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How investors can protect their international projects from resource nationalism and windfall taxes1 August 2024

There have been several recent instances of international projects being put at risk through resource nationalism or windfall taxes. This affects projects across many sectors including mining & commodities, oil & gas, power (conventional and renewables), infrastructure, and transportation.

This article explores how properly structured projects can be protected by investment treaties against such risks.

"Older treaties tend to have broader protections, with newer treaties often placing greater emphasis on a state’s right to self-regulate."

A.  HOW CAN INVESTMENT TREATIES PROTECT INTERNATIONAL PROJECTS?

Investment treaties can protect projects and investments in foreign states by:

  • avoiding the need to litigate in a state’s domestic court system and ensuring a fair and independent process;
  • providing protection under international law, allowing investors to take advantage of well-established principles over and above any local law protections or project agreements and licences; and
  • issuing a decision that is easily enforceable around the world.¹

Older treaties tend to have broader protections, with newer treaties often placing greater emphasis on a state’s right to self-regulate. Each investment treaty is separately negotiated and therefore different, but the most common provisions include:

  • fair and equitable treatment (“FET”), which is becoming a more common route for advancing direct and/or indirect expropriation claims, as it tends to be an easier path;
  • treatment no less favourable for investors than for host state nationals;
  • treatment no less favourable for investors than for nationals of other states, otherwise known as most favoured nation clauses (in older treaties these provisions were very broad and heavily exploited, but they are becoming less common and narrower in scope²);
  • protection against, and compensation for, expropriation or nationalisation, which can take the form of direct, indirect or creeping expropriation. Direct expropriation is increasingly rare and most modern cases argue for indirect or creeping expropriation—i.e., the cumulative impact of various measures over time;
  • compensation for losses due to war or other conflict;
  • rights to repatriate profits in the investor state’s currency;
  • umbrella clauses which elevate certain contractual commitments to treaty obligations under international law; and
  • dispute resolution provisions allowing affected nationals to claim directly against the host state under ICSID or UNICTRAL rules, allowing them to frame claims outside of the existing contractual framework (approximately 25% of treaties also contain fork-in-the-road clauses forcing the investor to choose to either bring a claim domestically in the courts or under the treaty, but not both).

"Largescale natural resources and/or infrastructure projects are crucial to a state’s energy and resources security strategy."

B.  WHAT IS RESOURCE NATIONALISM?

Investment treaty protections can mitigate resource nationalism. Largescale natural resources and/or infrastructure projects are crucial to a state’s energy and resources security strategy, but, from an investor’s perspective, this can also make those projects susceptible to resource nationalism risks.

Resource nationalism arises when a state changes its internal policies for natural resources to increase the economic benefit to the state at the detriment of external investors. Such policy changes are often triggered by external economic or political pressures.

Resource nationalism risks are wide-ranging, from changing tax rules to repatriating profits and expropriating projects without compensation. These risks are prevalent worldwide:

  • In August 2023, Mali adopted a new mining code to channel a greater share of revenue to the state and allowing the state and local investors to take stakes as high as 35% in mining projects compared to 20% previously. The government announced the review of the code in January 2023 after it said an internal audit had shown that, despite being one of Africa’s biggest gold producers, it was not receiving a fair slice of profits;
  • In January 2020, Indonesia banned the export of raw nickel ores, possibly to stimulate the domestic processing of ore and force electric vehicle manufacturers to produce their vehicles in the country;
  • In January 2020, the head of Bolivia’s state-owned lithium company, YLB, announced that it planned to employ strict limits on foreign investment in the extraction of lithium. This includes a requirement that Bolivians extract and process all Bolivian lithium; and
  • In March 2018, the Democratic Republic of Congo modified its mining code to double the nation’s free-carry equity interest in mining companies to 10%, with an additional 5% taken on each licence renewal. It also increased taxes and royalties payable and required contractors be owned by Congolese shareholders.

Sometimes, these policy changes are applied after an investment has been made in a state, which can completely shift the cost/benefit analysis investors originally undertook. In such circumstances, it is often difficult to recoup any investment through a sale or similar action as the project may be significantly devalued.

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"Investment treaties can help protect investments against resource nationalism risks."

