘fair determine can that formula simple model or objective no is There little parties practice, have In party. each for resources over control and revenues knowledge incomplete with arrangements contractual negotiate to than other choice these Under prices. future and risks project about expectations different with and become power in bargaining differences asymmetries and information conditions, upon the fall of a dictator, when contracts signed under the old regime are deemed to deemed to are regime signed the old under when contracts dictator, the a fall of upon illegal. or illegitimate be illegitimate also can deposit a be important an the of size as such characteristics Project small ‘a that remarked once Adelman Maurice economist The disputes. of determinant deposits Larger landlord’. unhappy find equals an a large landlord; find equals a happy the policy-makers and from expectations greater and attention more attract naturally larger Much investors. with negotiations politicized in heavily result often and public, further impacts environmental and infrastructure requirements expenditure, capital impact Owing the larger to each party. for the stakes raise and the process complicate and specific on operations centre often mining involving localon tensions livelihoods, the public and this, governments to contrast In level. the community at theirimpact sector the significance petroleum to strategic and economic greater far attach typically been sector has the oil that meant has This rents. resource larger size and its because of kinds. various policies of resource-nationalist to prone more foreign and considerations geopolitical that show the case studies addition, In the and investors foreign with relations policy a government’s influence can goals be in valued may example, for companies, Western-backed disputes. likelihood of Western by engagement and interest continued of guarantors as Centralparts Asia of balance partners to both Western look to Mongolia and Kazakhstan governments. ambitions. Chinese rise regional of be to the threatening they perceive what to hard often is it and difficult is disentangle, to interact factors these various How the one country cases suggest But disputes. to prone are which countries predict legitimacy lack whose governments in states operate when companies exception: This heightened. action is arbitrary or extreme of the threat accountability, and longer no are wealth that benefited from which have the elites be once either could The elites. struggles power when to the among sector subject becomes or in power Such will be repudiated. when contracts reviewed or if but not becomes here question Burma transitioning in relations affect government–company to likely are phenomena example. for Central African Republic, in the post-coup and a panacea not are panels arbitration international and treaties investment Bilateral spite in hands, politicians’ force can pressure public Domestic these problems. for African countries, in many example for ruling And elites, treaties. investment of the filing of trust. Thus of breach a as arbitration international regarded often have lose the assets in consequence. country and leave to the claimant a case force could changes accept to prefer may even powerful multinationals these conditions, Under what of regardless channels) informal through (while complaining contracts to them in principle. grant clauses arbitration protection Geopolitical considerations and foreign policy goals can influence a government’s relations with foreign investors and the likelihood of disputes. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 98 Conflict

Chapter 6 Chapter 6 What the company, the company, What or the government the public considers to a ‘fair deal’ is apt over time, change shifting influenced by power dynamics, political paradigms and market prices. countries Producer closely follow their peers. Precedents – from 50:50 profit- sharing in Venezuela in 1948 to recent lawsuits redefining corporate liability – can inspire legislative or court changes cases in others. The Outlook for Extractives Relations in a Changing Landscape 99 Landscape in a Changing Relations Extractives for The Outlook

As Chapter 4 has demonstrated, tensions often become unmanageable at the the at unmanageable become often tensions demonstrated, 4 has Chapter As which will of shifts, some power and country specific pressures of events, intersection democratization 5. Thus discussed in Chapter thebe global influenced initiatives by The national political economy of a producer country will shape the impact of global of the country impact will shape a producer of political economy national The the on impact a very different have They can extractive industries. its on trends of the level on example, for depending, countries, different of extractiveindustries the ideological or legacies that framework the institutional development, economic impact The the extractives sector. to approach governance a country’s characterize Chile, as which in a country such greater much is prices volatile more higher and of Mexico, in, say, than economy, its of pillar the extractives a main sector as depends on the economy. of smaller proportion a much up make extractive industries where investments a country state-backed Similarly, of a wave to may respond differently – elite knit a tightly by controlled are institutions state if its economies emerging from Peru as a country such might – than a case is in point reforms the recent to prior Burma the environmental monitoring civil society closely is that a vibrant with Mongolia or socialand companies. practices of 6.1.4 Local and regional contexts matter and regional contexts 6.1.4 Local through segmented remains Extractive industries matter. contexts Local regional and coal and barriers. Gas investment trade and through or infrastructural constraints investment and markets; regional a set in still of fragmented are example, for markets, China, India as such economies emerging in major extractive industries in the large markets. globalcapital from off cut largely remains Russia and Shifts in political paradigms and global norms affecting the sector can, moreover, moreover, affecting the sector can, global norms and Shifts in political paradigms countries Producer their legitimacy. challenge and contracts the for undermine basis adopting only not their peers. involves This among developments follow closely others. of the failures avoid to also attempts seen successful but as are policies that similar implementing countries of lead a range can to effects’ These ‘demonstration country – set in one precedents Thus time. the same at types policy of intervention the redefine that lawsuits recent in 1948 to in Venezuela the 50:50 profit-sharing from cases court in others. or changes legislative inspire – can liability corporate of extent What the company, the government or the public considers a ‘fair deal’ is apt to change change to apt is deal’ a ‘fair considers the public or the government the company, What market and political paradigms dynamics, power shifting influenced time, by over existing of the foundation away sweep can prices Structural shifts in commodity prices. data the arbitration As positions. bargaining alter and agreements revenue-sharing with correlated closely is arbitration international taken to the disputes rise of show, between stability relative was the there 1990s, Throughout oil. therise of in theprice the period with 2004. after parties in the sector compared government and company this weaknesses discussed throughout institutional and imbalances the same Yet presented the case studies from clear is It pertained countries. in most arguably report challenged has commodities many for prices rising decade the past of 4 that in Chapter to pressures fuelled national and expectations increased relationships, contractual country. the host benefits for more ensure key determinants of contractual outcomes. With expectations and assumptions on on assumptions and expectations With outcomes. contractual of determinants key the project as disputes and tensions potential this creates apart, far both sides often way. under gets

