Example of a First-Class UK Undergraduate Law Essay
This is an example of a high first-class UK undergraduate law essay that should give you some guidance on how to structure and reference your LLB law essay.
The principle of state sovereignty over natural resources is now well accepted in international law having first been acknowledged by a General Assembly resolution in 1952. The General Assembly adopted a resolution in 1962 on "Permanent Sovereignty over Natural Resources' which confirmed at Article 1:-
"The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned."
Discuss the impact of this shift away from the old regime that applied to the exploitation of natural resources. Explain some of the implications on states being involved in the energy sector. How have international oil companies commonly dealt with these concerns? In your answer give examples of states that have changed their legal regime relating to oil and gas transactions.
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During the first half of the twentieth century, many states granted concessions to international oil companies (thereafter “IOCs”) for around sixty years or more. These were granted to IOCs wishing to produce petroleum in a foreign state. By way of an example, in the case of Kuwait vs American Independent Oil Company it was revealed during arbitration that the concession which had been nationalised was for sixty years which Kuwait had granted Aminoil when it was still under British rule. Such concessions crippled the ability of the host nations to advance economically. After decolonisation, states started the wave of nationalisation in the 1960s as a way of asserting their permanent sovereignty over their natural wealth and resources. The right to expropriate stems from state’s sovereignty over natural resources and economic activities and its inalienable right to freely dispose them off in accordance with its national interests. This highlights the vulnerability of IOCs to host governments during the lifespan of these contracts. It is as a result of such vulnerability that stabilisation clauses evolved to mitigate such political risks by committing host government from unilaterally altering the terms of a contract normally through legislation or administratively which may culminate into direct confiscation of IOCs property. These clauses aim at neutralising the effect of prerogatives of the host state that would otherwise allow it to unilaterally alter the legal regime of such agreements and to maintain the sanctity of the agreement.
Resource nationalism may take a variety of forms, from outright nationalisation of resources to regulatory and fiscal measures which deprive an investor of the value of the resources it is exploiting, and increase the host state’s “take”. The 1970s was the high water mark for nationalisation of assets, with the Middle East being the principal arena. Long-term oil concessions which extended over vast swathes of the Middle East on extremely beneficial terms for oil companies had been renegotiated in the 1950s and the 1960s. In the 1970s a wave of nationalisations, facilitated by the creation of national oil companies, took place, permanently changing the landscape of the international petroleum industry.
Subsequent decades saw a retrenchment from resource nationalism, with greater emphasis placed on opening up developing economies to foreign direct investment, and privatisation of inefficient state assets. States needed private investors to develop infrastructure and oil and gas reserves. According to Maplecroft, Oil companies took advantage of greater access to exploration acreage, and negotiated favourable exploration and production deals with producing states.
A feature of the history of resource nationalism is its cyclicality. Just as the generous concessions of the pre-war period were the subject of attack by producing states in the 1960s and 1970s, the terms offered by oil companies in the 1980s and 1990s were revisited in the 2000s by states ill at ease with the small fraction of value which they were receiving from soaring oil prices. This spate of unilateral measures by states in the early years of the millennium extended from Russia and Eastern Europe to South America. Thus, by way of example, according to Daniel Yergin, measures which could be characterised as resource nationalism were imposed by governments in Russia: where the oil company, Yukos, was subject to various tax claims which resulted in its bankruptcy in 2006 and where pressure has been placed on Western investors such as BP and Shell to cede control of strategic projects, such as the huge Kovytka gas field and the Sakhalin-II oil and gas development.
How can investors protect themselves against resource nationalism, or, at least, mitigate the consequences of its occurrence?
Much can also be done in the drafting of agreements with host states.
First, contracts can provide for a progressive remuneration system for the host state, with the host state fully participating in increasing oil prices, together with the investor. A host state which considers that it is receiving a “fair take” which will swell as oil prices rise will be less willing to countenance aggressive action against an investor which could lead to disruption of production and a reduction in sums received by the state. Structurally, such an effect may be achieved by permitting a national oil company to become an equity participant in a project.
Secondly, stabilisation clauses can be included which aim to preserve the legal and economic bargain agreed by the investor and the host state at the outset of the investment. Stabilisation clauses have a long history in the extractive industries. Stabilisation clauses can broadly be divided into two categories: 1) clauses which impose an obligation on the host state not to make any changes to the law in place when the contract was entered into (such as increasing tax rates) and 2) clauses which provide for adjustment of contractual terms to reflect such changes. The purpose of the latter clauses is not to prohibit actions by the host state. Rather, it is to prescribe the consequences of such actions.
According to Muchlinski, the trend in recent decades has been away from so-called “freezing clauses” which seek to prevent host states acting as they see fit, towards adjustment clauses. The latter may take the form of clauses providing that the contract adjusts automatically in accordance with an agreed formula upon the occurrence of a specified event (such as the increase in, or imposition of, a new tax).
Alternatively, the clause may mandate negotiations between host state and investor to achieve a negotiated settlement which ensures that the investor’s anticipated returns are maintained. This may be difficult to operate in practice, if the host state is not prepared to negotiate to achieve this. Issues may also be raised with regard to whether an obligation to negotiate new fiscal terms is unenforceable for lack of certainty. A superficially neat fix is a clause which provides that any increase in taxes beyond those agreed at the commencement of the investment will be borne not by the investor, but by the national oil company of the host state. However, if the national oil company is not in a position to meet its tax burden (such as in circumstances where it has been drained of funds by competing state interests such as social programmes, infrastructure or defence), recourse is likely to be sought against a deep-pocketed investor. Law Essay.
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Bibliography
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