dissertation

1
The resource nationalism cycle and protection of energy investment in case of
Bolivia and Ecuador.

2
INTRODUCTION
CHAPTER I
DEVELOPMENT OF FOREIGN INVESTMENT IN ENERGY SECTOR IN BOLIVIA
AND ECUADOR
1.1 International law on foreign investment and Latin America perspective
1.2 Development of energy sector in Bolivia
1.3 Development of energy sector in Ecuador
CHAPTER II
RESOURCE NATIONALISM. STATE’S SOVERIGNTY OVER NATURAL RESOURCES
VERSUS INVESTOR RIGHTS
2.1 General overview of resource nationalism
2.2 “We want partners not masters” - resource nationalism in Bolivia.
2.2.1 “Nationalisation with no expropriation”? Bolivia’s investment treaty cases.
2.3 Resource nationalism in Ecuador. Windfall taxes and Law 42
CHAPTER III
PROTECTING INVESTORS AGAINST RESOURCE NATIONALISM
3.1 Anticipating risk against resource nationalism
3.1.1 Investment agreements. Stabilization and freezing clauses
3.1.2 Progressive taxation system
3.1.3 MIGA insurance
3.2 Future of energy investment in Bolivia and Ecuador
3.3 Conclusions

3
INTRODUCTION
High political risk, onerous fiscal and contractual terms and conditions, populist political
rhetoric, and the nationalization of foreign oil companies’ assets have caused a decline in
exploration and production investment in vast majority of Latin American countries. The
nationalization of privately held oil and natural gas assets by a number of governments, such
as Ecuador or Bolivia, underlines the reality of resource nationalism in Latin America and its
potential impact on future development of the region’s hydrocarbon resources. In order to
take advantage of the vast energy investment opportunities in the region, the international oil
companies must strengthen the credibility of investment protection principles and
instruments, along with continuity and stability in fiscal and political policies that would offer
the long-term guarantees and security.
The purpose of this paper is to examine how the cycle of resource nationalism has effected
the foreign investment in Bolivia and Ecuador. Taking into account, that resource nationalism
is a cycle phenomenon, the question arises to what extent the existing framework of
protection to foreign investment in natural resources proves to be effective.
The first chapter outlines the main features of international investment law and the Latin
America attitude towards it. This is followed by the overview of development of energy
sector in both countries and their legal structure of protection granted to investors prior to the
resource nationalism that occurred at the beginning of the new millennium.
The second chapter discusses the meaning of resource nationalism and the reasons for it
reoccurring within the developing countries. Furthermore, the chapter proceeds to examine
the resource nationalism in Bolivia and Ecuador and its consequences that in most of the
cases resulted in disputes between the hosts states and foreign investors.
The third chapter examines the legal mechanisms available for foreign investors by virtue
of which the risk and consequences of resource nationalism can be tackled and perspective of
the future investments in Bolivia and Ecuador after the recent wave of nationalisation and
denunciation from ICSID. The conclusion section provides with some remarks about the
effectiveness of the international investment law when faced with the resource nationalism.

4
CHAPTER I
DEVELOPMENT OF FOREIGN INVESTMENT IN ENERGY SECTOR IN BOLIVIA ND
ECUADOR
1.1 International law on foreign investment and Latin America perspective.
The international protection of investment is concerned with the safeguarding of foreign
investments against interference by the host state1. According to Sornarajah, “foreign
investment involves the transfer of tangible or intangible assets from one country to another
for the purpose of their use in that county to generate wealth under the total or partial
control of the owner of the assets”2. The nature and duration of the investment as well as the
special risks involved make stability and predictability particularly crucial for investors. In
the 18th and 19th centuries investments were largely made in the context of colonial expansion
and left the host States with limited control over their activities. The end of colonialism and
the emergence of nationalism brought greater risks to foreign investors. As foreign
investments could no longer be protected by the use of force, the international investment law
arose as a means of ensuring foreign investors a certain level of protection over their
investments made in host countries. Furthermore, when considering investment in energy
sector, laws and norms governing exploration and production of hydrocarbons generally
reflect ideological leanings of those at the highest levels of governments, inescapably linked
to politics and socially sensitive. Not surprisingly then, the Latin America region has played a
very prominent role in the evolution of contemporary international investment law.
Investment in energy sector accounts for a large portion of foreign investment worldwide.
However, both down-stream and up-stream energy activities have a higher cost, than
activities in many other sectors. Oil and gas exploration and development are characterised
by huge capital expenditure, high technological expertise and the ability to manage the risk.
Most of hydrocarbons reserves are located in developing countries without technical skills
nor financial means to efficiently exploit natural resources. Since the investments in energy
sector has the potential to affect national sovereignty over natural resources and create
significant risks in terms in sustainable development and economic growth, it is not
surprising that Sates interfere relatively frequently into the operation of investors what
results in an increasing number of disputes between investor and host State.
Consequently, foreign investors seek a clear, stable and predictable investment climate.
Developing counties, emerging economies and countries in transition, due to advantages
related to foreign investments have liberalized their investment regime and followed best
policies to attract investment. There is no doubt that benefits of foreign investments for the
host country can be significant, including technology, human capital formation support,
enhancement of competitive business environment, contribution to international trade
integration and improvement of enterprise development. At the same time it is important to
protect host State’s interest. The guarantees afforded to foreign investor must not jeopardize
1 R. Dolzer, C. Schreuer “Principles of International Investment Law”(OUP 2008) 12
2 M. Sornarajah “TheInternational Law of Foreign Investment” (3rd edn, CUP 2010) 8

5
the State’s right to legitimate regulation. Regulation of investment in energy sector, therefore,
requires a constant balance between the public interest of the State and the private interest of
investor.
The most important sources of contemporary international investment law are bilateral
investment treaties (BITs), as they evidence an acceptance of protection provisions by both
parties to the treaty. Most BITs have a comparable content and guarantee a certain minimum
standard of treatment to the investments of nationals and companies of the one party in the
territory of the other party, a fair and equitable standard of treatment, full protection and
security and also restrict the power of a party to expropriate the investment of the other
party3. Many of these agreements provide also for the clauses on investor-state dispute
settlement which usually gives the investor right to claim an alleged violation of BIT before
an international arbitration which will then render a binding award. The relative importance
of these agreements increased remarkably during the two last decades. According to the 2011
UNCTAD World Investment Record, “the IIA [International Investment Agreements]
universe at the end of 2010 contained 6,092 agreements, including 2,807 BITs, 2,976 DTTs
[Double Taxation Treaties] and 309 other IIAs .... The trend seen in 2010 of rapid treaty
expansion – with more than three treaties concluded every week – is expected to continue in
2011, the first five months of which saw the conclusion of 48 new IIAAs”4.When the
investment is subject to adverse changes in law and regulation applicable to its activities in
host state and these measures have negative impact on the project, investors may be able to
resist the relevant measures or claim compensation for the losses they have caused it to
suffer, though a claim for violation of the fair and equitable treatment of the relevant treaty.
Where the value of the project has been substantially reduced or destroyed, the investors may
claim for indirect expropriation in addition with violation of fair and equitable treatment. In
practice, this is the combination that is often use to respond to host state measures, including
those that fell under the banner of resource nationalism.
The International Centre for Settlement of Investment Disputes (ICSID) is the most
prominent institution for investment dispute settlement. ICSID was established in 1966 by the
Convention on the Settlement of Investment Disputes between States and Nationals of Other
States (the ICSID Convention).5The jurisdiction of the ICSID extends to any legal dispute
arising out of the investment and gives a unique access for private investors to the
international forum. In the absence of international arbitration mechanism, dispute settlement
between a State and a foreign investor takes place in the host state’s domestic courts. Foreign
investors frequently do not perceive the courts of the host state as sufficiently impartial to
settle investment dispute. The often complex nature of the dispute requires specialized
knowledge and national courts are usually bound to apply domestic law even is that law
should fail to protect the investor’s rights under the international law. The advantage of the
ICSID is that it provides an institutional framework that facilities conciliation and arbitration
and the actual settlement of disputes takes place mainly through arbitral tribunals that are
constituted on an ad hoc basis for each dispute.
3 Dolzer, Schreuer (n 1) 13
4 P. Buckley “Non-Equity Modes of International Production and Development” (2011) UNCTAD World
Investment Report 24
5 C.H. Schreuer, L. Malintoppi,A. Reinisch,A.Sinclair”The ICSID Convention: A Commentary” (2nd ed,
Cambridge University Press 2009)

6
However, in Latin American countries, the neutrality of international arbitration has been
questioned and regional or domestic forums have been championed more appropriate venues
for dispute settlements .When the idea of the ICSID Convention was proposed by World
Bank, South America countries collectively rejected this mechanism in known “Tokio No”
episode in 19646.The Latin American reluctance to the international foreign investment
protection system is widely known in international community. In no other part of the world
has the investment regime been challenged as explicitly and as often as it has been in Latin
America. It comes from the twentieth century, when countries adopted the “Calvo Doctrine”,
being perhaps the most familiar legal expression of opposition to foreign intrusion in their
economic affairs7. The Calvo Doctrine abolished the concept of the minimum standard of
treatment, which governs the treatment of aliens, “by providing for a minimum set of
principles which States, regardless of their domestic legislation and practices, must respect
when dealing with foreign nationals and their property”8. The idea behind the doctrine was
that foreign investors should not be entitled to treatment more favourable than domestic
investors, and the rights attributable to foreign investors ought to be governed entirely by
domestic law9.Some countries incorporated the doctrine into their constitutions, while others
included it in domestic legislation .The Calvo Doctrine “was logical and consistent response
to unfair military intervention that, under the guise of “diplomatic protection”, certain
European and North American States used against the independent countries of Latin
America”10. Thus, Latin American countries have frequently required the insertion of the
doctrine in investment contracts with foreigners, by which the foreign investor commits
himself not to seek diplomatic protection from his home states in case of a dispute with the
host state.
During the 1980s and 1990s the situation changed and more positive attitude to foreign
investment was developed. At first, foreign investments were mainly directed toward
upgrading public utilities and infrastructures, with investments focusing on
telecommunications, water projects, road and the energy sector. As Professor Sornarajah
pointed out “ the hostility towards foreign investments generated by ideological
predispositions has been erased by the adoption of more pragmatic approaches to foreign
investment in Latin America”11 In the process of liberalization of the Latin American
economies known as Apertura, most public services were privatized and access to natural
resources was conceded to international companies (aperture petrolera)12. A number of states
decided to abandon the Calvo Doctrine, to ratify the New York Convention13, to join the
ICSID and to conclude Bilateral Investment Treaties and other Free Trade Agreements
6 P.D. Cameron ”International energy investment law – the pursuit of stability” (OUP 2010) 248
7 ibid
9 Cameron (n 7) 247
10 Ibid 250
11 M. Sornarajah “Compensation for Nationalization: The provision in the European Energy Charter” in T.W.
Walde(ed) “The Energy Charter Treaty. An East-West Gateway for Investment and Trade” (Kluwer Law
International 1996) 386
12 Cameron (n 7) 251
13 The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the "New
York Arbitration Convention" or the "New York Convention," is one of the key instruments in international
arbitration,seeks to providecommon legislativestandards for the recognition of arbitration agreements and
court recognition and enforcement of foreign and non-domestic arbitral awards.

