Australia: Protecting Foreign Assets in Times of Rising World Commodity Prices

In our recent update click here we discussed how rising world oil prices saw the Mauritanian government assert that it would no longer be bound to oil concession agreements with Woodside Petroleum. Woodside was forced to renegotiate those agreements and pay in excess of US$100 million to settle the dispute.

This week there was another example how rising world commodity prices may lead the governments of developing States to ignore the contractual rights of foreign investors. This underscores the importance of Australian investors being well informed as to how they can protect their foreign investments, especially where a State party is involved.

On 1 May 2006, Bolivian President Evo Morales signed a decree to nationalise his country's oil and gas industries. He also said that the state would recover the Bolivian hydrocarbon companies that were privatised in the 1990’s. Troops were subsequently ordered to occupy gas fields. Foreign energy companies have been given a six months to sign new contracts giving a state-owned company majority control over petroleum production or leave the country. About 20 foreign oil companies including BP, British Gas and ExxonMobil are among those firms operating in Bolivia.

The foreign oil companies currently active in Bolivia as well as any future investors will now be reviewing treaties such as the 1965 Washington Convention to which Bolivia is a party. This treaty established the International Centre for the Settlement of Investment Disputes (ICSID) which provides facilities for arbitration of investment disputes between for example, Bolivia and nationals of other Contracting States.

The ICSID treaty is of particular importance to foreign companies seeking redress for losses caused by the acts of the governments of developing countries.

The trend by developing countries to threaten to "nationalise" privately held investments in the resources sector means companies with large investments in developing countries need to be especially careful in managing risk. Lenders and shareholders in these companies should insist that investors have the option of an investment treaty arbitration where the foreign state takes an action that is in breach of either the contract or the relevant investment treaty.
By Kim Middleton

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.