Mining Company Sues Canada Over Fracking Ban in Quebec

New trade agreements could hamstring progressive regulations in North America.

Cole Stangler November 7, 2013

Lone Pine estimates that its permit for gas exploration under Quebec's St. Lawrence River covered an area containing as much as 3.3 billion cubic feet of undiscovered shale—a highly lucrative prospect that province's fracking ban has now put out of reach. (Ad Meskens / Wikimedia Commons)

On Sep­tem­ber 6, Cana­di­an ener­gy com­pa­ny Lone Pine filed a $250 mil­lion law­suit against the Cana­di­an gov­ern­ment that took aim at a frack­ing ban in Quebec’s St. Lawrence Riv­er. But in spite of the par­ties involved, the case will not be heard in a pub­lic Cana­di­an court.

'Other public interest policies, whether [they’re] related to climate or our jobs, could all be subject to attack by corporations under our trade deals.'

Though the ener­gy company’s oper­a­tions are based almost exclu­sive­ly in in Cana­da, the com­pa­ny is char­tered in Delaware. As a result, Lone Pine is able to take advan­tage of a pro­vi­sion in the North Amer­i­can Free Trade Agree­ment (NAF­TA) that allows com­pa­nies to sue for­eign gov­ern­ments for alleged­ly vio­lat­ing cer­tain pro­vi­sions of the trade deal. Com­pa­nies can lit­i­gate such investor-state dis­putes” in spe­cial third-par­ty tri­bunals — inter­na­tion­al courts of law entire­ly sep­a­rate from domes­tic courts.

The fact that a pri­vate cor­po­ra­tion is able to sue Cana­da over this pub­lic inter­est pol­i­cy in a pri­vate trade tri­bunal, not in pub­lic court, in an un-trans­par­ent process, is a real­ly ter­ri­fy­ing prospect,” says Ilana Solomon, direc­tor of the Sier­ra Club’s Respon­si­ble Trade Pro­gram. Oth­er pub­lic inter­est poli­cies, whether [they’re] relat­ed to cli­mate or our jobs, could all be sub­ject to attack by cor­po­ra­tions under our trade deals.”

In the suit, Lone Pine is alleg­ing that Quebec’s June 2011 ban on frack­ing in the bed of the St. Lawrence Riv­er — which pro­hibits all oil and gas activ­i­ties” in the riv­er — amounts to an arbi­trary, capri­cious and ille­gal revo­ca­tion of the [company’s] valu­able right to mine for oil and gas.” Stretch­ing across the province from the Atlantic Ocean to Lake Ontario, the riv­er lies with­in the nat­ur­al gas-rich Uti­ca Shale. Lone Pine esti­mates that its per­mit for gas explo­ration under the riv­er cov­ered an area con­tain­ing as much as 3.3 bil­lion cubic feet of undis­cov­ered shale — a high­ly lucra­tive prospect that the ban has now put out of reach.

Lone Pine’s law­suit specif­i­cal­ly charges that Quebec’s law vio­lates two core pieces of NAFTA’s investor pro­tec­tions: the trade deal’s guar­an­tee that for­eign investors will receive a min­i­mum stan­dard of treat­ment” and its pro­vi­sions against indi­rect expro­pri­a­tions. NAF­TA does per­mit gov­ern­ments to use indi­rect expro­pri­a­tions — that is, when a gov­ern­ment agency takes con­trol of pri­vate prop­er­ty — for a pub­lic pur­pose,” but Lone Pine dis­putes that the excep­tion applies in this case.

Activists, how­ev­er, say bans on frack­ing are cer­tain­ly in the pub­lic inter­est. It’s real­ly dis­cour­ag­ing that there are trade agree­ments that allow com­pa­nies to make what look to be on the sur­face very ridicu­lous claims about what is and what isn’t a pub­lic val­ue,” says Stu­art Trew, trade cam­paign­er with the Coun­cil of Cana­di­ans, a left-lean­ing nation­al con­sumer advo­ca­cy group.