7
(FTAs). Governments actively sought to attract Foreign Direct Investments (FDIs) by
providing a variety of legal and contractual guarantees. Chile, for example, concluded 38
BITs, Mexico 18 and Venezuela no fewer than 25 between 1993 and 2001.Each country has
introduced new hydrocarbons law that usually allowed International Oil Companies (IOCs) to
participate through some form of association with national companies. In oil and gas sector, a
wide range of incentives and tax exemptions were introduced for new or difficult area,
stabilization measures were adopted to ensure stability of long-term projects and on
condition that the foreign investor shouldered all of the exploration risk, domestic laws on
protection of foreign protection was put in place14. Many governments gradually privatized
hydropower plants, thermos power plants, transmission lines and other electricity natural gas
utilities. The Peruvian government partly privatized the state-owned company, Petroperu in
1993 and the state-owned electricity company Electroperu15. In Brazil, where the oil sector is
dominated by state-owned Petrobras, legislation passed in 1997 allowed joint ventures
between Petrobras and foreign oil companies16. Similarly in Ecuador, Pteroecuador’s
production represented only 38% of national crude oil, with the remainder coming from joint
ventures with private investors17.
The most distinct innovation in contract stability was introduction of the Legal Stability
Agreements (LSAs), concluded between the state and a particular investor, which has an
added protection of the stability of the legal framework for the investment. Legislation for
such LSAs was introduced by six Latin American counties: Peru, Chile, Colombia, Ecuador,
Panama and Venezuela. LSAs are essentially an investment incentives in a way that they
serve as additional measures on protection and are not substitutes for basic right available to
all investors in particular State. The approval process applicable for commencing a LSA
usually requires legislative act to be introduced, thus they enjoy a stronger legal platform than
stabilization clauses18. Specifically, there are five sets of rules that are stabilized for foreign
investors under the LSAs regimes: the stability of the right to non-discrimination, the stability
of the right to use the most favourable rate of exchange, the stability of the free availability of
foreign currency, the stability of the right of free remittance and also the rules of the tax
regime.
By the end of 1990s this swing of the pendulum towards liberal, market-based reforms had
begun to change directions. After Hugo Chavez election in Venezuela in 1998, contestation
of neoliberal politics spread throughout South America. Since then left-wing governments of
various stripes been elected in eight countries, with mandates to limit this economic course
and eventually to dismantle the favourable investment regimes. Government’s actions against
foreign investors have followed disenchantment with foreign assets and triggered a number of
cases appearing before ICSID, with Argentina being party to more than forty claims and
being held liable in most of the concluded cases. The awards were perceived among some
states as biased in favour of foreign investors, limiting the countries’ exercise of their
sovereignty rights. In reaction to all these claims and in context of the Bolivarian Revolution,
14 Cameron (n7) 259
15 A. Brunet “Arbitration of International Oil, Gas, and Energy Disputes in Latin America” (2006) 27 Nw. J. Int'l L.
& Bus. 591
16 D. Levy, A. Borja A. Pucci (eds) “Investment protection in Brazil”(Kluwer Law International 2014)14
17 Brunet (n 17) 597
18 D. Vielleville,B.Vasani “Sovereignty over Natural Resources Versus Rights under Investment Contract: Which
one prevails?” (2006) Special Issue on Venezuela OGEL

8
Venezuela, Ecuador and Bolivia, initiated a campaign against ICSID and the protection of
foreign investments.
1.2 Development of energy sector in Bolivia
Bolivia is Latin America’s largest producer and exporter of natural gas. State-owned
hydrocarbons company Yacimientos Petroliferos Fiscales Bolivianos (YPFB), has outlined
plans for more than $4bn to be invested in the gas sector by the government and private
companies by 2015, when it hoped to have boosted daily production to 2,5bn cubic feet. The
government’s aim is to increase this annual production even more, for the amount that would
allow to keep up with export commitments to Brazil and Argentina, as well as meet domestic
demand. The last major discovery took place in April 2011, when French company Total
discovered large natural gas reserves in the Aquio block in the east of the country. Bolivia’s
energy ministry estimates that the found could boost total proven gas reserves by up to a
third, and the company hopes to be producing as much as 230m cubic feet a day by 2016. The
Bolivian government is also taking tentative steps towards diversifying its range of
petroleum-derived export products to reduce dependence on exports of raw commodities.
Bolivia’s petroleum reserves are however less plentiful than its natural gas and the majority
of oil production goes towards internal use. Other energy sources in Bolivia include
hydropower, wood and other forms of combustible biomass.
The history of Bolivia’s hydrocarbon industry has been dominated by the overlapping
power structures of privatization and nationalization. Before 1920’s, Bolivia did not have any
regulation on hydrocarbon activities19. During those years any person, citizen or foreign,
could request concessions without limit to explore and produce petroleum. Between the years
1927 - 1937, the Standard Oil of New Jersey Company conducted exploration and production
operations in Bolivia with contracts under the concession system and got the monopoly of the
sector with almost 7 million hectares20. While the benefit to company came directly in the
form of ownership over any oil and gas found, government benefited in the form of taxes and
royalties on 11 % of oil and gas produced. The "government take" of 11% was considerably
small, calculated as a flat rate rather than as a percentage of production or the value of the
sale price of production. No restrictions were also put on the disposal or destination of the
production. The oil company had an exclusive right to freely export all petroleum produced
and the host countries retained no right to participate in managerial decisions. Not
surprisingly then, the concession system became the target of increasing criticism and
hostility. Subsequently, in 1937, the first hydrocarbon nationalization occurred21.
As a part of the drive towards permanent sovereignty over natural resources, Bolivia
established a national monopoly over all petroleum-related activities. This resulted in the
creation of Bolivia’s state-own oil company, Yacimientos Petroliferos Fiscales Bolivianos
(YPFB) in 1936 that was in charge of exploration, exploitation and commercialization of
19 W. A. Morales “A brief history of Bolivia”(Lexington Associates 2003) 102
20 Ibid 103
21 C. V. Donaldson, “Analysis of the Hydrocarbon Sector in Bolivia: How are Gas and Oil Revenues Distributed?”
World Resources Institute No. 6/2007 8

9
hydrocarbons within Bolivian territory22. During the 1940’s and 1950’s the hydrocarbon
activity in Bolivia became very successful for the country. Bolivia became a net petroleum
exporter with all its domestic demand satisfied. However, the hydrocarbon activities of
exploration and exploitation demanded heavy investment and Bolivia did not have enough
economic capacity to satisfy the needs of a growing YPFB and at the same time meet the
needs of its population. Therefore, in 1955, the government passed a new law called the
Petroleum Code or Davenport Code with the addition of a new tax accounting for 30 percent
of the company’s profits23. However, .after the nationalisation of Gulf’s assets, foreign
investors did not enter into Bolivia’s upstream hydrocarbon sector until 1978, when
Occidental and Tesoro signed minor operation contracts with the Bolivian state to extract oil
and natural gas in select reserves24.
From 1993 to 1997, Bolivia pursued a privatization and reform program designed to turn
the country into a modern market economy with favourable investment climate. A total of 22
BITs were signed and the Foreign Investment Law 1182 was introduced in 1990. Article 2 of
the law expressly adopted the national treatment standard by providing that:” except where
otherwise established by law, foreign investors and the entities and companies in which they
take part, have the same rights, duties and guarantees that the laws and regulations give to
national investors”25. The existence of national treatment entitled foreign investors to a right
of entry and establishment in Bolivia. Also, foreign investments could enjoy many of host
state’s economic privileges reserved for its nationals. On the other hand, the provision of
national treatment clearly reflected the Calvo Doctrine, which required any dispute between
parties to be settle in national courts of Bolivia.
Law 1194 enacted on November 1990 replaced a previous law of 1972 signalling an
intention to bring private sector investment in an otherwise vertically integrated state
controlled monopoly26. Furthermore, Bolivia was unable to assume the high risks associated
with exploration, so began to devise contracts under which the risks and costs were
undertaken by foreign investors in return for a fee or a certain amount of petroleum. The new
law introduced a new form of agreement, the contract association, through which an investor
could perform with YPFB in the stages of exploration and development with other companies
and establish joint ventures with foreign companies. In these association contracts, private
companies performed the exploration and production activities with a 50/50 share of gross
production agreement with the Bolivian state and foreign investors assumed all costs and had
no additional taxes. Additionally, private firms would receive 50 percent of the production
value of prices for export or domestic markets. However, the costs incurred by the contractor
in the performance of the service, were only reimburse when there was a commercial
discovery. Otherwise, the investor’s capital and technological investment were sacrificed and
not entitled to any remuneration or payment. The main reason for this practice, for both
Bolivian government and foreign investors, were to spread and minimize the various risk
attached to exploration and production operations, like geological, technical or environmental
22 Morales (n 19) 106
23 Donaldson (n 21) 10
24 Morales (n 19) 107
25 W. Shan, P., Simons,D. Singh, “Redefining Sovereignty in International Economic Law”(Hart Publishing2008)
268

