Legal Analysis and Commentary from Justia

Will It Be Business as Usual For Oil Companies Operating in Libya? Why the Answer Is Not an Unequivocal Yes

With Brent crude oil currently trading at over $100 a barrel, multinational oil companies and related businesses have strong incentives to get back to Libya to resume business.  Meanwhile, Libya’s transitional government has a similar incentive to resume oil production.

It will take time, however, for Libya to get its oil production up to pre-conflict levels.  Fortunately, some commentators say that the country can afford to refrain from making quick decisions regarding oil.  The country’s net foreign assets, which should be released from an international freeze, are estimated to be worth around $150 billion–enough to cover more than three years of oil imports.

Libya has the largest oil reserves in Africa and the ninth largest in the world, with over 41 billion barrels as of 2007.  Before conflict broke out in February, Libya’s production of crude oil was reported at 1.6 million barrels a day.  With oil making up 80 percent of the country’s revenues, oil extraction is crucial to Libya’s political and economic recovery.

But what happens when a dictator is toppled?  Do prior contracts remain in force?  Will successor governments honor those contracts?  The idea that in Libya, it will simply be business as usual may be too optimistic.

In this column, I will explain the traditional premise that successor regimes need to honor previously negotiated sovereign agreements.  I will also explain, however, the new trend for sovereigns to renegotiate deals entered into by previously corrupt officials—and the legal basis for such renegotiation.  I will also contend that Libya’s Transitional Government, and its future government, should opt for greater transparency in any new oil concessions that are granted, as a way of instilling confidence in the new government, especially among the citizens of Libya.

Successor Governments Have Obligations to Honor Preexisting Contracts

Before the Libyan conflict began six months ago, Libya exported 1.6 million barrels of oil a day.  Now, that output has fallen to almost nothing.  Libya once supplied two percent of the world’s oil, and it is abundantly clear that oil is critical to the prosperity of Libya.

European multinationals have been active in the oil sector in Libya for years.  U.S. companies entered the Libyan market after sanctions were lifted in 2003.  Chinese companies have also made big investments in Libya.  And now, there are many major companies operating in Libya.  In 2007, British Petroleum entered into a major exploration and production deal with Libya, more than thirty years after Gaddafi nationalized the oil sector.  In addition, Spain’s Repsol, Austria’s OMV, France’s Total, and Russia’s Gazprom are among oil companies with key investments in Libya.

Under international law, successor regimes have obligations to honor existing contracts and loans incurred by their predecessors—no mater how corrupt, foolish, or inexperienced  a prior regime may have been.  Regime changes do not affect a state’s previously incurred legal obligations.  In this way, a state is like a company—a change in a company’s leadership does not impact its legal obligations, nor does a change in a country’s rulers.  This rule creates for greater predictability and stability in international economic relations.

This concept of state continuity exists, even when the structure of government changes—say, from socialist to democratic, or from dictatorship to democracy.  Any state contracts or international law treaties and conventions into which a state has entered still remain valid and in force.

State continuity instills confidence in foreign investors.  At the same time, there are risks that new governments that assume leadership following a significant political upheaval will attempt to disavow and unwind commercial transactions from a prior regime.  And, indeed, there are various examples of new governments altering their own laws in order to void contracts and agreements that were entered into by their predecessor regimes.

Were a transitional government to repudiate existing contracts following a regime change, foreign investors who were treated unfairly, or were required to give up contractual rights without adequate compensation, might seek a remedy under investment treaties.  Such treaties typically provide foreign investors with a right to compensation for breaches of contractual obligations, and a right to bring certain international legal claims before  independent international tribunals.

At present, Libya’s National Transitional Council (“NTC”) is saying all the right things to promote investor confidence in the new government.  One of its spokesmen, Ahmed Jehani, who is coordinating its reconstruction team, has stated publicly, “All contracts will be honored.  All lawful contracts will be honored, whether they are in the oil and gas complex or in the contracting.  At the moment it is not for this government to decide whether they will be revoking any contract.”

But it is very possible that things may change.

Why There May Be a Concession Review in Libya:  Possible Allegations of Corruption

At present, Libya’s transitional government is saying the right things.

But as the hunt for Qaddafi’s stashed wealth begins, there will be scrutiny as to how he gained his wealth—and whether it involved stealing billions from the national treasury, accepting bribes, or granting oil concessions in such a way as to enrich himself, rather than the national treasury.

There have been news reports that rebel leaders have said that contracts will be reviewed for signs of corruption.  And the transitional government may come under pressure to renegotiate contracts that do seem tainted by corruption, from a population that feels that it has not fully shared in the country’s oil wealth.

The contract review will likely focus on corrupt acts—such as bribes being paid by companies to win contracts or maintain relations with Qaddafi.  If certain contracts were the byproducts of corruption, or were not properly awarded according to Libyan law, then the new government—that is, either the current NTC or a future elected government—may have grounds for renegotiating the terms of these deals.

