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Confronting the obsolescing bargain: transacting around political risk in developing and transitioning economies through renewable energy foreign direct investment.

I. ENERGY SECURITY

Access to a reliable source of energy is indispensable to the stability of all nations. (1) Beyond the requirements of domestic demand, energy access is a component of any national security program and can be a primary source of wealth in producing countries. Energy producers' ability to shut off world supply gives them a powerful bargaining position politically and economically. (3) Recent expropriations of foreign energy investments in fossil fuel producing countries demonstrate the vulnerability of international energy investments to government intervention. (4) As an alternative, some investors avoid the fossil fuel market altogether and instead choose renewable energy. (5)

This Note argues that investment in renewable energy is an attractive method of mitigating political risk in developing and transition economies. (6) Part II introduces political risk and provides a brief description of the common methods of risk mitigation. (7) Part III examines expropriation through the lens of two high-profile case studies, Russia and Venezuela, and highlights the increasing global significance of renewable energy projects. (8) Part IV analyzes the attractiveness of clean energy projects in comparison to fossil fuel projects in light of the difficulties of arbitrating investor-state disputes. (9) Part V reaches the conclusion that by choosing renewable energy projects, investors can reach markets that would otherwise be closed to foreign direct investment (FDI) because of the expropriation threat, but cautions that renewable energy projects are not a panacea for political risk. (10)

II. PROTECTING FOREIGN INVESTMENT: DISPUTE SETTLEMENT TOOLS

A. Increased Risks of Foreign Direct Investment

Foreign direct investment presents a lucrative opportunity for the investors but also entails numerous risks, such as property loss if the political environment changes. (11) Developing and transition countries receive a large percentage of world FDI because of the confluence of three factors: inexpensive labor, market growth potential, and wealth of natural resources. (12) Political risk is an ever-present danger of FDI that is especially profound in the energy sector. (13) During an economic slowdown, political leaders may appropriate foreign assets to make up for the host country's losses. (14) When commodity prices rise, political leaders may be tempted to repudiate contracts that imposed ceilings on royalty payouts to host countries. (15)

The 1962 United Nations Resolution on Permanent Sovereignty Over Natural Resources and the 1974 United Nations Declaration on the Establishment of a New International Economic Order, announced the principle that host countries are free to control their natural resources despite contractual agreements granting rights to foreign corporations. (16) Host countries eager to assert their independence utilize this principle to justify expropriating foreign projects once they reach the production stage. (17) This "obsolescing bargain" is particularly prevalent in developing countries and those in transition from planned to market-based economies. (18) Frequent regime changes in such countries often increase their leaders' reluctance to recognize that prior contracts remain binding on current administrations. (19)

When investors operate in foreign legal regimes, they face an increased level of general business risk uncommon in domestic ventures. (20) Contract risk, specifically the risk of repudiation, increases when the counterparty is a foreign government entity. (21) Another example of the increased risk of FDI is currency risk, which includes the risk of currency devaluation, convertibility problems, and limitations on currency transfer from the host. (22)

B. International Investment Protection

1. Transaction-Based Risk Mitigation

The importance of taking proactive dispute prevention measures before conflicts materialize cannot be overstated. (23) If the risk involved outweighs the benefit, multinational businesses generally abstain from investing. (24) When the risk is more reasonable, multinational businesses actively reduce expropriation risk through choice of legal entity. (25) Common entity structures include joint ventures, strategic alliances, and other types of cross-holdings between foreign and domestic stockholders. (26)

Multinational companies also use general business tactics as defensive measures, such as staying in arrears on contracts and limiting assets held in the host country's jurisdiction. (27) Another common business measure is localization: both the reinvestment of profits in the host country and the employment of local workers. (28) In developing countries in particular, technology transfers and domestic training programs can sufficiently align interests. (29) Political risk insurance is another necessary proactive defense measure. (30)

2. Legal Remedies

Because of the imbalance of power involved in FDI, negotiation is often no longer an option once infrastructure improvements are completed and investors may only be able to resolve disputes with host countries through formal proceedings. (31) Legal recourse is seldom realistic in the host country, and arbitration proceedings must be initiated before the International Centre for Settlement of Investment Disputes (ICSID) or another arbitral body. (32)

The Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (The ICSID Convention), which established the ICSID, is the primary instrument of investment protection. (33) Under a traditional interpretation of The ICSID Convention, written consent from both parties is required before a claim may be filed with an arbitral body. (34) If consent is not given, the parties are forced to proceed before a national court in the host country. (35) The ICSID Convention also permits "arbitration without privity" that allows the host country to waive the need for its contractual consent to an arbitration agreement. (36) By forcing arbitration, Article 25 of The ICSID Convention reduces costs of individually negotiating every arbitration clause in each contract and increases investor leverage against host states by guaranteeing a legal remedy. (37)

Bilateral investment treaties (BITs) are the primary vehicles used by industrialized countries to insure investment protection in other nations. (38) BITs typically address expropriation directly, and generally require the following: prompt and adequate compensation for a taking; treatment that is predictable, transparent, fair, and equitable; non-discriminatory taxation; license fees; visa restrictions; anti-monopoly regulation; and most favored nation status. (39) In addition, investors may be able to compel arbitration through multilateral investment treaties. (40) The 1994 Energy Charter Treaty (ECT), for example, requires that parties engage in conciliation negotiations first, and only if those fail may the investor choose the forum. (41) By permitting the investor to choose either a domestic court in the host country or an international arbitration tribunal, the ECT provides another method of invoking "arbitration without privity." (42)

If the investor is able to win an arbitration proceeding, enforcement remains a problem in the current arbitration system. (43) Even when an aggrieved investor wins an arbitration decision, a host country can avoid paying damages if it has not waived sovereign immunity from enforcement. (44) If the host country waived sovereign immunity for enforcement, it may still seek to set aside the arbitration decision during the enforcement proceedings. (45)

III. FOSSIL FUEL FAILURES AND THE GREENER PROSPECTS OF TOMORROW

A. Modern Expropriations

1. Russia Reclaims its Oil and Gas

Some of the world's largest fossil fuel energy reserves lie in the Russian subsoil. (46) After the Soviet Union collapsed, multinational oil and gas companies received their first real Russian investment opportunities as the country shifted from a planned to a market-based economy. (47) Eager to replace outdated infrastructure, Russia encouraged foreign investment during this period. (48) In the early 1990s, Russia responded to perceived instability in its market for foreign investment by enacting the 1992 law "On Subsoil," and then in 1996 the Federal Law "On Production Sharing Agreements" (PSAs).

During the 1990s, an investor-friendly market was created in Russia by low oil prices and increased access to new resource deposits through PSAs. Today, however, high oil prices have led to an increase in nationalization of major Russian oil projects. (51) A prominent example of this trend is the case of the Yukos Oil Company, which was partially auctioned-off following a suspicious application of tax law against its president, Mikhail Khodorkovsky, and one of his partners, Platon Lebdev. (52) Following Khodorkovsky's 2003 arrest for fraud and tax evasion, the Russian government took control of Yukos's assets and auctioned them to a shell company, which subsequently merged with Rosneft, one of Russia's state-owned energy corporations. (53)

Plaintiffs have had difficulty finding a jurisdictional hook for Russia under Article 10 of its 1999 law on Foreign Investment, a problem complicated by Russia's decision not to ratify The ICSID Convention. (54) In this instance, the ECT to which Russia is a signatory may be applicable because it grants foreign investors the right to initiate arbitration without privity. (55)

Another technique Russia used to gain greater national control of its energy production market was the revocation of PSA licenses under the auspices of environmental regulation. (56) The joint venture between British Petroleum (BP) and Russian TNK, (TNK-BP), has recently come under attack following repeated feuds with Gazprom over pipeline access and oil field development strategy. (57) In 2006, TNK-BP was the focus of criminal investigations on charges alleging "systemic violations" of environmental and licensing rules. (58) TNKBP's 2006 chief executive Robert Dudley, a U.S. citizen, was also the focus of a Khodorkovsky-style tax evasion investigation, which caused him to flee from Russia in 2008. (59)

The Russian trend toward nationalization of oil and gas production was codified when Russia modified the law on subsoil by enacting Federal Laws No. 57-FZ and No. 58-FZ in April 2008. (60) These laws restrict foreign investment in certain "strategic sectors." (61) Energy corporations developing oil and gas resources could be characterized as "strategic subsoil companies" if they are operating on a large oil or gas reserve designated to be of "federal significance." (62) The Government Commission for Control over Foreign Investment in Russia must approve any transaction in which foreign investors gain a controlling interest in a company involved in a strategic sector.