C.  RECENT EXAMPLES OF INVESTMENT TREATIES PROTECTING AGAINST RESOURCE NATIONALISM

Investment treaties can help protect investments against resource nationalism risks. A few sector specific examples follow, but this is by no means an exhaustive list:

Mining
  • In July 2023, Tanzania was ordered to pay US$ 77m plus interest to Nachingwea and other investors as a result of claims arising out of the Government’s cancellation of retention licences held by the investors in the Ntaka Hill Nickel Project. Tanzania was also found to have breached the investors’ rights by not offering compensation for the subsequent public tender for the joint development of areas covered by these licences;³
  • In January 2023, Pakistan discontinued its annulment application against Tethyan Copper. In the original case, Pakistan was found to have reneged on an agreement to award a mining licence to Tethyan. The refusal to award the licence was found to breach FET, expropriation and non-impairment clauses. Therefore, in July 2019, the ICSID Tribunal ordered Pakistan to pay, excluding interest, over US$ 4bn in compensation to Tethyan;⁴ and
  • In August 2019, an ICSID tribunal ordered Colombia to pay Glencore and other investors US$ 19m excluding interest in compensation for Colombia breaching the FET standard. This is because when re-negotiating a mining licence, Glencore agreed with a State entity, Ingeominas, that they would pay lower royalties if they provided further investments benefitting the State. However, following this agreement, a different State entity (the National Mining Agency) subsequently refused to register the revised mining licence. To compound matters, Colombia’s public funds agency (Contraloría) then investigated the agreement; annulled it and fined Glencore’s subsidiary in the process. The inconsistent actions of different State entities amounted to a breach.⁵
Oil & Gas
  • In April 2023, Russia was found liable to Naftogaz for the expropriation of its oil and gas assets in Crimea and the transfer of assets to a Russian state-owned company. The Tribunal, by majority, ordered Russia to pay over US$ 4bn in compensation, plus interest, as well as approximately US$ 24m and € 1m in reimbursement of the costs of arbitration;⁶
  • In July 2021, Russia was ordered to pay just under US$ 3bn to Yukos Capital for claims arising out of Russia’s indirect expropriation of the claimant’s investments in Yukos Oil Company;⁷ and
  • In October 2012, Ecuador was ordered to pay approximately US$ 2bn to Occidental Petroleum for claims arising out of the improper termination of a participation contract for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region.⁸
Electricity and Renewables
  • In November 2023, Russia was ordered to pay DTEK over US$ 200m plus interest and legal costs for expropriating the investor’s electricity distribution business in Crimea by way of overt administrative and legislative measures enforced through local courts and physical force;⁹
  • In May 2019, an ICSID tribunal ordered Spain to pay about € 41m plus interest to the claimant. The claimant had invested around € 211m in Spanish photovoltaic plants following Spain’s decree that anti-tariff revisions would not affect projects registered before a certain date. The claimant’s projects were registered before the relevant date, but Spain subsequently reduced the claimant’s tariff. Spain’s actions were found to have breached the FET standard;¹⁰ and
  • In April 2019, Albania was ordered to pay over US$ 100m to Hydro. Hydro and other investors had made investments in a hydroelectric plant in Kalivaç in southern Albania along with other local investments. Albania’s actions were held to have undermined the claimants’ investments, including tax audit proceedings, improper money laundering investigations, seizure and sequestration of bank accounts and assets, and arrest warrants against individual claimants.¹¹
Transport
  • In September 2021, Venezuela was ordered to pay approximately US$ 20m to Air Canada. Air Canada had made investments in air transportation services, which were then allegedly expropriated and/or resulted in a breach of the FET standard. The claims arose out of the Government’s failure to approve Air Canada’s requests to convert its Bolivar-denominated returns into U.S. dollars for repatriation. The tribunal found that there had been a breach of the FET standard;¹² and
  • In November 2017, Kazakhstan was ordered to pay circa. US$ 23m to Aktau Petrol. Aktau Petrol had made investments by way of the ownership of an enterprise engaged in oil transportation. A dispute arose out of a series of measures taken by the Kazakhstan’s courts, which resulted in the unlawful transfer of Aktau Petrol ‘s assets to a third party, connected to the government.¹³

"These sudden and unexpected revenue spikes are often caused by unexpected geopolitical events, which make commodity prices within the energy sector volatile."

D.  WHAT ARE WINDFALL TAXES?

Another increasingly prominent issue is windfall revenues due to unexpected market volatility. This may also benefit from investment treaty protection.

These sudden and unexpected revenue spikes are often caused by unexpected geopolitical events, which make commodity prices within the energy sector volatile. These unexpected events can inflate an investor’s profit margin allowing them to inadvertently benefit in times of crisis. This has led to states seeking to increase or introduce taxes on these revenue streams i.e. windfall taxes.

Investors generally argue that they are entitled to these revenue spikes, because they also have to carry most of the risk associated with their investments. States generally argue that this money should be reinvested into the national economy and foreign investors shouldn’t be able to profiteer in times of crisis.