Polls have shown that frack­ing, short for hydraulic frac­tur­ing,” is indeed deeply unpop­u­lar in the province. The frack­ing process, in which ener­gy com­pa­nies inject a mix­ture of water, sand and chem­i­cals into the ground in order to blast apart shale for­ma­tions and extract nat­ur­al gas, is also asso­ci­at­ed with a num­ber of envi­ron­men­tal and pub­lic health con­cerns. Cor­re­spond­ing­ly, both cen­ter-right and cen­ter-left provin­cial gov­ern­ments have pro­ceed­ed cau­tious­ly on how exact­ly to over­see the extrac­tion of Quebec’s nat­ur­al gas reserves.

In August 2010, Quebec’s then-rul­ing cen­ter-right Lib­er­al Par­ty gov­ern­ment com­mis­sioned an envi­ron­men­tal study on gas drilling in the province. That report, whose find­ings were released by the gov­ern­ment in March 2011, led to the cre­ation of anoth­er strate­gic envi­ron­men­tal assess­ment on shale gas, and the province put in place a tem­po­rary ban on frack­ing until the assessment’s com­ple­tion. Short­ly there­after, in response to increased pres­sure from envi­ron­men­tal­ists, the par­ty decid­ed to sup­port a per­ma­nent leg­isla­tive ban on frack­ing on the St. Lawrence River.

Mean­while, as the province’s envi­ron­men­tal assess­ment nears com­ple­tion, envi­ron­men­tal groups are call­ing for a more ambi­tious province-wide ban on the prac­tice. The left-lean­ing Par­ti Québé­cois, for exam­ple, which defeat­ed the Lib­er­als in Sep­tem­ber 2012 and now leads a minor­i­ty gov­ern­ment, sup­ports expand­ing the area cov­ered by the exist­ing ban.

Milos Barut­cis­ki, an inter­na­tion­al trade and invest­ment lawyer rep­re­sent­ing Lone Pine, insists that activists are unfair­ly por­tray­ing the company’s inten­tions. He says the law­suit is not tar­get­ing envi­ron­men­tal reg­u­la­tions or the debate on frack­ing; in fact, he views the drilling ban in the St. Lawrence as an entire­ly sep­a­rate matter.

This case real­ly has noth­ing to do with the envi­ron­ment or envi­ron­men­tal reg­u­la­tion,” Barut­cis­ki says. The mora­to­ri­um [on frack­ing], I com­plete­ly agree, was for a pub­lic pur­pose … But to annul, not freeze, but annul the per­mits on the riverbed with­out hav­ing con­duct­ed, let alone com­plet­ed an assess­ment of the envi­ron­men­tal impact of [them], how can you pos­si­bly defend it as being for a pub­lic pur­pose, espe­cial­ly when the min­is­ter says it was for polit­i­cal reasons?”

Though deputy pre­mier Nathalie Nor­man­deau did, in fact, call the leg­is­la­tion a polit­i­cal deci­sion” in the pub­lic par­lia­men­tary con­sul­ta­tion on the bill in May 2011, she also said in the same con­sul­ta­tion that the pri­ma­ry rea­son for enact­ing the ban was to reflect the con­cerns of cit­i­zens” on the issue of shale gas.

And Quebec’s cit­i­zens have not been shy about voic­ing those con­cerns. Dominique Bernier of the Que­bec-based group AmiEs de la Terre, or Friends of the Earth, dis­putes the notion that the St. Lawrence Riv­er leg­is­la­tion is some­how detached from the ongo­ing envi­ron­men­tal debate about fracking.

That’s ridicu­lous,” Bernier says. This bill was passed by a [Lib­er­al Par­ty] gov­ern­ment that is very favor­able to frack­ing and oil exploita­tion. The gov­ern­ment had to do that because there’s been an impact assess­ment on frack­ing … and the impact assess­ment has proven [it’s] very dan­ger­ous for many, many rea­sons. It was the only sen­si­ble reac­tion to the impact assess­ment. It’s not arbi­trary. It’s the only reac­tion possible.”

Trew agrees that pub­lic pur­pose” includes frack­ing bans like the one on the St. Lawrence Riv­er. The province has every right, and hope­ful­ly feels it has some respon­si­bil­i­ty, to move ahead on resource projects with extreme cau­tion — espe­cial­ly with a tech­nol­o­gy as con­tro­ver­sial and con­test­ed as frack­ing — and that it is in the pub­lic inter­est to do things like put mora­to­ri­ums on explo­ration until the safe­ty of that process can be assured,” he says. It’s real­ly dis­cour­ag­ing that a com­pa­ny could claim that its right not to have its prof­its inter­fered with is some­how more impor­tant than the oblig­a­tion on the part of our elect­ed lead­ers to pro­tect us from this kind of activity.”