2. Venezuela Emboldened by Oil Profits

Outside of Russia, President Hugo Chavez of The Bolivarian Republic of Venezuela, has also been emboldened by high oil prices that have flooded his country with petrodollars. (64) The Venezuelan state oil company Petroleos de Venezuela (PDVSA), which functions like Gazprom, provides a mechanism for expropriation pursuant to Chavez's "21st Century Socialism" approach to governing. (65) Since 2005, Venezuela and Russia have been developing an alliance, including commitments on energy development and weaponry. (66)

In addition to political concerns, Venezuela exhibits other characteristics of an unstable investment climate. (67) Venezuela relies predominately on revenues from the oil and gas sector to fuel its economy. (68) Venezuela has had currency stability problems. Furthermore, Venezuela has unilaterally adjusted royalty rates, tax laws, and energy contracts. (70)

There are two basic oil and gas investment vehicles in Venezuela, the Operational Service Agreements (OSAs) and the Strategic Association Agreements (AAs). (71) The 2001 Organic Law of Hydrocarbons limited foreigners' rights to invest in the Venezuelan oil and gas industry by reserving exploration, production, gathering, initial transportation, and storage of petroleum and natural gas for the state. (72)

The 2001 Organic Law of Hydrocarbons partially justified the 2007 expropriation of ExxonMobil and ConocoPhillips' AA positions. (73) These companies may have been unwilling to voluntarily cede a majority stake to PDVSA because doing so would have resulted in a net gain in excess of six billion dollars (US dollar equivalents) for PDVSA. (74) The dispute went to arbitration after the parties were unable to come to an agreement on adequate compensation and the prospects of success for either company seems unlikely. (75)

B. Greening the Global Energy Market

Oil will remain the essential component of most developed nations' energy security plans for the immediate future. (76)

Nevertheless, renewable energy projects are becoming increasingly viable. (77) The world's energy demand is growing and is expected to be fifty percent higher in 2030 than it is today. (78) According to a 2007 United Nations Environmental Program report, worldwide investment in renewable energy increased sixty percent from 2006 with $148 billion (US dollar equivalents) in new investment entering the market. (79) The developing world plays a leading role in renewable energy development. (80) China is the world's largest clean energy producer and the fastest growing segment of the market is found in countries such as Brazil, India, and China. (81)

There are a number of international treaties and agreements encouraging investment in renewable power. (82) The 1974 Agreement on an International Energy Program (IEP), for example, was created to ensure the stability and security of world oil supplies following the Arab oil embargos. (83) The International Energy Agency, the implementing agency of the IEP, functions as one of the primary promoters of sustainable energy research and development because its charter requires that it seek out alternative fuels and methods of oil conservation. (84) The 1992 United Nations Framework Convention on Climate Change (UNFCCC) sets forth three legal obligations of particular importance to sustainable energy: 1) stabilization of greenhouse gasses; 2) common but differentiated responsibility; and 3) the right to sustainable development. (85) These obligations essentially require that all developed countries expend resources to diversify their methods of energy production and then share that information with the developing world. (86) The 1997 Kyoto Protocol is a protocol to the UNFCCC adopted by 160 countries as a commitment to reduce greenhouse gas (GHG) emissions. (87) The Clean Development Mechanism permits GHG emitters to receive carbon credits for emission reduction projects in developing countries. (88) Finally, the 1994 ECT was designed to encourage energy cooperation by creating a regime for regulating foreign investment in the energy sector. (89)

While there are some factors indicating investment in renewable energy may be more stable than investment in fossil fuels, renewable energy investments are not immune to expropriation. (90) Examples of expropriation include, among others, the case of Polaris Geothermal in Nicaragua, which lost half of its market share when a newly-elected government altered deal terms. (91)

IV. GOING GREEN EXPANDS INVESTMENT OPPORTUNITY

All investors must consider the type of project and its associated risk of expropriation when making direct investments in foreign markets. (92) Energy investors should be especially careful to structure their investments so that they minimize the risk of expropriation because of the heightened threat to energy projects. (93) In light of the recent expropriations in Russia and Venezuela, the difficulty of reaching a settlement through arbitration, and the global interest in clean energy, the time is now for foreign investors to make the switch to clean energy projects. (94)

A. Russia and Venezuela Demonstrate Arbitration is an Uncertain Remedy.

The recent expropriation of Yukos in Russia and Exxon-Mobil and ConocoPhillips in Venezuela demonstrates the increased political risk threatening FDI in transition and developing economies. (95) Political risk is especially high in these countries because their leaders seek to entrench themselves by commandeering foreign investments as a method of assuring short-term political gains. (96) Political risk, which has manifested itself in the form of environmental and tax-related seizures, has increased investor uncertainty in these countries. (97) This short-sighted strategy has long-term negative repercussions for host states because foreign investors may eventually come to consider the host states unstable. (98) Investor confidence is further eroded when these countries create laws that limit the ability of foreigners to invest in their fossil fuel markets. (99)

The difficulty of resolving FDI disputes through arbitration was highlighted by the recent experiences of investors in Russia and Venezuela. (100) Both Russia and Venezuela have leverage over foreign investors who may wish to remain in the governments' favor. (101) Proactive dispute avoidance mechanisms are particularly important when investors seek access to a host country's exhaustible natural resources and arbitration must be used as a last resort. (102) These FDI disputes also demonstrate the tendency of host countries to assert their permanent sovereignty over their natural resources. (103) Finally, arbitration is uncertain because arbitral awards can be difficult to enforce when host countries have a superior bargaining position. (104)

B. Clean-Energy Solutions

When the price of oil or gas rises, host countries containing these natural resources become less willing to honor earlier agreements between the government and foreign investors. (105) When a foreign government refuses to honor its agreement, arbitration is often the investor's only hope for a favorable resolution. (106) Arbitration, however, is an uncertain remedy and investors should attempt to structure their investments so as to avoid these types of situations entirely. (107) Transactional attorneys should encourage energy investors to consider clean-energy projects as another means of reducing political risk, especially in developing or transition economies where risk factors are heightened. (108)

Investors will be able to take advantage of contemporary global interest in environmentally responsible alternatives to fossil fuel by choosing clean energy projects. (109) One factor driving this trend in the developing world is interest in global warming due to GHG emission. (110) International treaties passed because of concern over global warming, especially the Kyoto Protocol, demonstrate an international interest in cultivating clean technology investment by encouraging emission-reduction projects in developing countries. (111) Investors acting pursuant to the Kyoto Protocol have an excellent opportunity to mitigate political risk through general business measures because they will need to work directly with foreign governments and transfer technology to those states. (112)

Environmental concerns aside, reliance on fossil fuels located in developing or transition economies carries too much political risk. (113) Developing and transition economy countries are aware the developed world is relying on their power supply and are justifiably eager to assert themselves on the international stage. (114) In addition to the political ambitions of host countries, there is more incentive to expropriate fossil fuel resources because they are exhaustible. (115) Clean energy projects on the other hand, rely on renewable sources of power to which host countries are less attached. (116)

Transactional attorneys need to alert investors to the psychological attachment host countries have to natural resources, which can be completely consumed. (117) No matter how lucrative a fossil fuel project may appear at first, in a country whose main national asset is natural resources, a mere transfer of extraction technology will not likely be sufficient to appease local politicians from feeling left out of precipitous gains by investors. (118) Counsel should alert investors that when facing these conditions, an investment in a clean energy project can enable them to reach markets that would otherwise be closed to fossil fuel FDI because of host sensitivity. (119)

Renewable energy projects will be less susceptible to expropriation because they can be set up to serve local populations rather than for export. (120) When investment is designed to serve the local population, investors have a good opportunity to align themselves with the host country's general population. (121) Host countries trying to improve their energy grids and energy generation techniques will be more willing to permit foreign investment because the relationship is mutually beneficial, not biased towards foreign investors. (122)

In light of the cost and uncertainty associated with arbitration, counsel should steer investors toward projects with dual bottom lines, those that are both profitable and socially beneficial, because they are the ideal form of dispute avoidance. (123) Clean energy projects that do not deplete natural resources and instead produce an energy supply for host populations effectively eliminate the obsolescing bargain problem. (124) This problem is eliminated because the host country's psychological attachment to renewable natural resources is likely to be less significant. (125) Dual bottom-line projects are more sustainable in the long-term because local populations will support foreign investors whom they believe are working in their best interests by expanding their access to electricity. (126) Essentially, clean energy projects are less threatening to host countries because they do not require permanent cession of exhaustible natural resources to foreign investors, merely the use of renewable resources. (127)

It is naive to argue that the threat of expropriation alone justifies a complete change in energy investment strategy. (128) Still, some change may be appropriate if only because of the potential for market growth in the area of clean technology, which is another factor protecting renewable FDI from expropriation. (129) Experts are uncertain about the extent of oil and gas reserves, but it is clear that the resources will eventually be consumed. (130) Methods of renewable power generation are far from perfected, but there is global interest in developing this technology. (131) Investors should opt for a role in an expanding market where investor-state relations are more amicable, rather than trying to gain a stake in a shrinking market where dispute resolution is difficult. (132) As a result, investors will acquire access to new developing markets by switching to clean energy projects mainly because the developing world is at the forefront of clean energy. (133)

C. Renewable Energy Investment is Not Without Risks

While renewable energy FDI projects are less susceptible to host country expropriation, it is premature to consider a whole-scale substitution of technologies. (134) Despite the problems with fossil fuels, they are expected to remain a primary source of energy for the immediate future. (135) This prediction raises one of the most frequent criticisms of investment in renewable energy: renewable energy projects are premature as long as a steady supply of cheap fossil fuel satisfies consumer markets. (136) Additionally, clean energy projects are not immune from political risk. (137) The issue therefore concerns which imperfect method of mitigating political risk is the most cost effective. (138)

