Oil exploration around the Falklands (Malvinas)

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In June, I looked at the longstanding sovereignty dispute over the Falklands Islands (Malvinas) on the occasion of the 30-year anniversary of the 1982 war. I revisit this topic today to examine the question of investor protection in areas where sovereignty is disputed, taking the Falklands (Malvinas) as an example. The promise of an oil boom in the South Atlantic has prompted several companies listed in London, including Falkland Oil and GasBorders and Southern PetroleumRockhopper, Desire Petroleum and Argos Resources, to survey the area. They obtained exploration licenses from the Falklands administration in 2011, which drew strong criticism from Argentina. Shareholders in these inherently risky ventures may wonder whether they have any legal protections should the sovereignty dispute intensify.

The sovereignty dispute adds an additional layer of uncertainty for the companies engaged in exploratory drilling and their shareholders, aside from the uncertainty on how much oil, if any, will ultimately be discovered. The listing prospectuses of the companies concerned all mention the pending sovereignty dispute as a risk factor, but likely underplayed its importance. For example, the Falkland Oil and Gas Prospectus contains the following disclaimer:

There may be other unforeseen matters such as disputes over borders. Investors will be  aware that the Falkland Islands were, in 1982, the subject of hostilities between the  United Kingdom and Argentina.

The Argentine Government has not relinquished all its claims in relation to the Falkland Islands. However, the position of the UK and Falkland Islands Governments is that the   United Kingdom has no doubt about its sovereignty over the Falkland Islands, South   Georgia and the South Sandwich Islands and the surrounding maritime areas. Her Majesty’s Government  remains fully committed to the offshore prospecting policy pursued by the Falkland Islands Government, as laid out in the Offshore Petroleum (Licensing) Regulations 2000. This policy is entirely consistent with Her Majesty’s sovereign rights over the Falkland Islands.

Do investments in the territorial sea of the Falklands (Malvinas) fall under the territorial scope of application of the UK’s BIT (or, for that matter, under the scope of Argentina’s BITs)? Both states claim sovereignty to the Falklands (Malvinas), and the typical formulation of their BITs leaves the possibility of territorial overlap at least open. Both states have incentives to include the Falklands (Malvinas) within the territorial scope of application of their BITs. If the investor’s home state has BITs with both Argentina and the United Kingdom, the investor may in principle be able to bring a claim against the two host states claiming sovereignty over the Falklands (Malvinas). Both states would probably accept that the investment took place in their territory. Provided the investor managed to find acts or omissions attributable to both Argentina and the UK that seemingly violate the BIT’s treatment standards, such an investor would be in the enviable position of having two host states against which to initiate arbitration.

Could a shareholder bring arbitral proceedings against Argentina for blacklisting and suing any company engaged in the exploration of hydrocarbon resources in the area? US energy company Noble is about to take a 35 percent stakes in Falkland Oil and Gas’ Northern Area Licences and Southern Area Licences. Noble is no stranger to ICSID arbitration. Several years ago, it already brought an arbitration against Ecuador. Should Argentina interfere with this investment, Noble could invoke the US-Argentina BIT.

It would be difficult to imagine Argentina raising the jurisdictional objection that the Falklands/Malvinas are outside the territorial scope of application of Argentina’s BIT. Unless Argentina’s potential liability in an investment arbitration was very high, the beneficial side-effect, from Argentina’s perspective, of such an arbitration would be that the investment case could offer a forum to air the sovereignity dispute (where no other fora, such as the ICJ, are currently available). While the tribunal would lack authority to decide the sovereignty dispute, it would be unlikely to avoid the sovereignty issue entirely. Of course, this by itself is unlikely to resolve the intractable sovereignty dispute. But it may raise the political profile of the sovereignty dispute, and raise, on the  margin, the pressure on both states to negotiate.

The UK Model BIT 2005 provides the following in relation to territorial scope:

(i) in respect of the United Kingdom: Great Britain and Northern Ireland, including the territorial sea and maritime area situated beyond the territorial sea of the United Kingdom which has been or might in the future be designated under the national law of the United Kingdom in accordance with international law as an area within which   the United Kingdom may exercise rights with regard to the sea-bed and subsoil and the natural resources and any territory to which this Agreement is extended in accordance with the provisions of Article 12

Article 70 of the ICSID Convention contains an extension provision for cases where a member state has assumed responsibility for international relations of a territory (such as the UK for the Falklands (Malvinas)):

This Convention shall apply to all territories for whose international relations a Contracting State is responsible, except those which are excluded by such State by written notice to the depositary of this Convention either at the time of ratification,  acceptance or approval or subsequently.