public discourse on resource-sector governance. But cases such as Argentina, Argentina, as cases such But governance. resource-sector on discourse public an parties embrace openly Bolivia,governing where and Zimbabwe Venezuela, rather the exception remain to likely are agenda, resource-nationalist aggressive the rule.than expertise and capital foreign flow of a steady attracting of the imperative Moreover, up tear willingness to governments’ most on be to a powerful constraint continues to and tax increase revenues to keen assets. Although expropriate to or contracts Mozambique, Peru, as such countries of the governments local processing, encourage consequences the debilitating of aware well are Guinea and Zambia Mongolia, them the among instances, been many have There investors. spooking foreign of tax or steep hikes announced has tax, in which a government super-profit Australian industry from pressure under later compromise to only requirements new ownership investors. and of share a larger appropriate to lead governments may reforms regulatory Successive over control direct greater seek exercise to may governments some and rents, resource involvement state tax take and – particularly where in mining, extractives projects major occurto likely are changes such But sector. gas and thein smaller oil than much remain between government disputes ‘low-intensity’ long-running through and incrementally nationalizations. and expropriations of a global through wave than rather company and 6.2 Outlook for company–government relations 6.2 Outlook for will shape that challenges and the outlook sectionThis about six observations makes in extractive industries. country relations company–host of development the future avoid can companies and best governments how for ramifications Theywill have disputes. damaging nationalism’ 6.2.1 A more nuanced view of ‘resource from the state of retreat economic the ideological with and broken have Governments have countries resource-rich the 1990s. Most characterized sector that the resource in the interests effectively, their extractives sector more harness been to seeking ways rents. resource of share a greater capture to and goals development national broader of a global of announcements and encroachment government of warnings However, overblown. 1970s are the 1960s and paradigm of the ‘resource-nationalist’ to return companies for terms in actual changes of nuances the widevariety of Theyoverlook that new measures underpinning concerns host-country legitimate ignoring risk and affect the sector. Africa South as and such countries about valid concerns course of are There the part of prominent a more become has rhetoric nationalist where Indonesia, and escalating tension between the central government and regions over wealth wealth over regions and between government the central tension escalating and enforcement, poor law over anger when public breach environmental an or distribution, a ripe high create can already is the economy of state the declining or corruption extractives companies. with disputes government for context Cases where governing parties openly embrace an aggressive resource- nationalist agenda are likely to remain rather the exception than the rule. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 100 Conflict

Chapter 6 Chapter 6 Fragile political Fragile systems in many producer countries are likely to contribute to regulatory instability.

