Expropriation in the Energy Industry: Canada’s Crown Share
Provision as a Violation of International Law
Cecil J. Olmstead,* Edward J. Krauland**
and Diane F. Orentlicher***
This article considers several aspects of
Canada’s recent National Energy Program and
examines their legality under international
law. The authors focus on the controversial
“Crown Share” or “back-in” provision which
gives to the Canadian Crown the right to take
retroactively a twenty-five percent share of
existing exploration and production inter-
ests. The authors contend that this new
measure constitutes expropriation under in-
ternational law and is therefore subject to the
principle of customary international law re-
quiring prompt, adequate and effective com-
pensation for aliens affected. Since the Canada
Oil and Gas Act provides virtually no recom-
pense to foreign investors, the Crown Share
provision stands in violation of international
law.
Cet article examine divers aspects du Pro-
gramme energ~tique national en vigueur au
Canada A la lumi~re du droit international.
En particulier, les auteurs insistent sur ]a dis-
position ayant trait A la (Part de la Cou-
ronne o qui octroie r6troactivement A la
Couronne fed~rale une part de vingt-cinq pour
cent des intrets petrolier actuellement d6-
tenus dans les secteurs de la production et
l’exploration. Les auteurs soutiennent que cette
mesure 6quivaut A une expropriation sur le
plan international, et serait donc soumis au
principe de droit coutumier international qui
exige une compensation prompte, adequate
et efficace. Comme la Loi sur le ptrole et le
gaz ne pr~voit aucune indemnit6 r~elle pour
les investisseurs 6trangers, il faut conclure que
la disposition sur ]a < Part de la Couronne >>
constitue une expropriation contraire au droit
international.
*Member of the District of Columbia Bar, Vice-Chairman of the Executive Council of the
International Law Association and Associate Reporter, Restatement (Second) of the Foreign
Relations Law of the United States (1965).
**Member of the District of Columbia Bar.
***Member of the District of Columbia Bar.
McGill Law Journal 1984
Revue de droit de McGill
440
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Synopsis
Introduction
I. Background and Operation of the Canada Oil and Gas Act
A. Acquired Rights Prior to the Act
B. 50% Minimum Canadian Ownership and a 25% Crown Share
C. Effect of the Crown Share Provisions on Acquired Rights
II. The Canada Oil and Gas Act and International Law
A. Minimum Canadian Ownership as Discriminatory Treatment
B. NEP and Denial of Justice
C. The Crown Share Provisions as Expropriation under International
Law
1. The Crown Share Provisions as Expropriation
2. The Duty to Compensate under International Law
3. The Standard of Compensation
Conclusion
*
*
*
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
Introduction
The Canadian government’s announcement on October 28, 1980 of its
National Energy Program (NEP) sent a series of shock waves throughout
the international petroleum industry. This paper considers several of the
more controversial elements of the Program, notably the provisions for
retroactive Crown ownership, and examines their validity in light of relevant
international legal principles.
The NEP is a comprehensive program for restructuring Canada’s energy
industry and seeks to increase Canadian ownership and control of oil and
gas production to a minimum of fifty percent by 1990. When the Canadian
government published the broad outlines of the NEP in 1980, the Minister
of Energy, Mines and Resources explained the Program’s threefold objec-
tives: first, the NEP would promote Canada’s independence from the world
oil market by allowing Canadians “to seize control of their own energy future
through security of supply”) Second, the program would promote a bal-
anced distribution of the benefits of resource development between the less
populated provinces where the resources are found and the more densely
populated provinces, through a “petroleum pricing and revenue-sharing re-
gime that recognizes the requirement of fairness to all Canadians no matter
where they live. ‘ 2 Finally, the NEP would offer Canadians “the real op-
portunity to participate in the energy industry in general and the petroleum
industry in particular, and to share in the benefits of industry expansion”. 3
Pursuant to the NEP, the Canadian Parliament enacted the Canada Oil
and Gas Act,4 which amended Canada’s Oil and Gas Production and Con-
servation Act.5 Although the Act contained a host of new regulatory mech-
anisms designed to achieve the fifty percent Canadian ownership target by
IDepartment of Energy, Mines and Resources, The National Energy Program, 1980 (1980),
2 [emphasis in original].
21bid., 2 [emphasis in original].
31bid., 2 [emphasis in original]. For a general treatment of the Program, see also Mendes,
The Canadian National Energy Program: An Example of Assertion of Economic Sovereignty
or Creeping Expropriation in International Law (1981) 14 Vanderbilt J. Trans. L. 475.
4S.C. 1981, c. 81 [hereinafter referred to as the Act].
5S.C. 1968-69, c. 48.
McGILL LAW JOURNAL
[Vol. 29
1990,6 one element in particular attracted considerable attention from var-
ious observers, including the oil and gas industry. This was the automatic
reservation to the Canadian government of a twenty-five percent “Crown
share” in certain exploration, development and production interests in the
“Canada lands”. Under section 27 of the Act, the Canadian government
can “back-in ‘ 7 on all exploration and production fields, and on all of the
ownership interests in the oil found on those fields, including those fields
in the possession and control of foreign oil producers. The operation and
effect of the Act raise the serious question of whether the Crown share
provisions violate international law by expropriating the property of non-
Canadians without providing adequate compensation. Moreover, the op-
eration of the NEP also raises the question of possible discriminatory treat-
ment and a denial of justice under international law.
I. Background and Operation of the Canada Oil and Gas Act
A. Acquired Rights prior to the Act
Before considering the validity under international law of the Crown
share and other provisions, a review of the nature of the pre-existing rights
now subject to those provisions is both necessary and helpful. The pre-
existing rights were established pursuant to the Canada Oil and Gas Land
Regulations (“COGL Regulations”), 8 which have governed oil and gas ex-
ploration, development and production activities on the Canada lands since
6Various regulatory mechanisms in the NEP are designed to promote “Canadianization” of
the energy industry. These include: (1) limitation of production from Canada lands to a com-
pany or a group of companies that has a minimum of fifty percent Canadian ownership. See
Canada Oil and Gas Act, S.C. 1981, c. 81, ss 19-23; (2) adoption of various measures designed
to encourage and ensure Canadian participation in the energy industry, such as implementation
of a new system of grant incentives for oil and gas exploration and development available only
to enterprises with at least fifty percent Canadian ownership. See The National Energy Program,
1980, supra, note 1, 39-40; (3) adoption of measures designed to “[e]nsure that a high level of
Canadian goods and services is employed in oil and gas activities carried out on Canada Lands”.
See The National Energy Program, 1980, supra, note 1, 47.
7″Back-in” is simply a descriptive term referring to the Canadian government’s authority,
under section 27 of the Act, to acquire an interest in any existing exploration, development or
production interest on Canada lands by taking a twenty-five percent share of the existing interest
of lease or permit holders. The term apparently originates from a statement made during a
Parliamentary committee debate on the proposed legislation: “Back-in is a shorthand way of
saying that all of the interest holders have to move over proportionately to make some room
for the party [i.e., the Government] coming in”. See the remarks of D.G. Crosby in House of
Commons, Minutes ofProceedings ofthe Standing Committee on National Resources and Public
Works, No. 17 (21 January 1981) 19.
8C.R.C. (Consolidated Regulations of Canada) 1978, c. 1518, The Canada Oil and Gas Act,
S.C. 1981, c. 81, s. 62(1), provides that these regulations remain in force to the extent they are
consistent with the newAct and until they are revoked or replaced by regulations made pursuant
to the Act.
19841
EXPROPRIATION IN THE ENERGY INDUSTRY
443
1961. 9 Those interests included exploration agreements,’ 0 exploratory permits'”
and special renewal permits.’ 2 The COGL Regulations also provided for a
production interest in the form of an oil and gas lease.’ 3
Under these Regulations the holder of an exploration interest had an
exclusive and automatic right to obtain an oil and gas production lease with
respect to the lands covered by his exploration interest. 14 Without this legally
protected right, it is unlikely that costly exploration operations would have
been undertaken. Thus, holders of exploration interests were guaranteed
under law the exclusive right to obtain an oil and gas production lease for
up to one-half the land area included in the exploration interest,’ 5 and were
entitled to select the area for the production lease. 16 Unless the exploration
permit specified a different term, oil and gas leases were granted for 21
years,’ 7 renewable for additional 21 year periods.’ 8 Upon obtaining a pro-
duction lease, the holder could retain those portions of his exploration in-
terest not included in the oil and gas production lease.19 The production
9The COGL Regulations, C.R.C. 1978, c. 1518, were issued under the Public Lands Grant
Act, R.S.C. 1970, c. P-29, and the Territorial Lands Act, R.S.C. 1970, c. T-6. The basic provisions
of the COGL Regulations were unchanged between 1961 and 1982, with two exceptions relevant
to the interests affected by the Crown share provisions. First, provisions governing the scope
of a production lease based upon an earlier exploration interest evolved over time. Infra, note
15. Second, the COGL Regulations were amended in 1977 to establish a new exploration interest
the special renewal permit – which was available under conditions described infra, note
–
20. Neither of these changes affects the basic analysis of this article.
10COGL Regulations, C.R.C. 1978, c. 1518, ss 30-2.
“COGL Regulations, C.R.C. 1978, c. 1518.
‘ 2COGL Regulations, C.R.C. 1978, c. 1518, ss 116-7. The COGL Regulations also provide
for the granting of exploratory licences: ss 24-6. These licences confer no exclusive interests
with respect to Canada lands; they merely authorize licence holders to carry out preliminary
prospecting.
13COGL Regulations, C.R.C. 1978, c. 1518.
14COGL Regulations, C.R.C. 1978, c. 1518, ss 32(2), 35(1) and 54(1).
