Natural Resources Ownership in the International Financial System - Case Study Example

REPORT By Name Course Instructor Institution City/State Date Executive Summary This study offers a succinct analysis of how natural resources ownership has changed plus how it has been contained in the international financial system in the 21st century.  The report will highlight the global effort as well as its failure to arrive at an all-inclusive bilateral agreement which can sum up the security of foreign investment along with its liberalization recognized as multilateral agreement on investment devoid of influencing the rights of host-governments concedes control or sovereign rights over their natural resources. In the study it was observed that exploration of oil as well as development ventures are attributed by lengthy lead times, partial data, enormous capital investments, plus in nearly all cases momentous variations in the parties’ capabilities to tolerate the risks drawn in the project. As a consequence, contracts are usually unsecure plus one or both participants could desire to renegotiate someday in time. In addition, the intrinsic unsteadiness of contracts could make several ventures not to be developed even though they are financially eye-catching on the whole. The qualms over reward-sharing as well as risk stop one or both signatories from progressing with the project. In this regard, the study seeks to establish if host-governments concedes control or sovereign rights over their countries natural resources to International Oil Companies, and if this statement still applicable in the 21st century. Table of Contents REPORT 1 Executive Summary 2 Table of Contents 3 Introduction 5 Types of Contracts Agreement between NOC and IOC 8 Part of the decisions that host countries must make is to choose the types of contracts agreement it will utilize to set up the development process terms. There are four types of contracts agreement and they include a joint venture (JV), concession or license agreement, production-sharing agreement (PSA), or strategic alliance (Bell & Faria, 2005, p.6). Based on concession or license agreements Hong (2012, p.21) posit that it have developed significantly since their introduction in 1900s as unilateral contracts when scores of the modern developed countries were protectorates, colonies, or dependencies of other empires or countries. According to Tachau (2011, p.71), the contemporary form of this contract time and again awards an oil company patent to explore, build up, trade, as well as export oil acquired from a particular region for a fixed amount of duration. Oil companies compete by bidding, frequently attached with bonus signing, for the authorization to such privileges. Hong (2012, p.22) posit that this type of contract is relatively common all over the globe plus is mostly utilized in countries like Angola and Sudan in developing countries. Joint ventures on the other hand plainly mean that two or more parties desire to practice a joint task such as oil exploration plus its prevalent in Arab countries such as Saudi Arabia and are achieved when all involved parties contribute equally. The most common for of agreement is the production-sharing agreement (PSA), which discerns hat the natural resources ownership rests squarely in the host country, but in unison authorizes IOC to operate in and manage the oil field. Most developing countries prefer PSA for the reason that OIC carries nearly all economic risks of development as well as exploration (Gosh & Leal-Arcas, 2013, p.27). Furthermore, all operational as well as financial risk rests with the IOC, and so, the host government hardly experience losses save for the negotiations cost (mostly money paid to consultants). The host country at most, loses a chance but experiences no financial or non-financial loss in case an exploration project falls short. Strategic alliance is the last type of contract that can be used and according to Van Laer (2010, p.67) it is an agreement between two or more parties to carry out the business with each other so as to achieve goals that are equally valuable. 9 Findings and Analysis 10 Situation 10 Problem 12 Solution 14 Evaluation 15 Conclusion 16 References 19 Appendix 21 Terms of Reference This paper takes into account the resource self-rule cyclical nature, and as the report thesis statement implies, the IOCus is if host-governments concedes control or sovereign rights over their countries natural resources to international oil companies. The study emphasis on countries that at all time dominates the worldwide oil reserves plus has lately had too much of conflict with regard to its fair share. This subject matters for the reason that it establishes the capability as well as enthusiasm of a country to change its natural resources into oil supplies for the international oil market without losing its sovereign rights. The issue as well matters since it have an effect on the country’s ability to change its natural resources into development signifying generation of employment as well as the mitigation of poverty for the country’s citizens. Introduction Basically, natural resources irregular distribution as well as endowment across the globe along with their limited temperament has enthused firm competition to get right of entry to such resources, since they are of vital significance to the continued existence as well as growth of the world financial system.  According to Van Laer (2010, p.66), the fact that the most of such resources are situated in developing economies has generated chances for unjust and discriminatory victimization of the host country.  For this reason, in the past four decades natural resources permanent sovereignty has been endorsed plus has developed owing to the claim of upcoming economies in opposition to inequitable victimization in the past years by developed countries by means of their cosmopolitans (Antolín & Cendrero, 2013, p.709).  