CHAPTER 23 STRUCTURING ENERGY PROJECTS FOR INVESTMENT TREATY PROTECTION: PITFALLS AND GUIDELINES

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 23
STRUCTURING ENERGY PROJECTS FOR INVESTMENT TREATY PROTECTION: PITFALLS AND GUIDELINES
Timothy J. Tyler
Richard D. Deutsch
Attorneys
Mayer, Brown, Rowe & Maw LLP
Houston, Texas, USA

TIMOTHY J. TYLER

Timothy J. Tyler has been with the Houston office of the law firm Mayer, Brown, Rowe and Maw LLP since 1995. He graduated cum laude from Yale University with a B.A. in English with distinction in the major. After graduating with honors from the University of Texas School of Law, where he was editor in chief of the Texas International Law Journal, he served as briefing attorney for the Honorable Nathan L. Hecht, Justice of the Supreme Court of Texas. His main area of practice is international commercial and investor-state arbitration. Mr. Tyler has advised and acted for parties in arbitrations in many jurisdictions under the rules of the ICC, the American Arbitration Association, the Singapore International Arbitration Centre, the Stockholm Chamber of Commerce, and the UNCITRAL rules, as well as advising on ICSID arbitration under bilateral investment treaties. Subject matters include oil and gas, energy, major equipment sales, commission arrangements, accounting, state contracts, construction, and joint ventures. He has also advised clients on structuring foreign investments for treaty protection. He is a Fellow of the Chartered Institute of Arbitrators. Of special interest to the oil and gas industry, he co-wrote Arbitrating International Oil and Gas Disputes: Practical Considerations, a chapter of the American Association of Petroleum Geologists' book, International Exploration and Production Ventures. He also wrote Judging the Past: Germany's Post-Unification Lawyers' Admissions Review Law, 29 Tex. Int'l L.J. 457 (1994). Mr. Tyler speaks and reads German and French, as well as some Spanish. Mr. Tyler is an adjunct professor at the University of Texas School of Law, where he teaches a course in international commercial arbitration. He has presented papers and spoken at conferences in Africa and the United States, and given numerous presentations for continuing legal education audiences.

RICHARD D. DEUTSCH

Richard D. Deutsch has been with the Houston office of the law firm Mayer, Brown, Rowe and Maw LLP since 2004. He graduated from the University of Texas with a B.A. in English and a Bachelor of Arts degree in Journalism. He earned a J.D. from the Dedman School of Law at Southern Methodist University, where he worked as managing editor of the SMU Law Review and as an extern for the Honorable Judge A. Joe Fish in the U.S. District Court for the Northern District of Texas. He also served as an intern for the Honorable Judge George P. Kazen in the U.S. District Court for the Southern District of Texas. His main areas of practice are commercial litigation, investor-state arbitration and international commercial arbitration. Mr. Deutsch has advised and acted for parties in arbitrations under the rules of the ICC, the American Arbitration Association and the UNCITRAL Rules. He has represented parties in investor-state arbitrations involving bilateral investment treaties under the rules of the ICSID Convention. He has also advised clients with regards to structuring foreign investments. Subject matters include oil and gas distribution, transportation, exploration and production, power production and distribution, construction, mining and telecommunications. He is an associate of both the Chartered Institute of Arbitrators and the International Centre for Dispute Resolution. He is also a member of the International Bar Association, the Houston International Arbitration Club and the International Law Section of the Houston Bar Association. Mr. Deutsch has written extensively for national publications, including the Washington Post, Miami Herald and Sports Illustrated. Of special interest to the oil and gas industry, he co-wrote CMS vs. Argentina - The Decision of the International Centre for the Settlement of Investment Disputes and its Main Consequences for the Practice, Sellier (Germany) European Law Publishers (Jan. 2004). He also co-wrote Wind Power and Other Renewable Energy Projects, which was presented at the Rocky Mountain Mineral Law Foundation's Institute on Natural Resources Development in Indian Country, Albuquerque, NM (Oct. 2005).