Some developing developing Some 130 The Outlook for Extractives Relations in a Changing Landscape 101 Landscape in a Changing Relations Extractives for The Outlook

There are of course exceptions, from Middle Eastern oil producers to mining mining to producers Eastern Middle oil from exceptions, course of are There As the regional cases have demonstrated, state attitudes towards the extractive towards attitudes state demonstrated, cases have the regional As a national lack countries resource-rich many and monolithic, rarely are industries Extractive best be managed. should resources their domestic how on consensus informal and be formal to to subject will continue countries in most industries As agendas. and interests between different with rival political factions contestation countries the extractives sectorin producer on the impact change, political fortunes be immediate. often can Fragile political systems in many producer countries are also likely to contribute contribute to also likely are countries producer in many politicalsystems Fragile the benefits about face high expectations producers New instability. regulatory to deliver. to governments on pressure will intensifying bring, their resources that bout another facing are producers experienced some emerging-economy Meanwhile, stymied has and increased effects,the sector has dependence on as curse’ ‘resource of will those be countries of Governments job creation. and diversification economic by example for jobs, more provide to and the economy rebalance to pressure under laws. trying local increase to content countries with large extractive industries have also been pushing for more direct direct more for also been pushing have extractive industries large with countries further economic the country’s to essential as a sector regarded over control state participation, state increased or automatic of takes the form often This development. Mongolia. and in Guinea laws to changes by example for demonstrated as the the Australian case as of But, Australia. Canada, Chile as and such countries resource-governance countries, even in developed tax demonstrates, super-profit least not reform, far-reaching to or contention to be can susceptible frameworks For also both can ways. cut Changes external conditions. evolving to in response considering is Nieto Peña Enrique of administration the new Mexican example, 1938. The the time first since for ownership foreign allow would that changes in the East Middle producers gas and oil the large of many of frameworks regulatory could in the region further political destabilization but now, for static seem largely very quickly. the situation change Price volatility can destabilize can destabilize contracts between extractives companies between extractives companies contracts destabilize can destabilize can volatility Price been have example, signed in the 1990s, for contracts Many governments. and dealing the with for provisions few revised because they or contained questioned accrued spiked when that prices windfall the extraordinary profits of division renegotiate to or taxes raise to attempts decade. the Resulting past several times over companies. with tensions led to often have terms contractual 6.2.3 Price volatility will be a key source of friction in company–government 6.2.3 Price relations 6.2.2 In most producer countries, regulatory regimes for extractives will regimes for extractives regulatory producer countries, 6.2.2 In most flux remain in have years in recent multinationals by investments of a wave and prices High rules, tax burdens ownership to seriesin a changes of bring to governments motivated During the most economies. advanced and in both developing export regulations and or increased 25 countries example, 2011, for in 2010 and spike metals price recent royalties. and taxes mining increase to their intention announced 6.2.4 Extractives projects pose serious challenges for new producer countries challenges 6.2.4 Extractives projects pose serious had have so far that countries in many emerged have extractiveindustries Large and Mozambique as such countries For the sector. experience regulating in limited a host also has brought but growth economic triggered rapid this has Mongolia, over concerns capacity, regulatory of a lack They include problems. familiar of the so-called disease growing and corruption, Dutch and damage environmental in mining interest Current rents. resource of division the appropriate over tensions region, the Arctic Somaliain or development hydrocarbon and Afghanistan in and company–community for newpossibilities of a host up throws instance, for disputes. company–government of aware well generally are countries in these new producer governments Although A lack others. of mistakes they the costly the still pitfalls, run repeating a highof risk creates extractive industries in managing both technical capability experienceof and and groups between sub-national tensions for the potential specific and challenges example, for Mongolia, or in Guinea agreements revenue-sharing Initial companies. attempts ongoing and investors, towards been criticized being too as generous have to subject become already have regulations tighten to the tax increase take and to causes a skilled infrastructure and workforce of a lack Furthermore, disputes. complex extractives- benefit from to the local of economy the ability limits and delays project the of unaware a public and expectations government Unrealistic sector operations. can initial investments recover and necessary a project is develop time that to long tensions. and rise frustrations give to extractive industries on dependent been heavily have that economies with Compared example, For advantages. some also enjoy may producers emerging time, a long for bodies oversight and institutions state develop time to more had have they may The current uncertainty and volatile outlook for prices in global metal and fossil fuel in global fossil prices metal and for outlook volatile and uncertainty current The processes Finding disputes. state–company be of to a powerful driver likely is markets of continuity ensure to and revenues fluctuating of the sharing manage better to more in creating factor will important be an environments in volatile projects relations. government company–host cooperative been have policies that and expectations both great countries, producer many In in slowdown a by beingchallenged now boom are the commodities by informed respond companies major many As prices. future about uncertainty and investments disputes projects, capital-intensive most the and riskiest cancelling or postponing by jobs infrastructure, provide to these projects on counting governments producer with to more resort may governments example, For surface. to likely are revenues and valuable develop to companies on exert pressure to in order arguments ‘use-it-or-lose’ uncertainty. economic despite deposits and management revenue prudent systems, flexible taxation and Well-designed the adverse reduce can windfall profits of the sharing for provisions contractual robust But extent. a great to governments and both companies on volatility of impacts And countries. producer in many in place still not are volatility against safeguards how about dialogue their hosts with a candid develop failed to often have investors and large of schedules affect the could development environment uncertain price an manner. in a cooperative be can managed impacts such how and projects complex Well-designed Well-designed taxation systems, prudent revenue management and contractual provisions for the sharing of windfall profits can greatly reduce the adverse impacts of volatility. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 102 Conflict

Chapter 6 Chapter 6 Environmental will confront change companies with many of the problems associated with inadequate due diligence and unclear liability regimes. Emerging producers Emerging some may experience as such advantages more time to develop and state institutions oversight bodies before they embark on production.