Earlier, a nationalistic policy was implemented wherein the countries acted as both a supervisory body as well as an active partaker in the trade of developing such natural resources. However, owing to appalling knowledge the developing economies discovered that they may possibly not carry on with such meditative approaches which just brought about devastating outcomes.  In addition according to Gosh and Leal-Arcas (2013, p.14), they realized that a natural resources’ high endowment by itself, is inadequate to support the growth of their economy and for that reason the desire of private venture turned out to be perceptible.  Aiming at drawing in private investment that are essential for the growth of its economy, scores of developing countries rationalized their rules so as to amend their policies to accommodate the new-fangled global market. Fig 1: World oil exports (1951–2005). Source: BP Childs (2011, p.216) posits that the understanding as well as use of the idea of permanent sovereignty over natural resources has evolved drastically in the past five decades, whereby it has evolved from a political declaration to a International Law principle. The understandings of the self-governing countries with the primary nationalistic policy failed to generate extremely valuable outcome. Rather than improving the growth of the economy it seems to have added to the development doldrums. As a result of this experience the statist policy evolved to a more reasonable one, wherein the countries do not concede control or sovereign rights over their natural resources, but by means of nationwide regulations they house their growth with regards to novel global financial system (Tachau, 2011, p.71).  Types of Contracts Agreement between NOC and IOC Part of the decisions that host countries must make is to choose the types of contracts agreement it will utilize to set up the development process terms. There are four types of contracts agreement and they include a joint venture (JV), concession or license agreement, production-sharing agreement (PSA), or strategic alliance (Bell & Faria, 2005, p.6). Based on concession or license agreements Hong (2012, p.21) posit that it have developed significantly since their introduction in 1900s as unilateral contracts when scores of the modern developed countries were protectorates, colonies, or dependencies of other empires or countries. According to Tachau (2011, p.71), the contemporary form of this contract time and again awards an oil company patent to explore, build up, trade, as well as export oil acquired from a particular region for a fixed amount of duration. Oil companies compete by bidding, frequently attached with bonus signing, for the authorization to such privileges. Hong (2012, p.22) posit that this type of contract is relatively common all over the globe plus is mostly utilized in countries like Angola and Sudan in developing countries. Joint ventures on the other hand plainly mean that two or more parties desire to practice a joint task such as oil exploration plus its prevalent in Arab countries such as Saudi Arabia and are achieved when all involved parties contribute equally. The most common for of agreement is the production-sharing agreement (PSA), which discerns hat the natural resources ownership rests squarely in the host country, but in unison authorizes IOC to operate in and manage the oil field. Most developing countries prefer PSA for the reason that OIC carries nearly all economic risks of development as well as exploration (Gosh & Leal-Arcas, 2013, p.27). Furthermore, all operational as well as financial risk rests with the IOC, and so, the host government hardly experience losses save for the negotiations cost (mostly money paid to consultants). The host country at most, loses a chance but experiences no financial or non-financial loss in case an exploration project falls short. Strategic alliance is the last type of contract that can be used and according to Van Laer (2010, p.67) it is an agreement between two or more parties to carry out the business with each other so as to achieve goals that are equally valuable. Findings and Analysis Situation Bell and Faria (2005, p.3) claim that when a government or its National oil company (NOC) starts negotiating with a international oil company (IOC) that anticipates offering expertise, technology as well as capital, the government always desires to make sure that it gets the most favorable deal bearing in mind the country's explicit state of affairs. In this regard, the NOC will get consider several elements and weigh them up under diverse circumstances like differences in prices of oil, discoveries of oil reserve, field development, as well as operating costs. The goal is to capitalize on profits in all circumstances, but the global competition for technology, risk capital, as well as knowledge trade-offs will crop up (Daintith, 2012, p.477). An additional limitation is, certainly, the actuality that the IOC has the equivalent plan of capitalizing on its profits. Even though countries and the two signatories to the agreement are alike in the aspirations they follow their comparative achievement will be established by their negotiation skills, bargaining position, as well as country-specific state of affairs. In this regard, the government has to establish the most favorable, or resourceful, agreement form for its nation. Fig 2: Distribution of Maximum profit Oil for IOC (% of total profit oil) (Hong, 2012) Using the Pareto optimality definition from contract theory to welfare economics Antolín and Cendrero (2013, p.709) posit that an agreement is resourceful when it is impractical to enhance one party's provisos devoid of affecting the other party, and therefore, a resourceful agreement is