Therefore, many states have sought to introduce windfall taxes, including Austria, Bulgaria, the Czech Republic, Finland, France, Germany, Greece, Italy, the Netherlands, Norway, Poland, Romania, Spain and the United Kingdom. A few examples of these policies include:

  • In 2022, Austria’s government applied a windfall tax of up to 40% on oil and gas firms whose profits were 20% above the average of the previous four years. Companies can bring the tax rate down to 33% if they invest in renewable energy;
  • In March 2022, Italy introduced a 50% one-off windfall tax on 2022 corporate income which was at least 10% higher than 2018-2021 average. The government also aimed to raise an additional € 1.4 bn in the first half of 2023 through a price cap on energy produced by plants fuelled by coal, oil and renewable sources. The cap is set at € 180/MWh under regulation laid out by the European Commission. On 7 August 2023, Italy also introduced a controversial windfall tax on its banking sector; and
  • In May 2022, the United Kingdom enacted a 25% windfall tax on extraordinary profits in the oil and gas sector (additional to existing taxation of profits in the sector) due to surging global commodity prices driven in part by the war in Ukraine. The UK has since increased the oil and gas windfall tax to 35% and imposed an “electricity generator levy” on low-carbon electricity generators of 45% on revenues above a benchmark price.

Investors may be able to seek protection from windfall taxes if they can demonstrate that a state has breached an investment treaty by introducing that particular tax regime. A breach could occur if the state has violated the legitimate expectations of foreign investors, or the FET standard.¹⁴

A claim may also be brought if it can be proven that the tax is discriminatory and/or confiscatory in nature. This was the case where Ecuador issued a law imposing a 99% windfall levy on foreign oil revenues as a result of an oil spike starting in 2002.¹⁵

"To qualify for investment treaty protection, you must establish that you are a relevant investor with a qualifying investment during the relevant period."

E.  HOW CAN YOU STRUCTURE YOUR PROJECTS TO BENEFIT FROM INVESTMENT TREATY PROTECTION?

To qualify for investment treaty protection, you must establish that you are a relevant investor with a qualifying investment during the relevant period. Then, you must evidence that the state breached one of the protections under the investment treaty, which has caused damage to your investment.

WFW can assist you by assessing whether your operations or projects benefit from (or could benefit from) investment treaty protection without losing any existing favourable tax treatment. WFW can also prepare a risk assessment outlining your project’s vulnerability to issues such as resource nationalism and windfall taxes, as well as other potential issues.

If an issue has already emerged, then WFW is ready to provide you with a cost-efficient strategy that takes full advantage of any investment treaty protections available and will achieve your specific goals.

WFW has established investment treaty expertise.¹⁶ If you have any questions, please contact the authors.

Footnotes

[1] There are currently 172 countries which are parties to the New York Convention, and 163 countries which are parties to the ICSID Convention. Both provide a mechanism for the enforcement of arbitral awards in signatory countries.
[2] On 26 October 2023, Professor George Bermann in his keynote lecture in Prague called on states to completely abolish MFN clauses
[3] Nachingwea v. Tanzania, ICSID Case No. ARB/20/38, Award, 14 July 2023.
[4] Tethyan Copper v. Pakistan, ICSID Case No. ARB/12/1, Award, 12 July 2019.
[5] Glencore and C.I. Prodeco v. Colombia (I), ICSID Case No. ARB/16/6, 27 August 2019.
[6] NJSC Naftogaz and others v. Russia, PCA Case No. 2017-16, Award, 12 April 2023.
[7] Yukos v. Russia, PCA Case No. 2013-31, Award, 23 July 2021.
[8] Occidental Petroleum and others v. Ecuador (II), ICSID Case No. ARB/06/11, Award, 5 October 2012.
[9] PJSC DTEK Krymenergo v. Russia, PCA Case No. 2018-41, Award, 1 November 2023.
[10] 9REN Holding v. Spain, ICSID Case No. ARB/15/15), Award, 31 May 2019.
[11] Hydro and others v. Albania, ICSID Case No. ARB/15/28, 24 April 2019.
[12] Air Canada v. Venezuela, ICSID Case No. ARB(AF)/17/1, Award 13 September 2021.
[13] Aktau Petrol Ticaret v. Kazakhstan, ICSID Case No. ARB/15/8, Award 13 November 2017.
[14] Sergei Paushok and others v. Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011.
[15] Burlington Resources v. Ecuador, ICSID Case No ARB/08/5, Decision on Liability, 14 December 2012.
[16] WFW and/or members of the current WFW international arbitration team have been involved in cases such as: Philip Morris Asia v. Australia, UNCITRAL, PCA Case No. 2012-12; Spółdzielnia Pracy Muszynianka v. Slovakia, PCA Case No. AA629; EuroGas and Belmont Resources v. Slovakia, ICSID Case No. ARB/14/14; KT Asia Investment Group v. Kazakhstan, ICSID Case No. ARB/09/8; AES Corporation and Tau Power v. Kazakhstan, ICSID Case No. ARB/10/16; and Alghanim v. Jordan, ICSID Case No. ARB/13/38. This list is not exhaustive.

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