Turnbull’s proposed LNG export restrictions and Australia’s liability under international trade law
WHO SHOULD READ THIS
- Foreign companies participating in or looking to participate in inbound investment opportunities in Australia, particularly in gas resources.
THINGS YOU NEED TO KNOW
- Foreign investors can be subject to the risk of government action such as legislative and other regulatory changes that diminish the value of an investment. Existing foreign investors may have recourse to certain bilateral investment treaties (BIT) or free trade agreements (FTA) if this situation arises. For potential foreign investors, these risks can be protected against by intelligent structuring of an investment so as to gain the protection of a BIT or FTA.
WHAT YOU NEED TO DO
- Contact us if you consider your foreign investment may be at risk of suffering financial damage as a result of government action.
- Talk to our team about proactively structuring your investments to enjoy the protection afforded by BITs or FTAs.
The Turnbull government has announced that its Australian Domestic Gas Security Mechanism (ADGSM) will come into effect by 1 July 2017. Under the Mechanism, the government will be able to impose controls on the export of liquefied natural gas (LNG) when there is a shortfall in the domestic gas supply.
This article considers whether the export restrictions could trigger Australia’s liability under international trade law and, in particular, whether certain LNG exporters may be able to bring an action against the government for breach of FTAs or BITs. It also briefly considers recourse available to affected Australian companies.
What is the Australian Domestic Gas Security Mechanism?
The government has stated that it will introduce export restrictions on gas companies that draw more LNG from the domestic market than they put in to ensure sufficient supply domestically. The regulations which will give effect to the ADGSM are due to come into effect on 1 July 2017 but currently remain in draft, with submissions being accepted by the government until 12 June 2017.
According to the draft, the government will create the ADGSM by amending the Customs (Prohibited Exports) Regulations 1958, which are made pursuant to the Customs Act 1901 (Cth). A new division will be inserted to enable the Resources Minister to mandate LNG export restrictions in his or her discretion.
Key characteristics of the proposed ADGSM include:
- It will only operate for five years. The government sees the ADGSM as a temporary measure to put downward pressure on gas retail prices in Australia and restore certainty to the market, particularly for gas fired electricity production.
- Export controls can only be triggered where the Resources Minister formally determines, on the basis of his or her reasonable belief, that there would not be sufficient supply of natural gas available for the Australian domestic gas market over a forthcoming calendar year.
- In addition, the Resources Minister must provide at least 30 days’ notice to the public before making such a decision.
- When export controls are invoked, an LNG exporter must seek permission to export from the Resources Minister. Such permission will be made on a condition mandating the annual upper limit on the volume of LNG that can be exported.
At the moment, the only gas project that is not a net contributor (i.e. draws more from the market than it contributes) is the GLNG plant, jointly owned by Santos, Malaysia’s PETRONAS, Total from France and Korea’s KOGAS. The APLNG plant (owned by Origin Energy, Conoco Phillips and China’s Sinopec) and the Queensland Curtis LNG plant (with train one jointly owned by Shell and China’s CNOOC and train two by Shell, but with a small share held by Tokyo Gas) are likely to be safe from decisions made by the Resources Minister pursuant to the proposed ADGSM as they presently supply more to the domestic market than they withdraw.
What international obligations may Australia breach?
Australia owes a myriad of trade-related obligations under multilateral and bilateral treaties. These may be enforced by other nations or, in circumstances where investment treaties provide for investor-state dispute settlement (ISDS), by foreign investors themselves. Australia’s tobacco plain-packaging laws were, for example, unsuccessfully challenged by Phillip Morris under Australia’s BIT with Hong Kong. Separately, however, these same plain-packaging laws face a challenge by Cuba, Honduras, Indonesia, and the Dominican Republic in the World Trade Organisation (WTO) pursuant to the 1974 General Agreement on Tariffs and Trade (GATT). The distinction between the investor-state arbitration pathway and the WTO pathway is that the former is instigated by the foreign investor directly against Australia whereas the latter is instigated by a foreign government (or governments) but, in substance, is also predicated on safeguarding the investor’s commercial interests.