10
risks. Besides, under the association contracts, host state maintain field ownership, and in
most cases do not have to allocate them to the foreign companies, while still using
technological expertise of these companies.
In 1994, the Capitalization Law, established the framework for the privatization of state-
owned companies, which had the major impact on YPFB, until then the main player in the
sector. The company was divided into three companies Petrolera Chaco, Petrolera Andin and
Transredes and auctioned off 50 percent of each27. This capitalization program allowed the
effective transfer of management and significant shareholding stakes to private companies in
exchange for investment commitments. The interesting part of the deal, however, was that
investor did not have to pay the 50 percent of market value of the company the purchased but
instead they were allowed to use the capital as investment into oil and gas exploration and
production. The auctions were won by three groups of companies, from United States and
Argentina. The refining units were sold to Brazilian Petrobras and the logistics company to
German and Peruvian investors28. Thus, the new regime led to the entry of several foreign
energy companies into the country: Total, BG, BP, Petrobras and Repsol.
Attempting to further increased investments in energy sector, in April 1996 the Law of
Hydrocarbons 1689 was approved, which created a general framework for exploration and
production of natural resources29. The new law allowed the conclusion of Shared Risk
Contracts (SRCs) that gave a foreign investors the right to prospect, explore, extract,
transport and market oil production. In practice, this was a tax regime where the contractor
carried the exploration risk and costs, with no actual cost sharing with the State. Law No.
1689 drastically decreased the Bolivian government’s share of revenues. The government
take was stabilized for the duration of the contract and amounted to no more than 18% in
non-traditional areas and 50% in all proven reserves30. The net income tax rate were also
reduced form 40% to 5% and new taxes of 12, 5% on dividend repatriation and extraordinary
net income tax were implemented31. International companies were allowed to take possession
of any hydrocarbons they extracted, except for a small amount slated for domestic
consumption in Bolivia. Other provisions included profit repatriation guarantees and
acceptance of international arbitration.
The discovery of large natural gas reserves in the 1990s positioned Bolivia to be the
second country in Latin America with the largest natural gas reserves outside of Venezuela.
Furthermore, the legal changes, in Bolivia’s hydrocarbon industry during the 1990s allowed
foreign private investment to dominate the industry, reaching annual average of $374 million
over the nine years of privatization programme. Economically, out of three hydrocarbons
laws enacted during 1990s, Law No. 1689 and its allocation of hydrocarbon revenue had
major consequences. Foreign petroleum companies received a disproportionate level of
wealth from Bolivia’s hydrocarbon resources while the Bolivian state received the minimum
of wealth from its natural resources. While investment and extraction levels increased after
the capitalisation, the majority of Bolivians failed to see the benefits of such activities. Slow
27 M. Mansilla,E. Cerutti “Bolivia:The hydrocarbons boom and the risk of Dutch Disease”(2008) IMF Working
Papers < https://www.imf.org/external/pubs/ft/wp/2008/wp08154.pdf> accessed on 11 July 2015
28 ibid
30 Donaldson (n 19) 12
31 ibid

11
economic performance and economic crisis in neighbour countries such as Argentina had
fuelled demands. As a result, the swing of the pendulum towards neoliberal policies had
begun to change discretion by the end century.
1.3 Development of energy sector in Ecuador
Commercial oil production in Ecuador began in 1920s, making the country one of the
oldest oil-producing countries. Increasing oil production and exports has consequently been
the focus of Ecuador’s governments, which have followed diverging policies over time that
negatively affected foreign investors. Ecuador has transited from an open-market approach in
the 1980s and 1990s to a nationalist state led strategy under the Correa presidency.
Beginning from 1967, when a Texaco Gulf consortium discovered a vast amount of
crude oil in the Oriente region, oil launched Ecuador’s third economic boom of the century,
following those of cacao and bananas32. Thus the Ecuadorian government enthusiastically
supported private investment in its hydrocarbons sector and granted concession contracts to
foreign investors. Under these contracts, the IOC assumed all exploration and currency risk
and agreed to pay royalties on the crude produced in addition to taxes on any profits earned.
The favourable climate for investment encouraged many oil companies to obtained contracts
from government, resulting in significant exploration and production. Black gold started to
transform Ecuadorian economy as rapidly and profoundly as anything before in its history.
In 1971, the government launched the Corporacion Estatal Petrolera Ecuatoriana (CEPE),
later becoming PETROECUADOR, the national oil enterprise33. Following the rise in oil
prices, Ecuador, like other Latin American countries, decided to increase control over its oil
industry. Within a few years, the CEPE acquired a 25% interest in Texaco Gulf consortium,
and later the level reached 51%34. In 1976, the company also took over the installations of a
British investor, Anglo Ecuadorian Oil Fields Ltd35. The government denied that the buyout
of foreign oil facilities amounted to nationalization, and insisted on continuing the State
expansion on other foreign entities, despite their protests. For the first time in Ecuador’s
history, with significant ownership in the oil industry and the ability to tax private foreign
petroleum companies, government had its own source of revenue. However, between 1973
and 1980, oil production stagnated as government failed to invest in new projects and foreign
investment dried up.
A return to investment followed shortly thereafter. In 1982, the government modified the
hydrocarbons law to permit CEPE to enter into service contracts with investors. Under this
arrangement, a company agrees for a fee or a share of production to provide the host country
or its state oil company with services or technical information relating to the development of
mineral resources. The service contract provides exclusive rights over the hydrocarbons to
the national oil company, what compromises between the principle of national sovereignty
32 A. Gerlach,“Indians, Oil and Politics. A recent History of Ecuador” (Scholarly Resources Inc 2003) 33
33 ibid
34 M. R Pelaez-Samaniego, M. Garcia-Perezc “Energy Sector in Ecuador: Current Status” (2007) Energy Policy
35(8) 4177
35 ibid

12
over natural resources and the demanding realities of the need for foreign investment. The
contracting parties carry out all the operations necessary to the exploration and development
in the service area and provide sufficient financial services. The main feature of the contract
represents a risk obligation clause that provides that all exploration and development
activities are carried out at the sole cost and risk of the party to the contract36. As
consequence of it, the costs incurred during the performance of the contract are only
reimbursed when there is a commercial discovery. Thus, the service contract relegated
foreign companies to the role of mere contractor providing service and with no title to oil
production, many companies were simply not interested in these agreements. While service
contacts better addressed sovereignty concerns for Ecuadorian government, the low price for
oil, at around $15 per barrel, made this form of investment too expensive also for the State.
As companies did not benefit from direct access to a share of petroleum produced, the
government initiated a program of structural reforms aimed at modernizing the public sector
to further encouraged private participation in the oil and natural gas sector. The general
framework was established thought the passage of a new Budget Law in November 1992 and
State Modernization Law in December 199337. Private investments in petroleum sector
increased considerable following the December 1993 amendments to the Hydrocarbon Law,
which permitted the State to execute Production Sharing Contracts (PSC) with companies
through PetroEcuador38. The Law also allowed the government both to deregulate the
domestic price of petrol by calibrating it to the international price of crude and enable private
companies to operate and further expand the Trans- Andean pipeline.
Under the PSCs, the contractor would assume all the costs of the investment and expenses
in exploration and production but also acquire an entitlement to a stipulated share of the oil
produced as a reward for the risk taken and services rendered. These contracts give decision-
making power to international oil companies in handling exploration and development
operations. This is of particular importance, as it raises sovereignty concerns for host state -
the state remains the owner of the petroleum produced subject to the contractor's entitlement
to its share of production. Under the original PSCs signed in the mid-1990s, Ecuador’s
portion in the first $15 to $17 per barrel of revenue was just 17 to 27 %, while everything
above and beyond that was profit for the foreign oil companies39. Investors were also granted
exclusive property over participation and a free disposal of oil at the international market
under condition that if required, the IOCs will market oil domestically to fulfil domestic
demands. Tax stabilization was also provided. Ecuador issued implementing regulations that
if any changes to the tax regime would be compensated by a corresponding adjustment to the
investor’s percentage share oil production40. Furthermore, private enterprises enjoyed certain
benefits, such as exemption from customs duties and other taxes on imported goods needed
for hydrocarbons exploration and exploitation, provided that such goods are not being
produced in the country. Royalties were exempted too. At the Seventh Round of auctions for
the exploration and development of new oil and gas fields in 1994, Ecuador awarded PSCs to
36 Z. Gao “International Petroleum Contracts: Current Trends and New Directions” (Kluwer Law International
1994) 121
37 S. Sawyer “Crude Chronicles: Indigenous Politics, Multinational Oil, and Neoliberalism in Ecuador” (Duke
University Press 2004) 109
38 Ibid 110
40 Executive Degree No 1417 Regulation of the Hydrocarbons Official Register No 364 1994/01 Art 16

13
international companies like Arco Oriente In., B.P. Petroleum Development Limited and
Chevron San Jorge S.A41.
In addition, the government introduced significant changes to the Constitution that were
designed to attract and protect foreign investment. Under the Constitution, the Law on
Investment Protection and Guarantee and the Foreign Trade and Investment Law are the key
instruments governing foreign investment in Ecuador. The Law on Investment Promotion and
Guarantees covers "any form of transfer of capital to Ecuador from abroad, made by foreign
natural or legal persons and destined for the production of goods and services”42
. This
definition encompasses financial contributions in freely convertible currency and physical or
intangible assets, including trademarks and industrial designs. Generally, the new law
confirms that foreign investments enjoy the same conditions as those provided for
investments by Ecuadorian natural and legal person43. However, it also allows discriminatory
treatment between domestic and foreign investor in “strategic” areas, including fisheries,
mining and hydrocarbon, in particular, the transport of hydrocarbons is reserved for domestic
shipping companies in which the State holds a controlling interest. Besides, the Constitution
restricts the purchase, for economic purposes, of land or concessions in national security
areas by foreigners.
According to the Executive Decree No. 3497, investors that meet certain requirements may
enter into more extensive investment contracts with the State, providing "specific legal
stability" guarantees. The purpose of such contracts is to shield investors from changes to the
legislation in force at the time of their investment that "might materially and significantly
affect" their rights44.
Within the time, Ecuador also adopted ICISID Convention what created an exception to
exclusive local jurisdiction requirement, included in Calvo Clause and allowed foreign
investors to initiate claims against state on international forum.
42 Law on Investment Promotion and Guarantees 1997 Art 14
43 Ibid Art 13
44 Executive Decree No. 3497 Official Journal 744 1998/06 Article22