15COGL Regulations, C.R.C. 1978, c. 1518, ss 55(2) and 59(5). The original COGL Regu-
lations, promulgated in 1961, required exploration permit holders, prior to obtaining a pro-
duction interest, to surrender to the Crown one-half of the acreage covered by the permit. To
encourage unitary development of discovery fields, the Canadian government issued Land
Order No. 1-1961, which offered operators the option of paying a higher royalty in exchange
for an exemption from the surrender requirement. Land Order No. 1-1961 remained in effect
from 1961 until 1970, when it was revoked. SOR/70-184, Canada Gazette, Part 2, vol. 104,
No. 9, 13 May 1970.
16COGL Regulations, C.R.C. 1978, c. 1518, s. 55(1)
17COGL Regulations, C.R.C. 1978, c. 1518, ss 61 and 35(1). A shorter initial lease period
could apply if an exploratory permit specified a shorter term. This shorter term would, of
course, be determined and agreed to in the operator’s original interest and thus would not be
applied retroactively.
18COGL Regulations, C.R.C. 1978, c. 1518, s. 62.
19COGL Regulations, C.R.C. 1978, c. 1518, s. 60(2).
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[Vol. 29
interest entitled the holder to the full benefit of his production efforts, 20
subject to fulfillment of basic obligations such as the payment of rent 2′ and
a royalty.22
B. 50% Minimum Canadian Ownership and a 25% Crown Share
The acquired rights set out above, embodied in legal arrangements
between certain operations and the government, were significantly altered
by the enactment of the Canada Oil and Gas Act. Holders of exploration,
development and production interests created under the prior law are re-
quired to convert them into new interests. Under section 64 of the Act, the
owner of a lease, under which no oil or gas has been produced (other than
for test purposes), must negotiate an exploration agreement or agree to take
a provisional lease.23 Section 63 requires holders of exploration interests to
convert those interests into either an exploration agreement or a provisional
lease. These new interests include exploration and development rights, and
the exclusive right to obtain a production licence, 24 provided the holder, if
a corporation or a group of corporations, has at least a fifty percent Canadian
ownership rate. 25 Interest owners who fail either to enter into negotiations
for an exploration agreement or apply for a provisional lease forfeit their
2This statement requires a narrow qualification. Sections 116, 117 and 121 of the COGL
Regulations, C.R.C., 1978, c. 1518, reflect a 1977 amendment. Sections 116 and 117 authorize
certain permit holders, at their own option, to apply for a special renewal permit instead of
applying for a lease. If the permit holder exercised that option with respect to lands as to which
no declaration of significant discovery was in force, and the holder’s Canadian participation
rate was not more than 35 percent, Petro-Canada was entitled under section 121 to be granted,
at its option, an interest in the special renewal permit ranging from 10 to 25 percent. Companies
could avoid this result by applying for a production lease.
Petro-Canada’s right to acquire interests pursuant to section 121 of the COGL Regulations
was abrogated as of the date of the coming into force of the new Act. See the Canada Oil and
Gas Act, S.C. 1981, c. 81, s. 62(3).
21COGL Regulations, C.R.C. 1978, c. 1518.
22COGL Regulations, C.R.C. 1978, c. 1518, ss 85-87. Those obligations also include an
obligation to drill wells if ordered to do so by the responsible Canadian authority at any time
except during the three years following issuance of a lease: s. 88.
23Canada Oil and Gas Act, S.C. 1981, c. 81, s. 64(1).
24Canada Oil and Gas Act, S.C. 1981, c. 81, ss 9 and 68(1)(d). An additional modification
concerns the renewal period. Production licences created under the Act have ten year terms
(s. 25), while production leases created under the COGL Regulations typically had 21 year
terms.
25Canada Oil and Gas Act, S.C. 1981, c. 81, ss 68(l)(d) and 19(1). This also represents a
significant modification. The COGL Regulations made production interests available to all
corporations in which Canadians participated in financing. See COGL Regulations, C.R.C.
1978, c. 1518, s. 54(2)(i)-(ii).
In addition, the Act allows the Canadian government to establish terms that may be more
onerous than those characterizing the previous interests. See, for example, s. 10.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
445
rights to ihe government.26 Holders of leases under which oil or gas was
first produced (other than for test purposes) after December 31, 1980 but
before March 5, 1982, when the Canada Oil and Gas Act came into force,
are required to apply for a production licence under that Act. Failure to
apply within 90 days of the coming into force of the Act could lead to
surrender to the Crown of the Canada lands held under the lease.27 Only
one type of interest is exempt: an oil and gas lease, under which oil and gas
was first produced (other than for test purposes) before January 1, 1981, is
allowed to continue in accordance with its original terms.28 This exception
is a very narrow one, since the only Canada lands on which oil or gas was
first produced, other than for test purposes, before January 1, 1981 are the
Norman Wells, Pointed Mountain and Kotaneelee fields.
As enacted, section 27(2), the basic Crown share provision, operates as
a matter of law at the time when a new interest is obtained or an old interest
is converted, so as to reserve to the Crown a twenty-five percent share in
the new interest. Thus, with regard to existing interests, the Crown share
provision allows the Crown to acquire retroactively a portion of the private
interests and rights. This Crown share is a twenty-five percent “carried
interest”, which the Crown may convert to a “working interest” at any time
before and no later than thirty days after the government authorizes a system
for producing oil or gas from the relevant lands. 29
C. Effect of the Crown Share Provisions on Acquired Rights
The effect of the Crown share provisions of the Canada Oil and Gas
Act is to divest holders of production rights that were vested under the
earlier law. The Act transforms virtually all of those interests into new
interests and transfers twenty-five percent of the new interests to the Canadian
government. Companies which, prior to passage of the Act, expended large
26Canada Oil and Gas Act, S.C. 1981, c. 81, ss 63(2) and 64(2).
27Canada Oil and Gas Act, S.C. 1981, c. 81, s. 64(6). Production licences obtained under
this provision, like other interests created pursuant to the interest-conversion provisions of
the Act, are subject to the Crown share provisions discussed herein.
28Canada Oil and Gas Act, S.C. 1981, c. 81, ss 64(4) and 28. Additionally, the interest-
conversion provisions of the Act are expressly made inapplicable to the Norman Wells Agree-
ment of 1944: s. 64(5).
29Canada Oil and Gas Act, S.C. 1981, c. 81, s. 36(1). A “carried interest” is one whereby the
operator carries (i.e., pays) the expenses for exploration and development activities for another
participant in the project; a “working interest” would require each such participant to pay its
share of the expenses as incurred. Specifically, the conversion is effected by a “designated
Crown corporation”, to which the Crown share would have been transferred previously. Under
s. 36(1) this designated Crown corporation converts the carried interest to a working interest;
under s. 35 the Minister of Energy may order that Crown corporation to become “operator”
of the entire interest. If such an order is made, the corporation must make the conversion to
a working interest: s. 35(4).
McGILL LAW JOURNAL
[Vol. 29
sums on exploration activities, are denied one-quarter of the benefits of
their investment –
benefits which, protected under the prior legislative
regime, were reasonably expected to arise from significant capital expenditures.
Although the Canada Oil and Gas Act states clearly that its effect is to
displace vested rights, section 61 expressly disclaims any government re-
sponsibility to provide compensation for any loss:
61. (1) Subject to subsections 62(2) and 64(5), the interests provided for under
this Act replace all oil and gas rights or prospects thereof acquired or vested
in relation to Canada lands prior to the coming into force of this Act.
(2) No party shall have any right to claim or receive any compensation, dam-
ages, indemnity or other form of relief from Her Majesty in right of Canada
or from any servant or agent thereof for any acquired, vested or future right
or entitlement or any prospect thereof that is replaced or otherwise affected by
this Act, or for any duty or liability imposed on that party by this Act.
The Act contains one narrow exception to this provision. The Canadian
government must make payments only for certain expenses tied to pre-1981
exploration costs that directly contributed to the drilling of a discovery well
or that are associated with development of discovery fields. 30 Moreover, the
Act expressly disclaims any responsibility for exploration or other expenses
incurred before conversion of the Crown share to a working interest. 3′
II. The Canada Oil and Gas Act and International Law
As the Canada Oil and Gas Act represents a bold departure from the
pre-existing regime of oil and gas regulation, it is important to consider the
retroactive application of the new law to existing investments. While the
motives of the Canadian government in enacting the legislation are not to
30Canada Oil and Gas Act, S.C. 1981, c. 81, ss 29(2), 29(4), and 41(6). Section 29 provides
for the reimbursement of expenses incurred only by holders of a production licence “in relation
to which the original discovery of oil or gas was the result of a well on which drilling was
commenced on or before December 31, 1980 and that qualified to be declared a significant
discovery on or before December 31, 1982”: s. 29(4)(a).
31Canada Oil and GasAct, S.C. 1981, c. 81, s. 36(3). Since conversion to a working interest
can take place at any time during the 30 days after authorization of a production licence (see
supra, text accompanying note 29) virtually all of the exploration costs could be incurred before
the government converts its share to a working interest.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
447
be questioned, 32 the validity of this new legal regime under international
law should be the object of close examination. Investors interested in en-
tering the Canadian oil industry for the first time may be particularly con-
cerned with what might be unjustified or discriminatory treatment of foreign
investors and, moreoveg with possible future legislative changes which could
adversely affect acquired rights.
A. Minimum Canadian Ownership as Discriminatory Treatment
The fifty percent minimum Canadian ownership requirement of the
NEP must be considered against a backdrop of relevant international legal
principles. As noted above, under the new regime holders of duly converted
exploration agreements or provisional leases have an exclusive right to ob-
tain a production licence, provided that any such corporate holder is at least
fifty percent Canadian-owned. 33 At issue is whether refusal to grant pro-
duction licences to foreign-owned entities, merely on the basis of foreign
ownership, violates the principle of “national treatment”. This principle
32Some jurists have stated that “[i]t is an established principle of international law that every
state has the right to regulate the condition upon which property within its territory shall be
held and transmitted”. I. Foighel, Nationalization and Compensation (1964) 48. See also The
Panevezys-Saldutiskis Railway [1939] P.C.I.J., Series A/B, No. 76, 18; L. Oppenheim, Inter-
national Law, 81h ed. (1955) vol. 1, 286. This would suggest that a national government may
have considerable leeway to adopt a commercial policy and to enact laws that it deems necessary
to effectuate legitimate national objectives. Ibid., 287. H. Lauterpacht, International Law (1970)
22. The United Nations General Assembly has passed resolutions which assert:
the right of all countries, and in particular of the developing countries, to secure
and increase their share.. .in the advantages and profits derived [from their natural
resources] on an equitable basis with due regard to development needs and objec-
tives of the peoples concerned….