One rea­son the com­pa­ny could be press­ing ahead with the law­suit, he says, is its trou­bled finan­cial con­di­tion. Lone Pine’s lawyer Barut­cis­ki fierce­ly con­tests that there is a rela­tion­ship, point­ing out that Lone Pine was a sub­sidiary of the Den­ver-based For­est Oil until 2011, but it is nonethe­less hard to ignore the recent case of Abitibi­Bowa­ter, an Amer­i­can-Cana­di­an com­pa­ny that was also char­tered in Delaware. In 2009, the com­pa­ny announced that it had gone bank­rupt and, in the same year, closed a cen­tu­ry-old paper mill in New­found­land and Labrador. Short­ly there­after, the New­found­land gov­ern­ment expro­pri­at­ed the company’s assets, in addi­tion to its hydro­elec­tric­i­ty and tim­ber rights in the province. In response, Abitibi filed a $500 mil­lion NAF­TA law­suit against Cana­da — even­tu­al­ly win­ning a $130 mil­lion set­tle­ment from the fed­er­al gov­ern­ment. It has since been restruc­tured and renamed as Res­olute For­est Products.

Lone Pine, for its part, has already launched bank­rupt­cy pro­ceed­ings in Cana­da and the Unit­ed States. The most recent quar­ter­ly report that it filed with the Secu­ri­ties and Exchange Com­mis­sion indi­cates the company’s finan­cial state, which has dete­ri­o­rat­ed over the last year.

Mean­while, on Octo­ber 1, Lone Pine was delist­ed by the TMX Group, which owns and oper­ates stock exchanges in Cana­da, includ­ing the nation’s largest, the Toron­to Stock Exchange. The Exchange does not com­ment on its rea­sons for delist­ing a spe­cif­ic com­pa­ny, but a spokesper­son point­ed to TMX’s gen­er­al guide­lines, which cite insol­ven­cy, poor finan­cial con­di­tion, low mar­ket val­ue or a company’s fail­ure to com­ply with reg­u­la­tions or dis­close changes to its busi­ness mod­el as pos­si­ble jus­ti­fi­ca­tions for doing so.

Lone Pine did not respond to a request for comment.

The next fron­tier of investor-state disputes?

The Lone Pine case has brought into sharp relief the poten­tial impact inter­na­tion­al trade agree­ments, and their cor­re­spond­ing invest­ment tri­bunals, could have on gov­ern­ment reg­u­la­tions in devel­oped coun­tries like Cana­da and the Unit­ed States.

Inter­na­tion­al tri­bunals, which are com­plete­ly sep­a­rate from domes­tic courts, have been on the books for near­ly half a cen­tu­ry — they were ini­tial­ly designed to pro­tect the invest­ments of West­ern com­pa­nies in coun­tries the U.S. and its allies regard­ed as lack­ing the sta­ble rule of law. The two most com­mon­ly used court sys­tems, the Inter­na­tion­al Cen­ter for Set­tle­ment of Invest­ment Dis­putes (affil­i­at­ed with the World Bank) and the Unit­ed States Com­mis­sion on Inter­na­tion­al Trade Law, were both set up in 1966. And for the first few decades of their exis­tence, they were used rel­a­tive­ly spar­ing­ly — there were only 50 investor-state cas­es before 2000.

But with the expan­sion of bilat­er­al invest­ment treaties and free trade agree­ments — most notably, the arrival of NAF­TA in 1994 — the num­ber of investor-state disputes­ has sky­rock­et­ed. Today there are rough­ly 250 out­stand­ing investor-state cas­es world­wide, and last year fea­tured the high­est num­ber of cas­es on record. The surge of such con­flicts has giv­en birth to a niche but high­ly prof­itable transna­tion­al legal indus­try: There are now law firms that cater towards these kinds of suits, some­times hir­ing the very lawyers who have served on the third-par­ty tri­bunals. In most cas­es, both par­ties each appoint one arbi­tra­tor of their choice, who togeth­er agree on an addi­tion­al arbi­tra­tor. Crit­ics have not­ed that pan­elists often come from a rel­a­tive­ly small pool of experts with sim­i­lar back­grounds in law and acad­e­mia — many hav­ing served mul­ti­ple times on tri­bunals together.

