Jorge E. Viñuales: International investment law and natural resource governance

Abstract:

This paper analyses the implications of contemporary international investment law for the regulation of natural resources. Natural resources are unevenly distributed across different regions and countries and that makes access a very important question. In turn, access to resources located in the territory or within the jurisdiction of a country and, more generally, any activities conducted in connection with such resources, are subject to the regulatory powers of the host State. Although such powers are above all a matter of sovereignty, understanding them through this prism alone would miss an important point, namely that the interests of a host State and a foreign investor may be aligned not only in pursuance of public welfare but also to the detriment of it. The latter phenomenon has been called the “resource curse” – i.e. a situation where a rapacious government exploits the country’s natural resources for its own benefit depriving the population of its due. Foreign investors may be involved in such phenomenon either deliberately (i.e. through a close connection with the rapacious government) or as a mere result of their activity in the host State (i.e. by making the exploitation profitable for the government irrespective of any explicit complicity). Thus, questions of ‘access’, ‘sovereignty’ and ‘distribution’ are closely interrelated in ways that require sustained analysis. The first section of the paper provides a brief overview of the basic architecture and building blocks of international investment law, from a structural and dynamic perspective. The focus then turns to the core subject matter, namely the specific implications of this body of law for the governance of natural resources, particularly as regards access, sovereignty and distribution. In conclusion, some observations and recommendations regarding possible avenues for reform are put forward for consideration and future research.

Available for download here.

Carbone & McKenzie: Going Dutch? The Impact of Oil Price Shocks on the Canadian Economy

Abstract:

We examine the steady-state impact of a 10 percent reduction in the price of oil using a CGE model of the Canadian economy. The model includes a high degree of disaggregation at both the sectoral and provincial level, international and interprovincial flows of goods and services, labour which is mobile between sectors, capital which is partly mobile both inter-provincially and inter-sectorally, and equilibrium exchange rate adjustments arising from the oil price shock. The key result of our simulations is that — on balance — a negative oil price shock leaves Canadians worse off. We also find that the welfare losses associated with a negative oil price shock are shared broadly across the provinces. The corollary, of course, is that a positive price shock leaves Canadians better off. Our results have implications for the presence (or significance) of Dutch Disease in Canada; we argue that the “disease” is just one of a number of effects generated by oil-price changes.

Available for download here.

Bailey, Ford, Brown & Bradley: Investing in Stability – Can Extractive-Sector Development Help Build Peace?

From the Summary:

Over the past decade growing demand for resources, geostrategic competition and new technologies have pushed resource exploration and development into increasingly politically, socially and environmentally sensitive areas. At the same time, donors and multilateral development banks have backed ‘extractives-led growth’ models in fragile and conflict-affected situations on the basis that resource development may help support stability and thus the underlying conditions for peace.

There is intuitive appeal to the logic that development of an extractive sector can help contribute to peace and stability via economic development; and in conflict-affected situations where governments struggle to attract foreign direct investment, the extractive sector may be the only real opportunity to do so. However a considerable body of literature argues the opposite, and draws a link between resource development and the risk of conflict.

The current softening in global commodity prices and a slowdown in the race to ‘frontier’ regions present an opportunity to reassess some current working assumptions regarding resource development, conflict and peace. This research paper takes as its starting point the idea that neither conflict nor peace is an inevitable consequence of resource development in fragile or conflict-affected settings. Drawing upon a large body of research on the ‘resource curse’ and the emerging field of business and peace, as well as on practical guidelines on responsible resource development in conflict-affected and fragile situations, it asks whether and under what circumstances resource development might support peace.

Available for download here.

Sporton (World Coal Association): The High Cost of Divestment

From the brief article:

Since 2012, when 350.org launched its “Fossil Free” campaign, there has been an increasing global campaign to divest fossil fuel assets, particularly coal. The approach has been supported by some institutions that have divested, while rejected by others. For instance, in February 2015, despite an expert panel supporting continued investment, NBIM, the manager of Norway’s sovereign wealth fund, announced it had divested a number of fossil fuel companies from its portfolio.

In contrast, a number of other high-profile organizations have resisted calls for divestment. Harvard University, Brown University, the University of Oxford, and the Wellcome Trust, among others, have released statements questioning the rationale of the campaign. Indeed, the President of Harvard, Drew Faust, who controls the university’s $32 billion endowment, stated:

Divestment is likely to have negligible financial impact on the affected companies. And such a strategy would diminish the influence or voice we might have with this industry. Divestment pits concerned citizens and institutions against companies that have enormous capacity and responsibility to promote progress toward a more sustainable future.