See e.g., G.A. Res. 2158, 21 U.N. GAOR Supp. (No. 16) 29, U.N. Doc. A/6136. Moreover,
the Declaration on the Establishment of a New International Economic Order, adopted in 1974,
recognized the sovereign right of a state to regulate the activities of multinational corporations
and to receive the benefits of modem science and technology. See G.A. Res. 3201, S-6 U.N.
GAOR Supp. (No. 1), U.N. Doc. A/9559 (1974). However, none of these resolutions goes so
far as to imply that such regulation can deviate from established principles of international
law. As Commissioner Nielsen stated in Neer and Neer (United States v. United Mexican
States) (1926) 4 R. Int’l Arb. Awards 60, 77:
Although there is this clear recognition in international law of the scope of sovereign
rights relating to matters that are subject of domestic regulation, it is also clear that
the domestic law and the measures employed to execute it must conform to the
requirements of the supreme law of members of the family of nations which is
international law, and that any failure to meet those requirements is a failure to
perform a legal duty and as such an international delinquency.
Thus, retroactive action which discriminates against aliens, or expropriation without com-
pensation, is not endorsed by these resolutions. See discussion in text, infra, Parts II(A) and
II(B).
33Canada Oil and Gas Act, S.C. 1981, c. 81, ss 19-23. See supra, Part I(B).
REVUE DE DROIT DE McGILL
[Vol. 29
entitles persons or entities of foreign nationality to the same type of legal
and regulatory treatment that is accorded to indigenous persons and entities
under similar circumstances. 34 Apart from treaty or “conventional” inter-
national law, 35 the principle of national treatment finds its roots in custom-
ary international law. The concept of “national treatment” is based on the
notion that aliens in foreign countries, outside the protection of their own
government, should be assured treatment before the law at least equal to
that accorded nationals.36 Although the principle of national treatment ad-
mits of certain exceptions, 37 it permits no discrimination with respect to
the protection of person and property. 38
Because the NEP’s fifty percent Canadian ownership requirement is
applied to all companies located in Canada, it may be argued that it is a
general enactment not directed at aliens. This position, however, is open to
serious attack given the express purpose of the NEP to divest foreign inves-
tors of their ownership interests in favor of enhanced Canadian participa-
tion. A more defensible position is that the retroactive application of the
minimum Canadian ownership requirement effectively discriminates against
aliens and therefore contravenes the principle of national treatment. Indeed,
by its very nature, the requirement cannot affect corporate holders that are’
already at least fifty percent Canadian owned. Moreover, the World Court
has stated that a general legislative enactment that has the purpose and
effect of discriminating against aliens violates the prohibition against dis-
34See, for example, Oppenheim, supra, note 32, 688.
35For example, the United States and other countries have negotiated a series of bilateral
commercial treaties (sometimes entitled Friendship, Commerce and Navigation Treaties or
Treaties of Amity) which provide for national treatment in the importation of goods, estab-
lishment of enterprises and freedom of commercial conduct. Some countries have also con-
cluded a number of bilateral investment protection treaties with developing and developed
nations alike. Although Canada and the United States have not entered into a bilateral com-
mercial treaty, the extensive and growing network of treaties demonstrates a predisposition by
governments toward the principle of national treatment as a method of safeguarding the in-
vestments and other commercial undertakings of entities or persons in foreign territories. See
the discussion of the network of treaties in note 107 and accompanying text, itfra. Moreover,
on 9 September 1983, President Reagan issued a statement which urged all countries to accord
national treatment to foreign investors in accordance with international law and the principle
of national treatment. See Office of the White House Press Secretary, Statement by the President
on International Investment Policy (1983) 4.
36Oppenheim, supra, note 32, 688.
37Ibid., 689. These would include the withholding of certain political rights to aliens, and
38lbid.
restrictions on certain types of employment or landholding.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
449
crimination. 39 In this regard, the NEP, both in terms of intent and effect,
is a discriminatory legislative regime.
Apart from customary international law, Canada’s obligation to accord
national treatment to alien investors arises from agreements with principal
allies to eliminate discriminatory treatment of foreign enterprises. In 1960,
twenty nations, including the United States and Canada, signed the Con-
vention which established the Organisation for Economic Cooperation and
Development (OECD).40 A major objective of this effort was to promote
the flow of capital between OECD member states and to eliminate measures
that are discriminatory or otherwise prevent international investment. 4′
On June 21, 1976, the then twenty-three OECD Member States, in-
cluding Canada, adopted a comprehensive Declaration on International In-
vestment and Multinational Enterprises. 42 This Declaration embraces the
principle of “national treatment”, whereby foreign-owned enterprises of one
member country, located in another member country’s territory, are to be
accorded treatment under the laws and regulations of that government that
is no less favorable than that accorded to domestic enterprises. Paragraph
II of the Declaration is specific:
Member countries should, consistent with their needs to maintain public order,
to protect their essential security interests and to fulfill commitments relating
to international peace and security, accord to enterprises operating in their
territories and owned or controlled directly or indirectly by nationals of another
Member country.. .treatment under their laws, regulations and administrative
practices, consistent with international law and no less favorable than that
accorded in like situations to domestic enterprises…. 43
Although the Declaration does not create binding obligations upon the
OECD member states, it is evident that those states are expected to eliminate
discriminatory treatment of foreign investors. Worth noting is that when
the Declaration was adopted, the Canadian delegate stated that “Canada
will continue to retain its right to take measures affecting foreign investors,
391n the case of Treatment of Polish Nationals [1932] P.C.I.J., Series A/B, No. 44, 4, 28, the
Court stated:
the prohibition against discrimination, in order to be effective, must insure the
absence of discrimination in fact as well as in law. A measure which in terms is of
general application, but in fact is directed against Polish nationals and other persons
of Polish origin or speech, constitutes a violation of the prohibition.
4012 U.S.T. 1728, T.I.A.S. 4891
(14 December 1960) [hereinafter cited as OECD
Convention].
41OECD Convention, arts 1-2.
42See OECD Committee on Foreign Investment and Multinational Corporations, Declaration
On International Investment and Multinational Enterprises, (21 June 1976) 20; reprinted at
(1976) 15 I.L.M. 967 [hereinafter cited as OECD Declaration].
431bid., para. 2.
McGILL LAW JOURNAL
[Vol. 29
which we believe are necessary…
.”,44 Whether this can or should be con-
sidered a reservation is unclear 45 Suffice it to say that since 1976, Canada
has joined with other OECD member countries in affirming “the continued
commitment of their governments to the 1976 Declaration”. 46 Furthermore,
the OECD Council, which can issue binding statements, 47 rendered a de-
cision which requires members to give notice of any actions taken which
constitute an exception to the general principle of national treatment.48 No
such notice has ever been given by Canada with regard to the NEP and the
fifty percent Canadian ownership requirement.
B. The NEP and Denial of Justice
As Section 61(2) of the Canada Oil and Gas Act denies any right or
claim to compensation, damages, or any other form of relief from the op-
eration of the Crown share,49 this raises an additional issue under inter-
national law, depending upon the interpretation given to its literal language.
On its face, section 61 precludes a foreign investor from exercising any
procedural rights or from seeking any form of compensation, injunction, or
other relief for the taking of an oil exploration or production interest.50 The
issue is whether such preclusion constitutes a “denial of justice” under
international law.
For some time, jurists and arbitral decisions have advanced the concept
of a “minimum standard of justice” under international law. Inherent in
“Department of External Affairs, Press Office, Statement: Notes for a Statement made by
the Secretary of State for External Affairs, the Honourable Allan J. MacEachen at the O.E.C.D.
Ministerial Meeting in Paris, June 21, 1976: Investment Issues and Guidelines for Multinational
Enterprises (1976) 2.
45The terms of the Declaration do not explicitly permit an OECD member country to deviate
from the national treatment standard on the basis of economic concerns or general welfare
considerations. The objectives of the NEP indicate that these are the predominant interests of
the Canadian government in the oil and gas industry. Thus, Canadianization of the oil and
gas industry would not appear to be necessary “to maintain public order, to protect.. .essential
security interests and to fulfill commitments relating to international peace and security…”
(OECD Declaration, para. 2). Moreover, the provision that treatment be at least “consistent
with international law” would seemingly prohibit discriminatory treatment that resulted in a
retroactive divestiture of acquired rights or property without appropriate compensation.
46See Communiqu6 of the Council Meeting at the Ministerial Level on 13-14 June 1979
relating to International Investment and Multinational Enterprises, excerpted in OECD, In-
ternational Investment and Multinational Enterprises (1979) 7.
47OECD Convention, art. 5.
48See OECD, Decision of the Council on National Treatment (1976) 15 IL.M. 978, 979;
OECD Council Document No. C(76)117 (21 June 1976).
49See supra, Part I(C).
