On May 1, President Evo Morales issued a decree nationalizing the country’s natural gas industry. Flanked by troops at Bolivia’s largest gas field, where soldiers now remain stationed, the President dramatically proclaimed that “the plunder has ended.” Implementing a campaign promise to claim a larger share of the country’s energy income, the President announced that Bolivia’s state energy company would take control of all energy operations and set gas prices.

Foreign contractors were given 180 days to accept a new contract, the terms of which are to be set following a government audit. In the meanwhile, Bolivia’s share of the income from natural gas will increase from 50% to 82% (having risen from 18% only a year ago). Bolivia has the second largest reserve of natural gas in South America, estimated to be in excess of 24 tcf of proved reserves, with approximately 52 tcf in proved and probable reserves. The effects of the nationalization are likely to reverberate through the global energy in the weeks and months to come.

Predictions that Bolivia’s nationalization of its natural gas resources is the first step in a wider program of expropriations (The Economist, May 5), were confirmed on Monday when President Morales vowed to nationalize the country’s mining, forestry and water industries as well.

On Sunday, May 8, President Hugo Chavez of Venezuela, offered his full support for Bolivia’s nationalization program, and announced significant further increases in Venezuelan tax and royalty rates on the Orinoco River Belt oil projects. Income tax on the projects is set to increase from 34% to 50% while royalty rates will double from 16.7% to 33.3%.

Foreign companies who have invested in these countries are now researching their rights and what recourse may be available in order to protect their investments.

Fortunately, in addition to contractual rights, investors may be in a position to seek redress from international arbitration tribunals, which can enforce extra-contractual, treaty-based international law rights. In particular, both Bolivia and Venezuela have entered Bilateral Investment Treaties (BITs) with the governments of a large number of capital-exporting nations.

While the precise terms of BITs vary, typically, they contain promises to protect investors from nationalizations and other unfair treatment by the State. Accordingly, unless coupled with prompt, adequate and effective compensation, both the Bolivian nationalizations, as well as the tax rises planned by Venezuela, would likely breach those State’s respective international law treaty obligations, entitling affected investors to compensation.

Other legislation or decrees that would adversely impact investors in those countries – whether by nationalizing assets, unfairly altering the applicable tax regimes, denying investors of returns on investments, divesting investors of control of investments, or treating foreign investors unfairly or in an unequal manner – might also violate of the rights granted to investors pursuant to BITs. Where such breaches occur, investors may be entitled to monetary compensation.

Crucially, BITs give foreign investors the right to pursue claims against the relevant host State directly in international arbitration proceedings, either before the International Centre for the Settlement of Investment Disputes (ICSID) or other independent international tribunals. Thus, investors are able to seek redress without becoming embroiled in the national court system of the host State, which (rightly or wrongly) may be perceived by as being unfriendly to foreign interests. They can also have greater confidence that they can enforce any awards they obtain.

Bolivia is a party to BITs with, Argentina, Austria, Belgium and Luxembourg, Chile, China, Costa Rica*, Cuba*, Denmark, Ecuador, France, Germany, Italy, The Republic of Korea, Netherlands, Paraguay*, Peru, Romania, Spain*, Sweden, Switzerland, the United Kingdom and the United States. Venezuela is party to BITs with Argentina, Barbados, Belgium and Luxembourg, Brazil*, Canada, Chile, Costa Rica, Cuba*, Czech Republic, Denmark, Ecuador, France*, Germany, Indonesia, Italy, Lithuania, Netherlands, Paraguay, Peru, Portugal, Spain, Sweden, Switzerland, United Kingdom and Uruguay. (*= BITs not yet in force.)

Kilpatrick Stockton’s International Arbitration team is experienced in advising clients on the rights of investors pursuant to BITs entered among states around the world, as well as pursuant to national legislation and direct contracts. We have successfully tried investment arbitrations before ICSID and other international arbitration tribunals. We can advise clients on steps they can take to protect their assets from nationalization and other “political risks” both before and after these events occur.

Contact Mary O’Connor or Shai Wade to discuss the impact the of Bolivia’s recent government action, or if interested in learning more about how to avoid any adverse consequences for your foreign investments.

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