While all FDI is at risk of expropriation, clean energy projects are less risky investments because the current fossil fuel market is relatively unstable. (139) Additionally, the argument that renewable energy is too expensive fails to consider the true costs of fossil fuels by excluding the hidden externalities of climate damage. (140) Clean energy projects provide investors a cost-effective means for establishing market presence in volatile developing economies while avoiding direct government scrutiny concerning natural resources. (141)

When investors take progressive steps to reduce political risk, it reduces the need to resort to arbitration. (142) Still, investment in clean energy projects is not a panacea for foreign government intrusions. (143) Investors must be wary of ambitious host countries, and transactional attorneys should steer clients toward countries that have adopted a treaty permitting arbitration without privity. (144) In addition to encouraging investment in countries that have adopted The ICSID Convention, counsel should also direct investors to countries that have adopted both the Kyoto Protocol and the ECT. (145) This two-treaty system facilitates clean technology investment in developing countries while protecting investors by enhancing the availability of arbitration. (146) Investors should use the treaties enacted out of environmental concerns as an opportunity to abandon fossil fuel projects. (147)

V. CONCLUSION

Political risk and expropriation, in particular, are realities of any FDI. (148) Arbitration provides an uncertain remedy to expropriation because of jurisdictional and enforcement difficulties. (149) Rather than viewing the difficulty of arbitration as merely another unavoidable cost of FDI, foreign investors should instead seek investments that are less susceptible to government usurpation. (150) Clean energy investment enables investors to reach markets that would otherwise be closed to traditional fossil fuel FDI. (151) Foreign direct investors should choose clean energy projects because they enable investment in a growing market where the interests of both investors and host countries are sufficiently aligned. (152)

(1.) See Energy as a Weapon: Implications for U.S. Policy: J. Hearing Before the Subcomm. On Energy and Resources & Subcomm. On National Security, Emerging Threats, and International Relations of the H. Comm. On Government Reform, 109th Cong., 26-37 (2006), Statement of Paul F. Simons, Deputy Asst't Sec'y for Energy, Sanctions, Commodities, Energy and National Security Bureau of Economic and Business Affairs, Dept. of State, http://www.state.gov/e/eeb/rls/rm/2006/ 66625.htm (describing energy as "a fundamental driver of growth and development around the world").

(2.) See generally, Justin W. Evans, Note, A New Energy Paradigm for the Twenty-First Century: China, Russia, and America's Triangular Security Strategy, 39 IND. L. REV. 627 (2006) (surveying importance of energy to nations).

(3.) See id. at 627 (stating "[a]n inexpensive supply of energy fuels a nation's economy, defense, and quality of life"). In a post-Cold War world, economic strength fostered by inexpensive energy and technological innovation is seen as a significant symbol of national power, in some respects, as significant as military might. See id. at 628 (describing relationship between energy security and military security); Ariel Cohen, The North European Gas Pipeline Threatens Europe's Energy Security, BACKGROUNDER Oct. 26, 2006, http://www.heritage.org/Research/Reports/2006/ 10/The-North-European-Gas-Pipeline-Threatens-Europes-Energy- Securityhttp://www.heritage.org/Research/Reports/2006/10/ The-North-European-Gas-Pipeline-Threatens-Europes-Energy- Security (describing European dependence on Russian gas delivered through new pipeline bypassing former Soviet Bloc countries). In 2006, Russia shut off gas shipments to Ukraine, a crucial delivery hub, resulting in a mid-winter fuel shortage for Europe. Id. at 3.

(4.) See Robert A. James & John G. Mauel, An Integrated Approach to International Energy Investment Protection, in PROCEEDINGS OF THE 58TH ANNUAL OIL AND GAS LAW CONFERENCE 11, LexisNexis Matthew Bender 2007, available at http://www.pillsburylaw.com/ siteFiles/Publications/06A1DB2AA7B771D7BE35C 38E152BA57F.pdf (stating "[o]f all international investment subjects, energy projects are perhaps especially vulnerable to government intervention."); U.S. DEPT. OF STATE, BACKGROUND NOTE: RUSSIA (2009), available at http://www.state.gov/r/pa/ei/bgn/3183.htm (explaining Russian economic success based on oil revenues). Russia is awash in petrol dollars. Id. Russian oil exports have increased more than thirty-nine percent from 1999 to 2007, rising from $12 billion to $470 billion (U.S. dollar equivalent). Id. While Russia has been able to pay all of its Soviet-era debt with funds from oil taxation, the country's dependence on oil leaves its economy vulnerable to fluctuation in world commodity markets. Id. Some have speculated fossil fuel projects are more susceptible to government involvement because revenues are not evenly distributed among ordinary and elite host-country citizens, and because of the emotional attachment host countries have to exhaustible resources. See Sharon LaFraniere, As Angola Rebuilds, Most Find Their Poverty Persists, N.Y. TIMES, Oct. 14, 2007, at A2, available at http://www.nytimes.com/2007/10/14/world/ africa/14angola.html?pagewanted=1& _r=1&fta=y (explaining average Angolan citizens remain poor despite oil revenues).

(5.) See Evans, supra note 2, at 628-30 (estimating world petroleum production near peak and demand expected to rise because of Chinese economic growth); Press Release, United Nations Environment Program, Clean Energy Investments Charge Forward Despite Financial Market Turmoil, (July 1, 2008), available at http://www.unep.org/Documents. Multilingual/Default.asp?DocumentID=538&Arti cleID=5849&l=en [hereinafter U.N. Press Release on Clean Energy Investment] (describing global rise in sustainable energy investment). Between 2006 and 2007, new funding in the sustainable energy industry rose sixty percent. Id. Despite the signs of continued growth, the clean energy industry still lags behind fossil fuels; sustainable projects account for only twenty-three percent of new power capacity added in 2007. Id.

(6.) See infra Part IV (evaluating political risk mitigation through investment in renewable energy projects). The discussion of political risk is limited to the risks associated with expropriation for the purposes of this Note, although political risk has been defined to include anything from the risk of government intervention generally to "governmental and social impairments of the integrity of the commercial bargain represented by an investment contract." James & Mauel, supra note 4, at 6. A "developing country" is defined as "[a] country that is not as economically or politically advanced as the main industrial powers." BLACK'S LAW DICTIONARY 482 (8th ed. 2007). Developing countries are located mostly in Africa, Asia, Eastern Europe, the Middle East, and Latin and South America. Id. The term "transition economies" describes countries that are transforming from planned to market-based economies. Int'l Monetary Fund Transition Economies: An IMF Perspective on Progress and Prospects, at I (Nov. 3, 2000), http://www.imf.org/external/np/ exr/ib/2000/110300.htm (listing Albania, Bulgaria, Croatia, Czech Republic, Estonia, Armenia, Azerbaijan, Georgia, Cambodia, China, and others as examples).

(7.) See infra Part II (discussing increased risk in foreign investment and limited utility of arbitration).

(8.) See infra Part III (using Russia and Venezuela as case studies of expropriation).

(9.) See infra Part IV (suggesting clean energy investment enables participation in markets closed to outside investment because of political risk).

(10.) See infra Part V (concluding arbitration risks provide incentives for foreign direct investors to choose clean energy projects).

(11.) See Richard J. Hunter, Jr., Property Risks in International Business, 15 CURRENTS: INT'L TRADE L.J. 23, 26 (2006) (distinguishing foreign direct investment from passive portfolio investments not involving control). Foreign direct investment (FDI) is achieved when foreign investors exert management control over another country's domestic companies by purchasing physical assets or a significant amount of stock. Id. FDI has positive and negative effects on the host country. Id. at 26-28. It encourages the transfer of technology, capital, and entrepreneurialism, but may disturb domestic political and economic practices and lead to foreign dependence. See id. at 27-28 (listing benefits and drawbacks of FDI).

(12.) See id. at 26-27 (indicating 2004 record year for FDI in Asia and Central and Eastern Europe). FDI is not evenly distributed and for much of the 2000s countries with high oil reserves have received disproportionally high levels of FDI. Id. at 27. FDI can bring technological advancements to developing countries where natural resources are plentiful and infrastructure is often outdated. See Jason M. Waltrip, Note, The Russian Oil and Gas Industry After Yukos: Outlook For Foreign Investment, 17 TRANSNAT'L L. & CONTEMP. PROBS. 575, 576 (2008) (describing Russia's courtship of foreign investors to improve oil and gas industry following privatization in 1990s). The risk of property loss may be intensified if investors seek to exploit limited natural resources because political leaders view this as an attack on their country's sovereignty. See Brandon Marsh, Note, Preventing The Inevitable: The Benefits of Contractual Risk Engineering in Light of Venezuela's Recent Oil Field Nationalization, 13 STAN. J.L. BUS. & FIN. 453, 454 (2008) (describing Hugo Chavez's "21st Century Socialism" plan and his political gains from nationalization). The trend towards energy investment expropriation is particularly worrisome for investors in the oil and gas industry because they often must make tremendous capital outlays before they receive any return on investment. See id. at 456 (explaining investments with high infrastructure costs require riskier long-term investment approach); see also Waltrip, supra note 12, at 579 (commenting remote location of Russian oil and gas fields made exploration capital intensive).

