10 Legal Frameworks Relating To Energy Development And Natural

10 legal frameworks relating to energy development and natural resource management barry barton professor of law, university o

10
Legal Frameworks relating to
Energy Development and Natural Resource Management
Barry Barton
Professor of Law, University of Waikato, Hamilton, New Zealand
Parliamentarian Forum on Energy Legislation
and Sustainable Development,
United Nations Department of Economic and Social Affairs,
Cape Town, October 2005
Introduction
My intention is to focus on the development of energy resources – the
upstream end of the flow of energy. So within my scope are oil and
gas, minerals like coal and uranium, but also geothermal energy, and
water. Minerals have particular characteristics in being hidden until
found by exploration. Water is a particular case because it is such a
key part of the natural environment. For energy purposes water is
important for hydro electric generation and for the cooling of
electricity generation equipment.
I will give a brief overview of the ownership of minerals, their
disposition and development, and then shift to the law concerning
environmental and social issues arising out of such development –
essentially the environmental law that applies. These are two huge
fields of study, but I hope to offer some insights about the kinds of
law you as legislators might want to see and to provide. What I have
to say is necessarily very general; I am not trying to describe the
law of any one country, or how it should be. At the foot of this paper
I provide a short bibliography, with references to materials that may
be useful to a reader who wants to pursue any of these issues in more
detail. Throughout, the theme of risk and how to deal with it is
important; and so is the theme of integration of development and
environmental concerns.
The development of natural resources presents some special challenges.
Natural resources are both the wealth of a nation, second only to its
people, and normally one would expect that natural resource
development is of great benefit to a nation. And indeed often it is.
But in fact there are many examples where natural resources
development has brought great difficulties to a country. This is
paradoxical. A great deal has been written about the ‘resources curse’
and the propensity of natural resource development to cause disruption
to a country’s economic, political, social, and environmental fabric.
I do not propose to review these problems, but I point out that good
law for natural resource development is of the greatest importance.
Sustainable development has very properly become the general framework
within which issues of natural resources development can be
considered. While I will return to it in the context of environmental
management, it is convenient to note now that it can be understood as
the integration of economic, social and environmental development
concerns. It can also be asked, what does sustainable development have
to do with the development and extraction of resources that are by
their nature non-renewable – such as minerals? How can an oil well be
sustainable? To tell the truth, it can’t. Rather, it is the
development of a society, not an oil well, that can be sustainable.
The underpinnings of society are rooted in the biophysical world. But
what can have a bearing on sustainable development are the rate at
which we use mineral resources (depletion rates), the care with which
we put them to use (energy efficiency and sustainability), and the
care with which we treat other biophysical assets (environmental
management).
Let me make two further short points about sustainable development.
First, sustainable development is possible, but it is not easy.
Sometimes corporations and government departments write material that
is excessively enthusiastic in declaring that they are doing
everything necessary to produce a sustainable future. Second,
sustainable development must necessarily be local; it is what happens
country by country, in districts, river by river, stream by stream.
Natural Resource Development
Let us turn to the laws on natural resources that we find in most
countries, and the issues that law makers will grapple with.
Ownership
There are numbers of different theories of ownership of natural
resources:
*
Accession theory: resource ownership is part of the ownership of
the surface. Resource ownership is therefore a form of property
law. This theory applies in the United States, parts of Canada,
and South Africa until 2002. But it has not prevailed elsewhere.
*
Domainal theory: ownership is vested in the state by virtue of
general legal principles. This is much more common
internationally.
*
Regalian theory: natural resources are now subject of ownership,
but access to them is controlled by the state.
*
Accession theory modified by nationalization or by implied
reservations in grants of land, producing ownership by state.
South Africa has been an example since 2002.
*
Offshore resources in the territorial sea: ownership is usually
vested in the state as above.
*
Offshore resources in the continental shelf: the state holds
‘sovereign rights’ under the United Nations Convention on the Law
of the Sea 1982, art. 77.
Ownership under any such theory is subject to various complications.
One of those is federalism – in a federal state, is the resource owned
by the federal or the state / provincial government? Another is
ownership of land; sometimes uncertainty or disputes about rights to
land can remain unresolved for years, but if valuable natural
resources are discovered there, then there is new pressure to resolve
the question. Aboriginal title or customary title is a complication
that can arise in such circumstances. Another complication comes from
boundary questions, on land and also (between nations) at sea. In
relation to oil and gas, there is the added difficulty that a
reservoir that straddles a boundary can be drained by development on
one side to the detriment of the other. And development of a river may
affect other parties upstream and downstream.