The Outlook for Extractives Relations in a Changing Landscape 103 Landscape in a Changing Relations Extractives for The Outlook

Environmental factors create uncertainties about the patterns of production and and production of the patterns about uncertainties create factors Environmental with associated problems The mineral energy resources. of and consumption 6.2.5 Environmental factors will continue to receive greater attention to effective responses develop to able whichthe extractivessector are to extent The is change, climate to scarcity water from pressures, global environmental intensifying over relations in company–government tension of source a greater become to likely decades. two the next Environmental change will also confront companies with many of the problems the problems of many with companies will also confront change Environmental were that regimes liability unclear and diligence due inadequate with associated extreme frequent in increasingly accidents of in Section the event outlined 2.2.4. In rapidly increasing consumption will be exacerbated and multiplied by the effects of by multiplied will and be exacerbated consumption increasing rapidly will be materials reduced; raw other food and water, of the availability change: climate made communities will and increase; resources to access over tension the of risk hazards. environmental will face mounting resources of their lack by vulnerable are and the world, parts of in many scarce already are agricultural land and Water industrial and usesurbanization as competing from pressure more under coming continue. development Increasing awareness of the value of other national resources, including water, water, including resources, national other of the value of awareness Increasing the costs of reassessment a also is sea encouraging life, and forests lands, indigenous arguments Such development. and exploration to new areas up opening benefits of and for pay expenditures, government rising cover to pressures over easily prevail will not that the moratorium as such examples However, poverty. alleviate or lifestyles elites’ that indication an are mineral development imposed on has the Laotian government from suffer that all in countries above a serious policy is option, development delayed stress. environmental conflict and political instability, of a combination A wealth of lessons to be learned, alluded to in Chapter 5, can provide helpful pointers pointers helpful provide 5, can be in Chapter to alluded learned, to lessons of A wealth the need is to lessons salient themost of One follow. to producers emerging for countries For in extractive industries. development the pace of of control maintain effectively revenues channel or the sector properly regulate to the capacity lack that a strong is there that experience past shows development, economic broader into even sometimes or extractive industries of the development down slowing casefor Iraq Afghanistan, as such countries Notably, in the ground. resources leaving for be conflict off better might from emerging just still in or mired are Somalia that and hard a is it Although exploitation. resource large-scale postponing or down slowing the national of most employ that the sectors developing patiently make, to choice option sensible be can a more services agriculture, be manufacturing, it or workforce, countries. many for oil production. production. oil before they embark on mineral or hydrocarbon production. They may also benefit They may production. hydrocarbon mineral or on they embark before multilateral and bilateral various from assistance international from effectively more theEITI. or the IMF, Bank and the World at thespecialist as teams such initiatives, a establish to the opportunity had already have new producers some Additionally, mineral production. or oil commencing before economy tax a diversified base and Ghana, as such African producers, oil emerging evidence that example, for is, There do their peers than long-established with indicators governance on better score