14
CHAPTER II
RESOURCE NATIONALISM. STATE’S SOVERIGNTY OVER NATURAL RESOURCES
VERSUS INVESTOR RIGHTS
2.1 General overview of resource nationalism
There is no single definition of resource nationalism. Given the recent revival of interest,
there are multitude of different definitions and interpretations. The International Energy
Agency has defined it as “nations wanting to make the most of theirs endowment”45. This is
reflected in the 1962 United Nations resolution on the permanent sovereignty of natural
resources which was based on “the inalienable right of all States freely to dispose of their
natural wealth and resources in accordance with their national interest”46. Another version,
described by Bill Farren Price in Middle East Economic Survey, is as a “situation where
producer countries have moved to maximize revenues from present oil and gas production
while altering the terms of investment for future output”47. Resource nationalism was also
defined by Paul Stevens as a clear indication of “obsolescing bargain” expression, “whereby
once oil has been discovered and the investment sunk in development, relative bargaining
power switches in favour of the government, which then tries to increase its fiscal take by
unilaterally changing the terms of the original contract”48. Some scholars described it from a
political perspective and state that governments adopt a policy nationalism when their
country’s sovereignty starts to play a vital role and becomes one of the major driving forces,
especially after decolonization period. However, the core elements of all definitions lie with
government efforts to maximise revenues form and exercise greater state control over
exploitation of natural resources.
To gain a better insight into the features of the phenomenon, Ian Bremmer and Robert
Johnston have distinguished four models of resource nationalism49. The first model,
revolutionary type of resource nationalism, is linked to political and social motivations where
natural resources play a broader role in state policy and it’s usually implemented by means of
forced negotiations and expropriation. Good examples are Venezuela, Bolivia and Russia.
Secondly, economic type, is associated with the desire of host state to change terms and
conditions in existing contracts so the government can enjoy greater economic benefits. The
example are Kazakhstan, Algeria and Mongolia. Other type of resource nationalism is legacy
type, related to historical issues that all natural resources of any kind must belong to the State.
This happened in Mexico in 1930s and Kuwait in 1960s. Lastly, there is soft type, where the
same goals are pursued as in the case of the economic type of resource nationalism, however,
the State uses legislation and ﬁscal regulation. This approach is common to countries such as
Canada or United Kingdom.
45 Middle East Economic Survey (2006) 49, 39
46 General Assembly Resolution 1803 (XVIII) “Permanent Sovereignty over Natural Resources” 14 December
1962
47 B. Farren Price“Middle East Economic Survey” 2006 (49) 37
48 P. Stevens “National oil companies and international oil companies in Middle East. Under the shadow of
government and the resource nationalism cycle”, (2008) JWELB 1(1) 5
49 I. Bremmer, R. Johnston “The Rise and Fall of Resource Nationalism” Survival 5,2

15
Resource nationalism has manifested itself in different forms and shapes of events over
the years in a resource cycle. There are many and varied reasons for the resource nationalism,
inter alia, the continuing high prices for crude oil, robust demand, the increasing bargaining
power of national oil companies or the nationalist forces in the host governments. In Latin
America, the spectre of the phenomenon often appears with resource scarcity and the
consequent increasing energy prices in the global market. Also, in academic writing, most
scholars believe that there is a significant correlations between resource nationalism and high
oil prices. Paul Stevens summarized that “because of this pervasive role of oil prices, the
resource nationalism cycle is self-feeding. A period of resource nationalism inevitably leads
to less investment and a shortage of crude oil. This supports high prices encouraging further
resource nationalism as the obsolescing bargain kicks in and the need for capital and
technology by the owner of the resources to expand capacity diminishes”50.
When oil prices were low in the late 1980s and for much of the 1990s, IOCs were courted
by Latin American resource rich countries to develop their national resources. As a
consequence, oil companies took advantage of greater access to exploration acreage, and
negotiated favourable exploration and production deals. Terms on which foreign oil
companies invested varied considerably, from favourable tax system or royalties exception to
new form of production sharing contracts and risk service agreements. However, when prices
rise, as they did in the early years of the new millennium, rethink their contracts and seek
higher taxes and royalties.
Resource nationalism may take a variety of forms from outright nationalism of resources
to regulatory fiscal measures which deprive an investor of the value of the resource it is
exploiting, and increase the host state’s take. The state’s action against or interference with
the oil company interest could be tantamount to a breach of contractual rights and standards
of treatments, creeping expropriation or even nationalisation. Resource nationalism is thus
treated as one of risk factors for international oil companies as it leads to disputes with host
governments.
The recent wave of resource nationalism, 2003-2008, in the oil-rich states was triggered
by various factors such as increasingly high demand of energy in the emerging economies
like China and India and the conflict between West and Middle Eastern countries like Iraq
and Iran51. All these factors have contributed to the skyrocketing of energy prices, from
around $20 per barrel in 2000 to $147 in 2008, and the resource-rich countries have found
their energy resources as a strategic weapon. Starting with threats to the sanctity of contracts
in Latin America, the same radicalism has spread eastwards into North Africa, the Middle
East, Russia and Central Asia.
However, the resource nationalism in the twenty-first century, unlike that in 1970s, needs
to be understood in the context of global concern for resource security, environmental
sustainability, sustainable development and poverty reduction. In countries like Venezuela,
Bolivia and Ecuador, resource nationalism is viewed as a way to “undo the evils” and put an
end to “resource privatism”. This view is fuelled by the perception that major oil companies,
as a result of their financial strength, dominate negotiations with host governments over the
50 Stevens (n 32) 27
51 G. Joffe, P. Stevens, “Expropriation of oil and gas investments: historical, legal and economic perspective in a
new age of resource nationalism” (2009) Journal of World Energy Law and Business 1(2) 6

16
access to the management of natural resources and thus secure regulatory and investment
conditions that favour their commercial interest unfairly. Consequently, this inequality of
bargaining power leads such companies to benefit inordinately from developing countries’
resource wealth, while the interest of local communities are neglected. The goal of resource
nationalism is then to maximize rent appropriation to benefit national development and
substantially reduce rates of extreme poverty. Nevertheless, in Andean countries, this has led
to calls for outright nationalization and creeping expropriation of strategic hydrocarbons.
2.2 “We want partners not masters”. Resource nationalism in Bolivia.
The dismantling of the favourable investment regime began in July 2004 with the
Hydrocarbon Referendum, where the majority of Bolivian citizens voted in favour of the
state’s taking back full ownership of the country’s hydrocarbons resources52.
Subsequently, in May 2005 the Bolivia government passed Law 3058, which repealed the
1996 Hydrocarbons Law53. The new Law was to ensure a more equitable distribution of the
benefits of oil and gas and to gain control of the production of the hydrocarbon sector by the
state. This had a number of consequences. Firstly, the right of property over petroleum at the
wellhead was returned to the state. Secondly, the shares in the capitalized by investors
companies, Andina, Chaco and Transredes, were renationalized. Also, a direct hydrocarbons
tax were introduced with a flat rate of 32 % of the value of production, in addition to the
existing 18 %, which guaranteed a level of no less than 50 % of hydrocarbon revenues to the
Bolivian state54. Finally, new Law set a 180 days deadline for the mandatory conversion of
the Risk Sharing Contracts into the new forms of petroleum contracts. Such new types of
petroleum contracts were production sharing contracts, operating contracts, and association
contracts. Under all three contracts, the reserves and production belong to the State and
contractor has the obligation to deliver to YPFB the full amount of hydrocarbons produced.
However, Law No. 3058 was not mandated until after Evo Morales became president in
2006 and further legislative steps were taken. On the 1st 2006 Morales issued the Supreme
Decree No. 28701 nationalizing the hydrocarbon resources of the country: “In exercise of
national sovereignty (…) the natural hydrocarbon resources of the country are hereby
nationalized” .Although, the 2006 Nationalization Decree of Bolivia’s hydrocarbon industry
is defined as resource nationalism, the new gas law was not in fact a classic nationalization -
there was no expropriation of asset. President Morales declared that “This is not an
expropriation…We simply want to know what they are doing and have a greater say in what
they do “55. This resource nationalization consisted rather of an increase in state power within
the hydrocarbon sector, regained control of some of its previously capitalized assets, and
increased its share of revenues from the sale and transport of natural gas.
53 ibid
54 ibid
55 A. Luoma “Bolivia Briefing Series: Reactions to Gas and Oil “Nationalization”<
http://democracyctr.org/bolivia/investigations/bolivia-investigations-gas/bolivia-briefing-series-gas-and-oil-
nationalization-2/>accessed on 7 August 2015