(13.) See James & Mauel, supra note 4, at 11 (stating "[o]f all international investment subjects, energy projects are perhaps especially vulnerable to government intervention"). Political risk comes in a variety of forms: confiscation, expropriation, and nationalization. See Hunter, supra note 11, at 28-32 (defining terms). Confiscation is the taking of property without compensation, often following open hostilities. Id. at 28. Confiscation is generally permissible under international law unless prohibited by a treaty. Id. Expropriation is generally permitted under the rules of customary international law as well. Id. at 29. Still, the taking must be for a public purpose. Id. In an expropriation, the government may only discriminate against the property owners if they are adequately compensated for their loss. Id. Nationalization is the taking of an entire industry and is accomplished through confiscation or expropriation. Id. at 31. Alternatively host countries may slowly domesticate foreign companies by imposing policy-based regulations aimed at reducing outflow of profits to investor countries. See id. at 32 (explaining domestication as a system of local content requirements). Host countries also implement regulations, such as requiring a percentage of foreign profits to be reinvested in local markets or that locals be hired, which operate similarly to takings. Id.

(14.) See James & Mauel, supra note 4, at 8 (explaining government involvement likely to increase if public perceives foreigners profiting at expense of host country).

(15.) See id. (describing downside of high profits).

(16.) United Nations Resolution on Permanent Sovereignty Over Natural Resources, G.A. Res. 1803, art. I, para. 1, U.N. GAOR, 17th Sess., Supp. No. 17, U.N. Doc. A/5217 (Dec. 14, 1962), available at http://daccess- ddsny.un.org/doc/resolution/gen/nr0/193/11/pdf/nr019311.pdf?OpenElement (providing right to permanent sovereignty over natural resources); G.A. Res. 3201, para 4(e), U.N. GAOR, 6th Special Sess., Supp. (No. 1) 3, U.N. Doc. A/9556 (May 2, 1974), available at http://www.un.org/ga/search/ view_doc.asp?symbol=A/9559&lang=e (providinghttp://www.un.org/ga/search/ view_doc.asp?symbol=A/9559&lang=e (providing full permanent sovereignty). Countries advancing this theory seek to diminish the principle of pacta sunt servanda, an international legal principle requiring the maintenance of contractual commitments. See Daniel E. Vielleville & Baiju S. Vasani, Sovereignty Over Natural Resources Versus Rights Under Investment Contracts: Which One Prevails?, 5(2) TRANSNAT'L DISP. MGMT. 1, 3 (April 2008), available at http://www.crowell.com/documents/ Sovereignty-OverNatural-Resources-Versus-Rights-Under- Investment-Contracts_Transnational- Dispute-Management.pdf (describing tenuous relationship between host countries and foreign investors).

(17.) See Louis Wells & Eric Gleason, Is Foreign Infrastructure Investment Still Risky?, HARV. BUS. REV., Sept.-Oct. 1995, at 44 (stating exploration, development, construction project phases vulnerable to expropriation). Expropriation at this stage of the investment process enables the host country to reap the benefit of the capital outlays in exploration or infrastructure development made by multinational corporations. Id.

(18.) See Klaus Peter Berger, Renegotiation and Adaptation of International Investments Contracts: The Role of Contract Drafters and Arbitrators, 36 VAND. J. TRANSNAT'L L. 1347, 1349 (2003) (defining "obsolescing bargain" as one of most significant political risks associated with foreign investment). Political risk, however, is not confined to the developing world. See Edmund L. Andrews, Chevron Could Avoid Huge Royalties From Oil Find in the Gulf, N.Y. TIMES, Sept. 12, 2006, at C1 (indicating system of laws, solid judiciary, established legislative process, democratic government do not eliminate appropriation risk). In the developed world, expropriation is often expressed through more subtle regulations that limit profitability. Id. In 2006, U.S. politicians sought to punish oil and gas companies holding Gulf of Mexico leases that were unwilling to renegotiate contracts awarded in 1998 and 1999, because they did not contain clauses for increased government royalty rates in the event of an increase in crude oil prices. Id. Finally, political risk can arise from actions in an investor's home country, such as sanctions against the host, or political disagreement. See James & Mauel, supra note 4, at 11 (concluding clients must consider relationship between host and investor countries to ascertain investment viability).

(19.) See generally Berger supra note 18 (warning of need to renegotiate contracts following regime change).

(20.) See James & Mauel, supra note 4, at 7 (explaining non-political risks faced by investors operating in foreign legal system).

(21.) Id. (noting increased contractual risk when dealing with governmental counterparty).

(22.) Id. at 7-8. Energy supply contracts are more susceptible to currency risk if revenues are paid in local currency; oil contracts, in contrast, are generally paid in hard currency and are therefore less susceptible. Id. at 8.

(23.) See Hunter, supra note 11, at 32-34 (listing risk reduction measures: avoidance, adaptation, information gathering, and influencing local politics through responsible corporate citizenship); Arif Ali & Baiju Vasani, 10 Golden Rules for U.S. Negotiations with a Foreign State or State Entity, 63 J. DISP. RESOL. 72, 76,78 (2008) (cautioning investors against "playing the arbitration, litigation card [im]prudently" when host country has desirable resources).

(24.) See Hunter, supra note 11, at 32-33 (defining risk avoidance as "refusing to engage in foreign business operations"). See generally James & Mauel, supra note 4, at 8 (stressing importance of pre-remedy protections because of uncertainty, cost, and time commitment for legal remedy).

(25.) See id. (explaining common risk mitigation mechanisms).

(26.) See id. (concluding concern for host country population generally accepted as best method of mitigating expropriation risk).

(27.) See James & Mauel, supra note 4, at 19-22 (noting contracts structured to require host countries' performance first will incentivize them to perform).

(28.) See id. at 20 (explaining how developed country investment in developing hosts can convey benefits to local populations). In addition to these basic tactics, multinational companies can employ any variety of approaches designed to align corporate interests with those of local stakeholders. See generally id. (outlining system for successful FDI).

(29.) Id. at 20.

(30.) See Hunter, supra note 11, at 33 (illustrating risks and insurance options for U.S. multinational corporations). Generally, this type of insurance protects foreign investors against such risks as: inability to convert profits, expropriation, confiscation, war, revolution, or insurrection. Id.

(31.) See Ali & Vasani, supra note 23, at 78 (explaining power imbalance as central concern in determining whether to arbitrate); James & Mauel, supra note 4, at 26 (indicating strategic importance of legal recourse). When parties initially agree to arbitrate disputes, investors can use the threat of bringing a complaint to strengthen their negotiating position. See id. at 27 (analogizing arbitration to "hanging sword" protecting otherwise powerless investors). Resort to legal remedy is undesirable because the results are uncertain, costly, time-consuming, and often indicate a substantial failure of primary project objectives. See Hunter, supra note 11, at 26 (stressing importance of pre-remedy dispute resolution).

(32.) See Frank Walsh, Flipping the Act of State Presumption: Protecting America's International Investors From Foreign Nationalization Programs, 12 TEX. REV. L. & POL. 369, 372-3 (2008) (concluding American foreign investors unprotected by domestic law, which favors foreign sovereignty). In the United States, the "Act of State" doctrine states that, "the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory." Id. U.S. courts have routinely concluded that nationalization of property is an Act of State and U.S. investors have no recourse domestically. Id. See James & Mauel, supra note 4, at 30 n.69 (listing arbitral administrative bodies). Possible administrative bodies include, but are not limited to: the London Court of International Arbitration, the International Chamber of Commerce, the International Centre for Settlement of Investment Disputes (ICSID), and the European Court of Human Rights. Id. A full discussion of all issues potentially relevant to the drafting of an arbitration clause is beyond the scope of this note; however, the fundamental point is that the power imbalance between the investor and the state makes arbitration a tenuous solution. See Ali & Vasani, supra note 23, at 78 (explaining potential negative effects of arbitral proceedings including termination of business relations and blacklisting). Investors must make many choices when deciding to arbitrate, including: sources of appointment of arbitrators, promulgators of arbitration rules, forum, rules of procedure, language, number of arbiters, payment of fees, discovery rules, time constraints, enforcement of awards, and accrual of interest on awards. James & Mauel, supra note 4, at 3031.

(33.) Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, opened for signature Mar. 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S. 159 [hereinafter The ICSID Convention]; see Matteo M. Winkler, Arbitration Without Privity and Russian Oil: The Yukos Case Before the Huston Court, 27 U. PA. J. INT'L ECON. L. 115, 127 (2006) (citing The ICSID Convention). The ICSID is an independent organization within the World Bank Group and is located in Washington D.C. See Hunter, supra note 11, at 33.

(34.) See Winkler, supra note 33, at 127 (explaining conventional and unconventional uses for The Convention).

(35.) Id.

(36.) Id. at 133-35. Article 25 of The ICSID Convention acts as a unilateral offer by the host country to arbitrate disputes. Id. at 133. That offer is accepted by the investor when it initiates arbitration proceedings. Id. at 134. This system permits investors to initiate arbitration proceedings against a host country, despite the lack of contractual agreement. Id.