Australia may expose itself to international legal claims if the ADGSM is unjustifiably prejudicial to the interests of Australia’s trade partners or to foreign investors. Broadly speaking, it is unlikely that Australia will breach its obligations as the ADGSM in its proposed form under the Customs (Prohibited Exports) Regulations 1958 seeks to strike a balance between achieving supply security while, in the government’s words, abiding by the ‘requirements of a globally integrated and highly competitive export industry.’ The ADGSM therefore seeks to ensure it is appropriately tailored to solving domestic supply shortfalls by:
- (a) existing temporarily, and
- (b) mandating that export controls can only be triggered where the Resources Minister formally determines that he or she has reasonable grounds for believing that there would not be sufficient supply of gas available for the domestic market over a forthcoming calendar year.
While (b) may be a “mouthful”, it is carefully worded by the government so as to provide a minimum assurance to industry that export restrictions will not be mandated whimsically, while simultaneously protecting the Resources Minister with a comfortable level of legal discretion.
Each potentially applicable trade obligation must be considered individually.
GATT is a multilateral treaty which aims to minimise international trade barriers. Disputes under GATT, which are between nations, have sometimes concerned export quotas. In 2012, the United States made a complaint to the WTO against China’s export restrictions (including export quotas) on a number of rare earths, tungsten, and molybdenum. Australia itself was a third party to this complaint. The WTO determined that China’s export quotas were in breach of Article XI of GATT.
Importantly, GATT establishes leeway for nations where, for example, export quotas are established to protect the environment or secure products which are in short supply nationally (Article XX). China sought to make use of the exception for GATT-inconsistent measures ‘relating to the conservation of exhaustible natural resources’. The WTO determined, however, that the design and structure of the export quotas unevenly burdened foreign consumers and were designed to achieve industrial policy goals rather than conservation.
China’s fate at the WTO must be understood in its global economic context. The United States and others feared that China’s export quotas enabled artificial inflation of international prices for raw materials critical to products such as smartphones, wind turbines, hybrid cars, and energy-efficient lighting. The implications were seen as extreme and an attempt by China to control the global distribution of raw materials.
Tempered LNG export restrictions falling within Australia’s right under GATT to secure products which are in short supply nationally (Article XX of GATT) and which do not have harsh ramifications for the global market will be unlikely to breach GATT or galvanise the political will of potential complainants at the international level. There remains, however, the question of whether the Resources Minister’s decisions under the ADGSM will be proportionate to securing domestic supply or merely setup to advantage domestic gas consumers by artificially lowering prices. In any case, it would presumably be difficult to prove the latter.
Australia is a party to 21 BITs with countries in many regions of the world, including China, Hong Kong, Indonesia, India, Mexico, Papua New Guinea, and Turkey. A BIT is a binding agreement between two states by which each assumes obligations in relation to investments made by investors originating from the other state. Australia is also party to a series of FTAs with significant trading partners. BITs and FTAs are aimed at fostering security and economic certainty for foreign investors, and may include investor-state dispute settlement provisions (as in Australia’s FTAs with China, Korea, and Singapore).
The obligations Australia has assumed under BITs and FTAs typically include, for example, the obligation to promote favourable investment conditions, to treat investors fairly and equitably, and to not undertake expropriation or nationalisation.
Article 2.19 of the Malaysia-Australia Free Trade Agreement (MAFTA), regarding non-tariff trade measures, provides that Australia may not restrict the exportation of any good destined for Malaysia except in accordance with Article XI of GATT. As discussed above, appropriately tailored LNG export restrictions falling within Australia’s right under GATT to secure products which are in short supply nationally (Article XX of GATT) will be unlikely to breach Article XI.
Under several BITs, including the Korea-Australia Free Trade Agreement (KAFTA) and the ASEAN-Australia-New Zealand FTA (AANZFTA) (to which Malaysia is a party), Australia must not commit expropriation or, in other words, deprive investors of their investments (direct expropriation) or subject investors to measures having effect equivalent to such deprivation (indirect expropriation). The LNG export restrictions may indirectly interfere with the value of foreign investments. It would, however, be difficult for a claimant to establish that they amount to an expropriation. KAFTA and AANZFTA state that non-discriminatory regulatory actions that are designed and applied to protect/achieve legitimate public welfare objectives do not constitute indirect expropriations (KAFTA Annex 11-B; AANZFTA Annex on Expropriation and Compensation). The LNG export restrictions will be safe if they apply generally to all investors in Australia (foreign and domestic) and are targeted at securing domestic supply, which is arguably a legitimate public welfare objective.