Sequence of Development
The development of most energy resources (most particularly oil and
gas and other minerals) goes through some or all of the following
phases in a sequence:
*
Strategy: a company decides what targets it seeks, and what region
of the world it will investigate to find them.
*
Reconnaissance: existing geological knowledge is surveyed, and new
data is acquired eg by airborne geophysical methods.
*
Exploration: particular geological features of interest are
identified and evaluated. At some point drilling occurs to
determine whether economic deposits of the target mineral are to
be found.
*
Development: the key decision is taken to develop the deposit.
Finance is arranged, and production facilities are built.
Infrastructure needs (roads, railways, gas pipelines) are built as
necessary.
*
Production: the project is completed and brought into operation.
Its operating life may last many years.
*
Rehabilitation: as land is no longer needed (eg for extracting
coal) it is reclaimed and restored or rehabilitated. Such
rehabilitation should be an integral part of the development and
production process, and not left till last.
As resources development proceeds through this sequence, three
different things happen. First, the amount of land affected decreases.
Secondly, the intensity of the effect on the land concerned increases.
Thus, environmental and social concerns change through the sequence.
Thirdly, the amount of capital required grows during reconnaissance
and exploration, and geological risk falls. However the fundamental
decision whether to go into production requires the commitment of
large amounts of capital. It is often an all-or-nothing matter; one
cannot part-drill an oil well. At this point a company will feel
vulnerable to changes in the legislative and regulatory environment –
a matter we will discuss further below.
Disposition of Title to Natural Resources
Legislation must deal with natural resource development in a manner
that is responsive to the characteristics of this sequence. The legal
framework for the issue of rights to natural resources such as oil and
gas or coal commonly includes the following features:
*
Ownership of the resource: as discussed above.
*
Land open to mineral activity, or withdrawn: eg, parks, areas of
high social or cultural significance.
*
Allocation of rights: more on this below. The different permits
need to be suitable for the different stages in the sequence ie
reconnaissance, exploration, development, production.
*
Nature of the rights: term, conditions.
*
Work requirements.
*
Right to go into production: often as a right to exchange an
exploration permit for a production permit. This raises questions
of security of investment, as considered shortly below.
*
Title registration.
*
Transfers: including registration and whether (and on what terms)
government approval is required.
*
Reporting of geological results.
*
Revocation, compliance, and enforcement.
*
Surface rights: relationships with landowners, rights to use land,
obligation to pay compensation.
*
Infrastructure
*
Royalties, rentals, and taxes.
*
Closure: abandonment, security, rehabilitation.
These, then, are the elements that one looks for in any system for the
disposition of natural resources.
There are different systems in use round the world for allocating
rights to natural resources – that is, for the disposition of natural
resources. We can list the major ones in a brief way.
*
Free Entry: acquisition of title by staking a claim and asserting
possession. Now obsolete for most purposes, especially for oil and
gas and coal.
*
Concessions: the classic concessions of the early twentieth
century in the Middle East were very wide in their coverage, and
very long in their term. They were disadvantageous to the host
country. In more modern times Australia has used comparable
franchise agreements that are subject to statutory ratification.
*
Competitive bidding or mineral leasing: one of the most common
systems, especially where a region is well explored. It often
entails cash bonus bidding. In some cases (eg the British North
Sea) discretionary forms of bidding systems have been used; the
government decides the basis on which bids will be considered.
*
Discretionary allocation system: provides a high degree of
government flexibility but it can leave companies unsure what
rules they need to follow in order to be successful.
*
Production sharing agreements: now very common. They first
appeared in use in the 1950s in Iran and Indonesia. The country
grants a contractual right to explore and develop, the company
recovers its costs and specified profits, usually in shares with a
state oil company. Management clauses and work commitments are
elaborate.
*
Participation agreements: a joint venture is formed between the
host country (or its state oil company) and a multinational
company. OPEC countries have gradually moved from concessions to
production sharing agreements and participation agreements.
State Development
While much of the foregoing implies development by a private company,
often a multinational resources company domiciled outside the host
country, many countries have established state-owned oil companies or
minerals companies. Often they operate through production sharing
agreements and participation agreements of the kind noted above. It is
common for them to enter into petroleum service contracts, technical
assistance contracts, risk service contracts, and technology transfer
contracts with multinational companies. Through such means they can
build up their own technical capacity. The existence of a state
company may raise questions about industry structure, monopoly, and
structural reform.
What is particularly important to note about state companies in this
context that sometimes they will have a special position in legal
terms; it may have special legal immunities and privileges by reason
of being the state’s agent in resource development. That can have
legal and environmental significance if it prevents ordinary land use
and environmental law from applying to it. If environmental agencies
cannot obtain remedies like injunctions or prosecutions, that presents
something of a problem. At the very least it presents an inconsistency
with other companies operating in the same sector, and with other
resource sectors that do not possess such an entity in their
structure.
