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High profits or low profits, tensions with governments rise

by Ana Komnenic | November 28, 2013 | Reprinted by permission of MINING.com

High profits or low profits, tensions with governments rise

 

The conflict between Romania and Canada’s Gabriel Resources TSX:GBU may be this year’s most high-profile dispute between a mining company and a state. The government has issued a semi-rejection of Gabriel’s plans to build Europe’s largest gold mine, and the company has threatened to sue for $1 billion.

But Rosia Montana is just one example of an increasingly common problem for the resource extraction industry. Since the beginning of the commodities boom more than one decade ago, clashes between companies and governments have been rising.

According to a recent report by Chatham House, the number of disputes that have resulted in international arbitration has increased tenfold for the oil and gas sector and fourfold for the mining industry. And in many parts of the world, these conflicts will only escalate, the report predicts.

Looking back at the 1990s, it seemed as if major disputes between governments and international companies in the oil, gas and minerals sectors would be over, lead researcher Paul Stevens said in an interview posted on the Chatham website.

“Exactly the opposite has been the case,” Stevens said. In fact, research shows that as the price of commodities has gone up, so have the number of conflicts.

High profits or low profits, tensions with governments rise

During the supercycle, commodities prices soared to record highs. Companies put billions toward mega mining projects—some of the biggest the world has ever seen. Barrick Gold TSX:ABX pumped billions into the Peruvian Pascua Lama project. Rio Tinto NYE:RIO launched its massive Simandou iron ore project in Guinea and has already spent $3 billion on it.

The extraction frenzy gave rise to some very high expectations from the public, governments and companies, which in turn led to clashes over how to split the bounty.

“Companies and governments are always competitors when it comes to the distribution of mineral and hydrocarbon revenues and profits,” the report reads.

And disputes are costing investors: Chatham estimates that three recent expropriations affecting Repsol, Rio Tinto and First Quantum Minerals TSX:FM have cost investors about $13 billion.

The reverse may not be true

But today’s low prices offer no relief. Tensions today are “raising questions about the long-term future of the extractive sector,” researchers write. Chatham warns that as companies respond to slumping prices by scaling back, delaying and even cancelling some projects, tensions with governments may rise.

“Higher prices have brought more disputes but the converse may not be true—falling prices could add more fuel to the fire,” Stevens said, as reported by Reuters.

Governments will increasingly adopt the “use-it-or-lose-it” mentality if projects don’t proceed as planned.

In addition to the inherently vulnerable nature of a government-extractive company relationship, the sector is also subject to increased scrutiny. A combination of various factors including fears over climate change, environmental degradation, resource security—especially in regard to water—have put resource companies under a microscope.

“The increasing level of scrutiny from multinational NGOs and the speed and reach of global communication mean that the spread of ideas and access to information about how projects should be conducted will influence local and national demands,” the report reads.

Going forward

The researchers advise caution going forward. The best option, Chatham writes, may be to “go slow” and for both sides to offer more flexibility.

“While economic and political pressure to develop resources quickly will be high, in some countries the best option may be to ‘go slow.’ The emphasis should be on building the capacity to regulate companies, generate employment opportunities and manage revenues in tandem with the resource sector.”

Improving dialogue—both with legislators and civil society—simplifying tax codes and introducing various measures to raise standards of governance are key.

Meanwhile, companies are encouraged to bring their environmental practices and transparency standards in line with “international best practice.” It’s also particularly important for firms to engage all levels of government, including regional and municipal bodies that could be most affected by a project.

Finally, Chatham recommends the creation of a high-level international ombudsperson to try to manage some of these conflicts before relations break down.

“At the heart of the problem is the absence of a practical formula or a benchmark to determine an equitable distribution of revenues between the state and companies in extractive ventures,” researchers found.

Ultimately, managing these projects is important for both sides—a government whose budget depends on the resource industry and a company that has bet billions of dollars on a project’s success.

“It’s also important for markets. Because in some ways if the conflict is not managed, this threatens future supplies of oil and gas and minerals,” Stevens said.

Reprinted by permission of MINING.com

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