Comment

Impact compensation

Many anti-industry problems experienced locally in upstream oil and gas extraction stem from - not too surprisingly - inadequate compensation for local impacts. When revenue opportunities are not present for local governments (and indirectly, the public), minor impacts are blown out of proportion and public opinion generally sides with industry critics.

We've come to expect poor local compensation in developing nations, where national governments find many other public and private uses for oil and gas revenues. However, industrialized nations don't do a much better job.

All national governments tend to disguise the local shortfall in compensation by claiming wider impacts - air quality, strategic interest, national economy. At the same time, the belief on the national level is that the economic benefits of increased employment and local contracts should be sufficient reward.

Because the petroleum industry has sought to minimize attention on local impacts, it has likewise avoided shedding light on the compensation shortfall. With so much at stake, perhaps it's time the industry began monitoring this neglect publicly - for all nations and regions. Hydrocarbon-prospective areas in Florida and California may have something in common with those in Nigeria and Russia.

Unfair liability

US-headquartered international oil and gas producers are being placed in a serious bind. The government and US public insist on the lowest prices for products, but expect companies to refrain from pursuing the most economic reserve prospects in countries where US sanctions are in force. But worse, US civil courts now are exposing production-sharing agreements between producers and governments with objectionable behavior to liability damages and penalties.

The first action, unilateral sanctions, is not surprising. Companies have been operating under that threat for years. The second, legal action on agreements, could severely complicate business with virtually any nation.

US law places a heavy responsibility on companies and individuals involved in partnerships to ensure ethical and moral behavior. When the behavior of one partner is found to be legally actionable, then all partners can be held liable. At the same time, US liability law well compensates plaintiffs when companies are found negligent.

Oil and gas producers are easily portrayed as having the means to pay off costly judgments, or needing a large financial penalty to make an impact on behavior. Oil and gas producers working in remote areas around the globe are easy victims in US civil courts.

International producers have worked long and hard to set up exploration and development partnerships (or production sharing agreements interpreted to be partnerships) that may now be in trouble in US courts. In cases such as Russia, where much effort has gone into obtaining passage of new laws designed to make production sharing agreements workable, opening up the partnerships to legal action will overturn everything that has been achieved.

Production sharing agreements work because they provide an incentive for maximum exploration and production efforts and provide good financial returns for all partners. The agreements have been modeled around the world.

Regardless of where the alleged negligence took place, US courts have decided there is responsibility for the actions of governmental partners in such relationships. Human rights and environmental groups find US partnership law particularly useful in attacking perceived wrongs on the part of government. While the action is justified in some cases, the remedies will probably enrich plaintiff groups without doing much to compensate the local communities or local environment.

If US appeals courts continue to support the interpretation that agreements are partnerships, US-based producers will have to find new arrangements to deflect liability. Significant damage could result from overhauling working arrangements, especially to companies with multi-billion dollar investments already in place.

Moreover, the liability could force US producers into one of two positions: (1) Withdraw from agreements with all governments with behaviors and practices subject to possible litigation, and like unilateral sanctioning, allow competitors free rein. (2) Move out of the US or form non-US companies to make freer use of those assets. Both solutions are troubling.

Leonard Le Blanc