17
The Decree established that national oil entity, YPFB, must commercialize all of the oil
and natural gas by defining prices, volumes and conditions for commercialization and also
placed this entity in control of the whole production chain56. Foreign enterprises were now
obliged to deliver their entire production to national oil company. Furthermore, the Supreme
Decree introduced a new participation tax for YPFB by which private producers operating in
the mega-fields must relinquish a further 32% of production at wellhead. After the
implementation of both the 2006 Nationalization Decree and Law 3058, Bolivia’s revenue
design plan was completely changed. The state maintained the 18 % royalty rate and added a
32 % Direct Tax on Hydrocarbons on production and an additional 32 % participation tax57.
As a result, the Bolivian state received a total of 82 % of revenue while the remaining 18 %
went to foreign oil companies. Such unilateral action of Bolivian government to increase its
income were, however, in the breach of stabilization clause. The Shared Risk Contracts
currently in effect guaranteed that “the regime for the canon and royalties, during the term of
the contract, for the exploration, exploitation and commercialization of hydrocarbons, shall
remain stable.58”
Upon issuance of the Decree, companies had a 180-day transition period to renegotiate
and sign new contracts with YPFB if they want to operate in Bolivia, otherwise, they must
leave the country. Previous agreements were not well-designed to accommodate significant
changes, such as the record commodity prices or evolving political, social or economic
conditions. As a result, Bolivia challenged these agreements as unfair or not sufficiently
beneficial to its economy. Evo Morales guaranteed that this nationalization process would not
take on the form of expropriation or confiscation of facilities, but clearly stated that “Bolivia
want partners in business not bosses”59. In terms of outcomes, renegotiations took place
between state and oil companies under the threat of arbitration proceedings. Nearly all
foreign investors operating in the sector submitted notification of disputes under the
arbitration provisions of the relevant BIT. However, arbitration was avoided, since all the oil
companies signed a total of 44 operations contracts.
With these new contracts, the state has recovered control of the energy sector and
increases the government take of the hydrocarbon revenues to more than 70 %60. The
operations contract is a sort of service contract between YPFB and one or more oil
companies, whereby the company undertakes to conduct petroleum operations in the
particular contract area at its sole risk and expense, assuming all costs and providing all
required personnel, technology, facilities, materials and capital, in exchange for a
compensation consisting of the reimbursement of certain recoverable costs and a profit.
YPFB will not assume any risk and responsibility regarding the exploration stage or the result
of those until foreign companies have registered the hydrocarbons found as commercial and
start their production. Foreign investor does not acquire any ownership rights over the
reserves or the hydrocarbons produced. With this new formula, from the gross production
income, every oil company will discount its operation cost. This operation cost shall be
calculated and submitted by each oil company to YPFB every month and the YPFB shall
56 Bolivian Supreme Decree 2006 Art 2(1)
57 Ibid art4(1)
58 G. Bilder,“Bolivia: Transitory Hikes Hydrocarbon Royalties to 82%” (2006) OGEL 4
59 Evo Morales’s speech to the United Nations 22 September 2006
60 M. V. Vargas,“Bolivia’s new contractual terms: operating under the nationalization regime” (2007) OGEL

18
audit the recoverable cost every three months. From the remaining amount, the oil rent, the
government will take in average around 75 to 85 % as revenues and the rest goes to the oil
companies as profits.
The renegotiations of the contracts resulted merely from political demands for state
sovereign power over foreign investor’s rights as the original contracts reﬂects unequal
bargaining power between private foreign party and host state. When Evo Morales took
office in 2006, transitional corporate interests were taking over 80% of the profits from
Bolivia’s natural gas reserves. Immediately after his election, Morales efficiently reversed
this trend with his nationalization decree giving Bolivia more than 80 % of the industry
profits in forms of taxes and royalties. The difference was clear, as hydrocarbons minister
Juan Jose Sosa noted: “Seven years before the nationalisation, from 1999 to 2005, the state
received about US$2 billion. The next seven years, 2005-2012, the state received more than
$16 billion”61 . Thus, Morales’s resource nationalism was design to rollback neoliberal
economics policies by reasserting sovereignty over Bolivian economy and natural resources.
Given the above overall outcome, the legal argument for renegotiation of the contracts by
Bolivian authorities was that contracts are only valid rebus sic stantibus (as long as
circumstances remain the same) and that governments have a unilateral sovereign right to
revoke or substantially modify contractual terms62. The implication of this view means that
state sovereignty prevails over state contracts means. However, the investor can rely on the
concept of ‘legitimate expectations’ as part of the obligation to provide ‘fair and equitable
treatment’ even if there is no speciﬁc governmental assurance or there is a violation of
stabilization clause.
2.2.1 “Nationalization with no expropriation”? Bolivia’s investment treaty cases.
Generally, all of Bolivia’s investment protection treaties provide that investments cannot
be expropriated, nationalized or subjects to measures having the effect of expropriation or
nationalization expect as required for public need and upon the payment of just or fair
compensation, or compensation for the value of investment. The latest Constitution, passed in
2009, stipulates that private property is guaranteed as long as its use does not affect the
collective interest and expropriation is governed by law for reasons of public interest.
Interestingly, under the Article 320 the Bolivian investment will be prioritized over foreign
investment and “every foreign investment shall submit to Bolivian jurisdiction, laws and
authorities, and no one may cite an exceptional situation, nor appeal to diplomatic claims to
obtain a more favourable treatment “63.The Constitution specifies that all hydrocarbon
resources are the property of the Bolivian people and that the state will assume control over
their exploration, exploitation, industrialization, transport, and marketing64. No concessions
61 F. Fuentes, “Bolivia: Nationalisation puts wealth in hands of the people”
<http://boliviarising.blogspot.co.uk/2013/05/bolivia-nationalisation-puts-wealth-in.html>accessed on 3
August 2015
62 T. T. Walde“Renegotiating acquired rights in the oil and gas industries: Industry and political cycles meet the
rule of law” (2008) Journal of World Energy Law & Business 1(1) 55,56
63 Political Constitution of the Plurinational Stateof Bolivia State7 February 2009 Art 320(1)
64 Ibid art348 (1), art 351(1)

19
or contracts may transfer the ownership of natural resources or other strategic industries to
private interests. For companies working in the industry, contracts are negotiated on a service
contract basis and there are no restrictions on ownership percentages of the companies
providing the services. Furthermore, very foreign enterprise will submit to the sovereignty of
the state, and to the laws and authority of the state. An important change in the Constitution
that directly affects possible foreign investments is that Bolivia no longer recognizes
international arbitration forums. No foreign court case or foreign jurisdiction will be
recognized, and foreign investors may not invoke any exceptional situation for international
arbitration, nor appeal to diplomatic claims65.
With regards to recent nationalization process, current government has argued that
“nationalization” is different from expropriation and therefore is not governed by the relevant
Constitutional provisions. The issue is thus whether compensation must be paid in advance in
the case of nationalization. The Decree nationalizing the hydrocarbons industry did not
contain any provision regarding compensation nor did subsequent decrees. The Bolivian
government; interpretation is simply that nationalization process in governed by international
law which in its view recognize a sovereign state’s right to nationalize property with an
obligation to compensate, but not requiring prior compensation. Such practice were thus
challenged by foreign companies in the arbitration proceedings.
The Pan America LLC v. Bolivia dispute arose when Bolivia enacted a new Presidential
Decree No. 29541 in May 200866. The decree mandated the acquisition by the Bolivian state
of at least 50 percent plus 1 share of nationalized package shareholder in the oil company
Chaco and Transredes. Among affected investors were subsidiaries of Shell, whose gas
transportation subsidiary, Transredes, was seized, and Pan America Energy, whose shares in
Empresa Perolea Chaco were nationalized. Shell resolved its dispute before commencing
arbitration for a settlement reported to be in excess of US$100 million. Pan America Energy
however, has initiated arbitration against Bolivia, seeking compensation for expropriation of
its 50 % equity investment67. The arbitration was registered by ICSID in April 2010 under the
Bolivia- United States bilateral investment treaty. The company was also demanding
compensation for losses suffered in 2003 and 2005 due to measures adopted by Bolivia that
violated the legitimate expectations of PAE with respect to the regulation and treatment of its
investment in the hydrocarbons sector. After nearly five years, the government has reached a
compensation deal with the company and the Tribunal issued a procedural order taking note
of the discontinuance of the proceeding pursuant to ICSID Arbitration Rule 43(1)68.
Similarly, the government began to alter the regulatory framework in electricity sector. In
2010 President Morales ordered the nationalization of Guaracachi America, Rurelec‘s US
based subsidiary, and transferred its shares to the State owned electricity company, ENDE69.
65 Ibid art320(2)
66 Pan American Energy LLC v. Plurinational Stateof Bolivia,ICSID CaseNo. ARB/10/8
67 ibid
68ICSID Arbitration Rule Art 43(1)” If, before the award is rendered, the parties agree on a settlement of the
dispute or otherwise to discontinue the proceeding, the Tribunal, or the Secretary-General if the Tribunal has
not yet been constituted, shall, at their written request, in an order take note of the discontinuance of the
proceeding”
69 J. C. Hamilton,O.E. Garcia-Bolivar,H.Otero (eds) “Latin American Investment Protections. Comparative
Perspectives on Laws, Treaties, and Disputes for Investors, States and Counsel” (Martinus Nijhoff Publishers
2012) 272

20
Initially, Morales indicated that the ENDE would compensate the company for its
nationalized interest, and that the amount of compensation would be determined through a
valuation process to be completed within 120 days. Despite prolonged negotiations, however,
the parties were unable to resolve the dispute, and Bolivia refused to provide any
compensation. As a result, the Claimants, Guaracachi (a USA company) and Rurelec (a UK
company) commenced a claim against Bolivia under the USA-Bolivia and the UK-Bolivia
BITs and claimed damages in excess of US$143 million. In the arbitration proceeding under
UNICTRAL Rules of Arbitration, that Bolivia violated the treaty provision with regards to
expropriation without prompt, adequate and effective compensation, fair and equitable
treatment, discriminatory treatment and failed to provide full protection and security. The
claimants also asserted that the valuation process of the investment was neither transparent
nor participatory as Bolivia retained an independent consulting firm to perform the statutory
audit. The Tribunal awarded Rurelec damages of approximately US$29 million, stated that
Bolivia had unlawfully expropriated its indirect investment without providing just and
effective compensation70. However, the tribunal was not convinced that Bolivia acted wilfully
and intentionally to obtain an expert valuation with negative values for the Rurelec
investment. Moreover, the tribunal concluded that there is no rule of customary international
law obliging an expropriating state to grant the expropriated investor a right to take part in the
valuation process. The award in Rurelec is first, to date, to be publicly available.
.
2.3 Resource nationalism in Ecuador. Windfall taxes and Law 42.
The Ecuadorian climate for foreign investment has been increasingly unattractive since
President Rafael Correa took office in 2006, calling for 21st century socialism that aimed at
“leaving the night of neo-liberal policies behind”71. When oil prices began to rise, Ecuador
considered that this may destroyed the economic stability of the PSCs and that the allocation
of oil production, which gave the majority to the contractor, was unfair on the grounds that
the State owning the oil should benefit the most. Resource nationalism in Ecuador, due to
increased oil prices, has manifested itself as direct and indirect expropriation through
demanding a higher share from the profits of the resources, unilaterally changing terms of
contracts, imposing high taxation on oil and gas productions and passing of new laws that
impose unfair obligations on the foreign companies.
The principal measure that signalised this “wake of resource nationalism” in Ecuador,
was introduction of the Law Amending Hydrocarbons Law, known as Law 42, implemented
in July 200672. The new law provided for greater state share of the profit from the sale of oil
and gas. Certain IOC’s revenues were classified as “extraordinary income” when they
derived a sale price of oil that was well above the price in effect at the time the contracts were
70 Guaracachi America, Inc.and Rurelec PLC v. The Plurinational Stateof Bolivia,UNCITRAL PCA CaseNo. 2011-
17 para 4
72 ibid