Development and Operation
Resource development and operations often proceed under joint ventures
and joint operating agreements, among commercial venturers or with the
host state. Especially in the case of natural gas or of coal, the
agreements will commonly involve infrastructure development as well as
the resource extraction itself. Generally, long-term sales contracts
will be needed to make sure that there is a stable income flow to pay
off the loans that financed the project. The contracts need to deal
with the risk of changes in the price of the commodity over the life
of the contract. They need to deal with the risk that there will be no
market for the commodity. So they are usually quite elaborate. This
theme of risk and how to deal with it runs right through this field of
law.
Sovereignty and Security of Investment
Indeed, the managing of risk is a key theme of natural resources law
in respect of the tension between the sovereignty of a state and the
need for a company to have security of investment. On the one hand are
considerations of national sovereignty and freedom from economic
colonialism. The United Nations Resolution on Permanent Sovereignty
Over Natural Resources (UNGA Res. 1803, 1963), the Declaration on the
Establishment of a New Economic Order (UNGA Res. 3201, 1974) and the
United Nations Charter of Economic Rights and Duties of States (UNGA
Res. 3281, 1975) all embodied these considerations. (It should be
noted that the declarations need to be examined in the light of the
general limitations on the rights of nations to expropriate
foreign-owned property.) And on the other hand are considerations of
the investment conditions that will be sufficiently reassuring to a
company that it will be prepared to commit its capital and effort to
an investment in a host country. If it is not sufficiently reassured,
then a much-needed investment will not take place and energy needs, as
well as general economic development, will not be met. The company is
concerned, in the extreme case, that its investment in the host
country will be expropriated or nationalized. Such expropriations
certainly have occurred, in the Middle East and in Latin America in
particular. The less extreme cases are also a major concern; for
example, restrictions on: transfer or mortgage of titles, operation,
procuring equipment, personnel, sale of products, currency transfer,
and repatriation of capital and profits. In the Middle East,
semi-compulsory renegotiations of concession terms have had similar
effect. For the company, the great concern is the moment when it
decides to go into production. It commits its capital, and then feels
something of a hostage. It is worried that adverse action will leave
it as owner of an expensive hole in the ground from which it cannot
economically produce the resources it sought. Resources companies will
say that they are used to managing many risks, including geological,
engineering, and market risks; but that they are not able to manage
governmental risk.
While attention is often focused on such risks in international
transactions, they exist within countries as well. In such cases the
debate is usually couched in terms of regulatory flexibility versus
security of property rights from government intrusions.
Investment certainty and government flexibility are inevitably in
tension. Governments want to attract investors, to create jobs, and to
supply energy; but they do not want to lose the power to introduce new
policies. The key is to find ways to manage risk, to manage change,
and to provide suitable measures of flexibility and certainty. At
root, of course, is the question of who gets the choice in determining
when there will be change, or in determining how changing
circumstances are to be met. If, for example, the price of oil goes up
dramatically, or if the price collapses, does the company get a
windfall? Or does it get ruined? Similarly, what policy changes will
be necessary to cope with a sudden security scare, or a natural
disaster? Or what responses will be proper if a new environmental
problem emerges?
There is a whole field of law concerning such matters. A great deal of
effort has gone in over the years to enable countries and investors to
find the right sort of balance and to resolve differences. And in fact
international companies are quite used to these issues. They are
usually sophisticated and capable of finding flexibility. Investment
safeguards such as investment protection treaties and constitutional
and legislative safeguards are helpful, although seldom sufficient by
themselves. Other measures are usually necessary, such as investment
protection agreements with the host government, joint ventures with
good local partners, and measures to combat corruption and other forms
of illegality.
Sovereignty and Security of Investment: the Environment
Let us take this question of sovereignty and investment security a
little further, in the particular case of environmental management.
Consider a natural resource development of some kind, or some economic
activity like farming. It has been proceeding under environmental
regulation that it is used to. But then consider the possibility that
it must face the likelihood that the environmental regulation is going
to change, and is going to become tougher. There could be various
reasons why – changing environmental circumstances, new scientific
information, or new community and government pressure to resolve a
problem. In any event, it faces a new set of rules that are going to
cost more money, and that could even put the activity out of business.
