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 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 www.chathamhouse.org Chatham House has been the home of the Royal Institute of International Affairs for ninety years. 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The Royal Institute of International Affairs Chatham House 10 St James’s Square London SW1Y 4LE T: +44 (0) 20 7957 5700 F: + 44 (0) 20 7957 5710 www.chathamhouse.org Charity Registration No. 208223 ISBN 978 1 78413 000 8 A catalogue record for this title is available from the British Library. Designed by Soapbox, www.soapbox.co.uk Typeset by Ingenious, www.ingeniousdesign.co.uk Printed and bound in Great Britain by Latimer Trend and Co Ltd 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