Withdrawal Of Oil Companies From Nepal: Realistic interventions – Analysis

By: IPCS

June 24, 2012

By Pradeepa Viswanathan

In June 2012, Nepal witnessed the withdrawal of two oil companies – the US-based Texana Resources Company and the UK-based Cairn Energy. These companies withdrew from their allocated blocks in the Terai region citing bureaucratic hurdles and lack of cooperation from the government. Against this backdrop, this commentary attempts to answer two questions: what are the reasons behind the current withdrawal? And what does the withdrawal mean for Nepal’s investment environment in general and its petroleum exploration plans in particular?

Reasons behind the withdrawal

Both Texana and Cairn cite ‘force majeure’ – non-fulfillment of an obligation in the event of circumstances beyond the companies – as reason for their withdrawal. While, Texana wanted to transfer its holdings in Nepal to Canada-based Patriot Petroleum Corp, Cairn was not only lobbying the ministry for the entitlement of two blocks (Block 3 and 5) that Texana was planning to transfer, but also made requests for amending its work plan. Though Texana’s claim was acceptable as part of the signed agreement (Clause 64) as against Cairn’s claims which were labeled ‘legally not possible’, both companies took the decision to withdraw. Texana has also threatened Nepal with international arbitration for the settlement of its demands. The withdrawal may be seen as a pressure tactic used by both companies to get their demands accepted. Reports also suggest that the invitation of bids for blocks 8, 9 and 10 were made much to the discomfort of both these companies.

The rationale behind Cairn investing in Nepal was the gains it had made in Nepal’s neighbourhood. It, however, met with an unfavourable environment in the country manifested by restrictive policies and political instability. A small amendment in the policies could have prevented Cairn from withdrawing, especially since its commitment towards its investment in Nepal was much more prolific than that of Texana.

The Department of Mines and Geology (DMG) in Nepal has neither contested the reason given by these two companies nor has it stated its position on the issue. All we understand from the statement issued by the Director-General of DMG is that ‘explanations have been demanded from both these companies’.

Implications of the withdrawal

Nepal is a net importer of many commodities, including petroleum. The identification of petroleum blocks was a welcome relief in a country heavily dependent on petroleum imports and prone to shortages. After the announcement of the withdrawal, two sections within the Nepali media emerged. One section viewed the withdrawal as a setback to the country’s petroleum exploration ambitions, while the other saw it as a ‘possible victory for Nepal’.

Foreign cooperation, in the form of foreign direct investment, is required by Nepal for petroleum exploration as the country is both technically and financially incapable of conducting these activities on its own. The withdrawal may hinder the bidding for blocks 8, 9 and 10. On the other hand, the withdrawal of Cairn, which was holding more blocks than the permitted number of two, can now allow Nepal to be more stringent about this rule with the new companies that enter the country. Moreover, if Cairn had succeeded in claiming Texana’s holdings, a monopoly of Cairn energy in Nepal’s petroleum sector would have been created adding to the weakness of the state’s negotiating position.

However, when viewed from a wider perspective, it appears that the withdrawal has every possibility of having a negative impact on Nepal’s already plundering economy and the decreasing ratio of foreign investments in the country. The withdrawal coincides with the commencement of the Nepal Investment Year (NIY) 2012-2013, thereby adding to the woes of the government. Surprisingly, oil and gas exploration projects are restricted to the DMG and have not been brought under the purview of either the Ministry of Energy or the Investment Board. This suggests that the country’s officials are more concerned with the hydropower resources than hydrocarbons.

What lies ahead?

Through international arbitration, Texana seeks not only the recovery of the money it paid to Nepal towards rent and guarantee, but also compensation from Nepal for not processing the demand for the transfer of blocks. Although there are faults on both sides, arbitration may benefit Nepal since Texana had not paid the rent for the blocks for two years during the initial leasing out phase (1998 – 2002). Also, it could contribute to making the process much more transparent as compared to the current state of affairs.

The road ahead should envisage making the Petroleum Exploration Promotion Project (PEPP), set up in 1982, transparent by publicising information related to its activities and engaging with the real stakeholders – the people living in the region. The second step could be to rework Nepal’s petroleum regulation acts to rationalise them and make them both time-proof and immune to the political developments. The third, and most important, step should be the formation of political will to equate hydrocarbon resources with other resources that Nepal has, and aim at retaining and eventually increasing the level of investments made in that sector.