5OEven the computation of ex gratia payments for exploration costs under Section 29 of the
Act does not appear to be open to challenge or modification through administrative or judicial
review.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
451
this concept is the notion that a state can be held responsible for a “denial
of justice” to an alien.51 As early as 1932, the term “denial of justice”
included both “cases of failure on the part of the legislature to provide a
legal remedy where, according to the ordinary standard of civilized coun-
tries, legal redress ought to be available, [and] a denial to a foreigner of
access to the court”. 52 Others have described a “denial of justice” as the
improper administration of civil and criminal justice as regards an alien,
including denial of access to courts, inadequate procedures and unjust de-
cisions. 53 Even in its narrowest interpretation, the concept of a minimum
standard of justice embraces the duty to provide access to an independent
judiciary.54
In cases concerning the valuation of expropriated property and the
payment of compensation, the denial of any form of relief or of judicial
review of the uncompensated taking could constitute a denial of justice. 55
Many countries typically provide both compensation for government tak-
ings as well as the opportunity to seek review of the award. Even in the
case of the Chilean copper mine expropriations, the Chilean government
afforded those affected by the taking the opportunity to have any decision
regarding compensation reviewed by a special tribunal. While the purpose
of this paper is not to pursue this analysis in detail, it is submitted that
Section 61 of the Canada Oil and Gas Act is at least open to attack on
grounds of denial of justice. Implementation of the apparent restrictions of
section 61 would result in an obvious denial to foreign investors of tradi-
tional forms of access to justice.
5’One ofthe more notable arbitral decisions to discuss this type ofliability under international
law was B.E. Chattin (U.S.A.) v. United Mexican States (United States v. Mexico) (1927) 4 R.
Int’l Arb. Awards 282. In that decision Commissioner Van Vollenhoven found that the Mexican
system of criminal justice, as applied to aliens, was “far below international standards”, and
that the treatment of the alien amounted “to an outrage, to bad faith, to wilful neglect of duty”.
The tribunal recited numerous instances ofproforma proceedings, ineffective legal assistance
or procedures, and the absence of necessary investigative actions to confirm the charges.
2Fitzmaurice, The Meaning of the Term “Denial of Justice” (1932) 12 Brit. Y.B. Int’l L. 93,
104.
Injuries to Aliens (1961) 55 Am. J. Int’l L. 548, 550-1, arts 6-9.
53See, e.g., Sohn & Baxter, Draft Convention on the International Responsibility of States for
54See, for example, C. Amerasinghe, State Responsibility for Injuries to Aliens (1967) 98-9;
F. Garcia-Amador, L. Sohn & R. Baxter, Recent Codifications of the Law of State Responsibility
For Injuries to Aliens (1974) 180.
55See Brower, “The Future of Foreign Investment – Recent Developments in the Inter-
national Law of Expropriation and Compensation” in Southwest Legal Foundation, Sympos-
ium on International Business: Private Investors Abroad (V. Cameron, ed., 1975) 93, 152.
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[Vol. 29
C. The Crown Share Provisions as Expropriation under International Law
1. The Crown Share Provisions as Expropriation
There is little doubt that the Crown share provisions constitute a form
of taking of existing, legally protected rights. To decide whether the pro-
visions constitute an expropriation for the purpose of international law, it
is necessary to determine whether the rights affected by the Canada Oil and
Gas Act constitute property rights which are accorded protection under
international law. Perhaps most telling in this regard is the Act itself, which
recognizes that interests subject to operation of the Crown share provisions
include “acquired” and “vested” rights in Canada lands. 56 International
tribunals have consistently held that the duty to compensate, which is con-
sidered in greater detail below, applies to property interests that “have the
character of acquired rights”. 57 It has also been recognized that “the principle
of respect for vested rights… forms part of generally accepted international
law”.58
International arbitrators have, moreover, given broad effect to the rule
of international law protecting acquired and vested rights. Arbitral awards
frequently refer to the international rule of compensation as covering “prop-
erty rights and interests”, 5 9 and arbitrators have emphatically rejected efforts
to confine the operation of the rule to takings of physical property. 60 Sim-
ilarly, it is generally recognized that patents are a type of property6′ that
can be the object of an expropriation with a concomitant duty to compen-
sate. Thus, the view has developed that the taking of an alien’s intangible
property rights, just as with the taking of physical property, triggers the
obligation under international law to provide compensation. “[A]ccording
P.C.I.J., Ser. A, No. 7, 42.
56Canada Oil and Gas Act S.C. 1981, c. 81, s. 61.
57See, for example, Saudi Arabia v. Arabian American Oil Company (1958) 27 I.L.R. 117,
168; see also Sapphire International Petroleums Ltd. v. National Iranian Oil Company (1963)
35 I.L.R. 136, 184 [hereinafter Sapphire Arbitration] “the respect for acquired rights… is un-
doubtedly one of the general principles of law recognized by international tribunals.”
58Certain German Interests in Polish Upper Silesia (Merits) (Germany v. Poland) [1926]
59See, for example, Factory at Chorzow (Merits), (Germany v. Poland) [1928] P.C.I.J., Ser.
A, No. 17, 46; BP Exploration Co. (Libya) v. Government of the Libyan Arab Republic (Merits)
(1974) 53 I.L.R. 297, 329.
60See, for example, Norwegian Shipowners’ Claims (Norway v. United States) (1922) 1 R.
Int’l Arb. Awards 307, 334. See also Starrett Housing Corp. v. The Islamic Republic of Iran
[1983] Iran. Assets Lit. Rep. 7,685 (Award No. ITL 32-24-1), (the Tribunal held that the
“property” interests that had been taken included the physical plant as well as the rights to
manage the project, to complete the project construction and to collect proceeds from the sale
of the apartments being constructed).
6 1See S. Ladas, Patents, Trademarks and Related Rights: National and International Protec-
tion (1975) 11-3; M. Bogdan, Expropriation in Private International Law (1975) 71.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
453
to a great array of diplomatic and judicial cases and the great majority of
authors, [the concept of property] comprises rights as well as tangible prop-
erty”, such as rights arising from concession agreements.62 “[T]he loss of
anything of value may be deemed a loss of property and prima facie to be
restored or to be the subject of compensation.” 63 In its definition of “prop-
erty” subject to the international rule of compensation, the Restatement
(Second) of Foreign Relations Law of the United States (1965) includes in-
tangible property,64 “interests” in property that have a reasonably ascer-
tainable value,65 partial interests in property,66 and the benefits of an interest
in property.67 In short, the great weight of scholarly opinion endorses the
views that property protected under international law includes assets both
tangible and intangible in nature.
Furthermore, there can be no doubt that the Crown share taking con-
stitutes an expropriation. During the post-World War II period, international
tribunals frequently concluded that nationalizing governments were obliged
to provide compensation for acts that adversely affected property rights
similar to those subject to nationalization under the Canadian Crown share
provisions. For example, arbitrators consistently described the abrogation
of concession rights during a process of nationalization as an expropriation
of property.68 The concession rights recognized as being protected in these
decisions are essentially the same as the interests subject to the Crown share
provisions. Under a concession agreement, the government typically grants
to the concessionaire for a specified term “certain rights relating to the
exploitation of the public domain, such as mining or mineral rights over
state property”. 69 “A particular concession may be found to be essentially
62Herz, Expropriation of Foreign Property (1941) 35 Am. J. Int’l L. 243, 244-5.
63See B. Wortley, Expropriation in Public International Law (1959) 8-12.
64American Law Institute, Restatement (Second) of Foreign Relations Law of the United
States (1965) 191. While cast as a restatement of United States law, the Restatement approach
is to articulate rules of general international law and indicate how the United States adheres
to and applies that law.
65Ibid.
661bid., 192, Comment c. Thus, the mere fact that only twenty-five percent of exploration
and production interests is taken does not make operation of the Crown share provisions any
less a “taking” under international law.
67Ibid., 192.
68See, for example, Libyan American Oil Company v. Government of the Libyan Arab Re-
public (1977) reprinted in (1982) 20 I.L.M. 1, 53: “Concession rights, as those of the present
dispute, may be included under the class ofincorporeal property”; see also SapphireArbitration,
supra, note 57, 183-4: “[T]he respect for rights acquired under concessions is only one aspect
of the respect for acquired rights, with is undoubtedly one of the general principles of law
recognized by international tribunals”; U.S. v. Guatemala (1930) 2 R. Int’l Arb. Awards 1080,
1097 [hereinafter Shufeldt Claim]: concession creates property rights protected by international
law.69G. White, Nationalisation of Foreign Property (1961) 83.
McGILL LAW JOURNAL
[Vol. 29
a licence from the State to carry on certain activities…
.- 70 The same
characteristics were present in the exploration, development and production
interests created under the COGL Regulations. Interest holders under the
Regulations were granted acquired rights for a specified term of years. Thus,
existing authority reinforces the position that the rights and interests affected
by the Crown share provisions constitute property protected by international
law against expropriation. 7′
The Canadian government, moreover, would be hard-pressed to sustain
a claim that it is making proper use of its taxing authority, or that the Crown
share provisions merely amount to a justifiable “creeping” expropriation.
A taxation provision typically exacts a portion of the revenues or profits of
an enterprise,72 whereas the Crown share provisions create a form of state
ownership. 73 Furthermore, taxation in Canada is administered by the Min-
ister of National Revenue, 74 whereas the Department of Energy, Mines and
Resources governs all aspects of oil and gas exploration and development
in Canada. Notably, the twenty-five percent Crown share is to be vested in
a “designated Crown corporation”, which is most likely to be Petro-Canada,
a Crown corporation created under the auspices of the Department of En-
ergy, Mines and Resources. 75 In any event, an attempt by the government
70Ibid., 84.
71Some authorities have taken the view that if an alien’s right is recognized as property by
the law of the country where the right is located, and that concept of property is more extensive
than that recognized under international law, then compensation is due when that alien “is
subjected to expropriatory measures which infringe the law in force at the time of the acquisition
of his property.” See, for example, International Law Commission, Fourth Report [1959] 2
Y.B. Int’l L. Comm’n 1, 18-19, U.N. Doc. A/CN.4/119, quoted in M. Whiteman, Digest of
International Law (1967) vol. 8, 1098. The conclusion that the acquired rights affected by the
Crown share provisions are entitled to protection under international law is not altered by the
1977 amendment to the COGL Regulations. This amendment allowed Petro-Canada to obtain
a partial interest in certain special renewal permits. Thus it merely created a new right –
the
right to obtain a special renewal permit subject to a possible interest held by Petro-Canada –
and did not diminish existing rights. Indeed, the 1977 amendment states that it creates “ad-
ditional rights”: COGL Regulations, C.R.C. 1978, c. 1518, s. 114. Moreover, the decision to
obtain a special renewal permit resided with the applicant, and was purely voluntary in nature.