As the divestment campaign has grown in exposure, proponents have begun to suggest that the financial valuations of energy companies may be damaged by strict international climate policies. Campaigners suggest that in order to avoid the potential impacts of climate change, governments must adopt policies consistent with limiting global average surface temperature increases to 2°C above pre-industrial levels. This scenario would require deep structural  changes to the business model of conventional energy companies. In effect, they argue, it would render large volumes of coal and hydrocarbon reserves “unburnable”. The concept continues that stock market valuations of fossil fuels are overvalued creating a “carbon bubble”. Under these circumstances, campaigners have begun to pressure governments and institutions to divest their financial holdings from companies that explore, produce, market, and/or exploit fossil fuels. However, with deeper analysis, it is clear that the movement is built on unsubstantiated claims and flawed logic.

Available for download here.

Delechat et al.: Harnessing Resource Wealth for Inclusive Growth in Fragile States

ABSTRACT:

Like other fragile sub-Saharan African countries, Côte d’Ivoire, Guinea, Liberia, and Sierra Leone are seeking to harness their natural resource potential in the context of ambitious development strategies. This study investigates options for scaling up public investment and expanding social safety nets in a general equilibrium setting. First, it assesses the macro-fiscal implications of alternative fiscal rules for public investment, and, second, it explicitly accounts for redistribution through direct cash transfers. Results show that a sustainable non-resource deficit target is robust to the high uncertainty of resources output and prices, while delivering growth benefits through higher public investment. The scaling-up magnitudes, however, depend on the size of projected resource revenue and absorptive capacity. Adding a social transfer raises private consumption, suggesting that a fraction of the resource revenue could be used to expand safety nets.

 

Available for download here.

Avalos & Lombardi: The biofuel connection – impact of US regulation on oil and food prices

ABSTRACT:

Biofuel policies are frequently mentioned in the policy and academic debates because of their potential impact on food prices. In 2005, the United States authorities passed legislation under which corn-based ethanol became in practice the only available gasoline additive. Some studies have then argued that ethanol and biodiesel subsidies in advanced economies may have strengthened the link between the prices of oil and those of some food commodities. This paper tests whether the response of food commodity prices to global demand shocks and to oil-specific demand shocks has changed following the introduction of this legislation. Our results show that corn prices exhibit a stronger response to global demand shocks after 2006. Some short-lived but statistically significant response to oil-specific demand shocks is also documented. Close substitutes of corn in the feedstock business (eg soybeans and wheat) exhibit comparable but more muted responses, while other food commodities unaffected by biofuel policies do not change their behaviour. We also report some evidence that global liquidity is a factor driving global demand shocks, and through that channel may have affected food commodity prices.

 

Available for download here.

Butts: Geopolitics of Resource Scarcity

From the Introduction:

Geopolitics refers to the relationship of geographical settings to political processes. The diversity and scale of the geography are important variables in the exercise of political power. Resources vary markedly in occurrence, giving rise to global patterns of trade and creating vulnerability to supply cutoff. National leaders should be aware of the occurrence of strategically important resources within their borders, understand which of these are critically important to sustain human and state security, and develop policies to achieve sufficiency from domestic or international sources. This paper addresses resource geopolitics, offers some examples, and provides concepts for reducing import vulnerability in an era of rising resource-focused policies by Russia and China.

 

Available for download here.

Bataa, Izzeldin & Osborn: Changes in the Global Oil Market

ABSTRACT:

Using a new iterative algorithm that tests for possible breaks in the coefficients and residual variances of recursively identified structural equations, we examine changes in the parameters of the oil market model of Kilian (2009). Our analysis reveals breaks in the coefficients of the oil production and price equations, together with volatility shifts in all equations. In particular, the medium term response of production to aggregate demand shocks increases after 1980 and the price response to supply shocks is more persistent from the mid-1990s. All variables evidence changes in the relative contributions of individual shocks to their forecast error variances.

 

Available for download here.