Pradeepa Viswanathan
Research Officer, IPCS
email: pradeepa@ipcs.org

Guess they didn't bribe those Politicians enough. lol !!  The prospect of future outside investment in Nepal was already bleak, now this pushes it to non-existent.  These politicians are more keen on pushing their own personal selfish  agenda's( get rich quick) rather than puting Nepal first. It is a shame..

We're always quick to jump into conclusions. Perhaps we should also see this problem from another angle.

http://www.myrepublica.com/portal/index.php?action=news_details&news_id=36451 Misadventures in oil exploration: Texana and Cairn in Nepal

KASHISH DAS SHRESTHA In most countries, oil companies don’t pack up and leave quietly. They have to be forced out. But in Nepal, Texana (American) and Cairn (Scottish) announced a self-imposed suspension of their oil exploration operations last week, citing “force majeure.” They have done this several times before. In response, segments of the Nepali media cited fairly unimpressive figures in oil royalty and declared these events as a loss for the country, and blamed the government for being business-unfriendly. Somehow, parts of the national media managed to enslave the country’s economy to a nonexistent petro-economy before a single barrel of oil has even been pumped out from Nepali territory. To most of the readers of that news, the entire affair must’ve come across as just another example of poor bureaucracy run by policymakers who can’t get anything right. But it’s worth rethinking the situation as a possible victory for Nepal. A brief history of Nepal’s oil exploration projects Started in 1982 as a World Bank initiative, the Petroleum Exploration Promotion Project (PEPP) was developed with the technical and financial assistance of the Bank. By 1985, almost 1/3rd of Nepal, that is, just about all the Terai region, had been divided into 10 blocks to be auctioned off for oil exploration to foreign countries. In 1986, Shell and Triton bought Block #10 in Eastern Nepal but abandoned its project soon when it didn’t strike any oil near Biratnagar. People in the project will argue now that Shell just didn’t drill deep enough. In 1992, 10 years after the project was initiated, its Completion Report was produced. Violation of Petroleum Act? In 1998, the Texas-based company Texana Resources signed a deal with the Nepali government for Blocks #3 and #5. The Petroleum Act that governs the Petroleum Exploration Promotion Project (PEPP) in Nepal stipulates a company may own only two of the 10 Exploration Blocks. Then, in 2004, came along Cairn Energy. The Scottish company had made it big after striking oil in India and bought Blocks #1, #2, #4, #6 and #7 in Nepal, three more than the Act permits. Last year, a representative of Texana explained briefly over the phone that he was unable to discuss the company’s stakes in Nepal and declined to comment further on the issue or respond to a follow-up email. It appears now the company had been trying to work out the transfer of their blocks to Canada’s Patriotic Petroleum Corp. However, Cairn had been trying to buy Texana’s blocks at least since 2007. This would have allowed Cairn to own seven consecutive blocks, leaving only three free. The Parliamentary Committee on Natural Resources and Means had shot down this proposal. Two attempts to contact Cairn’s communications officers in 2011 yielded no response at all. Still, Cairn as well as the officials involved in the case seems to already have violated the Act by allowing Cairn to own five blocks. Texana’s threats It has been reported that Texana is “considering international arbitration” charges against Nepal and has written to the Nepali Embassy in Washington DC and the American Embassy in Kathmandu. If anything, it portrays Texana as a flustered company playing the last defense strategy on the off chance that the Nepali government will feel pressured enough to process their requests. If Texana does actually pursue that legal path, it must be welcomed. Then, the Government of Nepal, and more importantly, the People of Nepal, must make sure the case is processed publicly. Let’s find out what all documents related to their deals in Nepal say, and let’s find out who would be paying for Texana’s legal fees. It would be just wonderful to finally have representatives of the illusive company stand before Nepal’s, or any, judiciary system and the Nepali public, or the world media, and answer questions regarding their operations, transactions, and presence in Nepal. Were the case to be filed in America, the right to information on the matter may become even easier, and the media glare possibly intense. The entire PEPP is one of the most opaque undertakings by Nepal. A handful of people designed it without consultations with any local stakeholders and communities. It is a project that will entirely serve the interests of foreign companies. The extraction- and mining-based projects are set on some of the most fragile and fertile regions of the country. Any legal battle regarding any of the deals would bring about the opportunity to finally open up the issue for public discourse. Should Texana be investigated? The U.S. Foreign Corrupt Practices Act (FCPA) can simply be defined as an Act that