Certainly it will be asked why shouldn’t companies, and businesses,
and farmers, know what the rules are, and not face changes? The answer
is that change is inevitable, and companies are having to respond to
change all the time. Certainly environmental regulation should not be
capricious, but it does have to change and evolve. Otherwise a
country’s ability to improve its environmental management is very
limited. Should a company be given a guarantee that environmental
regulation will not be tightened during the life of a project? That
may sound like asking a lot, but companies have asked and have been
given such guarantees in the past. Again, the issue is one of managing
risk, the risk of change. And again, the issue is not confined to
relations between a host country and a multinational corporation. It
is commonplace within any country you care to name.
Constraints on Legislation
Let us broaden our view somewhat, and consider the different factors
that legislators may need to take into account in evaluating proposals
for legislation in the energy area. There are a number of constraints
that can be relevant. The nation’s constitution may impose constraints
on national and state legislatures. So may international commitments
in treaties and conventions. So may the interjurisdictional character
of resources such as waterways. Less formal constraints, but very real
ones, arise from other factors. In particular, nations have found that
they are often in a form of regulatory competition, where the terms
they offer international companies in respect of royalties and the
like will be compared with those of other nations. Equally, a
legislature is constrained in making efforts to attract natural
resource development if the country simply lacks favourable geology.
On the other hand, there is a record of industry unconcern for the
legal form of its arrangements with a state if the geological
conditions and the track record of political behaviour are such that
the industry is reasonably sure that it can continue to make money.
Another constraint is the policy of international financial
institutions. For some countries, the policy of these institutions has
been a major external constraint. It is still there, but it is
noteworthy that its nature is changing. The World Bank in particular
went through a period of soul-searching about the worth of its
involvement in financing natural resource development projects. In
consequence of the Extractive Industries Review, the World Bank put in
place in September 2004 a new set of principles that it intends to act
on in its dealing with partner countries:
*
strengthening governance and transparency
*
ensuring that extractive industry benefits reach the poor
*
mitigating environmental and social risks
*
protecting the rights of people affected by extractive industry
investments
*
promoting renewable energy and efficiency to combat climate change
*
improving organizational co-ordination
*
ongoing learning and review.
Environmental and Social Impact Management
Sustainable development is the integration of economic, social, and
environmental development concerns. Or, as explained by the Brundtland
Commission, it is development that meets the needs of the present
without compromising the ability of future generations to meet their
own needs. We have come a long way in our understanding of the concept
since the 1980s when it first attained prominence. It is important to
observe that it is a concept that is not very meaningful at the broad
level. International law is full of bold statements about it, and
national law the same. All these generalities are commendable. But the
concept only begins to be significant when we bring it down to
specifics in a particular region, or a particular river, so that it
can work for us. And indeed if it is a useful concept then it should
work for us. It is therefore in the translating of the general concept
into specifics that it becomes useful. A great deal of environmental
law and environmental management is about that effort to translate the
generalities in a systematic way into good results.
Environmental Management of Energy Resources Projects
Let’s think for a minute about the particular characteristics of
energy resources projects; oil fields, coal mines, hydro dams, wind
farms, and the like. They have or they can have a high impact on the
environment; although as we noted the area concerned may not be all
that large. Oil and gas and mining occupy little land compared to
other resource uses like forestry or agriculture. But they have a high
impact on the land that is used. They are long term; they will
generally be there for decades, not years. They involve a lot of
money. And this is good news and it is bad news.
The good news is that in a high-capital project there is a lot of
money available to take care of environmental problems properly; you
get good mitigation. It is a small percentage of the overall cost, and
if the company is committed to doing it right then it can take care.
The bad news is that there is a lot of pressure – a lot of pressure to
get the project built. It may not just be the financial side; the
project may be seen as one essential for bringing power to the people
of the country, or it may get tied up with national identity, or the
enthusiasm of political leaders for mega-projects. This causes
problems of institutional design; how do we set up the environmental
management, the environmental laws, to be effective – so that they
don’t get thrown out or watered down?
It is a challenge for law makers to design a system of environmental
law that will be strong enough to withstand the pressure that comes
with big energy projects, and delivers sustainable management. The
hard question, the ‘deal-breaker,’ is when a project is put forward
that will have such a large impact on the environment that it simply
should not proceed. It is rare for such projects to arise; it is
usually possible to manage and control many kinds of adverse effects
on the environment. But not always; and that is when the politics and
institutional design become difficult; do the environmental regulators
have the ability to say no?
Good Law for Environmental Management
Turning to environmental and social issues, and focusing primarily on
environmental law, one can identify characteristics that one can look
for in good quality environmental management law. (It is desirable to
speak of environmental management, rather than environmental law,
because the law is only one part of the mix, and one hopes a minor
one; it provides the framework within which community decisions are
made.)
*
Strategic: it must be forward looking and comprehensive. This
involves planning in order to provide a context within which
decisions are taken about individual proposals.