As foreshadowed, obligations under treaties like KAFTA and AANZFTA are directly enforceable against Australia by foreign investors by virtue of ISDS provisions.
Which foreign investors may be able to bring a claim under ISDS provisions?
The inclusion of ISDS provisions in a BIT, FTA or other treaty gives covered foreign investors standing to challenge Australia before an arbitral tribunal in the event Australia breaches its obligations under the treaty. It is worth mentioning that under general international law, through the law of diplomatic protection, states are able to espouse the claims of their nationals, including companies, in certain circumstances. ISDS provisions, however, allow covered foreign investors to bring their own actions against states. At the moment, it appears that measures restricting the exportation of LNG are most likely to affect the GLNG project. PETRONAS, being a Malaysian entity, could consider its options under AANZFTA. KOGAS could consider its options under KAFTA.
Under most BITs and FTAs to which Australia is a party, foreign investors seeking to sue Australia can only do so if they have the nationality of a State party to the treaty and are not nationals of Australia. Treaties such as BITs and FTAs, which seek to protect foreign investments, will often consider shares or even participation in companies as applicable forms of investment. For example, AANZFTA defines ‘investments’ as ‘every kind of asset owned or controlled by an investor’, and explicitly includes shares. PETRONAS, as a 27.5 per cent shareholder in the GLNG joint venture, would therefore be able to directly bring a claim against Australia under AANZFTA.
If there is no BIT or FTA presently in effect between the investor’s state and Australia, it will be difficult for that investor to seek protection under a third country’s agreement by way of, for example, restructuring. Philip Morris sought to bring a claim against Australia by restructuring its investment through Hong Kong to therefore take advantage of the BIT between Hong Kong and Australia. This action was dismissed at a preliminary hearing as an abuse of process where the tribunal commented that the ‘main and determinative, if not sole, reason for the restructuring was the intention to bring a claim under the Treaty, using an entity from Hong Kong’.
Certain trade treaties, such as the Australia-United States FTA, may not provide for ISDS. Reportedly, APR Energy PLS (APR) has, however, brought an action against Australia by relying on the most favoured nation clause in the Australia-United States FTA to argue that the ISDS provisions in a separate BIT between Australia and Hong Kong should somehow be imported to enable its claim. The Attorney-General’s Department has stated that APR “cannot rely on other agreements in order to create jurisdiction”.
PETRONAS and KOGAS would not appear to experience jurisdictional difficulties analogous to those faced by Phillip Morris and APR, and bringing a claim could be relatively straightforward.
How would Australian companies go about challenging decisions by the Resources Minister?
\Obligations owed by Australia under bilateral and regional trade treaties are only owed to foreign countries and applicable foreign investors. Australian companies adversely affected by a future decision of the Resources Minister under the ADGSM might, however, have recourse to administrative law remedies. Administrative law is the body of domestic law regulating government decision making.
The government has stated that the ADGSM will not provide for merits review of the Resources Minister’s decisions. Decisions would, however, be judicially reviewable. In other words, the court cannot “stand in the shoes” of the Resources Minister and decide whether his or her decision under the ADGSM was the “correct or preferable” decision made. The court will be limited to assessing the legality of the decision i.e. whether it was made in accordance with the ADGSM.
Judicial review in Australia is available in the Federal Court or the Federal Magistrates Court under either the Administrative Decisions (Judicial Review) Act 1977 (Cth) or s 39B of the Judiciary Act 1903 (Cth), and in the High Court under s 75(v) of the Australian Constitution.
At this stage it seems that the purpose and proposed design of the ADGSM make it unlikely that Australia will breach any of its international trade obligations either under GATT or under the numerous BITs and FTAs to which Australia is a party. Much may depend on how the Resources Minister implements the ADGSM on a case by case basis. The government should tread carefully in ensuring the ADGSM secures a legitimate public aim without unduly inflicting prejudice on foreign investors. Foreign investors adversely affected by the introduction of the Australian Domestic Gas Security Mechanism should consider what BITs and FTAs are currently in place between the investor’s nation of origin and Australia, and seek advice regarding applicable protections, including those canvassed above, which might be available to them. Foreign investors looking to invest in Australia, particularly in the resources sector, should consider how their investment is to be structured to obtain the benefit of protections afforded by BITs and FTAs.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.