In other words, foreign interest holders were free to choose the special renewal permit with
full knowledge that Petro-Canada would receive a partial interest if that choice were made.
Thus, the Canadian government could not be charged with expropriating an existing interest.
72See, for example, Income Tax Act, R.S.C. 1952, c. 148, as amended, s. 3 (tax on annual
income); Customs Tariff, R.S.C. 1970, c. C-41, s. 8 (ad valorein taxation); Excise TaxAct, R.S.C.
1970, c. E-13, s. 10 (tax on amounts payable).
73Canada Oil and Gas Act, S.C. 1981, c. 81, ss 27 and 31. The Crown share is reserved to
the Minister of Energy, Mines and Resources on behalf of Her Majesty in right of Canada (s.
27), and may be transferred to a designated Crown corporation (s. 31).
74See, for example, Incone Tax Act, R.S.C. 1952, c. 148, as amended, s. 220(1); Customs
Tariff, R.S.C. 1970, c. C-41, ss 2, 15-20; Excise Tax Act, R.S.C. 1970, c. E-13, s. 2; Estate Tax
Act, R.S.C. 1970, c. E-9, s. 62.
75Petro Canada Act, S.C. 1974-75-76, c. 101.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
455
to use its regulatory or tax powers “for the purpose of depriving an alien
of his property” would also amount to a taking under international law.76
It is also of no import that the expropriation is only partial. The Crown
has reserved to itself a twenty-five percent interest in each right created
under the Canada Oil and Gas Act and has refused compensation. Such a
reservation is identical to “classic” expropriation in that property is taken
and no compensation is to be paid. Nor can it be argued, on the ground
that foreign investors can sell their interests, that this form of taking does
not amount to “compulsory” expropriation. Should the foreign-owned en-
terprise sell its acquired rights under the law of Canada, or should the
shareholder decide to divest himself of his interest, experience indicates that
it would be at a significant loss precisely because of the Crown share re-
quirement. 77 Further, this alternative would mean relinquishing rights to
future profits and failing to recoup past expenditures. Therefore, the foreign-
owned enterprise or foreign investor is faced with either a loss through a
sale or a loss through the direct taking by the Crown of a twenty-five percent
interest.
Finally, it is well settled that a state cannot escape liability or respon-
sibility under its international legal obligations by enacting inconsistent
municipal laws. 78 The mere fact that the Canadian Parliament has enacted
a national policy inconsistent with its international legal responsibilities is
of no consequence; Canada remains obligated under international law.79
2. The Duty to Compensate under International Law
The question is now whether the taking effected by the Crown share
provisions violates international law. As a general rule the taking of an
alien’s property without provision for just compensation is wrongful under
76Sohn & Baxter, Draft Convention on State Responsibility, supra, note 53, 553 (art. 10).
77The NEP had a depressing effect upon the value of interests held by non-Canadians. Im-
mediately following announcement of the NEP, the share prices for firms with clear majority
foreign-ownership dropped sharply. (Information based on comparison of Toronto Globe and
Mail closing prices for 16 October 1980 and 31 December 1980, Toronto Stock Exchange).
78Oppenheim, supra, note 32, vol. 1, 37, 350. “It is a well-established principle that a state
cannot invoke its municipal legislation as a reason for avoiding its international obligations.”
See also G. Schwarzenberger, A Manual of International Law, 5th ed. (1967) 48-9; Vienna
Convention on the Law of Treaties, U.N. Doc. A/Conf. 39/27 (23 May 1969) art. 27; Advisory
Opinion on Southwest Africa [1971] I.C.J. 16, 47.
79See Texas Overseas Petroleum Co. v. Government of the Libyan Arab Republic (Merits)
(1977) 17 I.L.M. 3, para. 75 (“the act of a state which is irregular internationally cannot be
affected by its legal character under municipal law within which the state acted.”) [hereinafter
cited as TOPCO Arbitration]; Free Zones of Upper Savoy [1932] P.C.I.J., Ser. A/B, No. 46,
508, 561 (“it is certain that France cannot rely on her own legislation to limit the scope of her
international obligations”).
REVUE DE DROIT DE McGILL
[Vol. 29
international law, even if the taking does not otherwise violate international
law.80 The duty of a State to pay compensation for an expropriation under
international law is derived from the traditional principle of according in-
ternational protection to the acquired rights of aliens.81 Moreover, this duty
has also been recognized as a corollary of the basic theory of justice that a
state should pay for what it takes. 82 This principle is accepted in virtually
8oSee American Insurance Group, Inc. v. The Islamic Republic of Iran [1983] Iran. Assets
Lit. Rep. 7,744,7,478 (Award No. 92-2-3); Banco NacionalDe Cuba v. ChaseManhattan Bank,
658 E 2d 875 (2d Cir. 1982); Domke, Foreign Nationalizations (1961) 55 Am. J. Int’l L. 555,
603; G. Von Glahn, Law Among Nations, 3rd ed. (1976) 233-4. Some writers have suggested
that restrictions on the use of economic assets and opportunities to invest are not compensable
takings even if they result in a loss of profits for the affected entity. See H. Steiner & D. Vagts,
Transnational Legal Problems (1976) 488-90. For example, takings of property that result from
tax laws or government regulations for the public order and welfare may not be viewed by
some as compensable takings. See Draft Convention on the International Responsibility ofStates
for Injuries to Aliens, Article 10(5), supra, note 53, 554. In Kugele v. Polish State (1932) 6 Ann.
Dig. 69 (Upper Silesian Arbitral Tribunal), it was held that government taxation which forced
the closing of a company did not constitute a compensable taking. Moreover, it is generally
accepted that a sovereign can confiscate the property of those who commit unlawful acts without
incurring liability under traditional notions of expropriation and compensation. S. Friedman,
Expropriation in International Law (1953) vols 1-2; Kugele v. Polish State, supra.
However, the key factor is either (I) that the State is taking action to enforce its criminal or
civil laws, or (2) the taking is an indirect and remote result of otherwise legitimate governmental
regulation taken to advance the public welfare without an intent to expropriate. The Canadian
NEP does not fall within these strictures since it is a direct taking of property with the very
purpose of divesting foreign ownership in favor of nationals. Furthermore, there is increasing
support for the notion that regulation of economic opportunity or property rights which in-
terferes significantly with ownership or results in significant loss of value is tantamount to an
expropriation. See Steiner & Vagts, supra, note 80, 490-92; Creel, Mexicanization: A Case of
Creeping Expropriation, (1968) 22 Sw. L.J. 281; Weston, “Constructive Takings” Under Inter-
national Law: A Modest Foray Into the Problem of Creeping Expropriation (1975) 16 Va J.
Int’l L. 103. In some instances, state regulation has been considered a defacto expropriation
subject to the rules of international law. G. Schwarzenberger, Foreign Investments and Inter-
national Law (1969) 91-102.
8 Early international judicial decisions examined the obligation of states to pay compensation
for expropriated property. See Factory at Chorzow (Merits) (Germany v. Poland) [ 1928] P.C.I.J.,
Ser. A., No. 17, 47; Oscar Chinn Case (United Kingdom v. Belgium) [1934] P.C.I.J., Ser. A/
B, No. 63, 81; Certain German Interests in Polish Upper Silesia (Merits), supra, note 58; Anglo-
Iranian Oil Co. (Merits) (United Kingdom v. Iran) [1952] I.C.J. 93, 159-60 (per Carneiro J.,
dissenting).
82But see Florence Mining Co. v. Cobalt Lake Mining Co. (1909) 18 O.L.R. 275, 279 (C.
A.), aff’d (1910) 43 O.L.R. 474 (P.C.). (“The prohibition ‘Thou shall not steal’ has no legal
force upon a sovereign body and there would be no necessity for compensation to be given”).
Indeed, in contrast to the United States and Australia, Canada has no explicit constitutional
guarantee that there be compensatioh when the federal government expropriates private prop-
erty. See Hogg, Constitutional Law of Canada (1977) 397; B. Laskin, Canadian Constitutional
Law, 4th ed., 1975, 537-8. Of course, a state cannot exonerate or exempt itself from its inter-
national obligations by way of conflicting or inconsistent national laws or obligations. See
supra, note 78, and accompanying text.
19841
EXPROPRIATION IN THE ENERGY INDUSTRY
457
all legal systems.83 Indeed, it has been observed that “[t]his obligation [to
compensate] has now become a principle of customary international law.”’84
Some international arbitration tribunals have referred to the rule as being
“axiomatic”, 85 and publicists have commented that “[t]he duty of a gov-
ernment to compensate in case of nationalization is almost universally
recognized.
’86
Several theoretical bases for the international rule have been identified.
Some attribute the rule to the need to prevent a state that has taken the
property of an alien from being unjustly enriched. 87 Unjust enrichment
formed the basis of the arbitral award in Lena Goldfields, Ltd. v. Government
of Russia.88 Moreover, failure to compensate an alien whose property has
been taken is said to be an abuse of a government’s power to expropriate.8 9
83See, for example, Benvenuti et Bonfant v. Peoples’Republic of the Congo, (1980) 21 I.L.M.
740, 758: “[The] principle of compensation in the event of nationalization is in accordance
with the Congolese Constitution and is one of the generally recognized principles of interna-
tional law as well as of equity.” See also, Foighel, supra, note 32; B. Wortley, Expropriation
in Public International Law (1959) 12; Mintz, “An Economic Analysis of International Ex-
propriation of Property”, in R. Lillich, The Valuation of Nationalized Property In International
Law (1973) vol. 2, 18.
