Stability clause in Petroleum Agreement will not cause much future remorse for Guyana

Dear Editor,

I beg to differ with Christopher Ram in his negative depiction of the Stability of Agreement clause in the Petroleum Agreement as “[s]trangling future governments” (Part 29 of his ‘The road to first oil’ series). His statement prompted a hyped headline in the Kaieteur News of December 31.

A stabilization clause is commonly inserted in contracts between investors and host nations to protect investors from future changes in the law that affect the economics of the project. Article 32 of the Petroleum Agreement captures this intention by stating, at its most extreme, that should our government either amend existing laws, enact new laws, or vary the interpretation and implementation of existing laws, it must ensure by “whatever means necessary” that the oil company suffers no economic loss. The agreement lists the hydrocarbon law, the tax and customs codes as examples of such laws. But in international practice, the laws mostly targeted also include those on labour, the environment, and health and safety. Whatever means necessary can range from exempting the company from the legislation changes, or financially compensating it for the cost of complying with the changes.

Is a stabilization clause a good or bad thing for the country? To answer in a structured manner, I suggest we set down a few assessment criteria. At a minimum, four possible criteria for judging Article 32 or any other concession are (i) the objective of the concession; (ii) how necessary is the concession for attracting investors by creating a favourable investment climate; (iii) how widely used worldwide is the concession in contracts between investors and host nations; and (iv) how costly is the jeopardy, if any, to the country.

We can address criteria (i), (ii) and (iii) together. Stabilization clauses between foreign investors and host states have been around for donkeys years. They became standard diet from the ʼ60s and ʼ70s, as companies tried to protect their investments from nationalization, expropriation, and other opportunistic actions by governments. The longer the project life and the greater the sunken cost of the project, the more vulnerable the investor. Therefore, the greater the demand by an investor for a stability agreement.

Of additional significance, global investment banks, insurers, and company boards and shareholders now insist on a stability agreement as a condition for project approval. Developing countries on all continents, in the fierce competition to attract foreign investment (and probably to bury their nationalization instinct for good), now offer stability agreements of their own free will.

Article 32 in the Petroleum Agreement (even as a full-blown version of such clauses) should therefore come as no surprise, given the billions of dollars the Esso consortium has already ploughed into the Stabroek Block and the estimated decades-long life of the project. The surprise would have been if it were missing.

But how costly is any likely jeopardy to the country of Article 32 (my criterion iv)? As the investor must comply with most existing laws, one can easily see in a general sense that the fewer and weaker those laws are, the greater the problem with exempting the investor from, or compensating it for complying with, emerging laws. In Guyana’s case, I do not anticipate that Article 32 will create much future remorse because (i) laws here on critical matters, such as human rights, labour, the environment, and health and safety are already in place and relatively robust, (ii) most of the country’s laws are already in compliance with international conventions—a fact that speaks to a main criticism of stability agreements as an obstacle for countries meeting their international obligations such as on human rights, and (iii) no government with mettle would allow any foreign investor to hide behind a stability agreement to avoid complying with a new law, especially one of general application, reasonably required for  the good of its citizens.

Yours faithfully,

Sherwood Lowe

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