Under this default rule, territories for whose international relations a State is responsible fall under the territorial scope of application of the Convention, unless explicitly excluded.

Notwithstanding this default rule, the UK’s current investment treaty practice is to include express extension clauses in its BITs, which also include the Falklands (Malvinas).

Similar issues of territorial scope arise in relation to other sovereignty disputes. One of the few remaining sovereignty disputes within the European Union – between the UK and Spain over Gibraltar, causes regular friction among the two EU partners. Most recently, Queen of Spain cancelled her planned attendance at the Jubilee celebrations of Queen Elizabeth II because Prince Edward and his wife paid an official visit to Gibraltar. In the Indian Ocean, the dispute between Mauritius and the United Kingdom as regards sovereignty over the Chagos Archipelago is pending before an arbitral tribunal under the U.N. Convention on the Law of the Sea.

Another example is Cyprus and the question of who has the authority to issue exploration licenses for the seas surrounding Cyprus. Noble Energy, a Texan energy company, began exploratory drilling in the seas south of Cyprus in October 2011. According to Turkey, Cyprus should abstain from drilling for gas until negotiators settle the long-term future of Republic of Cyprus and the Turkish Republic of Northern Cyprus, recognized only by Turkey.

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Lucas Barreiros says

August 14, 2012

The disccusion is very interesting as -contrary to popular opinion- the existence of oil and gas in and around the Islas Malvinas is probably the strongest incentive to a negotiated settlement as the uncertainty surrounding the question may deter investors from actually undertaking the project.

With regards to whether an investor could sue Argentina under the BIT (as in the case of Noble), while it is true that the Argentina would very likely accept that the BIT is indeed applicable to the Islas Malvinas, it appears to me that the investor would be in a tough spot in bringing the case against Argentina.

In doing so, the investor would somehow be recognizing that Argentina has sovereignty over the islands and, if that is the case, it follows that the investor should have obtained authorization (licensing rights) from Argentina and not the United Kingdom to pursue the exploration and exploitation of resources whether they are in the land territory of the islands or the adjacent continental shelf that would belong to Argentina.

As the investor would probably neither have required or obtained that authorization, by bringing a claim against Argentina it would be recognizing that it is not conducting the investment in accordance with domestic law, thus making it illegal and outside the scope of protection of the BIT.

Thus, it appears that things balance out and that the investor would not have incentives to bring the case against Argentina.

Thiago Braz Jardim Oliveira says

August 14, 2012

Dear Michael,

As the situation currently stands, I doubt that Argentina's claim to sovereignty would serve the purpose of placing any foreign investment in the Falklands under the protection of an Argentinian BIT. Or do you really think drilling concessions granted by the UK could be qualified as an investment made in accordance with Argentine laws and, as a result, be opposable to Argentina? Not only does this contradict most Argentine BITs' definition of a protected investment (see, e.g., UK-Argentina BIT, article 1(a)), but it goes against common sense. Otherwise, a claim for legal title would turn a dispossessed owner into the guarantor of the debts incurred by the wrongful possessor.



BritBob says

September 1, 2012

In 1833 the Royal Navy removed a small Argentine garrison from the Falkland Islands allowing the settlers to stay; Britain having already claimed the Islands. In 1850 Argentina and Britain signed a legally binding treaty called 'the Convention of Settlement'. In the treaty both countries acknowledged that 'a state of perfect harmony had been restored' and 'that neither country had ANY outstanding differences.' Argentina's claim to the Falklands is based on proximity only. The UK government has offered to go to the International Courts of Justice on three occasions to discuss ownership of the islands. Argentina declined. Argentina's claims to the Falkland Islands surfaces as late as the 1940s during the time of Peron. Argentina's claims to the Falkland Islands is no stronger than Canada claiming Alaska because it's closer. The 3,000 Falkland Islanders also have the right to self determination under the UN charter.