1

FDI in the Energy Sector: Challenges for IIA negotiators

Dr. Joachim KARLChief, Investment Policy Research Section

UNCTAD

Workshop on the Role of Intergovernmental Agreements

in Energy PolicyGeneva, April 29, 2013

2

US$ 26 trillion will be required in the energy sector until 2030

Transmission and Distribution

50%

Power Generation

50%

Biofuels <1% US$0.2

Coal 3% US$0.7

Power 52% US$13.6

Oil 24% US$6.3

Gas 21% US$5.5

Refining 16%

Shipping4% Exploration

and Development

80%

Mining91%

Port and Shipping

9%

IEA: World Energy Outlook

Investment needs in the energy sector

3

Greenfield FDI in the energy sector, 2003-2011– The annual FDI flows continue to remain below pre-crisis peak

0

20

40

60

80

100

120

140

160

180

200

2003 2004 2005 2006 2007 2008 2009 2010 2011

Mining, quarrying and petroleum Coke, petroleum products and nuclear fuel Electric, Gas, and Water Distribution

UNCTAD Database

4

Factors that discourage FDI in the energy sector:

1. “Cash overhang” in TNCs

2. Resource nationalism among energy producing countries

3. Unstable political and legal environment

4. Deficiencies in the international policy framework

5. Local resistance to new investment projects6. Increasing investment costs

5

The dichotomy of investment policies in the energy sector

On the one hand, many countries seek to promote FDI in the energy sector in light of pressing investment needs;

On the other hand, many countries seek to keep control over natural sesources and a strategically important sector.

6

Policies with regard to FDI in the energy sector

The energy sector is more prone to State intervention than most other economic activities

0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Liberalisation/facilitation in energy sector

Restriction/Regulation in energy sector

Liberalisation/facilitation in all

sectors

Restriction/Regulation in all

sectors

Source: UNCTAD

7

Recent examples of new investment liberalisation and promotion measures

in the energy sector

Approval of large-scale foreign acquisitions; Relaxation of approval requirement for FDI in

subsoil resources; Privatisation of state-owned power generation and

gas distribution companies; Granting of incentives to investments in

unconventional energy resources.

8

Recent examples of new investment regulations and restrictions in the

energy sector

Tightened screening requirements; Expropriations and nationalizations;

Increases in taxes or royalties; Renegotiation of investment contracts;

Exit from nuclear energy.

9

International investment arbitration on the rise

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

50

100

150

200

250

300

350

400

450

500

Energy Disputes Other Disputes

Cumulative Energy Disputes Cumulative Number of Disputes

UNCTAD Database

10

Investment arbitration in the energy sector (I)

29%

2%

25%

44%

Power Generation Oil and Gas Distribution and Transmission Others

UNCTAD Database

11

Most FDI in the energy sector is covered by at least one type of IIAs

BITs: More than 2,800. However, most of them are limited to post-establishment protection.

Regional IIAs: Increasing in number and importance.

ECT: Broad coverage of all policy aspects. However, many important oil and gas producer countries are absent.

WTO (GATS, TRIMS): Cover (1) investment in services and (2) prohibit certain trade-related performance requirements.

12

Strengthening the development dimension of IIAs

Balancing the rights and obligations of states and investors

Managing the systemic complexity of the IIA regime

• Safeguarding policy space for sustainable development needs• Making investment promotion provisions more concrete and

consistent with sustainable development objectives

• Reflecting investor responsibilities in IIAs• Learning from and building on CSR principles

• Dealing with gaps, overlaps and inconsistencies in IIA coverage and content and resolving institutional and dispute settlement issues

• Ensuring effective interaction and coherence with other public policies and systems

1

2

3

How to balance private and public interests- A key challenge for IIA negotiators

13

Crucial policy issues for IIAs

Entry rights – yes or no? Need for reservations and exceptions? Respect clause – yes or no? Interpretation of fair and equitable treatment clause; Issue of indirect expropriation; Access to international arbitration; Promoting non-binding standards on investor behaviour, such

as the UN Global Compact, “Ruggie Principles”, ILO, OECD Guidelines, CSR codes.

14

UNCTAD’s Investment Policy Framework for Sustainable Development helps policymakers address

these challenges

Core Principles"Design criteria" for investment policies

and for the other IPFSD components

National investment policy guidelines

Concrete guidance for policymakers on how to formulate investment policies and regulations and on how to ensure their effectiveness

IIA elements: policy options

Clause-by-clause options for negotiators to strengthen the sustainable development dimension of IIAs

15

Thank you

For more information, please visit:

http:// www.unctad.orghttp://

investmentpolicyhub.org