131 6.2.6 Disputes involving state-backed companies are likely to increase 6.2.6 Disputes involving state-backed (SOEs) companies state-owned and state-backed by investment overseas Growing the same to subject them increasingly make to likely is economies emerging from between host relations beenshaping have that 3) (described dynamics Chapter in is what Despite time. a long for (MNCs) multinationals Western and governments face very can investment sets similar of investors state-backed suggested, sometimes $2 over invested having After counterparts. their those private-sector to risks of cancel to forced recently was example, for Vale, miner state-backed Brazil’s billion, and inflation rampant the country’s to owing in Argentina project potash a large the from response a furious provoked incident The controls. rate strict exchange flee to the country. representatives top Vale’s forced and government Argentinian weather conditions, for example, questions will be asked about how prepared a prepared how will about be asked questions example, for conditions, weather Challenges precautions. safety been infrastructure and in its have should company pressure increasing thereby places, in various erupt energy may rights and water over companies. to those vital of resources allocations alter to or ration to governments on that signs are there that the country cases, demonstrate of particularlySome in Asia, assertive and more becoming are damage environmental to responses government decision- government in prominently figuring more are rights land about disputes that and assess will to be needed thein sectororder in however, efforts, making.Stronger climate infrastructure to transport and extraction, refining of the resilience strengthen effective regulatory more build to and intensity water energy and reduce to change, of impacts the environmental govern to countries developing in many frameworks extractives industries. Other SOEs have similarly decided to pull out from contentious projects in recent in recent projects contentious from decided out pull to similarly Other have SOEs in Iran). Lukoil CNPC and and in Venezuela Petronas (e.g. years be to high- considered countries some from multinationals Western of retreat The new also bring them, may among Iraq and Sudan decade, the Nigeria, past over risk are that SOEs and companies independent Smaller, countries. host to vulnerabilities seek and institutions developing-country with less engage taking may their place This country. a of the leadership with interaction of channels direct more foster to a play may their operations maintain to in order individuals to access for preference institutions. its part a country developing in undermining worker large-scale are influence disputes or spark may that new issues Among the ‘package’ and countries host to countries home the SOEs’ from immigration clear less These dealsfor SOEs. make Asian by pursued dealsoften development The breach. rights human or disaster environmental an of in the event accountability and SOEs MNCs, of combinations involving ventures, joint of varied nature more disputes, liability of also the complexity increase partners may smaller independent in Section on 2.2.4. touched as SOEs MNCs, Western many than risk-averse less often currently theyare Although countries producer in MNCs fill leftto by thegap unable or been sofar unwilling have such countries In nationalism. resource of forms aggressive embraced have that state-owned or state-backed by investments example, Bolivia, or for Venezuela as countries. host and both home for results, yielded disappointing often have companies will entities those state-backed of technical capabilities and muscle financing The The financing The and technical capabilities of entities state-backed will undoubtedly grow further over time – but so will their concern for risk management and return on investments. Conflict and Coexistence in the Extractive Industries Industries Extractive in the Coexistence and 104 Conflict

Chapter 6 Chapter 6 The Outlook for Extractives Relations in a Changing Landscape 105 Landscape in a Changing Relations Extractives for The Outlook

This could halt similar projects in This or ‘unconventional’ projects: Major environmental accident in ‘frontier’ disasters may companies and such New regulations might affect the country and beyond and result in disputes. as to how projects should proceed – and even whether they should become important factors in decision-making go ahead at all. A ‘capital iin developing countries could lead to in investments by major players strike’ by investors: Cutbacks This can result in new tensions between of ambitious flagship projects. delay or cancellation the scaling back, growth. in countries that are dependent on rapid extractives-sector governments and international investors and companies adhere to their ambitious development schedules, Governments are likely to demand that arguments. companies risk being confronted with ‘use-it-or-lose-it’ Shifting political regulation and effective Especially in post-conflict states without and security situations: or Somalia. Afghanistan for corruption, for example enforcement and with a large potential discrepancies between the resource-rich Socio-economic inequality: Growing tensions in countries with large tensions may lead to a region’s assertion of control over resources and and resource-poor regions. Heightening India, Iraq and Nigeria are examples. an unstable regulatory environment. Kazakhstan, Countries whose dependence on the mining or hydrocarbons on extractive sector: Countries whose dependence dependence Growing If reforms are not adequately volatility. grow in the event of price declines or market sector continues to private to try to squeeze more from dependence, this may encourage governments implemented to reduce investors. Russia is a case in point. The post-dictatorshipThe be considered regimes will widely under oppressive Deals negotiated phenomenon: taken against Measures wealth are no longer in power. have benefited from that if elites which especially unfair, Chinese others, for instance attempts to penalize could inspire similar measures in companies in one country companies in Burma. Unmet expectations: in emerging producer countries. to deliver on the popular expectations Governments failing calling for a and the rise of populist movements tensions include allegations of corruption Indicators of growing as in Mozambique. sector, of wealth and more control over the extractives radical redistribution z z z z z z z Box 6.2: Potential fault lines for disputes fault lines for 6.2: Potential Box undoubtedly grow further over time – but so will their concern for risk management management risk so will for their concern timebut – furtherover grow undoubtedly be to fond known governments a result, As investments. on return adequate for and partners be find to easier necessarily SOEs negotiating will not contracts up tearing of counterparts. their Western than Recommendations: from Conflict to 7 Coexistence

