Midstream Business Quotes Partners Williams, Kho, Davis on Impact of Trade Developments on Energy Industry

For its article “How Trade Issues Impact Energy Deals,” Midstream Business quoted Akin Gump international trade partners Stephen Kho and Christian Davis and international arbitration practice head Justin Williams on the potential impact of the U.S.-Mexico-Canada Agreement (USMCA) on energy companies and investors.

Williams, whose practice focuses on energy disputes among other areas, noted that the USMCA could mean greater exposure to political risk for some oil and gas investors. Under the North American Free Trade Agreement (NAFTA), U.S. companies investing in Canada or Mexico had certain protections against, for example, expropriation or discrimination. When, in the eyes of the investor, those protections were breached, NAFTA provided a route to redress via international arbitration— he noted that U.S. energy investors were able to bring claims under NAFTA and obtain damages.

By contrast, William said that the USMCA will change the landscape significantly, as the current U.S. and Canadian governments are against investor-state arbitration. He cited as an example the narrowing of investor-state arbitration between the U.S. and Mexico and its limited application to covered government contracts in sectors such as oil and gas and telecommunications.

Williams said, “This is a really big change. As a U.S. investor, if you think your rights under the USMCA are being violated, it may be your only option will be to sue Canada in the Canadian courts. Most U.S. investors would feel that international arbitration would be a more neutral forum.” He added that one consequence could be that U.S. investors into Canada might structure investments through a Mexican company to attempt to obtain enforceable protections under the Comprehensive and Progressive Trans-Pacific Partnership.

Stephen Kho, who focuses on matters related to trade policy, noted that the new treaty is not as robust in protecting investments, saying, “The USMCA has dialed back protections significantly.” These protections are important to U.S. energy companies who say they need them to protect overseas investments, particularly in emerging economies.

Kho said that the current U.S. administration does not favor investor-state arbitration mechanisms because it believes these encourage U.S. investors to invest overseas, adding that some argue that the USMCA is likely to put U.S. investors and companies at a long-term disadvantage. He said, “If you want to compete globally, you have to look at it from a more practical viewpoint and not force companies in this narrow lane.”

Christian Davis, whose practice focuses on advising clients before the Committee on Foreign Investment in the United States (CFIUS), said the Foreign Investment Risk Review Modernization Act (FIRRMA), which reforms CFIUS, expanding its scope of jurisdiction, among other changes, brings certain noncontrolling investments involving critical technology, infrastructure and sensitive personal data under CFIUS jurisdiction. These new rules could impact energy deals because companies, for reasons of compliance, would need to notify CFIUS in advance of the deal in order to avoid penalties. Petrochemical manufacturing, nuclear power and turbines, within the energy industry, could be among the sectors impacted, along with some of the service providers.

Davis said, “This is more regulation for these industries. For instance, if a non-U.S.-based entity tried to acquire a petrochemical manufacturer, it could trigger a mandatory reporting requirement.”

He added that, in the future, a foreign government-backed entity, such as a sovereign wealth fund, trying to acquire even a controlling stake in a pipeline could be forced to report the transaction for CFIUS review. Davis said, “The government is largely attempting to prevent countries of concern, such as China, from acquiring sensitive technology and acquiring critical infrastructure if it presents a national security concern…The idea is to cast a broad net to review deals that could present concerns even if they involve buyers from allied countries.”