Ed Barton, LLM, CPA, CFA

Property Rights and Natural Resources

Property Rights Generally

International law generally leaves the property rights of natural resources to each state. International law requires that states adhere to treaty obligations and other international laws that address property frights. For example, the 1972 UNESCO World Heritage Convention notes that if there is a cultural or natural heritage site, the state in which it is situated has an obligation to preserve it.

Generally, the natural resources sector is under strong state control. Only recently have we seen increased privatization of natural resources to facilitate investment producing access and increased competition.

For onshore resources, the property rights rest with the state under provisions of the PSNR. Under many schemes, the subsoil resources reside in the surface landowner – and the oil, gas, and other energy resources rest with the state. As it pertains to offshore resources, coastal states have rights over the continental shelf.

Generally, the ability to explore and exploit natural resources is licensed by the state to companies or individuals to extract and sell the resources, subject to duties and state supervision.

Types of Property Regimes

State Participation and Public Ownership

The approach is justified by the need of society to share in the financial benefits from the natural resources and the need to give the state a greater overview of energy resources. The approach conflates the property with the needs of society – and property rights do not exist for their own sake but because they facilitate a certain desired societal outcome. Under this regalian system, these energy resources are owned by the state. Landowners only have the right of compensation for the loss of surface rights. This is most commonly due to both the value and the criticality of these resources to development. Some states, such as Germany and Spain, bifurcate the ownership depending on the particular resource between the landowner and the state.

Private Ownership

Private ownership rests on the premise of excludability. Proponents argue that this is the most efficient means of allocating and exploiting resources. This is the primary form of ownership of natural resources in the United States. Most states follow the rule of capture theory, where those that extract the oil or gas possess it at the time of extraction. In Indiana and California, they follow a qualified ownership theory, and every landowner over the reservoir is owned jointly by all surface landowners.

Public-Private Partnerships (PPP)

The latest trends are moving towards public-private partnerships. The OECD argues that PPP can overcome the high risks associated with large investments and innovative approaches to extraction and marketing.

Indigenous Peoples

Indigenous peoples view their rights as transcending a share of the proceeds – and expect that they will also have a say in the management of the land and natural resources. In general, indigenous peoples view ownership in the collective.  The ICJ has routinely overruled indigenous people’s rights to natural resource governance under the theory of uti possidetis Juris. The Inter-American Court of Human Rights has taken a more aggressive view. It looks at remedies and legitimate land claims and historical treaties and compensation to determine indigenous peoples’ rights.

Common Heritage and the Global Commons

The high seas area is viewed as res nullius and can be possessed by anyone – with conservation requirements applying based on common treaties and customary international law. The deep sea bed is considered a common heritage, and the benefits of exploitation are expected to be shared by all humankind. The 1970 Declaration of Principles Governing the Seabed and Ocean Floor, as well as the UNESCO World Heritage Convention of 1972, the 1992 Climate Change Convention, and the 1992 Biodiversity Convention, recognize the common heritage of humankind, the need for its preservation, and that particular consideration should be given to the interests of developing countries.

Types of Agreements

Concessions

Concessions are contractual rights for the exploration, production, and development of natural resources. The state issues these concessions under licenses and leases. Concessions were the historical method by which colonial powers granted companies and individuals rights to extract resources.  Many of these concessions did not survive the decolonization process. In Kuwait v. Aminoil (1982), the ILM held that the Kuwaiti government could cancel the concession. The company was due reparations – but at a fair price instead of the exploitative price noted compensation for lost excess profits was not required.

New Concessions

Modern concessions contain limitations on time and development – scoping carefully the area, timeline, and scope of work to be completed by the developer. Thus, unlike historical concessions – where large blocks of land were given in concession for decades, the modern concession agreement allows for some control over the management of the resources.

Production Sharing

A production sharing contract (PSC) allows a company to acquire rights for exploration and production. This is now the most common type of agreement in the oil industry. The state retains ownership, the oil company bears the risk of exploration, and the first, or cost, oil is allocated to the company to recover their investment. The balance (the profit oil) is split with the state – often in an 80/20 proportion (to the state).

Joint Ventures (JV)

Under a JV agreement, the state acquires interests in the exploration and production process. The state participation may be fixed by legislation or contract. Each partner contributes to the cost and shares in benefits or losses in proportion to their equity interest in the partnership.

Risk Service Contracts

Under these agreements, the international oil company searches for and extracts the oil at its own expense. The sale of the oil recovers their costs, and the host country retains the remaining oil. Profits are gained contractually by the oil company through interest payments or payment by the state to the oil company for their services.

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