21
executed73. For such revenues, the contractors were required to pay at least 50 % from its
extraordinary income. Following the change of governments, the percentage increased to
99%74. Also, adopting Bolivian approach, the Ecuadorian government pressed for
negotiations with international companies to change their existing contracts. By 2010
negotiations came to an end and most firs had agreed to change their production sharing
contracts and to accept the country’s new flat-fee service contracts75.
The choice of a change in the participation share appears to have been an attempt to avoid
triggering the correction factor required by the stabilization clause in existing contracts.
Under PSCs, an increase in fiscal obligations that adversely affects the foreign investor may
trigger a provision that other parts of the fiscal regime should be adjusted to ensure there is
no effective change for the foreign investor in the aggregate of burdens and benefits76. The
government of Ecuador subsequently did not reply to Tax Consortium request to apply a
correction factor that would absorb the effects of Law 42. In order to trigger the tax
modification clauses under Ecuadorian PSCs, the contractor must show that the particular tax
measure had affected the economy of the PSCs. These measures sharply reduced the
profitability of foreign-owned oil operations within country. Consequently, major oil
companies requested arbitration at ISCID in connection with new tax, alleging violations of
various BIT provisions and additionally, requesting for interim measures. They included
Burlington Resources and French company, Perenco.
In 2008, Burlington Resources commenced arbitration against Ecuador alleging that the
Ecuadorian government’s decision to reform the country’s Hydrocarbons Law and regulate
profits generated by rising oil prices was illegal. The dispute centred on two production
sharing contracts for Blocks 7 and 21, entered into between Burlington and Ecuador in
September 200177. Burlington alleged that Law 42 represented a unilateral change of
contract, violated the principle of legal certainty, and constituted an expropriation of Blocks 7
and 21. The company claimed, that Ecuador's obligations to Burlington are not limited to
contractual obligations under the PSCs, but also encompass the Hydrocarbons legal
framework in general78. According to the Article II (3) (c) of U.S –Ecuador treaty, “Each
Party shall observe any obligation it may have entered into with regard to investments”79.
Thus Ecuador breached the umbrella clause because it failed to observe its obligations with
respect to Burlington's investment and failed to absorb the effects of Law 42 on the
contractor. Secondly, Burlington claimed that Law 42 was "a measure tantamount to
expropriation" as it transferred all of Burlington's revenues to Ecuador, and deprived
Burlington of practically all of the profits to which it was entitled under the PSCs80.Ecuador
subsequently denied that it expropriated Burlington’s investments, and stated that it had only
intervened in Blocks 7 and 21 after Burlington unilaterally opted to suspend operations at
73 ibid 273
74 ibid
75 ibid
76 PSC
77 Burlington Resources Inc. v. Republic of Ecuador,ICSID CaseNo. ARB/08/5 Decision on Liability para 23
78 Ibid para 99
79 United States-Ecuador BIT ArticleII(3)(c)
80 Burlington (n 76) para 109

22
those sites81. Ecuador argued that the revised hydrocarbons law was necessary and
appropriate given the unforeseen rise in oil prices, and did not breach or modify the PSCs.
A majority of the Burlington tribunal concluded that the tax measures introduced by the
state did not constitute an expropriation, explaining that:” The Law 42 tax is a so-called
windfall profits tax, i.e., a tax applying to oil revenues exceeding the ones prevailing at the
time the PSCs were executed. By definition, such a tax would appear not to have an impact
upon the investment as a whole, but only a portion of the profits. On the assumption that its
effects are in line with its name, a windfall profits tax is thus unlikely to result in the
expropriation of an investment”82. The Tribunal acknowledged that a tax would constitute an
expropriation if it was confiscatory in nature and its effects caused a substantial deprivation
or diminution of an investment83. In order to demonstrate a "substantial deprivation," an
investor must prove that it’s "investment's continuing capacity to generate a return has been
virtually extinguished”84. Although "Law 42 at 99% diminished Burlington's profits
considerably," Burlington's investment still "preserved its capacity to generate a commercial
return"85.
However, the Tribunal considered that Ecuador unlawfully expropriated Burlington’s
investment when it finally took possession of the production facilities in Blocks 7 and 21, in
violation of the US-Ecuador bilateral investment treaty.
A similar set of circumstances developed with respect to French Company, Perenco. The
Tribunal held that Law 42 reduced Perenco's profitability but it did not deprive the Claimant
of its rights of management and control over the investment in Ecuador86. Next, it found that
although the tax at 99 percent made operating conditions highly sub-optimal, it did not
amount to an expropriation because Perenco's business was not effectively taken away from
it87.
Given the Tribunal’s line of reasoning in Burlington Resources v. Ecuador case, States
would have a host of options to undermine the investment protection regime by adopting a
series of pervasive tax measures. In cases where an increase in fiscal obligations is proposed,
then the relevant question will be about the result of such ‘expropriation’ in terms of damages
to the IOC.
Taking into account that it is a settled part of international law that host governments have
the right to expropriate, this raises questions as to the effectiveness of investment protection.
In addition, the international law does not prohibit tax rates of 90 percent or more neither.
However, looking at the variation of tax rate, an extreme variation or a completely new tax at
a high rate that is enacted suddenly, may violate investor’s legitimate expectations and thus
could be indicative of an expropriation. As professor Dolzer notice” measure raising a tax
81 Ibid para 134
82 Ibid para 404
83 Ibid para 399
84 Ibid para 455
85 Ibid para 456
86 Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador),
ICSID Case No. ARB/08/6 Decision on Jurisdiction para672
87 Ibid para 687

23
from seventy-five percent to eighty-eight percent may not be subject to the same conclusion
as one that raises a tax from ten percent to eighty percent”88.
In Burlington case however, the issue was the effect of the introduced measure, rather
than how much tax is too much. Moreover, the Tribunal concluded, that while discriminatory
taxes may be prohibited under customary international law, this does not mean that a
discriminatory tax amounts per se to an expropriation in this case89. The Tribunal applied the
substantive effect test by considering the degree of deprivation and interference90. To qualify
as an expropriation, a substantial loss of control or value is required such that an investor’s
control of and use of its investment is no longer effective. In his Dissenting Opinion,
Professor Orrego Vicun’a criticizes the Tribunal findings and argued that the windfall taxes,
particularly at 99 %, constituted an expropriation when viewed in the overall context91. Thus,
one can argue that it may be more appropriate to consider not only the effect but also the
discriminatory character of the measure or for example the breach of the particular tax
stabilization guarantees.
On the other hand, there cannot be any doubt that a sovereign State, like Ecuador, has the
undisputable authority to enact laws and taxes in order to raise revenues for the public
welfare. The question remains then how to distinguish between actions failing within the
proper exercise of regulatory power and actions amounting to indirect takings. An investor’s
legitimate expectations may thus play a crucial role not only to determinate whether there has
been an indirect expropriation but also whether there has been a breach of fair and equitable
treatment standard. The award in Occidental v Ecuador became relevant here. The Tribunal
held that Law 42 as a measure violated the FET obligations because it unilaterally modified
the contractual and legal framework of concluded PSCs. Moreover, Occidental could
reasonably have expected to have earned significant revenue after 2006 or considered
whether its revenues would have been curtailed by Law 42. The Tribunal explained that the
exercise of State sovereign rights is not unlimited and therefore must have its boundaries and
treaty obligations provides for such boundaries92. Surprisingly, no expropriation was found to
have occurred with regards to taxation measures. However, arbitrators ruled that Ecuador had
breached the US-Ecuador bilateral investment treaty when the Ecuadorian government
cancelled an exploration and production participation contract in the Amazonian jungle and
seized Occidental assets in the country.
88 R. Dolzer “Indirect Expropriations: New Developments?” (2002) NYU Env L J 64, 78
89 Burlington (n 76) para 457
90 A. Gildemeister” How Much is Too Much: When is Taxation Tantamount to Expropriation?” Burlington
Resources, Inc v Republic of Ecuador CaseComment (2014) ICSID Review 29(2) 315,319
91 Burlington (n 76) DissentingOpinion by Francisco Orrego Vicun ˜a para 27
92 Occidental Petroleum Corporation v The Republic of Ecuador, ICSID CaseNo. ARB/06/11 para 529

24
CHAPTER III
PROTECTING INVESTORS AGAINST RESOURCE NATIONALISM
3.1 Anticipating risk against resource nationalism
Although resource nationalism is legal as manifestation of the sovereign authority of the
state, the way in which it is exercised could be questionable, and in its wake could give rise to
various disputes between states and foreign investors. When resource nationalism is fueled by
high prices, like in an example of Bolivia and Ecuador, the state’s actions against or
interference with oil companies could be tantamount to a breach of contractual obligations,
nationalisation or creeping expropriation. Taking into account, that resource nationalism is a
cycle phenomenon, the question arises to what extent does the rule of law prove to be
effective in the context of foreign investment and what regulation are relevant to protect
investors , or at least, to mitigate the consequences of its occurrence?
The protection typically afforded by bilateral investment treaties provide a unique
platform for investor-state arbitration for any breach of treaty provisions93. For example, an
obligation upon host state to afford fair and equitable treatment to investors could be
breached by the frustration of an investor’s legitimate expectations that it would receive a
certain return for its investments. Similarly, an obligation to ensure treatment no less
favourable than nationals of the host state could be breached by a law directed specifically at
foreign oil companies. Most importantly, a common provision of the investment treaties is
that dealing with expropriation, the term often used when resource nationalism arise94. While
treaties recognize that expropriation may occur, they provide for the level of compensation to
which investor is entitled. Expropriation, if it’s justified and non-discriminatory, will be
accompanied by the payment of prompt, adequate and effective compensation. 95
3.1.1 Investment agreements. Stabilization and adaptation clauses
For the purpose of this paper, as activities of foreign companies in Bolivia and Ecuador
were govern by provisions of investment contracts, much also can be done when drafting
such agreements. Whether the investment contract between the parties were concession,
production sharing contract or operation agreements, all of them can provide for various
investors protection mechanism. This includes stabilization and renegotiation clause, clause
as the governing law of the contract, compensation for expropriation, nationalisation, and
93 A. F. Maniruzzaman,“The issue of resource nationalism: risk engineering and dispute management in the oil
and gas industries” (2010) Texas Journal Oil Gas and Energy Law 5 ,87
94 M. Clarke,T. Cummins “Resource nationalism. A gathering storm?” (2012) International Energy Law Review
220,223
95 Sornarajah (n 2) 414