84State Responsibility, Summary Records of the Eleventh Session [1959] 2 Y.B. Int’l L. Comm’n
1, 18, U.N. Doc. A/CN.4/119/1959. See also the David Goldenberg Case (Germany v. Rou-
mania) (1949) 2 R. Int’l Arb. Awards 903, 909, wherein the Tribunal noted: “if international
law authorizes a State, for motives of public utility, to derogate from the principle of respect
for the private property of aliens, it is on the condition sine qua non that the expropriated or
requisitioned property will be paid for as quickly as possible” [translated].
s5″It is axiomatic that acts of government in depriving an alien of his property without
compensation impose international responsibility.” De Sabla Claim (United States-Panama
Claims Comm’n 1933) [1933-1934] Ann. Dig. 241, 243. See also Anglo-Iranian Oil Co. Case
[1952] I.C.J. 93, 159-60 (Carneiro J., dissenting rejurisdiction); Upton Case (U.S. v. Venezuela)
(1903) 9 R. Int’l Arb. Awards 234, 235. (“The seizure of the launch may have been justified
by the necessities of the state, but it was a taking of private property for public use and involved
the obligation of just compensation to the owner.”); Norwegian Shipowners’ Claims (1922) 1
R. Int’l Arb. Awards 307, 334 (involving the taking of private contracts, “just compensation
is due.. .based upon the respect for private property.”); Delagoa Bay & East African Railway
(Great Britain and United States v. Portugal) (1900), summarized in M. Whiteman, Damages
in International Law 1694-1703 (1943) vol. 3; Palestine Railway Case (France v. United King-
dom) (1922), summarized in Wetter & Schwebel, Some Little-Known Cases on Concessions
(1964) 40 Brit. Y.B. Int’l L. 183, 222; Benvenuti et Bonfant v. People’s Republic of the Congo,
supra, note 83.
86See, for example, Domke, supra, note 82, 603. See also Wortley, supra, note 83, 152-3.
87See McNair, The Seizure of Property and Enterprises in Indonesia (1959) 6 Nederlands
Tijdschrift voor International Recht 219, 240; also quoted in M. Whiteman, Digest ofInter-
national Law (1967) vol. 8, 1035.
88(1929-30) 1 Ann. Dig. 426 (No. 258).
89See Whiteman, supra, note 87, 1033-4, where the author discusses the Fifth Report on
International Responsibility [1960] 2 Y.B. Int’l L. Comm’n 42, 60, U.N. Doc. A/CN. 4/125
(Garcia-Amador, Special Rapporteur).
McGILL LAW JOURNAL
[Vol. 29
Whatever theory is relied upon to explain the duty to provide com-
pensation, the existence of the duty itself is firmly established in interna-
tional law. The obligation is not affected by recent United Nations General
Assembly Resolutions reaffirming the sovereignty of nations over their re-
sources. While these Resolutions may appear to cast uncertainty upon the
traditional view of the duty to compensate, such developments have not
altered Canada’s duty90 to compensate foreign investors adversely affected
by the Crown share provisions. Indeed, the Canadian positions taken on
these Resolutions confirm this obligation.
In 1962 the General Assembly adopted Resolution No. 1803 (XVII),
“Permanent Sovereignty Over Natural Resources”, which recognized and
reinforced the strict duty to compensate. 91 Paragraph four provided that
“Nationalization, expropriation or requisitioning [of property requires] ap-
propriate compensation, in accordance with the rules in force in the State
taking such measures in the exercise of its sovereignty and in accordance
with international law.”92
While two subsequent Resolutions possibly shifted away from the tra-
ditional view,93 the more significant Declarations were adopted in 1974. On
May 1, 1974, the General Assembly adopted, without a vote, Resolution
9Nor, it could be observed, have these developments altered any nation’s duty under in-
ternational law to provide compensation.
91Ten years earlier, on 21 December 1952, the General Assembly had adopted Resolution
No. 626 (VII), “Right to Exploit Freely Natural Wealth Resources”, which recognized that all
nations can freely “use and exploit their natural wealth and resources wherever deemed de-
sirable by them for their own progress and economic development”. G.A. Res. 626, 7 U.N.
GAOR Supp. (No. 20), U.N. Doe. A/2361 (1952) 18. The United States objected to this
resolution since it failed to recognize the rights of private investors under international law to
hold and acquire property.
92G.A. Res. 1803, 17 U.N. GAOR Supp. (No. 17), U.N. Doc. A/5217 (1962) 15 [emphasis
added].
93
0n 25 November 1966, the General Assembly passed Resolution No. 2158 (XXI), “Per-
manent Sovereignty Over Natural Resources”. The United States abstained. See G.A. Res.
2158, 21 U.N. GAOR Supp. (No. 16), U.N. Doc. A/6316 (1966). Although the Resolution
reaffirmed Resolution 1803 (XVII), it failed to address directly the limitations under inter-
national law on states to increase their share in the advantages and profits derived from the
exploitation of natural resources.
When the General Assembly voted Resolution No. 3171 (XXVIII) on 17 December 1973,
sixteen nations abstained, including ten West European nations and the United States. This
resolution represented a somewhat radical departure inasmuch as it stated the “principle of
nationalization.. .implied that each State is entitled to determine the amount of possible com-
pensation and the mode of payment, and that any disputes which might arise should be settled
in accordance with the national legislation of each State carrying out such measures”. G.A.
Res. 3171, 28 U.N. GAOR Supp. (No. 30), U.N. Doc. A/9030 (1973) 52. This language not
only suggested a departure from established rules of international law regarding the standard
of compensation but also seemed to question the right and the amount of compensation. See
infra, text accompanying note 95 and following.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
459
3201 (S-VI), the “Declaration on the Establishment of a New International
Economic Order”. 94 The Declaration noted the widening gap between de-
veloped and developing nations and, without any mention of the require-
ment of compensation, stressed the sovereign right of each nation to nationalize
its natural resources. Further, all nations that suffered from colonial dom-
ination had the right “to restitution and full compensation for the exploi-
tation and depletion” of their natural resources. That no vote was taken,
however, seriously eroded the influence or relevance of the Resolution re-
garding the development of rules of law, and suggests that ideological mo-
tivations rather than legal considerations may have been decisive.
On December 12, 1974, the General Assembly adopted Resolution No.
3281 (XXIX), the “Charter of Economic Rights and Duties of States”. 95
Article 2(c) of the Charter pays little heed to the laws of expropriation as
developed over time; rather, it provides that any nation could freely expro-
priate foreign property “in which case appropriate compensation should be
paid.. .taking into account [the nation’s] relevant laws and regulations and
all circumstances that the State considers pertinent. ‘ 96 Were such a provi-
sion to be considered binding, the obligation to provide compensation would
admittedly be less strict.
The question is whether these recent developments have altered Canada’s
obligations. It can be seen that the Canadian government has consistently
supported expressions of international law to the effect that states must
provide compensation when they take the property of aliens. Canada voted
in favour of Resolution 1803,97 thereby endorsing the rule that compen-
sation must be provided in “accordance with international law”. 98
In General Assembly debate on the proposed U. N. Charter ofEconomic
Rights and Duties of States, Canada specifically objected to the wording of
Article 2(c) and therefore abstained. The objection was based upon the
realization that the proposed article failed to provide for a duty to com-
pensate in accordance with international law. The Canadian position was
later stated clearly:
Canada.. .did take the view that, when a host state takes measures against
foreign investment, it should not discriminate against foreign investment from
one country in relation to foreign investment from other sources, and the
94G.A. Res. 3201, S-6 U.N. GAOR Supp. (No. 1), U.N. Doc. A/9559 (1974).
95G.A. Res. 3281, 29 U.N. GAOR Supp. (No. 31), U.N. Doc. A/9631 (1974) 52.
96Ibid. [Emphasis added].
97While not of a binding nature and not law-making instruments, United Nations General
Assembly resolutions can reflect the view of international law of the countries that support
them. See TOPCO Arbitration, supra, note 79, paras 83-8.
93Supra, note 92, 15.
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measures which it applies to all foreign investment should be in accordance
with its international obligations.
…The Canadian position was not only that the right of nationalization was
conditional upon payment of compensation, but that the whole of Article 2
was defective because of the absence of any reference in the Article to the
applicability of international law.99
It is evident, then, that Resolution No. 3281, adopted in 1974, does not
affect Canada’s obligation under international law to provide compensation.
If anything, the reasons for Canada’s abstention confirm these obligations.
In any case, U.N. General Assembly Resolutions are not sources of inter-
national law. Indeed, a recent international arbitral decision concerning the
duty to compensate explicitly rejected the argument that these resolutions
had created a new customary rule of expropriation and compensation under
international law.’ 00
The United States government has also consistently endorsed the rule
of international law requiring compensation for the expropriation of the
property of aliens. The United States supported U.N. Resolution 1803, and
has opposed all later efforts to dilute its force. The position of the United
States, viewed as consistent with international law, was stated in 1940 by
Secretary of State Hull in a note to the Mexican Ambassador: “the right to
expropriate property is coupled with and conditioned on the obligation to
make adequate, effective and prompt compensation. The legality of an ex-
propriation is in fact dependent upon the observance of this require-
ment.” 10′ In 1976 President Nixon made a similar declaration, 102 and more
recently President Reagan has reiterated that:
Under international law, no U.S. investment should be expropriated unless
the taking (a) is done for a public purpose; (b) is accomplished under due
99Department of External Affairs, Legal Bureau, Canada and the U.N. Charter of Economic
Rights and Duties of States, (October, 1975; Mimeograph). In the words of the Canadian
delegate, the provision could not be accepted because of “the absence of any references in
Article 2 to the applicability of international law to the treatment of foreign investment”.
Statement by the delegate of Canada, 29 U.N. GAOR, C-2 (1649th mtg.) 446, U.S. Doc. A/
C.2/SR. 1649 (1974).
200TOPCO Arbitration, supra, note 79, para. 86. This is even more apparent given the recent
political “polarization” of the U.N. General Assembly and the absence of any consistent state
practice endorsing these recent resolutions. See The Asylum Case [1950] I.C.J. 266, 276 (the
party seeking to establish a new rule of customary international law “must prove it is in
accordance with a constant and uniform usage”).