makes it illegal for American corporations to bribe foreign officials. The Obama Administration has actually managed to conduct several high-profile cases using this Act. Texana has been lobbying the Nepali government to push through its deal with Cairn for about a decade. In those years, there have been multiple turnovers of prime ministers and line ministers and other officials in the governments. Let’s make it official: Has Texana, and Cairn, ever engaged in any corruption in Nepal? Have conflicts of interests been overlooked for the sake of their business deals here? Let’s have the respective countries, where these companies are based, clear up this issue for the people of the country in which these companies have been working. The American Embassy in Nepal has been working tirelessly to improve American-Nepal business relations, and to help American companies to set up shop here. What better way to encourage all of this than to also say that the Government of the United States will not stand for American businesses engaging in corruption in Nepal. In fact, the onus might even be on the American Embassy in Kathmandu to encourage the relevant Department to ensure Texana has never violated the FCPA during its operations here. What loss? It is baffling that any news media would report the suspension of activities by Texana and Cairn as a loss of Nepal without looking at the issues in a larger perspective. It is even unfair to make such a suggestion without actually calculating what the loss could have been if those companies had succeeded in doing what they set out to do in Nepal: Find and extract crude oil. The Terai is Nepal’s breadbasket. Any seasonal fluctuation in production there can put Nepal’s food security at greater risk. The forests in the region serve not just Nepal’s interests but also help India by checking floods and maintaining water tables. Outside of the National Parks, Terai also serves as a critical South Asian ecological corridor for rare and endangered wildlife. Simply putting the entire Terai region on the global market for oil exploration has already put all of these elements in jeopardy. So, would ending the project be an actual long-term loss for Nepal? Must our economic growth be hinged on one of the most unsustainable and devastating forms of natural resource extraction and consumption? No country should have to cower down to foreign companies, especially the kind that suck out your natural resources, make great profits on it, and leave behind a trail of long-term ecological disasters, and in many cases, a socio-economic mess. It is absurd, and misguided, that a national daily would behave like an apologist for these companies because Nepal made it difficult for them to peacefully find and extract oil. Oil is coming out of Libya and going to the world. Oil is coming out of Sudan and going to the world. Oil is coming out of Nigeria and going to the world. To genuinely believe that these two companies are leaving Nepal because working conditions are not right might be slightly naïve and aloof. Texana has no use for its blocks except to sell them to a new buyer. Cairn is the only real buyer around. And Nepal Government is shopping for new buyers for the remaining three blocks in the east, which surely must irritate both Texana and Cairn. While Cairn made serious investments in Nepal, there is no evidence to suggest that Texana ever had the same commitment here. Cairn has a lot going on but Nepal may not really be on the top of their priority list. When Cairn came to Nepal, it was the new hotshot in the global oil exploration industry. Their standings in the industry may have changed a bit since. Last year, Cairn announced perhaps one of their largest projects yet: oil exploration and extraction in the Arctic Sea. The project turned into a massive controversy and an ego war between Greenpeace and Cairn. When Cairn failed to find oil there, it also turned into a fiscal loss and an embarrassment. In India, Cairn deals had come under government scrutiny and suffered major setbacks. And so last year, the company shifted its focus to more promising and lucrative oil and gas exploration projects in Sri Lanka. Digging into Nepali territory to find and extract oil is not in Nepal’s general interest – ecological, economical, or social. Developed countries are finding that it isn’t even in their real long-term interest to do this. If Nepal plays its cards right, it has the opportunity to become a serious producer and consumer of renewable energy, such as solar. Nepal’s long-term energy and economic future is not buried deep in its grounds. We need to stop looking down, and start looking up, and all around. Texana and Cairn might feel like they have had a misadventure in Nepal right now. But should things have gone as planned for their oil exploration projects, it could very well have become one of Nepal’s greater misadventures. Shrestha is a writer, photographer and a Policy Fellow at the Niti Foundation. You can follow him on Twitter @kashishds or email him at kashish@350nepal.org.

Most of the time people always blame nepali politicians who are always inept and corrupt to begin with, but the multi national companies aren't any less manupulative and greedy either.