As a result, activists say, the courts are prone to cor­rup­tion. It’s a very con­flict-rid­den, inces­tu­ous, cor­po­rate, gov­ern­ment-trea­sury raid­ing oper­a­tion with the side­line casu­al­ties being a whole slew of pro­gres­sive laws and poli­cies,” says Lori Wal­lach, direc­tor of Pub­lic Citizen’s Glob­al Trade Watch.

Typ­i­cal­ly, major cor­po­ra­tions have filed law­suits that tar­get oil, gas and min­ing reg­u­la­tions against the gov­ern­ments of devel­op­ing coun­tries. Latin Amer­i­can and Caribbean nations, for instance, are on the receiv­ing end of about half of the pend­ing oil, gas and min­ing cas­es at the Cen­ter for Set­tle­ment of Invest­ment Dis­putes, the most fre­quent­ly used court, accord­ing to an April 2013 report from the Insti­tute of Pol­i­cy Stud­ies (IPS).

Advo­cates say these cas­es are gen­er­al­ly exam­ples of cor­po­ra­tions push­ing back against these devel­op­ing coun­tries’ attempts to pro­tect their envi­ron­ment. You see these cas­es in sec­tors where there are a lot of changes going on in reg­u­la­tions,” says Sarah Ander­son, who authored the IPS report and pre­vi­ous­ly served on an advi­so­ry com­mit­tee on bilat­er­al invest­ment treaties to the Oba­ma admin­is­tra­tion. That’s what’s hap­pen­ing in a lot of devel­op­ing coun­tries right now. Gov­ern­ments are open­ing their eyes to how much for­eign com­pa­nies have real­ly tak­en advan­tage of them, in terms of their nat­ur­al resources.”

One such high-pro­file instance is the Cana­di­an min­ing com­pa­ny Pacif­ic Rim’s $315 mil­lion law­suit against El Sal­vador. The company’s Unit­ed States sub­sidiary has alleged that the Sal­vado­ran government’s refusal to issue key per­mits to mine for gold in the north­ern province of Cabañas vio­lat­ed investor pro­tec­tions under the Cen­tral Amer­i­ca Free Trade Agree­ment. Arbi­tra­tion is ongoing.

But Ander­son, who now directs the Glob­al Econ­o­my Project at IPS, says that cas­es tar­get­ing gen­er­al­ly pro­gres­sive reg­u­la­tions in North Amer­i­ca, like Lone Pine’s suit against Cana­da, could also be on the rise with the estab­lish­ment of new free trade agree­ments among cap­i­tal-export­ing countries. 

The Unit­ed States is in the final nego­ti­at­ing stages of the Trans-Pacif­ic Part­ner­ship (TPP) — an agree­ment cov­er­ing the Pacif­ic Rim economies of Aus­tralia, Chile, Japan, Malaysia, New Zealand and Sin­ga­pore among oth­ers. The actu­al text of the agree­ment remains a secret, but leaked por­tions have revealed it includes investor-state pro­vi­sions sim­i­lar to those of NAF­TA. Mean­while, the USTR is also in the ear­ly stages of sep­a­rate nego­ti­a­tions with the Euro­pean Union as they draft the Transat­lantic Trade and Invest­ment Part­ner­ship (TTIP). Cana­da is also involved in TPP nego­ti­a­tions and recent­ly com­plet­ed its own free trade agree­ment with the EU, which includes NAF­TA-style investor-state pro­tec­tions. Both the U.S. and Cana­da are expect­ed to ful­ly rat­i­fy the lat­ter deal in the next two years.

Accord­ing to the por­tions of the trade deals that have been made pub­lic, nei­ther agree­ment appears to enhance the grounds for com­pa­nies to sue for­eign gov­ern­ments; they would, how­ev­er, expand the exist­ing dis­pute res­o­lu­tion sys­tem to include coun­tries home to some of the world’s largest and most pow­er­ful mul­ti-nation­als. And giv­en that there are 75,000 cross-reg­is­tered firms between the Euro­pean Union and Unit­ed States, accord­ing to Pub­lic Cit­i­zen, and 30,000 between the Unit­ed States and TPP coun­tries, that’s an incred­i­bly alarm­ing propo­si­tion for trade critics.