25
clauses for waiver of immunity of the state or state enterprise from both jurisdiction and
execution96. For IOCs, one the most attractive mechanism seems to be incorporation of
international law or such other non-national legal systems, rules and principles as the
governing law of the contracts. The purpose of it is to take the contract out of the influence of
the otherwise applicable national law of the host state. However, this approach is not very
popular within the Latin American countries, such as Ecuador or Bolivia, where even the
international arbitration is questionable. Thus, the practice common to contracts entered into
with developing countries is to incorporate stabilization and adaptation clauses.
Stabilization clause aim at protecting the private investor by restricting the legislative or
administrative power of the state, as sovereign in its country and legislator in its own legal
system, to amend the contractual regulation or even to annul the agreement97 .Clause of this
kind are intended to guarantee the stability of essential conditions of the agreement and
immunise the foreign investment contract from arrange of matters such as taxation, labour
legislation or exchange control regulations. They may also sometimes even provide for a
State’s undertaking no to expropriate or nationalize the investment98. While stabilisation is a
way of managing the risk of unilateral host government changes in the rules governing the
contract, there are two important limitations to this exercise.
A first limitation is that any undertakings given by the host country government must be
given in a form that is consistent with the country’s legal and constitutional framework99.The
state, must act in the public good as it perceives it to be at any given time. It may not be
possible for a state to bind itself by a contract made to foreign private investor, to fetter its
legislative power. When oil prices increased, the government of Bolivia found production
sharing contracts to be unfair and consequently forced foreign investors to renegotiating
contracts to obtain more benefit from its natural resources. Similarly, in Ecuador, existing
hydrocarbons law was amended so government can receive more revenues from oil and gas
production. Besides, contractually or otherwise legally ﬁxed investment terms tend to
naturally become the target of the new government. While the “aperture” process in Bolivia,
Ecuador led to very large oil, gas and mineral investments, most of them has been taken over
or seriously renegotiated by late 2008. It can be assumed that, in spite of any laws or
contracts, the sovereign retains the power to enact laws that legally will ‘trump’ previous.
Thus, attempts to ‘freeze’ the law of host state at the time of the entry of the foreign investor
become unenforceable. State sovereignty over natural resources evidently supersedes any
stabilization clauses, making nationalization legal. However, the manner in which it is done
should not lead to conflict between host states and IOCs. As it was mentioned earlier, this
should be done for reasons of public interest and under due process.
A second limitation on the introduction of a stabilisation provision does not concern the
fiscal package itself100.The legislative capacity of the State with respect to environmental,
human rights and health and safety issues which when exercised may result in an increase in
business costs is less likely to be granted a special protection. Investors cannot expect to
96 Ibid 87
97 P. Bernardini,“Stabilization and adaptation in oil and gas investments” (2008) Journal of World Energy Law
and Business 1(1),.100
98 Ibid 101
100 Ibid

26
obtain guarantees over non-fiscal elements and then seek to receive adjustment of the fiscal
terms by way of compensation in situation when host state unilaterally revised the
relationship with the IOCs in the context of health, safety and environment matters.
Doubts concerning the legal effectiveness of stabilization clause due to the State’s desire
to preserve its sovereign prerogatives, brought about a new approach providing higher level
of protection. As an alternative or in combination with a stabilization clause, the
renegotiation clause may offer both parties protection against the hardship caused to either of
them by a change of those circumstances which were present at the time of the conclusion101.
There are two types of renegotiation clause: economic equilibrium of the agreement and
adaptation clause102. The advantage of the introduction of economic equilibrium in the
petroleum agreements is that it does not infringe upon the State’s sovereign power to changes
its law. Instead it opens the way to the renegotiations of certain terms of the contract, such as,
in the context of PSCs, to the revision of cost petroleum or the profit petroleum split. The
Ecuadorian Model PSC of October 2002 for the Exploration of Hydrocarbons and the
Exploration provided economic balancing provision : “In case of modiﬁcations to the tax
regime, including the creation of new taxes, or the labour participation, or its interpretation,
that have consequences on the economics of this Contract, a corresponding factor will be
included in the production share percentages to absorb the increase or decrease in the tax
burden or in the labour participation of the previously indicated contractor”103. . Contrary to
freezing clauses, economic balancing clauses stabilize the economic equilibrium of the
contract rather than the regulatory framework itself. In other words, regulatory changes are
possible so long as action for example renegotiation of contract, is taken to restore the
economic equilibrium .However, it is worth to mention that, it did not stop authorities to
enact new tax, which served as a basic for future arbitration proceedings.
The other type of renegotiation clause is an adaptation clause of general application,
leading to the renegotiation of the agreement upon initiative of either party the state or
investor104.In other words, if the contract’s equilibrium is negatively affected under the
occurrence of an event that is beyond the control of both parties, renegotiation can take place.
In order for adaptation clauses to work properly, it must be assured that the contract offers a
clear definition on which changes of circumstances and what effect on the contract should
trigger the right to request for a renegotiation105.
It has become clear that businesses in the oil industry cannot often follow the pacta sunt
servanda principle. Experience of oil companies in Bolivia shows that if investors insist in
guiding their businesses by the sanctity of contract principle and repeatedly deny any claim
for renegotiations, in particular in cycle of resource nationalism, will be a subject to hostile
treatment and forced renegotiations by the host state.
101 P. D. Cameron “Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil &
Gas Investors “ Association of International Petroleum Negotiators Final Report 2006 102
102 Bernardini (n 97) 102
103 Ecuadorian Model PSC of October 2002 for the Exploration of Hydrocarbons & the Exploration of Crude Oil
Art 11(7)
104 Bernardini (n 97) 103
105 Maniruzzaman (n 93) 96

27
3.1.2 Progressive taxation system
The prospect of stability in petroleum agreements between parties can also be enhanced
through the development of progressive taxation system that would operate as a built-in fiscal
mechanism without needing the parties to renegotiate the deal106. This may be particularly
important to investors willing to operate in developing countries in Latin America and
elsewhere. In progressive taxation system, a method has evolved that provides an automatic
adjustment of the increased profitability of the project to the host state ‘share107 . Thus the
host state can fully participate in increasing oil prices together with the investor. The
government share applies if and only “the taxpayer’s accumulated receipts exceeded the
accumulated value of the expenditure multiplied by an interest rate which is established at a
level which reflects the cost of money plus risk attaching to the industry108”. More
importantly, it does not distort the investment decision, as the system itself take into account
product prices, costs and also timing and production rate. The government does not receive
payments until the contractor has recovered its initial financial investment plus predetermined
threshold rate of return. It is known as economic resource rent or resource rent tax109.
The main advantage of this progressive remuneration system is the stability of the parties’
contractual relationship. A host state which consider that it is receiving a fair take which will
swell as oil price rise will be less willing to countenance aggressive action against investor. It
gives the fiscal regime the needed flexibility in changed circumstances and will save the time
and troubles of parties for renegotiation.
3.1.3. Political Risk Insurance. MIGA Insurance
Foreign investors may also seek protection against a range of political risks, thus
resource nationalism, through the investment insurance schemes. Political risk insurance is a
tool for businesses to mitigate and manage risks arising from the adverse actions or inactions
of governments. Recent events of nationalisation in Latin America, have further elevated the
political risk insurance as a mechanism for risk mitigation in international business
transaction. One of them is Multilateral Investment Guarantee Agency (MIGA), created in
1985 by the member states of the World Bank110. The main purpose of MIGA is promote
foreign direct investment in developing countries by providing guarantees such as political
risk insurance and credit enhancement to investors and lenders. Within the framework of
MIGA, political risk is defined as : “Political risks are associated with government actions
106 Ibid 98
107 ibid
108 J. Kinna,“Investing in developing countries: Minimisation of political risk” (1983) Journal of energy and
natural resources law89,98
109 ibid

28
which deny or restrict the right of an investor/owner i) to use or benefit from his/her assets; or
ii) which reduce the value of the firm. Political risks include war, revolutions, government
seizure of property and actions to restrict the movement of profits or other revenues from
within a country111”. Thus, covered risks include usually the risk of expropriation, breach of
the contract, currency inconvertibility and transfer restriction, war, terrorism, and civil
disturbance and also non-honouring of financial obligations112. Consequently, MIGA
insurance serves to compensate investors for financial losses sustained as a consequence of
host government action or the politically motivated conduct of host populations.
Although political risk insurance has a role to play in fostering investment in developing
states by mitigating some political risks, other factors such as business opportunities, market
size, and reform in these countries weigh heavily on investment decisions rather than the
presence of the guarantee itself. However, within the recurring cycle of resource nationalism,
the political risk insurance could prove a very useful tool.
The main advantage of the political risk insurer like MIGA, from the investor perspective,
is that it helps to avoid involvement in dispute with the host state and provide needed
guarantee for their investment in countries with political and economic instability. The
advantage of MIGA insurance itself is that, in case of a dispute, the host state and an
international organisation are part of the procedure. If the investor has receive compensation
under the investment insurance, the investment insurance subrogates in the claim113.This
means that the existing claim is assigned from the guaranteed investor to a third party and the
third party acquired all the rights of the investor. The investment agency, MIGA, therefore
pursues the claim according to the dispute settlement agreed on with the host state.
The involvement of a political risk provider, in an investment project may also significantly
influence the project’s operational design and investors’ engagement with the host state114.
The presence of World Bank institution may thus, reduce the willingness of the state to
interfere as this would damage the relationships between them. Furthermore, of relevant
importance to the foreign investor is a fact that, upon the nationalisation of host state oil and
gas industry, will receive a guaranteed compensation for its investment.
3.2 Future of energy investment in Bolivia and Ecuador
Surprisingly, Bolivia and Ecuador’s nationalization did not drive out foreign investors
nor did it significantly deter future foreign investment with some exceptions. All fifteen
foreign oil companies that operated in Bolivia’s hydrocarbon industry before its 2006
nationalization have agreed to country’s contractual agreements115.With regards to Ecuador,
111 K. Gordon, “Investment Guarantees and Political Risk Insurance: Institutions, Incentives and Development”
2008 OECD Investment Policy Perspectives < http://www.oecd.org/finance/insurance/44230805.pdf> accessed
on 18 August 2015
112 ibid
113 C. Tan, “Risky business:political risk insuranceand the lawand governance of natural resources”(2015)
International Journal of Law in Context 11(2), 191
114 ibid
115 Vargas (n 60 )