(37.) See id. at 135 (finding adoption of The ICSID Convention attracts foreign investment).

(38.) See Hunter, supra note 11, at 33 (analogizing bilateral investment treaties to insurance against political instability in host countries).

(39.) Id. The United States' 2004 Model Bilateral Investment Treaty, which prevents either the United States or another host country from expropriating "either directly or indirectly through measures equivalent to expropriation or nationalization" unless the taking is "for a public purposes," "in a nondiscriminatory manner," "on payment of prompt, adequate and effective compensation," and "in accordance with due process of law," is a good example of common bilateral investment treaty (BIT) language. Treaty Between The Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment art. 6(1) (2004), http://www.state.gov/ documents/organization/117601.pdf

(40.) See Winkler, supra note 33, at 133 (indicating shift in multilateral agreement provisions from encouraging arbitration to compelling it).

(41.) See Energy Charter Treaty arts. 13, 26, Dec. 17, 1991, 2080 U.N.T.S. 100 [hereinafter ECT] available at http://untreaty.un.org/unts/ 144078_158780/10/8/3517.pdf (providing arbitration should occur before action in national forum).

(42.) See Winkler, supra note 33, at 133-35 (explaining importance of arbitration without privity).

(43.) See Marsh, supra note 12, at 474 (describing various methods of enforcement avoidance by host countries). Enforcement concerns are typically addressed through the U. N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention on Recognition and Enforcement), which significantly limits grounds for non-compliance. See Edna Sussman, The Energy Charter Treaty's Investor Protection Provisions: Potential to Foster Solutions to Global Warming and Promote Sustainable Development, 14 ILSA J. INT'L & COMP. L. 391, 393 (2008) (discussing Convention on Recognition and Enforcement).

(44.) See Marsh, supra note 12, at 474 (explaining system of arbitration enforcement). Article 55 of The ICSID Convention states that arbitration awards shall not "be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign state from execution." The ICSID Convention, supra note 33, art 55.

(45.) See id. at 475 (noting potential problems for award enforcement).

(46.) U.S. Dep't of State, 2008 Investment Climate Statement--Russia, http://www.state.gov/e/eeb/ ifd/2008/101005.htm (last visited Feb. 17, 2010) (stating "[Russia contains] the world's largest natural gas reserves and some of the world's largest crude oil reserves"); see also Ernest Chung, Petroleum Investment in the Russian Federation-Russian Federation Federal Law No. 2250FZ On Production Sharing Agreements (December 30, 1995), 37 HARV. INT'L L.J. 551, 551 (1996) (indicating Russia's significance as leading source of untapped fossil fuels); Yuli Grigoryev, The Russian Gas Industry, Its Legal Structure, and Its Influence on World Markets, 28 ENERGY L. J. 125, 125 (2007) (noting size of Russian natural gas reserves at forty-eight trillion cubic meters). Combustion engines, fueled by natural gas, burn far cleaner than their oil or coal counterparts and produce less carbon dioxide per energy unit. JOHN M. PRATTE, ENVTL. SCI. ACTIVITIES FOR THE 21ST CENTURY, FOSSIL FUELS: NATURAL GAS (2004), http://esa21.kennesaw.edu/ activities/naturalgas/naturalgas.pdf. A major difficulty with natural gas, however, is that it is prone to leak during the transportation and storage process. Id. This qualification has led to significant problems for Russia's neighbors who rely on natural gas supplied via transnational pipelines. See Cohen, supra note 3, at 4 (portraying historical difficulties with pipeline supply when political differences arise between Russia and transport states).

(47.) See WILLIAM E. BUTLER, RUSSIAN LAW 604 (Oxford Univ. Press, USA ed., 2003) (discussing limitations to foreign investment under Soviet Union and relative changes with spread of capitalism). In the Soviet Union, the only legislation that related to foreign investment was the Joint Venture Law. Id. Foreign investment was restricted between 1987 and 1992 to ownership of shares of Soviet limited liability joint venture companies formed with a domestic license holder. The Procedure for the Establishment on the Territory of the USSR and Activity of Joint Enterprises with the Participation of Soviet Organizations and Firms of Capitalist and Less Developed Countries, adopted by Decree No. 49, U.S.S.R. Council of Ministers (Jan. 13, 1987).

(48.) See Waltrip, supra note 12, at 576 (observing difficult task of modernization faced by Russian companies struggling after years of technological stagnation).

(49.) LAW OF THE RUSSIAN FEDERATION CONCERNING SUBSURFACE RESOURCES, (Ernst & Young trans., Feb. 21, 1992) (originally published in the RUSSIAN GAZETTE); Russian Federation Federal Law on Production Sharing Agreements, No. 2250FZ, effective Jan. 11, 1996, amended Jan. 7, 1999 [hereinafter Russian Subsoil Law]. The Russian Subsoil Law regulated the granting of exploration and production licenses. Marc Polonsky, Jennifer Josefson & Sergei Stepanov, Mar 10 2006: Oil and Gas Exploration and Production: Russian Legislation, Mar. 10, 2006, available at www.amcham.ru/doing_business/oil_and_gas_issues/oil_exploration. Throughout the 1990s, exploration licenses were granted for up to five years and production licenses granted for up to twenty years. Id.; see James W. Skelton, Jr., Status of Russian Petroleum Legislation, 30 HOUS. J. INT'L L. 315, 322-324 (2008) (explaining Russian Subsoil Law entrenched Soviet nationalist approach serving as only method of obtaining subsoil rights). PSAs provided the regulatory framework for the establishment of FDI in Russia. Nowell David Beckett Bamberger, In the Wake of Sakhalin II: How Non-governmental Administration of Natural Resources Could Strengthen Russia's Energy Sector, 16 PAC. RIM L. & POL'Y J. 669, 674-75 (2007). In Russia, production sharing agreements (PSAs) generally assigned the risk of political instability to the host government, the risk of failed exploration efforts to the investor, and granted jurisdiction over disputes to an arbitral tribunal. Id. PSAs are used outside of Russia as well and are generally comprised of three basic structural elements:
   1) continued state-ownership of the underlying natural resources
   (rather than concession to a foreign entity), 2) a self-contained
   agreement, entirely insulated from the domestic regulatory regime
   and ostensibly guaranteed against further state expropriation, and
   3) payment to the host regime in crude oil, rather than currency,
   providing both a guarantee against under-pricing of oil in sale by
   the development company to its foreign affiliates and State access
   to a strategic resource.


Id. PSAs are unique from other mineral exploration contracts in that the host country does not receive payment unless oil is found, and the investor is often reimbursed in kind for its exploration expenses. Id.; see also Chung, supra note 46, at 555 (asserting PSAs most widely used investment instrument for petroleum investors in developing world despite problems).

(50.) See Chung, supra note 46, at 557 (noting Russian trend during 1990s of increasing acceptance of foreign investment).

(51.) See Waltrip, supra note 12, at 585 (explaining investor confidence problems after Yukos seizure).

(52.) See Winkler, supra note 33, at 115-17 (illustrating rise and fall of Yukos). Some suspected the charges were politically motivated because of Khodorkovsky's support for Putin's opponents. Id. at 116 (hypothesizing Khodorkovsky's political ambition and personal wealth led to his arrest).

(53.) See id. at 120 n23 (noting aspects of sale). Essentially the Russian government auctioned Yukos to itself because only Gazpromneft, the Russian state-owned gas company, and Baikalfinansgroup, a mysterious new shell corporation, participated in the auction and Baikalfinansgroup was thought to have been acting on Gazpromneft's behalf. Id. Baikalfinansgroup won with a bid equivalent to $9.3 billion. Id. at 120. Yukos argued unsuccessfully that Baikalfinansgroup should not have been permitted to bid at all because it acted on behalf of Gazpromneft, which was subject to a Texas restraining order preventing Gazpromneft from bidding. Id. at 117-118, 147-153. The irony here is that Khodorkovsky was arrested for tax evasion charges based on allegations that he did the exact same thing: using a shell company to falsely create the false perception of competition. See id. at 120 n23 (citing Benoit Faucon, Yukos CEO: Finalizing New Strategy After Yugansk Sale, DOW JONES NEWSWIRE, Feb, 1, 2005, http://jpmc.lonebuffalo.com/ story.cfm?story_id=948777).

(54.) See Winkler, supra note 33, at 144 (indicating difficulty of compelling arbitration when no ICSID Convention or BIT network exists).

(55.) Id. at 145. Initiating arbitration may be more difficult in practice, however, because of the potential negative political consequences. Id. at 151-52. Investors also may not have proceeded under the ECT because asserting that theory would require amending the complaint to allege violations of international treaties and customary law, not just a violation of Russian tax law. See id. at 147 (noting obstacles to investment dispute resolution).

