Resource nationalism and investment treaties – Structuring your projects to limit risks15 April 2020

What is resource nationalism?

Resource nationalism (“RN”) arises when a nation changes its internal policies with respect to natural resources with the intention of benefiting the nation, to the detriment of an external investor’s economic benefit. The policy changes can be wide-ranging, from changes to rules regarding taxes and repatriation of profits to, in the extreme, expropriation of a project without compensation.

Sometimes, such policy changes are applied after an investment has been has been made in a host nation, changing the cost/benefit analysis investors have undertaken. In those circumstances, it will often be difficult if not impossible to recoup any investment through a sale or similar action as the project may be worth considerably less than anticipated due to the policy changes. While most often associated with natural resources projects such as oil & gas, mining, and soft commodities, RN can also affect other industry sectors such as energy, including the growing renewable energy sector.

Who does it affect?

Historically, RN was most often associated with politically turbulent and resource-rich countries where projects have been so commercially successful for an external investor that there is a political impetus to intervene in the deal, on the basis that the original deal agreed was a bad one. However, RN is now seen in other areas and sectors of national importance even if the associated project has yet to achieve a significant level of commercial success.

RN therefore affects both profit-making producers as well as explorers for natural resources and other project developers. This can often be when they have reached a critical stage in their project development or moved to a potential exit for investors as this is when the reward for the project company and its owners is most obvious for the host country to see. This could lead to the investor receiving less of a return than agreed, despite potentially taking considerable risk at the project’s outset. RN obviously also affects investors in, and lenders to, such projects, particularly as it may not be viable (economically or otherwise) to cancel or unwind any investment and recover funds.

With the potential for an economic slowdown in the coming years, commentators have identified the potential for countries to adopt more protectionist and nationalistic policies as a response. Increased RN could form a part of that trend. A report by a risk consultancy in March 2019[1] identified a trend towards resource nationalism in countries including Russia (which has the most extensive commodity reserves globally and is a G20 economy) and Vietnam (which has a growing renewable energy sector).

Recent examples of RN

• Tanzania – In June 2017, Tanzania introduced a new Mining Act. This required “indigenous Tanzanian companies” to have a minimum of 5% of the shares in mining companies, in addition to a 16% free-carry equity interest for the nation. Among other things, this has resulted in a new deal between Barrick and the Tanzanian Government with a payment of US$300m to settle outstanding tax and other disputes, the lifting of a concentrated export ban, and the sharing of future economic benefits from mines on a 50-50 basis;
• Democratic Republic of Congo – In March 2018, DRC modified its mining code to double the nation’s free-carry equity interest in mining companies to 10%, with an additional 5% taken on each licence renewal. This was accompanied with a rise in taxes and royalties payable, and a requirement for contractors to be owned by Congolese shareholders;
• Zambia – In May 2019, a liquidator was appointed to run Indian mining company Vedanta Resources following an application by the state-owned mining company of Zambia (“ZCCM”). Vedanta Resources and ZCCM currently co-own (79.4%/20.6% respectively) Konkola Copper Mines and the Zambian government have pressed on with a sale process;
• Sierra Leone – In October 2019, Sierra Leone revoked (with immediate effect) a licence held by SL Mining to mine iron ore following a rise in iron ore prices. This was ostensibly in response to a dispute over royalty payments. The cancellation of the licence followed a refusal by Sierra Leone to lift an export ban on an SL Mining mine despite an arbitration tribunal ruling that it ought to be lifted;
• Bolivia – In January 2020, the head of YLB, Bolivia’s state-owned lithium company, explained that the company planned to employ strict limits on foreign investment in the extraction of lithium. This includes a requirement that Bolivians extract and process all Bolivian lithium (presumably through the state-owned entity);
• Indonesia – In January 2020, Indonesia banned the export of raw nickel ores. It has been suggested that the intention of the ban was to, inter alia, stimulate the domestic processing of ore and force electric vehicle manufacturers to produce their vehicles in the country;
• Mexico – At the time of writing, the Mexican government are embroiled in a dispute with Talos Energy over how to allocate ownership over an oil field which straddles one of Talos’ oil blocks and an oil field over which Pemex has control; and
• Mexico – Again, at the time of writing, Mexico’s Regulatory Energy Commission, CRE, is reportedly considering whether, inter alia, to unwind grandfathered discounts to transmission costs for renewable energy projects. The elimination of the discount was (again, reportedly) proposed by the country’s state-owned utility, CFE, who are said to be also seeking preference over private projects when electricity enters into the national grid.