*
Integrated: it must take into account all aspects of the
environment (water, air, wildlife, etc), even if different aspects
are handled at different times or by different agencies.
*
Well-informed: it needs a good knowledge base. Scientific studies
and traditional knowledge are both likely to have a place.
*
Community-based: it is local and participatory. Decision-making is
not all centralized; it includes regional and local elements.
*
Effective; it must be adequately funded and enforced. Resourcing
is always an issue. Enforcement must be available if necessary,
but often the suitable response is education, guidance, or
offering seed money.
*
Adaptive: it must change as necessary. Environmental regulation is
a continuing game. Knowledge changes, funding changes, and so do
community expectations.
Integration of Environmental Management and Energy Projects
Should environmental assessment and management be part of the natural
resource development legislation? The issue is important with respect
to natural resource development, and is a significant choice for
legislators in deciding how to improve their legal framework.
Different views can reasonably be held, so long as the consequences
are understood.
If environmental assessment and management is to be part of the
natural resource development legislation, then (for example) the legislation
for oil and gas will include a part that deals with the environmental
aspects of oil and gas development. There is a special code for oil
and gas environmental management. A positive feature is that the grant
of an oil and gas permit will be linked to environmental concerns. On
the other hand, there will be less integration with other
environmental management legislation. That may lead to an allegation
that there is easier treatment for oil and gas than for other
developments. If a gas pipeline and a water pipeline involve similar
effects, why should they be treated differently? Similarly, if a mine
has similar effects to a quarry, should its environmental effects be
regulated under quite different legislation?
The other view is that environmental assessment and management should
not be part of a country’s natural resource development legislation.
Then the resources legislation (such as the oil and gas legislation)
will be silent on environmental matters. The country’s general
environmental legislation applies to all projects, whether oil and gas
or anything else. The consequence must be that the grant of and oil
and gas permit is neutral on environmental concerns. There is a higher
degree of integration in the environmental legislation, because there
is no special code for a different kind of development. On the other
hand there is the risk that environmental concerns, and environmental
managers, will come under pressure once an oil and gas permit issued.
What expectations are raised by the grant of such permits?
The Role of Legislation
At this stage, let us pull together several broad themes about the
role of legislation. More specifically, here are some matters for
legislators to weigh up in considering proposals for changes to
natural resources and environmental laws in their country. Generality
is the first such matter. It is generally desirable that laws are of
general application, and are not different for different classes of
project or for each individual project. General framework legislation
is often followed by decrees or regulation, in both natural resources
law and in environmental law. Such arrangements of legislation are
common, and perfectly workable, but they raise questions about the
role of the legislator in relation to the official who makes the
detailed regulations, and about the speed with which legislation at
different levels can be amended.
The second broad theme is jurisdiction and procedure. Legislation
confers jurisdiction or authority on named officials; it allocates
power to make decisions on different issues. Depending on the issue,
the right level for it may be federal, state, regional, or local. The
officials exercising such power work within an institutional
framework, and we have noted at several points how important a role is
played by the design of institutions. Likewise, we have noted the
importance of the integration of different bodies of law, and of the
establishment of clear relationships between them. Procedure of course
is important, especially where its role is to provide for public
participation. Indeed, having a say in resource developments is a
basic democratic right.
The third broad theme that one can identify is the balance between
certainty and flexibility. We have considered the central problem of
sovereignty in tension with security of investment, and the many ways
that have been developed to deal with it. In fact, legislation of all
kinds needs to find a suitable balance between clear rules and
discretion; between firm statutory requirements and administrative
(bureaucratic) flexibility for individual cases.
Such broad themes lead us to questions such as simplicity, both in
procedure and in substantive rules or norms (on what matters is it
really necessary to lay down a rule?) and good governance – what kinds
of legislation will promote good governance and the rule of law?
Enforcement, for example, requires a range of responses for different
degrees of culpability, not only forfeiture and prosecution.
Accountability measures for audit and review can be built in to
legislative and institutional requirements.
Our thinking about natural resources and the environment is evolving.
It involves the boundary areas between state and law and economy.
Energy and resources are a classic case where both play a role, for
example in the relations between governments and large corporations;
neither can sensibly be excluded. Market reform and sustainability are
not incompatible. Developer companies are hearing that, and say that
they can live with it. They can manage those risks. But sustainability
requires substantial effort, and general statements of support for it
do not necessarily translate into good experience on the ground. Every
country has its internal political pressures that can lead to adverse
outcomes for people affected and for the environment. So good laws are
essential, in order to make sure that environmental and social
elements are firmly in place as part of the processes of energy
resource development.
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