Rather than focusing on rigid, ‘watertight’ rigid, ‘watertight’ on focusing Rather than Companies’ engagement is often narrowly focused the arm on narrowly often is engagement Companies’ Improving the terms of engagement stage. contractual the Buildin flexibility at agreements, companies and governments should opt for more flexible contractual flexible more for opt should governments and companies agreements, Automatic conditions. market changing to mechanisms response built-in with arrangements the of the viability sustain to scales, help can royalty sliding as such mechanisms, adjustment or projects of the cancellation preventing example for a downturn, extractives sector during more spikes price during windfall profits capture to governments They also help lay-offs. mass also be should the project downsize or delay cancel, companies that possibility The effectively. in the contract. addressed explicitly countries producer many In investors. regulatory and tax frameworks Simplify for more Clearer, complex. unnecessarily and patchy remain frameworks regulatory reduce can frameworks licensing standardise that laws petroleum and mining concise avoid to help can and contracts, or licences individual for negotiation of the burden projects. individual for terms payment or special tax incentives dialogues organized the media labour and Maintain with as well as civil society, oppositionparties. affected and regulators signed, relevant was which the with contract government of also enter should companies projects, major of Especially in the context communities. Disputes between stakeholders in extractive industries are escalating. Many producer producer escalating. Many are in extractive industries between stakeholders Disputes future undermining conflicts such from in preventing interest an have governments of the risks reduce to eager are countries while prospects, consuming development global resource exacerbate could that cancellations and delays project unanticipated damaging commercially in avoiding leaders face challenges Business insecurity. operations. and their presence by created tensions managing and disputes need deliver to only will not governments and companies Looking the future, to the long- demonstrate to will also but have the local benefits to community, tangible country. the host of well-being theeconomic to theirprojects of contributions term the conflict, offers this of report drivers and the causes of Based the analysis on extractives companies. and governments host for recommendations following 7 Recommendations: to from Conflict Coexistence

Chapter 7 Recommendations: from Conflict to Coexistence 109

into constructive dialogues with other stakeholder groups on a project’s impact and the extent of its ability to contribute to local and national aspirations.

Raising standards of governance

Companies should align due diligence, environmental practices and transparency standards with international best practice. Evolving good governance norms and standards for sustainability will put greater pressure on companies to implement best practices. To maintain their ‘social license to operate’, companies should opt for international best practice in their operations, regardless of host-country rules.

Producer countries should make full use of initiatives for improving governance (e.g. with respect to revenue transparency, or assistance in training local journalists and community leaders to enhance public understanding of extractives-sector development) to strengthen accountability through capacity development and checks and balances, with the support of donor agencies. Home-country governments of extractives companies also need to implement and enforce the standards to which they sign up at the international level such as those pertaining to due diligence in the Ruggie Framework on human rights.

Clarify the liability regime and ensure that it is fit for purpose. Robust liability regimes are crucial in both influencing how companies operate and how quickly disputes are resolved. For new producers and projects, there is an opportunity to stress-test regimes against possible scenarios based on international experience and to incorporate best-practice norms. In particular, liability regimes should clearly apportion responsibility when several parties are involved in projects or when projects change ownership. It is also important to define the jurisdiction of relevant local and national courts and the competencies of different government authorities.

Planning together for the long term

Conduct a comprehensive assessment of the benefits and risks of resource developments under proposal. Countries with low institutional capacity to manage, regulate and benefit from extractives resources, especially those still mired in or just emerging from conflict, might be better off postponing resource exploitation. This is a hard choice to make in view of spending priorities, but patiently developing the sector that employs most of the national workforce, be it agriculture, services or manufacturing, is a sensible option for many countries. Even for those with sophisticated institutions and experience, careful choices need to be made where projects would degrade national assets such as major forest or sea ecosystems.

Develop national ‘action plans’ for the extractives sector. Governments in producer countries, with broad input from opposition parties, civil society, industry and trade unions, should develop action plans for the sector. Such plans, which could Chapter 7 be reviewed every two to five years, should define a strategy for the development of major deposits, the role of the state in the sector, the sharing of revenues, infrastructure needs and the pace at which resources are to be developed. A step-by- 110 Conflict and Coexistence in the Extractive Industries

step approach that matches the pace of foreign investment and industry expansion with the development of regulatory capacity should be the priority. The plans could also set out how social and environmental impacts will be mitigated and how the sector will contribute to broader economic development. Companies can assist by giving a clear idea of what they can and cannot contribute in line with the plan through their investments.

Build public–private partnerships to channel targeted investment in local capacity. Creating stronger forward and backward linkages from the extractives sector to the rest of the economy is a prime objective of governments, but firms in host countries often need time and support to upgrade their technology and skills base and scale up supply chains. Off-take agreements, small business loans and training programmes for local firms could be established by government agencies, with expertise and investment provided by the extractive industry. Blunter approaches such as export restrictions on unprocessed materials or unrealistically high local content requirements often backfire and can deter investment in the sector.