Some Possible Models for Renegotiation of Contracts Entered Into by Prior Regimes

By comparison, in Iraq, the government has renegotiated terms of prior Saddam era contracts, and has put out many new concessions for bidding.  There have been many problems in Iraq with the development of new laws, however, so Iraq’s new government may not be a strong model for other successor regimes.

A more instructive example may be Liberia—which moved from the repressive and violent dictatorship of Charles Taylor to a democratic government.  Its transitional government performed a full review of business related to its key natural-resource sector, forestry and timber.  In 2004, the Chairman of the National Transitional Government of Liberia appointed a Forest Concession Review Committee (which I will refer to as “the Committee”) composed of representatives “from a broad cross-section of government agencies, international agencies, and nongovernmental organizations working in Liberia.”

The Committee then examined the legal status of all of the timber concessions that Charles Taylor had granted during his regime.  As it turned out, none of the concessions had followed Liberian law; the contracts awarded had never actually adhered to the legally stipulated procedures.

Indeed, in the course of its comprehensive case-by-case concession review, the Committee found multiple and massive instances of legal non-compliance and mismanagement.  As a result, the Committee recommended that all existing forest concessions be terminated, and further recommended that a comprehensive set of forest-sector reform measures be developed and instituted before the government of Liberia awarded any future timber concessions.

Even more startling, the Liberian concessions review found that not a single concession holder met the baseline legal standards for having a valid timber contract with the government.  Relatively few even had a current and valid business license, and many of the concessions had expired.  In addition to this general and pervasive non-compliance, the review confirmed the existence and seriousness of the widespread illegal activity associated with “conflict timber.”  The Committee linked at least fifty of the existing seventy timber concessions to warlords and criminals engaged in armed conflict, the taking of private property, and corrupt business practices.

The Liberian Forest Concession Review resulted in an Executive Order that voided Taylor-era timber concessions, and mandated wide-ranging reforms relating to the forest sector.  Liberia worked closely with international organizations to undertake the review.  The approach taken by, and with, Liberia provides a possible model for the review of other natural-resource concessions, and offers valuable lessons for other resource-rich, post-conflict, destabilized societies—such as Libya.

Importantly, what happened in Liberia was not that a new government decided to repudiate contracts on  a whim—or due to political pressure alone.  Rather, the contracts were examined to see if they were actually enforceable based on Liberia’s own law—as it existed at the time when the contracts initially were granted.  Thus, a similar review in Libya could focus on whether all oil contracts are actually in conformity with Libyan law.  If so, then international law would require that the contracts must now be enforced according to their terms—even if the actual prices or payments would not seem to be as fair as the population would like.

Possibilities for Libya’s Future: Transparency and EITI

It is too early to tell whether Libya will engage in a wholesale review of its existing oil contracts.  One can imagine, however, that there may well be pressure from citizens and others for greater transparency and accountability as the government handles oil revenues moving forward

It is likely that the NTC will have to honor Gaddafi-era contracts in order to get oil revenues flowing.  But no new deals for the exploration or exploitation of oilfields should be considered by Libya, until a properly elected government can review existing rules and laws to ensure robust transparency and accountability in the contracting process.

How might this transparency and accountability be achieved?  First, a new constitution could provide for transparency in the oil sector—by requiring public disclosure of how the government manages oil revenues.  In addition, the terms of existing and future agreements could be disclosed, so that they are open to public scrutiny.

Libya could also become a candidate country for the Extractive Industries Transparency Initiative, referred to as “EITI.”  EITI is an international framework with strong support from G20 nations.  It provides that companies with natural resources—such as oil—can create domestic multi-stakeholder monitoring bodies, comprised of representatives from government, civil society, and the private sector (e.g., oil and gas companies).  These groups then monitor how the government handles the royalties it receives from natural-resource concessions. The theory behind this approach is that greater transparency and monitoring will allow citizens to see where revenues are going—and serve as a check on the theft and corruption that are always a risk in any resource-rich country.

The EITI Principles require countries to regularly publish information regarding all material oil, gas and mining payments by companies to the government and all material revenues received by governments from oil, gas, and mining companies, to a wide audience in a publicly-accessible, comprehensive and comprehensible manner.  EITI also requires that governments allow for independent, credible audits—applying international auditing standards—that will monitor and reconcile all payments and revenues made under natural-resource contracts.

Let’s hope that Libya’s future will be brighter—and far less corrupt—than its past with the adoption of the EITI principles and the use of approaches such as those previously implemented in Liberia.  With their dictator finally deposed, the Libyan people deserve more transparency and accountability with respect to their country’s most precious resources.

Anita RamasastryAnita Ramasastry is the UW Law Foundation Professor of Law at the University of Washington School of Law in Seattle, where she also directs the graduate program on Sustainable International Development. She is also a member of the Law, Technology and Arts Group at at the Law School. Ramasastry writes on law and technology, consumer and commercial law, and international law and globalization.
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