not a sum game. Presuming that an agreement is being negotiated again plus is believed to remain resourceful, Stevens (2008, p.14) claims that the renegotiation have to either advance both parties’ positions or one party advances its state of affairs exclusive of the other party losing something. More purposely, presuming that the country’s regime can take advantage of its bargaining position, Hong (2012, p.20) posits that it will try to present provisos that offer adequate incentives for the IOC to sign the agreement whereas simultaneously making sure that the foreign party will not use up all additive benefits (Aidelojie & Makuch, 2008, p.235). The subsequent feature that is directly connected to incentives is the distribution of price risk, natural resources, as well as investment. Lastly, the risk of contracting must be dealt with, and this denotes the likelihood, as well as chance, of non-performance by one or both partners. Every such change to the novel international financial system does not denote that the law of permanent sovereignty over natural resources has reduced, quite the reverse it has changed corresponding to the latest global trends, wherein not just the countrywide welfare are well thought-out but also the global state of affairs (Bell & Faria, 2005, p.5). Problem Strategic planning and investment decisions in most cases are perfumed under precariousness, plus the risk evaluation implicated in a venture as well as the assessment of whether possible rewards rationalize taking a certain risk are carried out by searching probability distributions of concerned measures. According to Daintith (2012, p.482), the key unidentified features in oil exploration as well as development are: resource type (gas or oil), new resources discovery, deposit size, development economic feasibility, price developments in the future, technological conditions, as well as wide-ranging political along with economic risks. These risks allocation according to Russell (2013, p.32) is an important aspect in the efficient contract formulation. Bear in mind that for the agreement to be Pareto optimal, or resourceful it has to be measured resourceful by both parties. Essentially, it is believable that NOC could be more uncovered to price risk as compared IOC; therefore, NOC is at a relative shortcoming in bearing the price risk (García-Castrillón, 2013, p.141). Preferably, the two parties should search for a risk distribution that considers this, and such process will unavoidably entail a rewards sharing that is associated to the risk distribution. Table 1: IOCs’ profit oil (Antolín & Cendrero, 2013) Hong (2012, p.19) developed a comparable argument in connection with the cost risk, whereby the total costs on an exploration process relied on a proliferation of features like offshore, onshore or jungle field position, the utilization of 2D or 3D seismic, the deposit depth and so on. Evidently, more than a few million dollars may be exhausted on a project that becomes unproductive for the reason that no viable oil quantities have been discovered. Therefore, Hong (2012, p.23) posits that a triumphant venture must not just be commercial viable on their own provisos but must produce a sufficient amount revenue to compensate for losses sustained in another place The government will as well have sights on how the agreement must be executed, specifically how the venture must be supervised, but still most governments rely on a foreign contractor to offer expertise as well as technology. Once more there will be a transaction between the ways the government desires the oil exploration operation to be run as well as the incentives it must proffer to its partner (Aidelojie & Makuch, 2008, p.247). For this reason the government will structure the agreement in order that the IOC manages the project with regards to how the government has decided. On the other hand, contracting risk is simpler to control given that the one party’s non-performance might lead to abridged rewards for both parties. For instance, if, the IOC sees that the possibility for a potential default by the host country subsists, the company will demand either to slot in a clause for compensation into the contract or demand a superior share of the benefits from the venture (Piskunova, 2010, p.859). Simultaneously the government, as well, will be worried in relation to the IOC infringing its vow on the contract. Solution With free access proviso for foreign investors as well as the commitment of the country to authorize it, in case of natural resources development, Putte et al. (2012, p.294) argue that the foreign investors would benefit from equal rights to the host country citizens with regards to natural resources access. Any regulation to this will apparently bring about concern as well as conflicts, because its usage would violate the global rule of permanent sovereignty over natural resources. The basis on which countries might claim exemptions to free-access in natural resources areas are summed up by Bell and Faria (2005, p.7) as follows: the natural resources are located in a land that belongs to the citizens of the host country and so the citizens must have precedence in the resolution on how the natural resources should be developed.  