I. SUMMARY

A vast network of specialized treaties protects assets ("investments") of one country's investors against improper actions by the other signatory country's government, organs, or instrumentalities. The core idea of these treaties is to increase economic development, mostly by lowering the risk of foreign direct investment. By creating a code of conduct for investment-receiving ("host") states, backed by solid procedural protections, these treaties reduce some elements of political risk, increasing investors' (and lenders') confidence, unlocking private capital, and spurring development. Recent and recurrent political shifts around the world make clear the importance of these treaties for the mining and oil and gas sectors.

This treaty network now includes almost 2,500¹ bilateral investment treaties ("BITs") and the investment provisions in various bilateral and multilateral free trade agreements ("FTAs").² BITs and FTAs (collectively "IIAs") offer investors substantive protections under international law--largely independent of a contract's specific provisions and local, host-state law. Substantive protections guard investors against illegal expropriation, i.e., that lacks nondiscriminatory due process and appropriate compensation; various types of discrimination; and unfair treatment. Many BITs also ensure host states comply with "all other obligations" regarding an investment, as well as allowing free repatriation of profits and gains from investments. As a procedural protection to enhance foreign investors' substantive protections, recourse to international arbitration, at the investor's choice, held outside the host country, may allow bypassing local courts. Awards resulting from such arbitrations are enforceable directly against the host state itself under treaties that strongly limit recourse against the award.

But these powerful treaty protections accrue only to investors who fulfill the IIA's requirements. In general, an "investor" must have (i) the nationality of a country that is a party to the IIA, and (ii) an investment in the host country's territory. For companies -- our focus here -- this frequently entails holding an investment through one or more entities that are party to one

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or more IIAs with the host state. In the abstract and in isolation, fulfilling these requirements seems simple enough. Indeed, anyone can locate online most of the IIAs to which a particular host state is party. However, in practice, careful examination of treaty texts is required because subtle variations in treaty language count, especially given the application of that language in the continually evolving, non-binding, arbitral tribunal practice, which is still thin in many areas. Moreover, because the network of treaty protection is not universal and changes from one generation of IIA to the next, pitfalls abound. Finally, nationality planning for investment protection is but one element in corporate and deal structures, where tax and other business considerations demand attention. In this context, IIA protection in an individual deal may need to be weighed against or may complement these other considerations.

This paper seeks to provide a very brief overview of the substantive and procedural protections IIAs offer; the prerequisites for protection, including pitfalls and cautions; and some principal guidelines for structuring or restructuring the ownership chain for a project in a host state. Part II offers an overview of the substantive and procedural protections, with special emphasis on energy projects. Part III discusses the legal requirements to access IIA protection and points out some caveats and limitations. Part IV distills the analysis into some practical guidelines for nationality planning to protect investments.

II. WHAT IS AN IIA AND WHAT DOES IT DO?

IIAs are treaties between nations, "state parties," that establish standards of conduct for the government or instrumentalities of each state party toward investments of persons and companies of the other state party. There are bilateral treaties like, for example, the Argentina-US BIT, which regulates how the US will treat Argentine investors' investments in the United States, and vice versa. Other treaties, like the multilateral NAFTA and CAFTA/DR, deal with free trade and investment protection. BITs and the investment chapters of FTAs typically cover the scope and definition of foreign investment; criteria to determine an investor's eligibility for protection; admission and establishment of investments; treatment protections including national and most-favored-nation status, fair and equitable treatment, various sorts of non-discrimination, compensation for improper expropriations, and compensation in the event of war and civil unrest; guarantees of fund transfers; and dispute resolution provisions. According to the United Nations Conference on Trade and Development ("UNCTAD"), BITs constitute "the most important protection of international foreign investment" to date.

A. IIAs protect investments of persons or companies from one signatory country against improper measures by the other signatory government's authorities or entities.

1. Substantive Investment Protection.

IIAs protect foreign investments in the host state against improper governmental measures of that state, its agencies and, in some instances, its instrumentalities.³ It bears emphasis that the protections offered do not stem from contract provisions or local, host-state

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law; rather, protection...