101MS. Department of State, file 812.6363/6659A, quoted in M. Whiteman, supra, note 87,
102″Under international law, the United States has a right to expect [that when American
private property is taken by a foreign government, the U.S.] citizens will receive prompt,
adequate, and effective compensation from the expropriating country.” Dept. of State, Bulletin,
vol. 74, no. 1910 (2 February 1976) 138, quoted in E. McDowell, Digest of United States Practice
in International Law (1975) 489.
1020.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
461
process of law; (c) is non-discriminatory; (d) does not violate any previous
contractual arrangements between the national or company concerned and the
government making the expropriation; (e) is accompanied by prompt, adequate
and effective compensation. 103
In summary, both the Canadian and U.S. governments continue to recognize
the duty under international law to compensate for expropriation.
3. The Standard of Compensation
Presuming Canada’s reservation of a twenty-five percent interest in
exploration and production rights of aliens constitutes a taking of property
which under international law must be accompanied by compensation, the
question of an appropriate standard of compensation arises. The classic
formulation of the measure of compensation is “prompt, adequate and ef-
fective” payment. 10 4 The Restatement (Second) Foreign Relations Law of
the United States provides that failure to pay “just compensation” for an
expropriation is wrongful. 05 Just compensation is defined as “adequate in
103Statement by the President on International Investment Policy, supra, note 35, 5.
104See I. Brownlie, Principles ofPublic International Law, 3rd ed. (1979) 533 et seq.; B. Wortley,
Expropriation in Public International Law (1959) 33-4; Weigel and Weston, Valuation Upon
the Deprivation of Foreign Enterprise, in Lillich, supra, note 83, vol. 1, 7-8. I. Foighel, Na-
tionalization and Compensation (1964) 103, 141 and 147; Restatement (Second) of Foreign
Relations Law of the United States, supra, note 64, 187.
The standard of compensation for expropriation has engendered considerable debate and
some confusion. In Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964), the Supreme
Court of the United States reviewed state practice in paying compensation for expropriation
and concluded that there was no clearly defined standard. Ibid., 429-31. In some instances,
compensation has been paid but only after considerable effort to effect payment. See the Sicilian
Monopoly case (settlement reached under threat of imminent arrival of British warships in
Sicily); post war dispute between Yugoslavia and the United States (settlement on $12 million
in claims achieved after U.S. attached $47 million in Yugoslavian gold); Chilean expropriation
of copper mines (settlement obtained after suits brought against Chile in European courts).
Moreover, it has been argued that there is a practical limitation on the amount of compen-
i.e., the state’s ability to pay or to cope with the resultant economic burden. See
sation –
Murphy, Limitations Upon the Power of a State to determine the Amount of Compensation
Payable to an Alien Upon Nationalization, in Lillich, supra, note 83, vol. 3, 49, 52-3; Dawson
and Weston, Prompt, Adequate and Effective: a Universal Standard of Compensation? (1962)
30 Fordham L. Rev. 727, 734. Some states have demonstrated a willingness to accept less than
full compensation in recognition of the limited financial resources of the expropriating state.
Brower, supra, note 55, 144. Of course, the ability of a state to pay and the willingness of a
state to accept less than full compensation do not indicate any change in the basic rule requiring
that a state make full compensation. Indeed, claims in all areas of the law have been settled
for reasons known only to the parties, and such settlements have had no effect on the applicable
rules of law.
05Restatement (Second) of Foreign Relations Law of the United States, supra, note 64, 186.
McGILL LAW JOURNAL
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amount, paid with reasonable promptness, and paid in a form that is ef-
fectively realizable by the alien, to the fullest extent that circumstances
permit.”106
International acceptance of this standard is evidenced by its incorpo-
ration into a growing network of bilateral treaties between capital-investing
and capital-receiving countries. 10 7 These treaties, with the requirement of
the traditional standard of full compensation, serve to encourage the flow
of capital and technology by providing reasonable assurance and security
to investors. With the foreign debt of some countries reaching alarming
heights, the importance of equity investment by foreign companies, partic-
ularly in developing countries, has taken on added significance.
Turning to the specific elements of this standard, “adequacy” has gen-
erally been held to mean that compensation should reflect the full market
value of the property rights taken, together with interest, 08 without taking
account of the diminution in value occasioned by the expropriation. In
applying the “full value” standard in particular cases, tribunals have taken
a variety of factors into account. Such factors have included expected future
1061bid., 187.
107See, for example, Agreement on Protection of Investments, 15 January 1970, Belgium-
Indonesia, art. 5, paras 1-2, Moniteur Belge, No. 168, 31 August 1972, 9449 (Belgium), 843
U.N.T.S. 1921; Agreement on Commerce, 10 May 1960, Japan-Malaysia, art. 4, (1961) 5 Jap-
anese Ann. Int’l Law 211-3, 383 U.N.T.S. 293-8; Agreement on Protection of Investments, II
June 1975, United Kingdom-Egypt, art. 5, para. 2, 1976 U.K.T.S. 97 (Cmd 6638), 1032 U.N.T.S.
(to be published) (U.N. Reg. No. 15181); Treaty on Protection of Investments, 10 December
1966, Federal Republic of Germany-Zambia, art. 3, para. 2, 1968 Bundesgesetzblatt [BGB] II,
No. 3, 33 (West Germany). Each of these provisions is reprinted in International Chamber of
Commerce, Bilateral Treaties for International Investment (1980).
’08See, for example, Factory at Chorzow (Merits) [1928] P.C.I.J., Ser. A, No. 17, 46 (com-
pensation due for otherwise lawful expropriation is “not limited to the value of the undertaking
at the moment of dispossession, plus interest to the day of payment”). The general rule in
international law is that interest shall be allowed. As stated by one authority, “Interest, ac-
cording to the usage of nations, is a necessary part of a just national indemnification.” See
Moore, International Law Digest (1906) vol. 6, 1059. The Restatement provides that adequate
compensation “must be equivalent to the full value of the property taken, together with interest
to the date of payment when the taking involves rights acquired under a licence or commission.”
Restatement (Second) of Foreign Relations Law of the United States, supra, note 64, 188(a).
The legal adviser of the U.S. Department of State has argued that the amount of compensation
due to owners of operating enterprises that were expropriated by Iran should be based on the
“going concern” value. This should reflect the property’s income producing capacity, not just
the book value or replacement costs of the expropriated enterprise. Legal Adviser, U.S. De-
partment of State, Application of Treaty of Amity to Expropriations in Iran, 129 Cong. Rec.
(14 November 1983, daily ed.) S 16055.
19841
EXPROPRIATION IN THE ENERGY INDUSTRY
463
profits where concession rights are taken, 10 9 purchase and investment costs 110
and valuation of physical assets and other elements of a going concern.”‘I
Another valuation method is based on the dollar amount of investment
made by the expropriated entity (reduced by appropriate depreciation where
necessary) and the present capitalized value of projected future earnings.”t 2
Applying these standards of adequate compensation to the present case,
it is evident that Canada’s taking of a twenty-five percent share in explo-
ration and production interests held by aliens is unlawful unless accom-
09See, for example, Award in the Matter ofan Arbitration Between Kuwait and the American
Independent Oil Co. (1982) 21 I.L.M. 976 (Arb. Trib.) (depreciated value of fixed assets plus
the owner’s legitimate expectations of a reasonable rate of return); Award in the Case ofAGIP
Company v. PopularRepublic of the Congo (1979) 21 I.L.M. 726 (ICSID Arb.) (award included
actual losses plus expected profits); Benvenuti et Bonfant, supra, note 83, (award included
expected lost profits); Shufeldt Claim (U.S. v. Guatemala) (1930) 2 R. Int’l Arb. Awards 1080,
1097. See also G. White, supra, note 69, (several cases have awarded compensation for loss
of future profits during unexpired term of concession agreement).
“0See American Mexican Claims Comm’n, Report to the Secretary of State (1948) (Dept’t
of State publication) 2859; Claim of Mexico Diversified Land Co* (Decision No. 33-C, General
Docket No. 3006), discussed in Whiteman, supra, note 87, 1146.
” ‘See Claim ofAmerikansko Jugoslovensko Elektricno Drustvo (Foreign Claims Settlement
Comm’n) (Docket No. Y-252, Decision No. 1485, Proposed Decision, 10 November 1954:
Final Decision, 30 December 1954) discussed in Whiteman, supra, note 87, 1147.
” 2See, for example, Starrett Housing Corp. v. The Islamic Republic of Iran (1983) Iran.
Assets Lit. Rep. 7,685 (Award No. ITL 32-24-1) (Tribunal appointed expert to consider the
discounted cash flow method of valuation); Mobil Corporation v. Marathon Oil Co. (1981)
Fed. Sec. L. Rep. para. 98,375 (S.D. Ohio) (discounted cash flow analysis of oil field).
Other methods exist such as the replacement value of the expropriated property plus interest.
This, however, could result in an inflationary windfall to the expropriated investor, but at the
same time, would not include any compensation for expected future earnings. A more amor-
phous measure would be the “value” to the expropriating government of the property, but
such a subjective standard does not lend itself to easy application or mutually agreeable results.
It should be noted that although compensation for reasonably ascertainable future profits is
appropriate, there is some evidence that “excess profits” are non-compensable. United Nations
General Assembly Resolution 1710 recognized that a State is entitled to receive only reasonable
profits on investments. And in the Chilean expropriation of the Anaconda, Cerro, and Ken-
necott copper mines in 1971, the Chilean Congress enacted a constitutional amendment which
provided that in the “case of the nationalization of mining activities or companies … [a]ll or
part of the excess profits that nationalized companies have obtained may also be deducted
from the compensation”. See Law No. 17450 of 15 July 1971, printed in (1971) 10 I.L.M.