29
most of the IOCs had agreed to change their production sharing contracts and to accept the
new flat-fee service contracts. Some firms decided to exit, like Brazilian state-owned oil
company Petrobras, the US Noble and China National Petroleum Corporation, while Repsol
YPF, Eni, PetrOriental and Chilean Enap decided to stay116.
Nevertheless, recent denunciation of both countries from ICSID is raising further
concerns related to the protection of investment and the possibility of initiating new BIT
claims against the denouncing State.
Up to present, Bolivia, which ratified ICSID Convention on 23 June 1995, has been party
to four concluded ICSID arbitrations, most of them arising out of nationalization decrees
ordered between 2006 and 2009117. The resulting awards were perceived by Bolivia
government as biased in favour of foreign investors. On 2 May 2007 Bolivia decided to
withdraw from ICSID Convention and filed a notice of denunciation in accordance with
Article 71 of the Convention, which took effect six month later. President Morales supported
his decision, clearly stating that : “Some multinational companies take over our natural
resources, privatize basic services, fail to pay taxes and then, when they have no arguments in
their defence, they go to the so-called ICSID. And then, in that World Bank tribunal, no
country wins against the multinationals. So why do we need an ICSID where only the
multinational companies can win?”118. Similarly, Ecuador had effectively denunciated from
the ICSID Convention on January 2010119.
Opinions on the exact effects of Bolivia and Ecuador’s denunciation vary. Most of the
bilateral investment treaties at issue contain a provision allowing for a “termination period”.
The termination of these agreements typically will become effective six months to one year
after receipt of the notice of termination120. Although Ecuador currently is looking to revise
or terminate its treaties, many of existing BITs, such as ones concluded with Germany,
United Kingdom or United States, may be denounced at any time, with 12 months’ notice
period121.
Of particular relevance is fact that dispute settlement under the auspices of ICSID is
provided for in the majority of country’s BITs. However, by the virtue of the “survival
clause”, the provisions of the relevant treaty will continue to be effective for the investment
for a further period of 10 or 15 years after the termination date: “In respect of the investment
or commitment to invest made prior to the date when the termination of this Agreement
becomes effective, the provisions of the Article I to XVII inclusive shall remain in force for
the period of fifteen years”122. Thus, even though a State may terminate a BIT, it will often
still remain bound by its provisions vis-à-vis investments made prior to the treaty’s
termination. During both the termination and survival period, rights and obligations arising
116 G. Escribano,“Ecuador’s Energy Policy Mix: Development, conservation and nationalism with Chinese loans”
(2012) Real Insituto Alcano 26
117 P. V. Ceron “The protection of foreign energy investment in Latin American countries: Comparative analysis”
(2009) Transnational DisputeManagement 6(4) 35
118 Luoma (n 55)
119 T. E Carbonnea, M. H Mourra (eds) “Latin American Investment Treaty Arbitration. The Controversies and
Conflicts” (Kluwer Law International 2008) 64
120 Supra note 88 p. 88
121 Ecuador-United States BIT Art 12(2), Ecuador- Germany BIT Art 12(2), Ecuador-United Kingdom Art 14
122 Ecuador-Canada BITArt 17(2)

30
under the treaty remains in effect, including consents to jurisdiction. Consequently, during
these periods, an investor in Ecuador or Bolivia, who was previously protected by the
investment treaty, would still have residual rights despites country’s denunciation from
agreement. Also, dispute resolution clauses contained in treaties might continue to provide
for ICSID arbitration proceedings well beyond the date of denunciation of ICSID
Convention.
Additionally, while Article 71 of the ICSID Convention does allow denunciation, Article
72 governs the consequences of the denunciation in the following terms : “Notice by a
Contracting State pursuant to Articles 70 or 71 shall not affect the rights or obligations under
this Convention of that State or of any of its constituent subdivisions or agencies or of any
national of that State arising out of consent to the jurisdiction of the Centre given by one of
them before such notice was received by the depositary.123” Thus, one can argue that the
investor will be able to give his consent and commence ICSID proceedings even after the
denunciation takes effect. This happen with Pan American Energy LLC claim against
Bolivia, where the case was initiated more than two years after the Bolivia’s denunciation of
the ICSID Convention had taken effect, and despite the fact that Bolivian Constitution no
longer recognizes international arbitration 124.
Given the above, the denunciation of the ICSID by Bolivia and Ecuador should not
significantly dismantled foreign investors from future investment in the countries’ natural
resources. Although, the nationalisation of oil and gas industries arising out of resource
nationalism and very high tax rates did not rapidly drive away private capital, the current
legislative framework can do. The reason is that after the nationalization of the industry in
2006 there is no economic incentive on the part of foreign investors to risk capital in
exploration under the new service contact model. Risk is not rewarded. The foreign oil
companies that left in the country are investing only in developing existing reserves because
such costs are reimbursable and the companies earn some income per unit of production
delivered to YPFB. However, there is an eloquent saying that may explain why foreign
investors are willing to invest in extractive industries in countries like Bolivia or Ecuador:
“natural resources last longer than governments”.
3.3 Conclusions
This paper has examined the resource nationalism process that has recently occurred in
Bolivia and Ecuador and the example of protection available for foreign investors that have
been exposed to such risk.
While oil and gas exploration and development are characterised by huge capital
expenditure, resource nationalism may represent a political obstacle for foreign investors
seeking to invest in energy resources in some countries. When resource nationalism is fueled
123The Convention on the Settlement of Investment Disputes between States and Nationals of Other States 14
October 1966 art 72
124 A.W. Rovine (ed)“ Contemporary Issues in International Arbitration and Mediation”(Martinus Nijhoff
Publisher 2012)

31
by high energy prices, the state asserting of control over the activities of IOCs may lead to
various disputes between the state and investors. Although, the oil industry has extensive
experience in dealing with resource nationalism, the example of investors’ treatment in
Bolivia and Ecuador may alert for seeking greater amount of protection. Where the risk is
seen as low, mechanisms to manage it are less frequent. However, in developing countries,
where there is a high political risk and no sufﬁciently investment protection available through
the domestic judiciary, investors should develop a strategy and maintain some risk
management tool that could be effective to avert the risk for which they are exposed.
Additionally to protection that investors can seek in bilateral investment treaties, there are a
wide range of contractual mechanism, including stabilization and renegotiation clauses,
introduction of progressive taxation system or protection granted under political risk
schemes, such as MIGA insurance.
. Resource nationalism has manifested itself in different forms and shapes of events over
the years in a resource cycle. There are many and varied reasons for the resource nationalism,
inter alia, the continuing high prices for crude oil, robust demand, the increasing bargaining
power of national oil companies or the nationalist forces in the host governments Resource
nationalism in Bolivia and Ecuador is however, of different nature. The nationalization and
renegotiation of oil contract can be explained by the new wealth brought to those countries by
the sharp increase in oil prices. Furthermore, nationalization served for both countries as a
sphere for the exercise of heightened state power and as a symbol of the re-established
sovereignty over natural resources. Consequently, regulatory expropriation that took place
have posed a problems in finding a “proper balance between investment protection and the
State’s legitimate right to regulate for the public good.125” These include arguments that
contracts are only valid rebus sic stantibus (as long as circumstances remain the same) and
that governments have a unilateral sovereign right to revoke or substantially modify
contractual terms. While, there cannot be any doubt that a sovereign State, like Bolivia or
Ecuador, has the undisputable authority to enact new laws and taxes in order to raise revenues
for the public welfare, exercise of State sovereign rights cannot be unlimited. Taking into
account, that resource nationalism is a cycle phenomenon, the question arises to what extent
the rule of law proves to be effective in the context of foreign investment. The whole of
international investment law, in particular bilateral and multilateral investment treaties,
stabilization clauses, access to international dispute settlement direct investor–state
arbitration, can be understood as trying to remedy such unilateral exposure of the investor to
host state powers. As prof Walde notes: “Perhaps one can describe the function of law as one
of ‘smoothing’ the spikes of volatility between the investor and the host state at the top end of
the economic and political cycle (…) They also provide a procedure to impose costs on both
sides for an exit of the investor from the country and so encourage both parties to arrange the
exit in a more civilized fashion in contrast with a rapid, violent and non-compensated
expulsion. The cycle is not ‘neutered’. But its effect is smoothed, proceduralized and delayed,
with an agreed upon reasonable settlement often at the very end.126”
. By the way of conclusion, after each period of resource nationalism, new legal
instruments have been designed to cope with the way the political risks materialized in the
last cycle. However, they have not been able to provide full protection to international oil
125 Vincentelli (n 19) 409
126 Walde(n 62) 91

32
companies in countries such as Venezuela, Bolivia or Ecuador where reliance on investment
protection instruments would have meant a forced, uncompensated exit from the country.
While it is possible to identify legal concepts, contractual mechanism and authoritative
principles to mitigate the resource nationalism consequences, it is not possible to come up
with a very detailed solution for providing effective protection framework against resource
nationalism.

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