Prepare for volatility in investment and tax revenues with mechanisms appropriate to capacity and needs. Most producer countries lack adequate mechanisms to protect themselves against shocks and more prudent long-term planning of revenue use will be essential. Some countries, among them Botswana, Chile and Norway, have benefited from the use of sovereign wealth or revenue stabilization funds, but their successful management remains difficult in countries with weak institutions. Policy- makers considering similar mechanisms will need to adapt them to the domestic institutional context and align them with development priorities.

Assess and adapt infrastructure plans related to the extractive industry against broader development objectives. Multilateral institutions and donor agencies could support the development of an integrated infrastructure plan in developing producer economies which meet not only the needs of specific projects but also broader development objectives – from access to markets and urbanization planning to food and water security. This would also avoid unnecessary duplication and minimize environmental and social impacts arising from infrastructure expansion.

Defusing tensions

Create a panel of international experts to assess the terms of a new extractives agreement at the request of the host country. This body would provide an impartial and independent source of advice for governments with limited technical capacity or experience. It could, for example, offer advice on getting the terms of a contract right, to better enable resilience and flexibility to markets and other forces of change.

Establish an independent, high-level ombudsman for dispute management. Donor agencies could support the appointment of an independent, high-level ombudsman

Chapter 7 for the extractives sector, especially in emerging producer countries, to help defuse company–government tensions at an early stage, and to conduct public investigations into allegations of legal breaches. The scope could include, for example, allegations of environmental damage, contested land and water rights and corruption as well as human rights violations related to the extractive industries. Chapter 7 Endnotes

1 A ‘contract’ in this report refers to an agreement between the host 31 For the industry view of risks from the ‘anti-fracking’ movement, see government as owner of the resources and a company as the operator. Control Risks, 2012. As will be developed in Chapter 3, these agreements come in many 32 Robertson, 2011; BBC, 2012; Healy, 2012. different forms. 33 Ok Tedi Mining Ltd, 2013; BHP, 2002; Callick, 2013. 2 World Bank, 2009. 34 Kazmin, 2013; Vedanta Resources, 2013. 3 Williams, 2013. 35 Kosich, 2012. 4 Calculations based on statistics supplied by the London Stock Exchange. 36 Jasamie, 2013. 5 Vorhees, 2011. Stock market valuations of extractives companies have declined considerably since 2011. The overall estimate presented here 37 Bowman, 2012. should nonetheless be considered as conservative. 38 Townsend, 2012; Reprisk, 2011.

6 Swint and Shiryaevskaya, 2013. 39 Els, 2013.

7 Titman, 2010. 40 For example, the ‘Strategic Approach to International Chemicals 8 Citi, 2012. Management’, adopted in 2006, is an international policy framework to foster the sound management of chemicals, many of which are used 9 Liberum Capital, 2012. extensively in the mining and oil and gas sectors. 10 Ibid. 41 Ogilvy et al., 2009. 11 Williams, 2013; Berthelsen, 2013. 42 World Wildlife Fund, 2013. 12 Standard & Poor, for example, estimates capital expenditure growth in 43 For the mining industry see, for example, International Council on Mining energy to register ‘barely positive’ growth of about 1.5 per cent in 2013 and Metals, 2013a; Hodgkinson et al., 2010; Pearce et al., 2011. and negative growth in materials capital expenditure, –4 per cent in 2013 and –14 per cent in 2014. See Williams, 2013. 44 A notable exception is a recently published ICMM report. See International Council on Mining and Metals, 2013b. 13 European Commission, 2013. 45 Ford et al., 2011. 14 The case of the US–Iranian Claims Tribunal was unusual in that both parties agreed in advance to deposit $500 million in an escrow account 46 Azam and Li, 2010. held by the Bank of Algeria and the Bank of England. This effectively 47 Ernst & Young, 2013. guaranteed that both sides would receive compensation based upon the 48 Egbochue, 2013. findings of the Tribunal. 49 BP, 2011. 15 Quan, 2004. 50 Emmerson and Lahn, 2012. 16 Jensen, 2008. 51 Chevron, 2013a. 17 Fails, 2012. 52 BBC, 2011. 18 Minor, 1994. For similar views, see e.g. Shirley, 1992. For a rare critical perspective, see Chua, 1995. 53 Oil and Gas Journal, 2013.