(56.) See Justin R. Marlles, Public Purpose, Private Losses: Regulatory Expropriation and Environmental Regulation in International Investment Law, 16 J. TRANSNAT'L L. & POL'Y 275, 276 (2007) (providing case of Sakhalin-2 oil and gas project as example). This technique is called "regulatory expropriation" and is defined as "any scenario in which a capital-importing state uses its regulatory powers to deprive foreign investors of their property or the effective enjoyment thereof." Id. See also Waltrip, supra note 12, at 586-91 (hypothesizing protectionist measures sometimes disguised as environmental regulations). Regulatory expropriation is an example of what is sometimes called "indirect expropriation." See CHRISTOPHER SCHREUER, THE CONCEPT OF EXPROPRIATION UNDER THE ETC AND OTHER INVESTMENT PROTECTION TREATIES 3-14 (2005), http://www.univie.ac.at/intlaw/pdf/ csunpublpaper_3.pdf (explaining how loss of property rights without governmental seizure still constitutes expropriation).

(57.) Stephen Bierman, Russia Turns Guns on TNK-BP's Rospan Unit, OIL DAILY, Nov. 10, 2006. TNK-BP was formed in 2003 "as a result of the merger of BP's Russian oil and gas assets and the oil and gas assets of Alfa, Access/Renova group (AAR)." TNK-BP, Our Company, http://www.tnk-bp.com/company/ (last visited Apr. 6, 2010). It is currently a leading Russian oil company and a leading producer of crude oil. Id.

(58.) Catherine Belton, TNK-BP License Under Attack, MOSCOW TIMES, Nov. 8, 2006, at 1, available at http://www.themoscowtimes.com/ business/article/tnkbp-license-under-attack/201102.html

(59.) See Ainsley Thomson, Legal Move Looms After 'Harassed' TNK-BP Boss Leaves Russia, INDEPENDENT ON SUNDAY (London), July 27, 2008 (reporting on recent Russian aggression). Dudley blames Russian oligarchs, Mikhail Fridman, German Khan, Viktor Vekselberg, and Len Blavatnik, co-owners of TNK-BP through the investment group Alfa, Access, and Renova (AAR), for his unprecedented investigation. Id. Russian oligarchs are individuals who acquired enormous wealth after the fall of Communism, and have in some instances opposed the Kremlin. See Interview with Mikhail Knodorkovsky: Money, Power and Politics, in MOSCOW: RICH IN RUSSIA, FRONTLINE WORLD (Oct. 2003), available at http://www.pbs.org/frontlineworld/ stories/moscow/khodorkovskyinterview.html (detailing Khodorkovsky's involvement in Russian business and politics from lawless post-Soviet days to his incarceration). Foreign investors dealing with Russian oligarchs have found that power struggles between the government and the oligarchs further threaten their investment. See generally Thomson, supra (noting oligarchs' power).

(60.) Federal Law On Procedures for Making Foreign Investment into Business Entities having Strategic Significance for National Defense and State Security, No. 57-FZ (April 29, 2008), available at http://www.amcham.ru/_images/upload/ FL57_2008_OnForeignRestrictions_ENG. pdf [hereinafter 57-FZ]; Federal Law On Amending Certain Legislative Acts of the Russian Federation and Declaring Invalid Certain Provisions of Legislative Acts of the Russian Federation and Declaring Invalid Certain Provisions of Legislative Acts of the Russian Federation Pursuant to Adoption of the Federal Law "On Procedures for Implementation of Foreign Investment into Business Entities Having Strategic Significance for National Defense and State Security," No. 58-FZ (April 29, 2008), available at http://www.amcham.ru/_images/ upload/FL58_2008_OnAmendingLaws_ENG.pdf [hereinafter 58-FZ]. Additionally Prime Minister Mikhail Fradkov's statements that "[m]echanical openness" to foreign investment could be seen as "stupid" and that "we [Russia] . . . should not be made losers" seem indicative of the intention of the Russian government to ensure that they reap a substantial benefit from the development of their exhaustible natural resources. See generally Sergei Blagov, Foreign Investment: Russia Mulls Limiting Foreign Investments in Strategic Sectors Such as Oil and Gas, 24 INT'L TRADE REP. (BNA) 205 (2007) (indicating Russian leaders' suspicion towards oil and gas FDI projects).

(61.) See 57-FZ, supra note 60; 58-FZ, supra note 60.

(62.) See L. Brank, K. Withane, D. Litvinova, The Strategic Sectors Law and its Impact on Foreign Investment in Russia, CIS LEGAL NEWSWIRE (Chadbourne & Parke LLP, June 15, 2008), at 1-3, http://www.chadbourne.com/files/ Publication/45879028-eb56-4997- 9db9b1a1298d56f7/Presentation/PublicationAttachment/ca1a8540-da13-4b89-a02a- b30167eda535/CIS%20Newswire-061508.pdf (outlining Russian codification of disinterest in oil and gas FDI). For the purpose of oil and gas exploration, subsoil plots within the Russian Federation and its territories are considered to have "federal significance" if, on January 1, 2006, they were listed on the state balance of mineral reserves as containing recoverable oil reserves in excess of seventy million tons, or gas reserves of fifty billion cubic meters or more. Id. Mineral reserves located within inland sea waters, territorial sea waters, along the continental shelf of the Russian Federation, or located in subsoil areas where the land is used for defense or security purposes are also considered to have "federal significance." Id.

(63.) See id., at 3 (explaining new Russian system). Control of a strategic subsoil company is defined as the right to dispose of ten percent of the voting shares, appoint ten percent of the executive body, or elect ten percent of the board of directors. Id. at 2.

(64.) See Roger Cohen, Op-Ed., Shutting up Venezuela's Chavez, N.Y. TIMES, Nov. 29, 2007, at A31, available at http://www.nytimes.com/2007/11/29/ opinion/29cohen.html (comparing Chavez's attempt to entrench himself to Vladimir Putin's effort). According to Cohen, the World Bank ranked Venezuela 172 out of 178 for ease of doing business in its "Doing Business 2008" ranking. Id.

(65.) See U.S. Dep't of State, 2008 Investment Climate Statement: Venezuela, http:// www.state.gov/e/eeb/ifd/2008/101026.htm (Last Visited Mar. 5, 2010) [hereinafter Venezuela Investment Climate] (indicating how Chavez's socialist leanings influence his desire to expropriate industry). Venezuela under Chavez may present even greater political risk as Chavez has been expropriating actively in other industries in addition to the oil industry. See id. (demonstrating high risk present in Venezuela). Other significant expropriations during 2007 included CANTV, Electricidad de Caracas, and Radio Caracas Television. Id.

(66.) See James Suggett, Venezuela and Russia Initiate Gas Exploration and Expand Strategic Alliance, VENEZUEALANALYSIS.COM, Nov. 8, 2008, http://www.venezuelanalysis.com/news/3936 (characterizing Russia and Venezuela as having formed strategic business relationships); Gazprom, Gazprom Delegation Visited Venezuela, Sept. 22, 2008, http://www.gazprom.ru/eng/news/2008/09/30898.shtml (describing meeting between representatives of two state controlled oil companies). Gazprom received a license to explore and develop natural gas in the Urumaco-1 and Urumaco-2 fields in the Gulf of Venezuela in 2005. Gazprom Home Page, http://www.gazprom.ru (last visited Feb. 18, 2010). Since 2005, Venezuela purchased $4.4 billion (U.S. dollar equivalent) worth of weapons from Russia. See Suggett, supra (investigating Russia-Venezuela relationship).

(67.) See supra notes 11-22 and accompanying text (outlining additional risks confronting foreign investors).

(68.) See Cohen, supra note 64 (stating oil accounts for ninety percent of Venezuela's exports). In 2007, Venezuelan GDP was $227 billion (U.S. dollar equivalent). U.S. Dep't of State-Background Note: Venezuela, http://www.state.gov/r/ pa/ei/bgn/35766.htm (July 2009) (acknowledging petroleum industry as major component of Venezuela's gross domestic product). In 2007, the petroleum industry, including oil refining and petrochemicals generally, comprised twenty-eight percent of Venezuela's GDP. Id.

(69.) See Venezuela Investment Climate, supra note 65 (explaining how illegal currency market and other problems lead to investment disincentive).

(70.) See id. (indicating Operational Service Agreements and Strategic Association Agreements not guaranteed protection against rate increases); Marsh, supra note 12, at 468 (describing inconsistent trend following inaction of 2001 Hydrocarbons Law). Chavez has used the 2001 Organic Law of Hydrocarbons extensively over the last few years. Id. It was used in 2001 to increase rates for Operational Service Agreements (OSAs), in 2004 to terminate a nine-year royalty holiday for Strategic Association Agreements (SAAs), and to convert all OSAs to joint ventures, and to increase taxes and royalties on AAs in 2005. Id. Most significantly, in 2007, Chavez was able to attain a majority position for PDVSA in AAs joint ventures ExxonMobil and ConocoPhillips. See Venezuela Investment Climate, supra note 65 (discussing Chavez's plan and resulting litigation). ExxonMobil and ConocoPhillips refused to cede their positions to Venezuela and instituted arbitral proceedings following Venezuela's taking of their fields. Id.

(71.) See Marsh, supra note 12, at 462 (describing OSAs, AAs, and Risk Exploration Agreements). Venezuela's opening of its oil fields to foreign investment occurred in a series of rounds throughout the 1990s. Id. Thirty-four different OSAs were awarded and four of the more cost-intensive AAs were awarded. Id. The AAs awarded for exploration of the Orinoco Oil Belt required initial investments between $2 billion and $4 billion (U.S. dollar equivalent) to refine the low-quality oil located there, and as a result, were structured as joint ventures with PDVSA. Id. at 463. The OSAs, however, were structured as service agreements. Id.