Additionally, the host country citizens have the sovereign right to utilize them, considering that natural resources are limited plus they are required for their source of revenue as well as for food. Russell (2013, p.32) in his study exhibited that has the natural resources conservation might be accomplished more promptly if their management is in  the locals hands, since with the delivery  of a free right of entry to IOC to exploit the oil reserves the natural resources might be depleted quickly owing to over-exploitation. Furthermore the way that natural resources are used must stick to a formula that ensures that the profits are set out for the economic growth of the countries (Ribeiro, 2009, p.140). This perfect state of affairs according to Ribeiro (2009, p.143) is not assured when natural resources exploitation is completely in foreign companies hands who for instance, might tend to ‘gold plate' exploitation costs so as to capitalize on profitability. International oil companies’ free-entry for the natural resources development, could clash with the conservation laws set up by the host country, given that the international companies, different from the local population, don’t have strong connection with the land aimed at exploiting the natural resources. Evaluation Most countries have agreement on investment, which stipulate provisos associated with the security of the investment as well as investors. Within its temperaments, the IOC should not be single out in opposition to their investments, but instead will be subject to the most favored nation treatment as well as national treatment (Antolín & Cendrero, 2013, p.714). The agreement on investment goes further laying down the responsibility of the country to offer foreign investors favorable treatment than, plus this condition offers the foreign investors, not just a minimum typical treatment, but as well the assurance of the utmost treatment in the host country, which according to Aidelojie and Makuch (2008, p.231) might be higher to the treatment offered for local investors.  Hong (2012, p.19) posits that this temperament can bring about the incentives offer to draw the foreign investor as well as the global competition promotion between countries, which most scholars see as an aspect of perversion of international investment principles. These laws discriminate the local investors and can wear down the soundness of State regulations, for the reason that the country can be forced to house such international principles, devoid of considering their own requirements. Gosh and Leal-Arcas (2013, p.17) posits that such proviso might generate conflicts in host country, since they may permit the IOC to be in opposition to the national regulations application, within the alleged reason that the standards are unfair. According to Putte et al. (2012, p.296), the non-discrimination clause can incite a country to pull out from the negotiations, bearing in mind the fact that this rule can imperil the culture of the host country. Conclusion In conclusion, it has been observed that the real state of affairs is conquered by a suppler notion of sovereignty, for the reason that it has to become accustomed to worldwide demands. Importantly, the economies that have open market flourish whereas meditative ones remain less developed. The collapsing of agreement on investment proves that the industrial economies are as well not yet prepared to bargain their sovereignty rights with the aim of generating a mutual agreement for supporting liberalization as well as shielding investment devoid of offering appropriate country regulation. What's more, the adoption of multilateral agreement on investment in developing economies has had overwhelming effects; for instance, it can bias the provisions for capital investment by offering IOC exceptional benefits as well as rights, which might bring about anti-competitive activities that cannot aid the economic development of such states. Therefore permanent sovereignty over natural resources or oil reserves, whereas is still an essential law that give reason for the right of the host country to exploit and supervise freely their natural resources so as to support their growth, devoid of obstruction from external manipulation, has evolved to the novel globalization trends considering the interest of IOC as well as civilization. Apparently, most countries in developing countries concede their control or sovereign rights to IOC, especially companies sourcing from developed economies. References Aidelojie, K. & Makuch, Z., 2008. Multilateral Organisations,Fossil Fuels and Energy Law and Policy: The Tower of Babel Re–visited. European Energy and Environmental Law Review, vol. 17, no. 4, pp. 227–255. Antolín, M.J.P. & Cendrero, J.M.R., 2013. How important are national companies for oil and gas sector performance? Lessons from the Bolivia and Brazil case studies. Energy Policy, vol. 61, pp. 707–716. 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The energy factor in the Arctic dispute: a pathway to conflict or cooperation?. The Journal of World Energy Law & Business , vol. 5, no. 1, pp.13-26. Piskunova, E., 2010. Russia in the Arctic: What's lurking behind the flag? International Journal, vol. 65, no. 4, pp.851-64. Putte, A.V.d., Gates, D.F. & Holder, A.K., 2012. Political risk insurance as an instrument to reduce oil and gas investment risk and manage investment returns. Journal of World Energy Law & Business, vol. 5, no. 4, pp.284-301. Ribeiro, M.R.d.S., 2009. Sovereignty over Natural Resources Investment Law and Expropriation: The case of Bolivia and Brazil. Journal of World Energy Law & Business, vol. 2, no. 2, pp.129-148. Russell, B., 2013. USA commits to greater transparency with implementation of EITI. The Journal of World Energy Law & Business , vol. 7, no. 1, pp.30-35. Stevens, P.P., 2008. National oil companies and foreign oil companies in the Middle East: Under the shadow of government and the resource nationalism cycle. Journal of World Energy Law & Business, vol. 1, no. 1, pp.5-30. Tachau, A.L., 2011. A comparison of US and Chinese incentives in winning oil contracts in African countries. The Journal of World Energy Law & Business, vol. 4, no. 1, pp.68-76. Van Laer, T., 2010. Damage to energy resources during armed conflict: towards a new regime. International Energy Law Review, vol. 28, no. 8, pp.64-72. Appendix Annex 1: Impact of Production Sharing Agreement on IRAQ Annex 2: Annex 3: Read More