In the context of high global prices for natural resources, governments seeking to ensure that their people benefit fairly from these resources and do not suffer from environmentally harmful extractive projects are finding themselves increasingly at odds with transnational corporations.[i]
In these battles over resource rights, transnational companies are increasingly using a powerful and relatively new weapon – the right to sue governments in international arbitration tribunals granted under a complex web of free trade agreements (FTAs) and thousands of bilateral investment treaties (BITs).
This report explains the institutional framework that allows global firms to extract enormous profits in international arbitration tribunals. It then documents the increased use of these rights by transnational corporations involved in the oil, mining, and gas industries, particularly in Latin America.
This analysis is particularly important in the context of the Trans-Pacific Partnership (TPP), a trade agreement currently being negotiated among 11 countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. As of April 2013, Japan was also on track to join the talks, and other countries like South Korea and Thailand have also expressed interest.
Transnational corporations in the extractives sector are increasingly turning to international arbitration tribunals to resolve resource disputes.
- As of March 2013, there were 169 cases pending at the most frequently used tribunal, the International Center for Settlement of Investment Disputes (ICSID), of which 60 (35.7%) were related to oil, mining, or gas.
- By contrast, in 2000, there were only three pending ICSID cases related to oil, mining, or gas. There were only 7 such cases filed during the entire decades of the 1980s and 1990s.
- The 60 current extractive industries cases include: 23 related to oil, 19 related to mining (including 5 over gold), 13 related to gas, and 5 related to combination oil/gas projects.
- In 2012 alone, 48 cases were filed at the ICSID. Of these, 17 (35.45%) related to extractive industries. All are against developing countries.
Investor-state lawsuits related to oil, gas, and mining disputes are on the rise in developing countries, particularly in Latin America and the Caribbean.
- Latin American and Caribbean governments make up about 14% of the 158 ICSID member governments. And yet they are the targets of 79 (46.7%) of the 169 ICSID pending cases (as of March 2013) and 31 (51%) of the 60 current extractive industries cases.
- In the past, in contrast, only 23% of the 251 cases concluded at the ICSID pertained to extractive industries and of these only 34% were against Latin American countries.
Regional breakdown of pending ICSID cases related to oil, mining, and gas:
- Latin America and Caribbean: 31 (51.6%)
- Africa: 12 (20.0%)
- Eastern Europe: 5 (8.3%)
- Asia: 10 (16.6%)
- Middle East: 1 (1.6%)
- North America: 1 (1.6%) (against Canada)
The potential economic impact of investor-state lawsuits is significant, especially for developing countries, creating a disincentive for environmentally and socially responsible policies.
- In the largest award to date, in October 2012, Ecuador was ordered to pay $1.7 billion plus interest to the U.S.-based Occidental Petroleum Corporation (Oxy) for having canceled its operating contract in 2006. In March 2010, Ecuador had lost another oil-related case – this one brought by Chevron for approximately $700 million. These two awards combined are the equivalent of approximately 3.3% of that nation’s GDP. [ii]
- Two international mining firms—Pacific Rim and Commerce Group—have sued El Salvador to pressure the government to grant permits for potentially environmentally devastating gold mining projects. On Pacific Rim, the ICSID tribunal ruled that it did not have jurisdiction under the Central American Free Trade Agreement but allowed the case to go forward under El Salvador’s investment law. Pacific Rim is demanding “compensation” of $315 million (the equivalent of approximately 1.8% of El Salvador’s GDP,[iii] or about half its entire education budget.[iv] Although ICSID dismissed the Commerce Group case, El Salvador still had to pay $800,000 in legal fees, and the company is seeking an annulment of the decision.
- In 2011, Renco Group Inc. filed a claim with UNCITRAL against the Peruvian government on behalf of itself and its subsidiary, Doe Run Peru. The U.S. corporation is asking for $800 million in damages after the Peruvian government revoked Doe Run’s operating license for a smelter in La Oroya, Peru, one of the most polluted sites on Earth. These resources could be better used to combat the poverty that affects 78% of the country’s indigenous children.[v]
Oil, mining, and gas cases would likely increase further under the proposed Trans-Pacific Partnership (TPP), given many of these countries’ reliance on extractive industries.
- In six TPP countries, fuels and minerals make up more than 20 percent of total exports. These are: Brunei Darussalam (87%), Peru (64%), Australia (54%), Chile (53%), Canada (32%), and Mexico (21%).
- Six of the TPP countries are global minerals production powerhouses. Australia, Canada, Chile, Mexico, Peru, and the United States rank among the world’s top 10 producers of many minerals, including copper, gold, and silver.
- Vietnam has a less developed mining sector, but the growth potential is significant. For example, Vietnam has the 4th-largest reserves of bauxite (used to produce aluminum). Malaysia’s mineral resources were significantly depleted in the last century, but the country is pursuing increased foreign investment in minerals processing, including in aluminum smelting and highly controversial rare earth minerals processing.
- Aside from Australia, which has rejected investor-state dispute settlement, these resource-rich countries are likely to be most prone to investor-state suits under TPP if they take actions that foreign investors could claim significantly reduce the value of their investment in the extractives sector.
[i] Mineral Rents and the Finance of Social Policy: Options and Constraints, Research and Policy Brief 16, December 2012, UNRISD.