19 Morse, 1999, p. 14. 54 Reddall, 2013.

20 World Bank, 2009, p. 51. 55 CNN, 2012.

21 AFP, 2012. 56 MacNamara and Wheatly, 2010.

22 Webber and Miles, 2012. 57 Ibid.

23 Economist, 2013; Webber and Crooks, 2013. 58 Burgis, 2013.

24 Reuters, 2013; Mander, 2013. 59 Burton, 1999.

25 Bremmer and Johnston, 2008; Joffé et al., 2009; Currie et al., 2008. 60 Ok Tedi Mining Ltd, 2013.

26 African National Congress, 2012. 61 O’Neill, 2013.

27 MacNamara and Thompson, 2011. 62 Chevron, 2013b.

28 Davis and Franks, 2011. 63 Even in the few cases where deals for mineral rights can be struck with individual landowners (such as in the US), a range of approvals will have 29 Economist, 2012a; Defensoria del Pueblo, 2013. to be secured at the state and federal government level. 30 See, for example, Deutsche Welle, 2013; Harvey, 2013. Endnotes 113

64 A good summary of the different types of legal frameworks and their 103 United Nations, Department of Economic and Social Affairs, Population development over time can be found in Dietsche, 2013. Division, 2008, p. 3.

65 This discussion draws heavily on Stevens, 2008, p. 5. 104 Ibid.

66 Vernon, 1980. 105 Ng’wanakilala, 2012.

67 Stevens, 2008, p. 5. 106 Gismatullin, 2012.

68 Joffé et al., 2009. 107 Pirani, 2011.

69 Few voices were raised against such state intervention. Those that were 108 In November 2012 it was announced that VSMPO-Avisma was being (predominantly the Chicago and Austrian Schools) were regarded, at sold via a management buy-out. See Moscow Times, 2012. best, as eccentric. 109 Tompson, 2006. 70 Over half a century after it was developed, the question whether the 110 Sutela, 2012, p. 120. Prebisch-Singer thesis actually enjoys empirical support is still a matter of debate among economists. See Tilton, 2013. 111 Gustafson, 2012a, p. 447.

71 For those with a sense of history, it will come as no surprise that 112 Wis´niewska, 2012. exactly the same failure in the 1960s led to the gradual undermining of 113 Bradshaw, 2010. conventional development economics and the rise of the ‘Basic Needs’ 114 Ibid. development strategy: Hirschman, 1981. 115 Gustafson, 2012b. 72 Stroebel and von Benthem, 2010. 116 Ibid. 73 Thomas, 2012. 117 Kinross Gold and Foreign Investment Advisory Council of Russia, 2011. 74 For a recent review see Smith, 2013. 118 Muttitt, 2008. 75 Ibid. 119 Kennedy and Nurmakow, 2010. 76 Johnston, 2006, as cited in Tordo, 2007. 120 Gorst, 2011. 77 Ernst & Young, 2011. 121 Roberts, 2011. 78 Deutsche Bank, 2011. 122 Ferghana Information Agency, 2012; Kozlova, 2006. 79 Hogan and Goldsworthy, 2010. 123 Guj, 2012. 80 Tordo, 2007. 124 For a review of these and more detailed analysis of this complex subject, 81 Pay et al., 2011. see Stevens and Kooroshy, forthcoming. 82 Otto, 2012. 125 Vines et al., 2009. 83 Yap, 2013. 126 More country examples can be found as part of the Natural Resource 84 Daniel and Sunley, 2010. Charter initiative at http://naturalresourcecharter.org/content/case- 85 Kasongo, 2008. studies.

86 This term refers to the strengthening of exchange rates as a result of the 127 Poteete, 2009. extraction of natural resources. The stronger currency then causes other 128 Natural Resource Charter, n.d. parts of the economy, notably the manufacturing sector, to suffer. 129 Shaxson, 2009. 87 Humber, 2011. 130 Ernst & Young, 2011. 88 Ibid. 131 Pearson and Webber, 2013. 89 Knowledge at Wharton, 2012. 132 A more extensive discussion of strategies and lessons for emerging 90 Reuters, 2012. producers can be found in Marcel, 2013. 91 Shimkus, 2011.

92 New York Times, 2012.

93 Lintner, 2012.

94 Mead, 2012.

95 AREU, 2012.

96 Bowley, 2012.

97 Global Witness, 2012; Noorani, 2011.

98 Sexton, 2012.

99 Ibid.

100 AREU, 2012.

101 Ibid.

102 Baumüller et al., 2011. References

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Conflict and Coexistence in the Extractive Industries Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee

Conflict and Coexistence in the Extractive Industries A Chatham House Report Paul Stevens, Jaakko Kooroshy, Glada Lahn and Bernice Lee

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