June 25, 2012
The following article was written by Pradeepa Viswanathan, Research Officer for Institute for Peace and Conflict Studies:
In June 2012, Nepal witnessed the withdrawal of two oil companies – the US-based Texana Resources Company and the UK-based Cairn Energy. These companies withdrew from their allocated blocks in the Terai region citing bureaucratic hurdles and lack of cooperation from the government. Against this backdrop, this commentary attempts to answer two questions: what are the reasons behind the current withdrawal? And what does the withdrawal mean for Nepal’s investment environment in general and its petroleum exploration plans in particular?
Reasons Behind The Withdrawal
Both Texana and Cairn cite ‘force majeure’ – non-fulfillment of an obligation in the event of circumstances beyond the companies – as reason for their withdrawal. While, Texana wanted to transfer its holdings in Nepal to Canada-based Patriot Petroleum Corp, Cairn was not only lobbying the ministry for the entitlement of two blocks (Block 3 and 5) that Texana was planning to transfer, but also made requests for amending its work plan. Though Texana’s claim was acceptable as part of the signed agreement (Clause 64) as against Cairn’s claims which were labeled ‘legally not possible’, both companies took the decision to withdraw. Texana has also threatened Nepal with international arbitration for the settlement of its demands. The withdrawal may be seen as a pressure tactic used by both companies to get their demands accepted. Reports also suggest that the invitation of bids for blocks 8, 9 and 10 were made much to the discomfort of both these companies.
The rationale behind Cairn investing in Nepal was the gains it had made in Nepal’s neighbourhood. It, however, met with an unfavourable environment in the country manifested by restrictive policies and political instability. A small amendment in the policies could have prevented Cairn from withdrawing, especially since its commitment towards its investment in Nepal was much more prolific than that of Texana.
The Department of Mines and Geology (DMG) in Nepal has neither contested the reason given by these two companies nor has it stated its position on the issue. All we understand from the statement issued by the Director-General of DMG is that ‘explanations have been demanded from both these companies’.
Implications Of The Withdrawal
Nepal is a net importer of many commodities, including petroleum. The identification of petroleum blocks was a welcome relief in a country heavily dependent on petroleum imports and prone to shortages. After the announcement of the withdrawal, two sections within the Nepali media emerged. One section viewed the withdrawal as a setback to the country’s petroleum exploration ambitions, while the other saw it as a ‘possible victory for Nepal’.
Foreign cooperation, in the form of foreign direct investment, is required by Nepal for petroleum exploration as the country is both technically and financially incapable of conducting these activities on its own. The withdrawal may hinder the bidding for blocks 8, 9 and 10. On the other hand, the withdrawal of Cairn, which was holding more blocks than the permitted number of two, can now allow Nepal to be more stringent about this rule with the new companies that enter the country. Moreover, if Cairn had succeeded in claiming Texana’s holdings, a monopoly of Cairn energy in Nepal’s petroleum sector would have been created adding to the weakness of the state’s negotiating position.
However, when viewed from a wider perspective, it appears that the withdrawal has every possibility of having a negative impact on Nepal’s already plundering economy and the decreasing ratio of foreign investments in the country. The withdrawal coincides with the commencement of the Nepal Investment Year (NIY) 2012-2013, thereby adding to the woes of the government. Surprisingly, oil and gas exploration projects are restricted to the DMG and have not been brought under the purview of either the Ministry of Energy or the Investment Board. This suggests that the country’s officials are more concerned with the hydropower resources than hydrocarbons.
What Lies Ahead?
Through international arbitration, Texana seeks not only the recovery of the money it paid to Nepal towards rent and guarantee, but also compensation from Nepal for not processing the demand for the transfer of blocks. Although there are faults on both sides, arbitration may benefit Nepal since Texana had not paid the rent for the blocks for two years during the initial leasing out phase (1998 – 2002). Also, it could contribute to making the process much more transparent as compared to the current state of affairs.
The road ahead should envisage making the Petroleum Exploration Promotion Project (PEPP), set up in 1982, transparent by publicising information related to its activities and engaging with the real stakeholders – the people living in the region. The second step could be to rework Nepal’s petroleum regulation acts to rationalise them and make them both time-proof and immune to the political developments. The third, and most important, step should be the formation of political will to equate hydrocarbon resources with other resources that Nepal has, and aim at retaining and eventually increasing the level of investments made in that sector.
AUTHOR: Pradeepa Viswanathan
IPCS (Institute for Peace and Conflict Studies) conducts independent research on conventional and non-conventional security issues in the region and shares its findings with policy makers and the public. It provides a forum for discussion with the strategic community on strategic issues and strives to explore alternatives. Moreover, it works towards building capacity among young scholars for greater refinement of their analyses of South Asian security.
For a BRIEF HISTORY OF OIL EXPLORATION IN NEPAL, read Kashish Das Shrestha’s article, "Misadventures in oil exploration: Texana and Cairn in Nepal", recently published in Republica:
CLICK HERE: REPUBLICA ARTICLE