Lefsrud: Framing Fairness – The Case of Alberta’s Oil Sands

ABSTRACT:

Despite the proliferation of research on legitimacy and justice, there is a paucity of knowledge of how fairness is socially constructed in and through field-configuring events. That is, we know little of how legitimacy is established in relation to and between stakeholders – both evaluators and those evaluated, human or non-human, in time and space. To understand the ways in which fairness is socially constructed over time, we examine the historical case of Alberta oil sands. Our longitudinal study is based on a comprehensive analysis of the ways in which fairness has been framed and argued in field-configuring hearings and the media coverage around these hearings. We show how the frames of fairness are constructed and reconstructed in and through these field-configuring discussions and how actors use a variety of frames and rhetorical strategies to argue for their views and interests. In particular, our analysis reveals a dynamic of issue or frame containment and expansion where the incumbents tend to contain the frames of fairness to minimize challenges and define status quo as preferred and challengers expand the bases of comparisons to define the need for change.

 

Available for download here.

Larusson: Commercial or Political Interests – Oil and Gas in the Russian Arctic

Summary:

The Russian efforts of developing the natural resources in the Arctic region have intensified during the last years, and the leadership of the country is underlining the importance of speeding up the process of doing do. Putin has states that the current resources on land are depleting, and that a substitute needs to be found. But the Russian state companies Gazprom and Rosneft, the two companies who have been granted licenses to develop the Arctic shelf, are struggling against heavy bureaucracy and tight restrictions. Not the least because the Russian energy sector is considered an issue of national security, foreign involvement is heavily restricted. Furthermore, profitability of such offshore Arctic projects is uncertain, due to large demands for investments and high technology and the need for a high world oil price.

The dubious nature of developing the Arctic thus spurs the question of why the Russian government is so keen on landing these oil and gas reserves. By highlighting the economic viability of developing the northern oil and gas resources and putting them in contrast to other potential reasons for developing the regions resources, this study attempts to present possible drivers for the Russian development of the Arctic oil and gas riches. Furthermore, the question of what the state oil and gas companies do to try to affect the regulations for their Arctic endeavors is studied.

Even though the Arctic is expected to hold large amounts of resources, the economic viability of developing the Arctic region is questionable. The crucial oil price, which recently has experienced a sharp decline, could pose difficulties for the profitability of the oil and gas development projects. Furthermore there are potential development sites on land that do not require the same costs and risks. Russian governmental officials however, have pointed to the development of the Arctic as a way of giving a boost to the Russian economy, not just by sales of oil and gas, but also by using domestic technology and expertise to support the Arctic activities. As a result of the Ukraine sanctions against Russia, Rosneft has stated that it could replace the foreign equipment used in a matter of three to four years.

Having this dubious economic outlook for developing the Arctic, other drivers are suggested. One driver connects to the image-making of Putin. Being one of the first to land resources in the unhospitable conditions of the Arctic is a feather in the hat for Putin, and leads to a positive international reputation.

Another highly topical potential driver is geopolitics. The planned increased military presence is portrayed as a guarantor for the safety and security of the commercial activities in the Arctic, but it should also be able to discourage other powers from engaging in any of the contested sea areas. Furthermore, the increased US interest in the Arctic, as well as the deteriorating relations between Russia and the West as a result of the events in Ukraine, could be seen as factors instigating this driver.

For Rosneft and Gazprom the Arctic is a difficult place to operate and the profits are uncertain. However, their Arctic ventures attract capital investments, something which both companies are in need of. In order to facilitate their work on the shelf, they do try to influence the leadership. Letters leaked to the media, sent to the president and the government from the state companies, give an indication of how they try to lobby the state and what issues they focus on. One of the major issues the state companies lobbied against was to allow any other actors onto the shelf. To date, it appears as if this has been successful – only Rosneft and Gazprom are allowed access. Another result of the lobbying efforts could be seen in the Interdepartmental Commission for removing administrative barriers for subsoil development. Rosneft had prior to this sent letters to state representatives about the tight regulations and excessive red tape for the oil and gas business. As these letters were surely preceded and succeeded by informal and non-public lobbying efforts, the result is still clear. Both state companies were to be included in the Interdepartmental Commission, which gives them a better position to influence and present their views. Similar lobbying efforts had earlier been attempted by e.g. Lukoil, but without any success. Igor Sechin’s arrival as the President of Rosneft has made the state companies’ voice stronger and seemingly more influential. His close ties with Putin and his understanding of the political drivers and the commercial realities of oil and gas development in such difficult areas as the High North, has given him a unique position in the development of the Russian Arctic.

 

Available for download here.