Photo: sandy.redding/Flickr

Both in Quebec and in the United States, public authorities have legislated to protect populations from shale gas industry-related risks. These precautions could however come up against controversial NAFTA provisions within the infamous Chapter 11 regarding investor protection.

In the U.S., the Bureau of Land Management (BLM) is an Department of the Interior agency in charge of managing the entire country’s public lands and whose mission consists in sustaining their health, diversity and productivity.

Recently, the BLM recommended that the American government should stop granting leases to produce shale oil for commercial purposes. The agency rather suggested the White House should limit shale oil extraction to research, development and demonstration (RD&D) purposes. Given the major environmental risks and uncertainty concerning the technological reliability of this type of development, the agency favours limiting risk.

CERES is similarly worried. An investor network tuned in to financial opportunities and risks in climate change, it manages in total more than $11 trillion. It considers that the economic, technological, environmental, and regulatory risks are much too high to guarantee a profitable long-term investment.

Bearing in mind these assessments, we can only congratulate the government of Quebec on deciding to establish a moratorium on shale gas production (including shale oil) and initiate an environmental evaluation in May 2011. This bill suspended the oil and gas exploration and production activities under the St. Lawrence River. It also cancelled the mining rights and permits that had previously been issued. Decisions such as these taken in order to protect public health and the environment from the understudied effects of a technology known to be harmful are certainly within the remit of the state’s responsibilities.

However, this decision did not please everyone. On 15 November, the American firm Lone Pine Resources Inc. threatened to sue the federal government for $250 million. The company claims it is a victim of an arbitrary decision which violates NAFTA laws. As a legal basis to its lawsuit, it invokes NAFTA’s Chapter 11 which allows a company to sue a state if it deems that its “economic rights” have been violated. Hence, Lone Pine Resources considers that its “potential profits” have been inflected by Quebec’s decision to prevent fracking beneath the St. Lawrence River. It demands a monetary compensation.

As Canada is multiplying negotiations in the hopes of signing free-trade agreements notably with Europe, China, and Pacific countries, it is becoming more and more urgent to understand the legal (and political) implications of NAFTA. During 1990s negotiations leading up to the agreement, Chapter 11 was the result of a desire to protect private investments of American and Canadian companies from laws put in place in Mexico (the third partner in NAFTA) that they would deem unjustified.

However, an article’s use is not based on the text’s authors’ original motives but on the judges’ interpretation. Chapter 11 has thus been transformed into an instrument used by private companies to threaten governments when the latter’s decisions are detrimental to the former’s profitability, or even just their dreams of profitability.

To this day, only a few international courts’ decisions have favoured companies. The reason is rather straightforward: governments prefer settling out of court (examples can be found here). Simply threatening to sue has allowed these companies to receive millions of dollars in public money based on virtual hopes of profit. In the case of Lone Pine Resources, the company taking up arms hopes to squeeze out $250M from the state despite the fact that the oil resources under the St. Lawrence riverbed were not yet in use. To get $250M without producing a single drop of oil from a risky resource, now that’s tremendous success. Business success that is.

According to CCPA’s Scott Sinclair, this type of lawsuit is likely to increase both in numbers and in value in the years to come. New market entries from Europe and China as free trade expands will have an upward effect on lawsuits. According to Sinclair, as long as environmental protection, public security, and other Canadian laws are not entirely protected, provisions such as Chapter 11 should be excluded from free-trade negotiations.

There is no evidence that Lone Pine will succeed in demonstrating that Quebec’s decision was arbitrary. The company is nonetheless going down a path potentially leading to huge sums cashed through an out-of-court settlement without having to demonstrate its capacity to produce shale oil. The government would be penalized for having acted in a prudent and responsible manner.

This article was written by Bertrand Schepper, a researcher with IRIS, a Montreal-based progressive think tank.

Photo: sandy.redding/Flickr