1067. Subsequently, the President issued a decree that compensable profits would be determined
as 10% of book value of the investment. See Presidential Decree Concerning Excess Profits of
Copper Companies (1973) 12 I.L.M. 983. The United States objected strenuously to this de-
termination as not having any foundation in international law. See, generally, Steiner & Vagts,
supra, note 80, 452-5. It should be noted that excess profits were apparently deducted in the
Iranian expropriation of the Anglo-American oil company. See Wesley, “A Compensation
Framework for Expropriated Property in Developing Countries”, in Lillich, supra, note 83,
vol. 3, 32, No. 143. The issue of excess profits would not arise in the context of investments
that have yet to earn a substantial return. Moreover, the term “excess profits” is not subject
to objective definition – what is excessive to one may be normal or reasonable to another.
Nor does the term appear in international decisions or writings involving expropriation cases.
REVUE DE DROITDE McGILL
[Vol. 29
panied by payment of the full value of those interests. Any measure of
compensation short of this would deprive foreign interest holders of the
value of property rights that were vested and protected under the Canadian
law that created them. The Crown share provisions do not satisfy the stan-
dard of adequate compensation since the Act does not even purport to
compensate foreign persons for the value of interests which have been trans-
ferred to the Canadian government. Indeed, the Act expressly denies a right
to receive such compensation. 1 3
Nor can the provisions for the limited expense-related payments satisfy
the standard of adequate compensation. 14 Those provisions afford no com-
pensation whatsoever to many interest holders whose property is subject to
the operation of the Crown share. Moreover, the payments that are available
would not even cover exploration and development expenses, let alone the
full value of the expropriated property rights. 15 The costs that are covered
113Canada Oil and Gas Act, S.C. 1981, c. 81, s. 61(2).
1141ndeed, the Canadian government has repeatedly insisted that these ex gratia payments
‘are not to be construed as representing ‘financial compensation’ for the Crown Interest”. See,
Memorandum, “Canada Lands and the Crown Interest”, attached to Letter to Alexander M.
Haig, Jr., U.S. Secretary of State from Mark MacGuigan, Canadian Secretary of State for
External Affairs (5 November 1981) 5.
One might suggest that the Petroleum Incentives Program (“PIP”), a separate component
of the NEP, should be viewed as compensation for the taking effected by the Crown share law.
Under PIP, the Canadian government contributes to expected exploration and development
costs. However, the amount of the PIP contribution varies with the rate of Canadian partic-
ipation in the exploration activity. Indeed, the purported benefits accruing under PIP are in
no way related to the value of interests that may be taken by virtue of the Crown share
provisions and therefore cannot be regarded as adequate compensation for that taking.
Moreover, PIP clearly is not identified as compensation for persons affected by operation of
the Crown share law. The stated purpose of the legislative program including both PIP and
the Crown share law was to give the Canadian government a greater share of the benefits of
oil and gas production activities. See Memorandum, “Evolution of Crown Participation in Oil
and Gas Rights on Canada Lands”, attached to Letter to Alexander M. Haig, Jr., U.S. Secretary
of State, from Mark MacGuigan, Canadian Secretary of State for External Affairs (5 November
1981). To this end, a whole complex of programs, including the Progressive Incremental Roy-
alties program and the Crown share law, was instituted. Taken in its entirety, this complex
operates to the detriment of pre-existing foreign operators when compared with the previous
regulatory regime governing oil and gas exploration and production activities in Canada.
“5The payments authorized by the Canada Oil and Gas Act, S.C. 1981, c. 81, cover 25
percent of two-and-one-half times specified exploration costs incurred by holders of certain
production licences. Those payments, which bear no relation to the value of assets taken, are
unavailable to holders of any interest other than “a production licence in relation to which
the original discovery of oil or gas was the result of a well on which drilling was commenced
on or before 31 December 1980 and that qualified to be declared a significant discovery on or
before 31 December 1982″: s. 29(4)(a). The provision for multiplying eligible costs by two-
and-one-half, together with a provision for annual escalation of eligible costs by 15% until 31
December 1980 (s. 29(4)(b)), is apparently designed to ensure that the expense payments retain
their real dollar value even if commercial production does not begin for several years. See
Memorandum, supra, note 114, 5.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
465
by these payment provisions include only pre-1981 exploration costs that
contributed directly to the drilling of a discovery well, and pre-1981 costs
associated with the development of an actual discovery. This limitation
deprives many interest owners of any payment whatsoever for expenses that
were incurred in anticipation of enjoying the full benefits of eventual pro-
duction. Exploration activities preceding the drilling of a discovery well
typically span a period of several years,’ 16 and entail millions of dollars in
costs. Consequently, the payment provisions in the Act can only be described
as inadequate.” 17
Compensation for the taking of an alien’s property must also be made
promptly or “as quickly as possible”. 18 This standard has been interpreted
” 6The length of time typically spent on exploration and development activities prior to
commercial production is reflected in the time periods associated with exploration rights created
under the COGL Regulations. For example, exploration agreements were granted under those
regulations for initial terms of up to 10 years, renewable for additional periods of up to 10
years. COGL Regulations, C.R.C. 1978, c. 1518, s. 31(1).
171n practical terms, the measure of payment provided in the Act covers only a fraction of
the costs incurred before oil or gas can be produced in commercial quantities. It completely
excludes the overwhelming majority of costs entailed in drilling exploratory wells. Approxi-
mately -85 percent of all exploratory wells are “dry”. When successful in drilling a discovery
well, typically a number of dry holes have preceded the discovery. For example, 46 dry holes
were drilled on the North Slope of Alaska before Prudhoe Bay, the largest field in North
America, was discovered. See the testimony of William E. Crain before the House Ad Hoc
Select Committee on the Outer Continental Shelf (10 May 1977) 8.
Each of these unsuccessful exploration wells costs literally millions of dollars to drill. Under
the payment provisions of the Act, none of the costs associated with such dry wells would be
subject to reimbursement. When the myriad of costs necessary to oil exploration are considered,
it is apparent that the payment provisions do not come close to covering the basic costs incident
to finding and producing oil even if they were intended to do so. Of course, mere reimbursement
of costs would appear to be inadequate under the international standard of compensation.
The inadequacy of the payment provisions of the Act is even more apparent when the
provisions are viewed in light of the industry practice of paying for unproductive exploration
efforts with the revenues attributable to successful ones. A study undertaken by the National
Petroleum Council found that only one out of fifty or more leases for exploration and production
in frontier areas can be expected to be profitable. National Petroleum Council, U.S. Arctic Oil
and Gas (1981). This average reflects the fact that exploration activities, by their very nature,
entail substantial risks. For this reason, profits from a successful lease are needed to absorb
the costs for the vast majority of leases that prove unprofitable. Yet under the Canada Oil and
GasAct, twenty-five percent of the petroleum found in productive interest areas is taken without
compensation, and no payment is authorized to cover the costs of unproductive exploration
activities, even on the same exploration area.
I sSee David Goldenberg Case (Germany v. Roumania), supra, note 84, 909.
McGILL LAW JOURNAL
[Vol. 29
as requiring payment of full compensation as of the date of effective tak-
ing. 1 9 Since the Canada Oil and Gas Act prohibits compensation for the
taking of acquired rights, then a fortiori the legislation fails to meet the
standard of prompt compensation. Moreover, even the provisions for ex-
pense-related payments do not provide for prompt payment. These pay-
ments are to be made “only out of the net proceeds of disposition of the
oil and gas produced that is imputable to the Crown share.”‘ 20
Compensation for expropriation must also be in an “effectively real-
izable form”.’ 2′ This standard generally requires that compensation be in
the form of cash, or property readily convertible to cash, in the currency of
the country of which the alien is a national. 22 The Canada Oil and Gas
Act obviously fails to provide effective compensation since it provides nei-
ther adequate nor prompt compensation.
Conclusion
The issues, both legal and political, raised by the Canadian National
Energy Program are complicated and of considerable import to Canada’s
external affairs, notably Canada-U.S. relations. This paper has focused on
the legal question whether the Program implements its policies of Cana-
dianization in a manner consistent with established rules of international
law. Certainly, the Government’s desire to encourage Canadian participa-
tion in the oil and gas industry should not be subject to criticism. The means
to further this goal, however, cannot be discriminatory or unfairly retro-
active. In a world of diverse national objectives, where normative judgments
regarding those objectives are not universal, the need to protect against
unfair and illegal methods is critical. It is the role of international law to
ensure that diverse national objectives are not sought or obtained at the
expense of fairness or justice.
International law requires full payment for the expropriation of the
property of aliens. The generally accepted standard is one that affords prompt,
“19See Whiteman, supra, note 87, 1171.
120Canada Oil and Gas Act, S.C. 1981, c. 81, s. 29(3)(b).
1’2 Restatement (Second) of Foreign Relations Law of the United States, supra, note 64, 190.
122Restatement (Second) of Foreign Relations Law ofthe United States, supra, note 64, 190.
Cf Agreement on Protection of Investments, 16 October 1974, Netherlands-Republic of Korea,
art. 5, para. c, 1974 Tractatenblad, No. 220, 973 U.N.T.S. 97-9 (compensation for taking of
property of treaty party’s nationals, to be effective, must be paid and made transferable to
country of which claimants are nationals and in convertible currency); Agreement on Protection
of Investments, 28 July 1967, Italy-Malta, art. 4, Gazetta Ufficiale, No. 216, 22 August 1973,
5803 (Italy) (compensation must be “immediately transferable in convertible currency, without
limitation”). These and similar provisions appearing in other bilateral treaties are reprinted
in Bilateral Treaties for International Investment, supra, note 107.
1984]
EXPROPRIATION IN THE ENERGY INDUSTRY
467
adequate and effective compensation, reflecting the full value of the property
that is taken. In this regard Canada has fallen short of its obligations, as
Parliament has passed legislation which effects a taking of valuable property
rights without meeting the international standard of compensation. More-
over, the legislation deprives the alien of access to any legal or regulatory
remedy. As this legislation is uncharacteristic of the Canadian Government’s
traditional respect for the rule of law, it is hoped that the National Energy
Program will be re-evaluated and brought back into step with established
rules of international law.