As they like to say at [the Unit­ed States Trade Rep­re­sen­ta­tive (USTR) office], we’ve seen these invest­ment rules [used] as part of an offen­sive strat­e­gy to pro­tect U.S. investors abroad,” Ander­son says. But with these new deals that have a lot more major cap­i­tal exporters, we could be in a much more defen­sive posi­tion, hav­ing to defend U.S. laws and reg­u­la­tions from very expen­sive law­suits from for­eign investors.”

The Unit­ed States has nev­er lost an investor-state case — but that could soon change once it incor­po­rates these tens of thou­sands of heavy-hit­ting mul­ti-nation­als and for­eign-char­tered sub­sidiaries into the sys­tem. We’ve dodged the bul­let because pre­vi­ous agree­ments didn’t have cap­i­tal-export­ing coun­tries,” agrees Wallach.

The loom­ing expan­sion of the sys­tem is par­tic­u­lar­ly men­ac­ing to those push­ing for a proac­tive gov­ern­ment role in rel­a­tive­ly under-reg­u­lat­ed fields. In the case of the Unit­ed States or Cana­da, activists warn, those fields could include labor rela­tions, finance or the envi­ron­ment — the kinds of reg­u­la­tions that present pos­si­ble obsta­cles to cor­po­rate expansion.

Under the TTIP, for exam­ple, a U.S. ener­gy com­pa­ny that hap­pens to be cross-reg­is­tered in the Nether­lands could the­o­ret­i­cal­ly chal­lenge new envi­ron­men­tal leg­is­la­tion in an Amer­i­can state — say, a ban on frack­ing — on the grounds that it vio­lates the min­i­mum stan­dard of treat­ment” for investors under the trade agree­ment. Sim­i­lar­ly, new kinds of Amer­i­can finan­cial reg­u­la­tions could find them­selves under attack from British banks.

In gen­er­al, envi­ron­men­tal­ists and trade pol­i­cy crit­ics say, the agree­ments leave pro­gres­sive gov­ern­ment reg­u­la­tions vul­ner­a­ble to a reg­u­lar onslaught of cor­po­rate law­suits. And many see the Lone Pine case as a har­bin­ger of the kinds of reg­u­la­to­ry dis­putes the TPP and TTIP could ush­er in.

Unlike the com­mon law sys­tems in place in the Unit­ed States and Cana­da, inter­na­tion­al arbi­tra­tion pan­els do not have to fol­low prece­dent. But crit­ics still fear the case could dis­cour­age leg­is­la­tors or state offi­cials from intro­duc­ing new envi­ron­men­tal reg­u­la­tions. If the pan­el rules in favor of Lone Pine, says Solomon, it would set an incred­i­bly dam­ag­ing prece­dent for gov­ern­ments look­ing to put in place mora­to­ri­ums or bans [on fracking].”

That could very well be test­ed in the com­ing months. On Mon­day, Quebec’s neigh­bor to the east, New­found­land and Labrador, announced a mora­to­ri­um on frack­ing. The province has already issued explo­ration per­mits on the west­ern coast of New­found­land—an untapped stretch of shale that the oil indus­try esti­mates could be enor­mous­ly valu­able. Now, those per­mits will be ren­dered use­less — at least temporarily.

I think the more we expand the [trade] agree­ments … the more we expand the oppor­tu­ni­ties for com­pa­nies to chal­lenge what would have, pri­or to the agree­ment, been com­plete­ly ratio­nal, legal, nor­mal pub­lic pol­i­cy,” says Trew. When you’ve mul­ti­lat­er­al­ized or glob­al­ized this cor­po­rate rights régime, clear­ly your goal is for it to be used by every­body on every gov­ern­ment, on every country.”

Cole Stan­gler writes about labor and the envi­ron­ment. His report­ing has also appeared in The Nation, VICE, The New Repub­lic and Inter­na­tion­al Busi­ness Times. He lives in Paris, France. He can be reached at cole[at] Fol­low him @colestangler.
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