(72.) See Venezuela Investment Climate, supra note 65 (explaining methods of investing in Venezuela).

(73.) See Marsh, supra note 12, at 467-469 (describing history leading to 2007 expropriation).

(74.) See id. (speculating about Exxon-Mobil and ConocoPhillips' motivation).

(75.) See id. at 470-82 (listing legal and practical constraints on oil and gas investors' ability to sue host country).

(76.) See Evans, supra note 2, at 628 (arguing oil signifies power today); U.S. Dep't of Energy Fossil Fuels, http://www.energy.gov/energysources/fossilfuels.htm (last visited Mar. 5, 2010) (stating eighty-five percent of U.S. energy consumption derived from fossil sources). Despite the increased viability of renewable energy in light of increased energy costs, U.S. dependence on fossil fuels is likely to continue for the next two generations. Id. In a comparison of fossil and renewable methods of power generation, it is important to remember that the different methods serve slightly different markets. See Anne Trafton, 'Major discovery' from MIT Primed to Unleash Solar Revolution, MIT NEWS, Jul. 31, 2008, http://web.mit.edu/newsoffice/2008/oxygen-0731.html (discussing limitations on photovoltaic energy sources). For example, the storage problems associated with photovoltaic generation requires it be used for small-scale energy production. Id.

(77.) See Edwin Feo, Presentation at the U.S. Export-Import Bank: Envtl. Technologies and Renewal Energy Conference, Int'l Energy Investment Opportunities for U.S. Companies (Oct. 16, 2007) (indicating greatest opportunity for clean energy investment in Asia and Latin America). The term "renewable energy" encompasses power generation by wind, solar, hydropower, geothermal, biomass, and biofuel techniques. Id. A good market for renewable energy projects exists in developing countries because in some instances they lack an established fossil fuel infrastructure and can instead develop a renewable infrastructure directly. Id. Often these techniques of energy generation require government subsidies to be cost competitive with fossil fuel alternatives. See generally Press Release, Energy and Security Group, Clean Energy: An Exporter's Guide to China (July 2008) (on file with U.S. Dep't of Commerce, Int'l Trade Admin.)[hereinafter Exporter's Guide to China] (explaining details of China's Renewable Energy Law). Included in the benefits mandated by Chinese law are subsidies, favorable loans and tax treatment, and access to the national grid. Id. at 27-33. Renewable energy is not, however, a new concept dependent on highly advanced technology. See John Richter, Michigan Renewable Energy and Efficiency Success Stories, http://www.michiganenergyoptions.org/ learnmore/renewable-energy-successstories/ 241-5-the-history-of-renewable-energy- use (last visited May 10, 2010) (stating ancient Greeks oriented windows towards south to collect passive solar heat). In the United Sates, interest in clean energy investment was demonstrated by President Barack Obama's clean energy investment proposal. See BARACK OBAMA AND JOE BIDEN: NEW ENERGY FOR AMERICA (2008), http://www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf (explaining President's plan to develop clean energy). Some of the goals laid out in the plan included: investing $150 billion in the next ten years to "catalyze private efforts to build a clean energy future" and create five million new jobs; ensuring that ten percent of US electricity comes from renewable sources by 2012, and twenty-five percent by 2025; implementing an economy-wide cap-and-trade program to reduce greenhouse gas emissions eighty percent by 2050; putting one million Plug-In Hybrid cars on the road by 2015 and establishing a National Low Carbon Fuel Standard; boosting energy efficiency and "weatherizing " one million homes annually; developing and deploying clean coal technology; and making the United States a leader on climate change. Id.

(78.) U.S. Energy Information Association, International Energy Outlook 2008, at 7, http://www.eia.doe.gov/oiaf/ieo/index.html (September 2008).

(79.) U.N. Press Release on Clean Energy Investment, supra note 5 (describing global rise in sustainable energy investment). Renewable energy is a growth market that is receiving about one third of the total global energy investment capital, although renewables only account for one to two percent of the installed energy capacity. Feo, supra note 77. The potential for economic growth is so substantial in China that the country passed the Renewable Energy Law in 2006 to facilitate renewable energy projects. Id.

(80.) See Feo, supra note 77 (explaining clean energy investment opportunities worldwide).

(81.) See id. See generally Exporter's Guide to China, supra note 77 (describing types of clean energy projects currently employed in developing world). Despite this growth, one criticism of clean energy projects is that they are not viable as long as fossil fuel provides a cheap alternative. See Rick Newman Pros and Cons of 8 Green Fuels: Our dossiers detail which fuels are overrated--and which could power your next car, U.S. NEWS, Jan. 11, 2008, http://www.usnews.com/money/personal-finance/articles/2008/ 01/11/the-pros-andcons-of-8-green-fuels.html (indicating problems with cost effectiveness and availability for certain green fuels).

(82.) See ECT, supra note 41 (encouraging investment in clean energy); Agreement on an International Energy Program, Nov. 18, 1974, 37 U.S.T. 1685, 276 U.N.T.S. 3; United Nations Framework Convention on Climate Change, May 9, 1992, 31 I.L.M. 849, 1171 U.N.T.S. 108 [hereinafter UNFCCC].

(83.) Lakshman D. Guruswamy, A New Framework: Post-Kyoto Energy and Environmental Security, 16 COLO. J. INT'L ENVTL. L. & POL'Y 333, 346 (2005).

(84.) Id.

(85.) UNFCCC, supra note 82, arts. 2-4; Guruswamy, supra note 83 at 348.

(86.) Guruswamy, supra note 83, at 348-9 (discussing UNFCC requirements). The UNFCCC has been ratified by all the countries in the world, demonstrating the worldwide consensus on the need for exploration of renewable energy. Id. at 347.

(87.) Kyoto Protocol to the United Nations Framework Convention on Climate Change, Dec. 10, 1997, 37 I.L.M. 22 (entered into force Feb. 16, 2005). The Kyoto protocol is unique in that it requires developed countries to invest in developing countries in exchange for their efforts to mitigate greenhouse gasses (GHGs). In addition to environmental protection created via international agreement, clean energy supporters argue that GHGs can be reduced if the cost of environmental damage caused by fossil fuels is reflected in their price. See generally TERRY TEMMINEN, LIVES PER GALLON: THE TRUE COST OF OUR OIL ADDICTION (2006) (analyzing health-related costs resulting from land, water, and air pollution).

(88.) Sussman, supra note 43, at 400.

(89.) See Guruswamy, supra note 83, at 347 (discussing ETC and its 1998 Protocol on Energy Efficiency and Related Environmental Aspects). The ECT was signed or acceded to by fifty-one states, however, developed countries including the United States, China, Venezuela, India and Japan were not among those countries. Sussman, supra note 43, at 392. Additionally, developing countries have not unanimously adopted the ECT, which reduces the attractiveness of foreign investment in those countries. See id. at 398-402 (hypothesizing if developing countries adopt ECT it will secure investment environment and reduce transaction costs).

(90.) See Feo, supra note 77 (explaining how similar political risk concerns affect renewable energy investments).

(91.) Id.

(92.) See generally supra note 4 (describing importance of advising clients to avoid international investment disputes by making informed business decisions).

(93.) See supra note 11 (indicating host government's ability to appropriate foreign- owned property); supra note 13 (indicating energy projects are particularly susceptible to government intervention).

(94.) See supra note 55 and accompanying text (indicating arbitration without privity difficult in Yukos case); supra notes 72-75 and accompanying text (finding practical and political problems preventing successful arbitration in Venezuela).

(95.) See supra notes 16-19 and accompanying text (describing host country's assertion of sovereignty over resources regardless of contractual agreements); supra notes 47-51 and accompanying text (detailing Russia's opening of oil and gas sector after fall of communism and recent closing); supra notes 67-70 and accompanying text (indicating typical variety of economic problems facing developing countries).

(96.) See supra notes 14-15 and accompanying text (observing expropriation risk exists when prices are high or low); supra note 51 and accompanying text (indicating high gas prices drove Russian expropriations); supra note 64 and accompanying text (identifying high oil prices as source of Chavez's confidence during Venezuelan expropriations).

(97.) See supra notes 52-59 and accompanying text (demonstrating Russian government's use of tax law for expropriation purposes); supra notes 71-75 and accompanying text (explaining similar developments in Venezuela).

(98.) See supra notes 56-59 and accompanying text (suggesting interference with TNK-BP puts investors on notice of unfavorable conditions in Russia).

(99.) See supra notes 60-63 and accompanying text (noting Russian laws eliminated foreign participation in any lucrative "strategic sector"); supra notes 7273 and accompanying text (noting Venezuelan laws reserved to state all lucrative aspects of oil production and provided for expropriation).

(100.) See supra notes 43-45 and accompanying text (finding sovereign immunity may bar some arbitration awards); supra note 68 and accompanying text (predicting difficulty with arbitration in Venezuela); supra notes 54-55 and accompanying text (indicating Russia's failure to ratify The ICSID Convention potentially problematic for FDI arbitration with Russia).

