Wed 19 Mar 2008
In taking on the government of Venezuelan President Hugo Chavez, Exxon Mobil Corp. is going to bat for a principle it says is fundamental to foreign investment around the world — sanctity of contract.
“When you enter a country and you make enormous investments over several years, and then it’s several years for those investments to pay out, you have to have an understanding between yourselves and the host government that these are the rules,” Rex Tillerson, Exxon Mobil’s chief executive, argued in a recent analyst presentation.
“They write the rules in laws, constitutions, regulations, and then we put them into contracts, and we sign contracts and we trust one another to honour those contracts. If you don’t have that situation, on what basis do you then invest?”
The same principle could soon be tested in Alberta, a province that has attracted a flood of foreign investment to develop the oilsands, partly on the promise that its political and legal systems are safe.
Now, however, the government of Ed Stelmach wants to renegotiate a Crown agreement expiring in 2016 with the Syncrude oilsands project — in which ExxonMobil is a major partner through its ownership of Imperial Oil Ltd. and also the project manager — so it can collect higher royalties as part of its new royalty framework.
While the two sides are still trying to work out a deal, the spectre of a confrontation was raised last week, when Tim Hearn, the retiring CEO of Imperial, said the consortium would not agree to new terms unless shareholders are compensated for the loss in value.
This raises the question: If push comes to shove, who sits on firmer ground — the state (Alberta), or a private corporation (Syncrude)?
One of the few certainties is that this situation is a lot more complex than Mr. Stelmach made it sound a few months ago, when he said in announcing the new royalty terms that deals with Syncrude and Suncor Energy Inc., the other oilsands pioneer with a Crown agreement, would be renegotiated “so there would be a level playing field for all industry stakeholders.”
The other certainty is that time is on Syncrude’s side. The province is at risk of losing its new deal with Suncor, under which the company can back out if Syncrude and the province haven’t come to terms by the end of the year.
If this turned into a court fight, experts say that Alberta has a weak legal case. The government can indeed change terms for oilsands projects governed by generic terms by changing the law, but a contract between two parties is a different situation. As one lawyer put it: “The general principle is that agreements can’t be unilaterally amended.”
But there is a big practical side to this: governments can strong-arm corporations into doing what they want — whether in Russia or in Alberta, which is probably why these types of confrontations don’t happen that often.
Greg Stringham, vice-president at the Canadian Association of Petroleum Producers, said tactics available to the government include withholding approvals, which would be a problem for some of the Syncrude members that are developing other oilsands projects for which they need government co-operation.
Bob Schulz, a professor of strategic management at the University of Calgary’s Haskayne School of Business, said Alberta could also persuade some Syncrude partners to break ranks with Exxon Mobil, threaten to charge huge royalties when the Crown deal expires, delay environmental approvals, or play the social corporate responsibility card.
“Social corporate responsibility is higher up on an ethics ladder than a contract,” Mr. Schulz argues. “Exxon is making enough money. Their profits are astronomical because oil prices are high. If they want to do what is right, they should sign a new deal.”
Considering the stakes, it’s in everyone’s interest that this doesn’t turn into another Exxon showdown. There are some broader lessons: That governments shouldn’t go around the world making promises they can’t keep, that corporations shouldn’t invest expecting that terms won’t ever change, that Mr. Stelmach took a risk when he promised the electorate more oil money.
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