CHAPTER 3 PATTERNS AND TRENDS IN AGREEMENTS WITH FOREIGN COUNTRIES

• Jurisdiction: United States

International Minerals Acquisition and Operations
(Oct-Nov 1974)
CHAPTER 3
PATTERNS AND TRENDS IN AGREEMENTS WITH FOREIGN COUNTRIES
James D. Tocher
President Taiga Resources, Ltd.
Calgary, Alberta, Canada

A. Nationalism, Nationalization and Multinational Companies

I have chosen as the first subject of this paper nationalism and nationalization because in examining patterns and trends in agreements with foreign countries, unless one wants to deal only with history and not the circumstances of the day he cannot ignore the world-wide phenomenon of nationalism and its consequent act of nationalization. The arch enemy of nationalists in most parts of the world is the multinational company. There is a large irony in this fact for as Peter Drucker, the noted economist and international management consultant, has to say in his latest book entitled Management, "the multinational corporation is the outstanding social innovation of the period since World War II — a period otherwise lacking in social imagination. It has become the foremost non-nationalist institution in a world torn asunder by paroxysms of nationalist fever and an organ of integration in a world of political fission. This makes the multinational corporation important beyond its services as a business institution. But this also makes the multinational corporation a difficult and problematical institution. Indeed the testing period is still ahead for the multinational corporation. If it cannot resolve

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the contradictions it has created, both internally and externally as a result of being multinational in a nationalistic world, it is unlikely to prosper. For the multinational corporation is both cause and result — but also symbol — of the most profound event of the post World War II period — the split between economy and sovereignty."¹

For each of us employed by a corporation which carries on business in more than one country Peter Drucker's words apply. The testing period is still ahead for the multinational corporation if it cannot resolve the contradictions it has created — it is a symbol of the split between economy and sovereignty.

These contradictions and conflicts relate directly to the subject at hand. I do not suggest I have the solutions to these complex and far reaching problems. I do suggest that one cannot analyze the patterns and trends in relationships and agreements between multinational companies and foreign governments except with these contradictions and conflicts clearly in mind. The interests of the corporation and the interests of the state are different in the most fundamental sense, but are they necessarily incompatible?

To attempt to answer this question in relation to the petroleum and mineral industries one must first look at the major susceptibilities of these industries to the forces of nationalism. Unlike manufacturing or service industries the petroleum and minerals have to be explored

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and discovered with the most expensive of capital, capital willing to lose, risk capital. Once discovered and developed in economic quantity and quality they are depleting natural resources. The very term "natural resources" conjures an image of national treasure, the crown jewels, and depleting is a draining away.

What appeared to be a reasonable risk-return relationship to the foreign government and the company at the time, probably five or ten years earlier when the concession or exploration agreement was negotiated, now becomes to many a give-a-way, a rip-off, or economic rape. The anxiety of the government to get capital and expertise to work to discover oil or minerals and the willingness of the company to risk its capital are forgotten or swept aside by emotion, greed, or both often masquerading as ideology.²

Whatever may be our dislike or disenchantment with these events if we are to be responsible for petroleum and mineral agreements between companies and foreign governments, we need to recognize the problem created by the split between economy and sovereignty. If one of the criteria for judgment is success in formulating long term agreements not affected by forces of nationalism, the petroleum and mining companies appear to have failed far more often than succeeded. If we ask why, I think we can determine several reasons which might help us in the future.

The first of these is recognition that there are at least two

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kinds of nationalism or forces behind nationalization, economic nationalism and political nationalism. Because a deal appears to be in the economic interests of the country is not a reason to prevent political nationalism from bringing about nationalization. Examples of politically motivated nationalization go back to the 50's in Mexico and Argentina. In Brazil during the same period, political nationalism led to the creation of the government owned Petrobras before oil was found. Cuba after Castro provides an example of ideologically motivated political nationalism causing nationalization of industry.

Another facet of nationalism and nationalization we might observe from experience is that nationalization, although defined historically as a takeover of an industry or companies within an industry, appears in more subtle forms which stop short of outright takeover but have almost the same or similar economic results.

When the Lybians took over the operations of American oil companies or when the Chilieans confiscated the copper industry, no one had difficulty understanding what was happening. When the Canadian Federal and Provincial governments imposed an export tax on crude oil and multiplied royalty rates last year, many people would have hesitated to call the actions nationalization yet their economic effects fall in the same category. These actions and others such as foreign takeover control legislation, restrictions on export of capital and any other government imposed change in the ground rules which

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abrogates all or part of the original contract, are in the same category of subtle nationalization. Since virtually every nation in the world considers all of these actions including a takeover itself to be its sovereign right, the argument of what is taxation and what is nationalization can become an exercise in semantics. For our purposes here they are potential economic hazards or risk factors to be evaluated when the deal is made between a company and foreign government.

Looking at these forms of nationalism and nationalization as they have manifested themselves during the past thirty years, one may reach some further conclusions. A company or person who has operated internationally in natural resources relying on "sanctity of contract" or any other legalistic basis is now probably an extinct species. In the absence of any effective form of international jurisdictional body to enforce contracts between foreign governments and companies, the viability of the contract is as good as the law which governs it, usually that of the host country. There are no signs that in the event of real or alleged conflict between the national interest and the rights of a foreign company, most governments will treat sanctity of contract as important. Respect for contract today does not extend beyond national interest, real or construed, even in countries with a tradition of respect for contractual rights.

For a government seeking legal justification to rationalize

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its disregard for contractual rights entered into in good faith, there are various resolutions of the United Nations responding to urgings of less developed countries upholding the inalienable right of permanent national sovereignty over natural resources. The Council of Ministers of the Organization of African Unity, in a resolution passed at its Seventh Ordinary Session in Addis Ababa on June 15, 1971, went further. Besides reaffirming national sovereignty in the exploitation of natural resources, the OAU resolution "denounces the economic and political pressures which certain developed countries are attempting to bear on African countries with a view to threatening their development and to obstructing them in the exercise of their sovereignty over their natural resources, (and) recommends the formation of an African Union of Mineral Exporting Countries."³

Finally in reviewing the history of nationalism in relation to the natural resources industries during the past thirty years, one must question if the forms of contract and methods of negotiating them have stood the test of time. Certainly a great amount of oil, minerals and money has been produced under concession agreements but they have either disappeared through nationalization or their terms have been eroded by escalating demands for a greater share of the revenue for the state.

A summary of the history and evolution of concession agreements appears later in this paper but it is evident that the trend is from

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title to property, to service for profit. In other words the trend is away from the foreign company having or interfering with sovereignty to a kind of partnership between capital and expertise on one side and sovereignty on the other. This leads to the company and the state occupying different roles but working together under contract for a common objective of discovery and development. It also calls for a change in outlook at the negotiating table. It means recognition that the functions and powers of each party are fundamentally different. The state has the title to the property and the power. The company has the capital and the technology but not the power of an adversary.

Negotiating in an adversary role is basic to intercompany relationships in the Western World and in days when the major oil and mining companies roamed the world as exclusive possessors of capital and technology, perhaps it was the expedient if not the farsighted way to deal. Many of us have been trained in negotiating techniques and game...