(101.) See supra note 23 (stressing difficulty of dealing with host country rich in natural resources).

(102.) See supra note 23 and accompanying text (indicating importance of using dispute prevention steps before attempting arbitration); supra notes 26-30 and accompanying text (listing methods of mitigating political risk).

(103.) See supra note 16 and accompanying text (explaining concept of permanent sovereignty over natural resources); supra note 54 and accompanying text (noting Russia has not ratified The ICSID Convention); supra notes 60-63 and accompanying text (noting Russia took steps to eliminate FDI in energy industry).

(104.) See supra notes 43-45 and accompanying text (explaining problems with enforcement of arbitration award). While the dispute in Venezuela, for example, has not reached the arbitral award stage, the difficulty of the process thus far indicates a potential for problems during the award phase, when and if it is reached. See supra note 75 and accompanying text (indicating successful arbitration unlikely in Venezuela).

(105.) See supra note 19 and accompanying text (explaining obsolescing bargain particularly high in developing and transition economies); supra note 65 (demonstrating increased political risk across all industries when leaders become emboldened by profitable expropriations). Additionally, there is a similar risk when prices decline. See supra notes 14-15 and accompanying text (explaining risk factors).

(106.) See supra notes 31-32 and accompanying text (explaining U.S. investors' lack of recourse in U.S. courts against foreign governments).

(107.) See supra note 23 and accompanying text (stressing pre-dispute remedies where political risk is high and finding arbitration costly); supra note 31 (describing numerous considerations in arbitration agreements).

(108.) See supra note 19 (finding political risk from obsolescing bargain particularly high in developing and transition economies); supra notes 26-30 and accompanying text (giving examples of other risk mitigation methods).

(109.) See supra note 77 (anticipating interest in renewable energy projects based on increasing investment and political activism); supra notes 82-89 and accompanying text (explaining international treaty system's role in encouraging sustainable development).

(110.) See supra note 87 and accompanying text (discussing Kyoto Protocol as international response to global warming).

(111.) See supra note 87 and accompanying text (describing developed countries' obligation to provide investment if developing countries mitigate GHGs).

(112.) See supra notes 26-29 and accompanying text (explaining typical methods of risk mitigation through sound business practices); supra note 87 (noting developing countries willing to mitigate GHGs in exchange for technology transfers).

(113.) See supra notes 2-3 and accompanying text (demonstrating danger of Europe's reliance on Russian fossil fuel for energy supply); supra notes 11-15 and accompanying text (stating foreign energy investments particularly susceptible to host country involvement).

(114.) See supra notes 16-19 and accompanying text (describing heightened political risk when countries seek to use natural resources for bargaining on international level); supra notes 50-53 and accompanying text, 64-66 and accompanying text (providing examples of leaders emboldened to expropriate by petrodollars).

(115.) See supra note 4 (hypothesizing countries fearful about not getting their fair share from foreign fossil fuel energy projects).

(116.) See supra note 77 (listing wind, geothermal, and biomass among types of renewable energy sources believed inexhaustible); supra note 60 (suggesting Russia believes foreign investors not always acting in its best interest).

(117.) See supra notes 16-19 and accompanying text (explaining host countries entitled to maintain permanent sovereignty over natural resources creating obsolescing bargain).

(118.) See supra note 29 and accompanying text (demonstrating technology transfer one mechanism of political risk mitigation); supra note 60 (stating "mechanical openness" to FDI believed "stupid" by some in Russia).

(119.) See supra notes 60-63 and accompanying text (demonstrating Russia's closure of its fossil fuel market to FDI); supra note 72 and accompanying text (demonstrating Venezuela's closure of its fossil fuel market to FDI). Significantly, neither of these laws indicates that they apply to clean energy projects. See supra notes 60-63, 72 and accompanying text. This implies that while fossil fuel markets are closed to FDI, these host countries would accept foreign investment in clean energy projects. Id.

(120.) See supra note 77 (indicating high-growth renewable energy markets lack well established fossil fuel infrastructure); supra note 60 (stressing potential for discontent among citizens when foreign investors extract fossil fuels).

(121.) See supra note 60 (indicating Russian lawmakers consider foreign participation in its energy market detrimental); supra note 76 (finding problems with battery storage make photovoltaic renewable energy appropriate only for onsite consumption).

(122.) See supra note 79 (identifying China as one developing country seeking to improve its renewable capacity); supra note 12 (stating FDI often has positive effects on countries).

(123.) See supra note 23 and accompanying text (stating importance of predispute remedial practices for foreign investors); supra notes 25-30 and accompanying text (listing other, perhaps inferior, methods of risk mitigation).

(124.) See supra notes 16-19 and accompanying text (explaining obsolescing bargain stems from two treaties).

(125.) See supra note 60 (finding some Russians opposed to "mechanical openness" to FDI); supra notes 80-81 and accompanying text (indicating developing world open to renewable energy projects).

(126.) See supra notes 28-29 and accompanying text (illustrating common methods of aligning foreign and domestic interests); supra note 60 (demonstrating danger of not aligning foreign and domestic interests).

(127.) See supra notes 16-19 and accompanying text (explaining obsolescing bargain premised on dispute over control of natural resources); supra note 77 (describing types of clean energy projects that do not require cession of natural resources).

(128.) See supra notes 20-22 and accompanying text (indicating political risk only one of several factors facing foreign direct investors).

(129.) See supra notes 27-30 (explaining where technology transfer is required, host countries rely on foreign investors); supra note 79 and accompanying text (referencing growth potential in renewable energy market).

(130.) See supra note 46 and accompanying text (estimating size of Russian gas reserves); supra note 78 and accompanying text (predicting substantial increase in future energy demand).

(131.) See supra note 79 (explaining clean energy generation as accounting for only small percentage of global power output); supra notes 82-89 and accompanying text (outlining treaties encouraging use of clean energy).

(132.) See supra note 46 and accompanying text (implying natural resources limited); supra note 75 and accompanying text (indicating difficulty of arbitration in Venezuela); supra note 79 (implying high potential for growth in clean energy market).

(133.) See supra note 81 and accompanying text (indicating developing world leading global push toward clean energy).

(134.) See supra notes 60-63 and accompanying text (implying Russia believes fossil fuels will remain profitable); supra notes 72-73 and accompanying text (implying Venezuela believes fossil fuel will remain profitable).

(135.) See supra note 76 and accompanying text (predicting fossil fuel will predominate in energy schemes).

(136.) See supra note 81 (explaining common criticism of clean energy projects); supra note 76 and accompanying text (concluding world still relying on fossil fuels for power).

(137.) See supra notes 90-91 and accompanying text (providing example of expropriation of clean energy project); supra notes 67-70 and accompanying text (demonstrating Venezuela's unstable investment climate presents investment risk beyond political risk).

(138.) See supra note 23 and accompanying text (finding investors primarily concerned with reducing costs and uncertainty).

(139.) See supra notes 11-15 and accompanying text (addressing constant risk of expropriation involved with FDI); supra note 64 and accompanying text (revealing Venezuela's recent influx of petrodollars from rise in oil prices).

(140.) See supra note 87 (identifying external costs of fossil fuel consumption).

(141.) See supra notes 60-63 and accompanying text (explaining Russia's system of strict governmental scrutiny for fossil fuel FDI); supra note 77 (describing types of clean energy projects not requiring cession of natural resources).

(142.) See supra note 23 and accompanying text (stressing importance of using proactive business methods to avoid investment disputes); supra notes 43-45 and accompanying text (indicating difficulty of enforcing arbitration awards).

(143.) See supra notes 27-30 and accompanying text (implying no single method of risk mitigation is sufficient to overcome ambitious host countries); supra notes 71-75 and accompanying text (displaying willingness of host countries to change laws and expropriate when advantageous to do so).

(144.) See supra notes 33-37 and accompanying text (finding arbitration without privity involves less cost than traditional arbitration systems); supra note 89 (suggesting developing countries receive greater FDI by adopting ECT due to predictable investment climate).

(145.) See supra notes 87-89 and accompanying text (outlining Kyoto Protocol and ECT); supra notes 90-91 and accompanying text (noting even clean energy projects susceptible to expropriation).

(146.) See supra note 87-89 and accompanying text (explaining mechanisms of Kyoto Protocol and ECT).

(147.) See supra notes 50-59 and accompanying text (demonstrating difficulty of arbitrating disputes over fossil fuel projects); supra note 82-89 and accompanying text (examining treaties enacted to confront environmental concerns through encouraging clean investment).

(148.) See supra Part II (outlining heightened political risk in energy FDI); supra Part III (examining expropriation by Russian and Venezuelan governments).

(149.) See supra Part IV (arguing arbitration best as last resort remedy).

(150.) See supra Part IV (concluding arbitration not as effective as dispute avoidance).

(151.) See supra Part IV (explaining benefits of clean energy FDI compared to fossil fuel investment).

(152.) See supra Part IV (finding expropriation risk sufficiently mitigated where host country incentive to expropriate eliminated).
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Author:Sieck, Daniel R.
Publication:Suffolk Transnational Law Review
Date:Sep 22, 2010
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