Assume you are a big-name international resource producer, maybe an oil company. From the following selection, choose two countries where you would most want to operate: Canada, United States, Russia, Venezuela, Bolivia and Ecuador.
That's easy. You'd pick the first two, because the others have had scant regard for the rule of law. At one point or another, each has been accused of expropriation or other acts of aggression toward foreign investors. Since you are accountable to your shareholders, you strike those countries off your list.
Today, however, you might want to strike the United States off the list, too. The response of the Obama White House and Congress to the BP oil leak in the Gulf of Mexico is sure to have foreign investors trembling. As the damage claims roll in like a hurricane, BP has become the world's biggest ATM. The endless payouts encouraged-even demanded-by Washington may result in the company's sale, breakup or bankruptcy.
I doubt BP ever expected to pay the ultimate price for the sub-sea blowout. That's because of the 1990 Oil Pollution Act, passed a year after the ruptured Exxon Valdez supertanker turned Alaska's Prince William Sound into toxic soup. The Act required every oil company to have a detailed containment and cleanup plan for leaks and made them responsible for cleanup costs.
But it also had a key loophole: In recognition that oil exploration was essential to maintain the American right to drive a two-ton SUV two blocks to buy two quarts of milk, it placed a $75-million (U.S.) liability cap on monetary damages payable to public and private parties (except where negligence was proven).
In BP's case, that cap was quickly deemed null and void. On April 30, under relentless pressure from the White House, BP agreed to pay all "legitimate" damage claims. To guarantee the payments, the company set up a $20-billion (U.S.) escrow account, which may have to be topped up again and again.
By midsummer, BP had suspended its dividend and was selling assets in an attempt to hoard cash. Then, the company announced that Tony Hayward, its hapless CEO, would step down in October, and there was speculation that several directors should follow.
If that weren't punishment enough for an oil spill that made Exxon Valdez look like a punctured can of WD-40, the White House asked BP to pay compensation to workers who lost income because of the leak, including the roughnecks on other Gulf drilling rigs. Never mind that some of the workers found themselves out of work precisely because of the legally dubious government moratorium on deepwater drilling. The extended compensation lunge has taken the scope of "damages" into uncharted territory.
In short, the U.S. government dictated financial responsibility in a politically driven way well before blame for the leak had been determined in a court of law. Even if BP is not found criminally liable, it will likely end up paying enormous damages. Some estimates have put the bill as high as $60 billion (U.S.). True, the $75-million (U.S.) liability cap is clearly ridiculously low (Canada has a similar cap, at $40 million in Arctic waters and $30 million off Eastern Canada). But it is the law.
BP's now massive liability may downgrade the world's view that the United States is an investment haven. After the Second World War, the country became the most desirable place on the planet to invest.
Even before the BP spill, however, foreigners had become increasingly wary about investing in the U.S., because of the 2002 Sarbanes-Oxley corporate governance and accounting legislation. The government's attack on BP will only make them more hesitant. Many foreign companies have already started bypassing U.S. stock markets in favour of the Hong Kong and London bourses. The trend is bound to accelerate.
America's loss could be Canada's gain. The TSX is already gaining more foreign listings-especially resource issuers-at the expense of the U.S. exchanges. Chinese oil companies have pretty much given up on the United States, apparently because they see as much political interference there as they do in China. Five years ago, China National Offshore Oil Corp. (CNOOC) tried to buy California's Unocal, triggering a political firestorm in Washington. CNOOC withdrew, and Unocal went to Chevron.
Today Chinese oil companies are virtually invisible in the U.S. Not so north of the border, where they are making multibillion-dollar investments in the Alberta oil sands. In July, the president of CNOOC's Canadian arm, Zheng Li, told The Globe and Mail that many more Chinese companies "will come here to look for resources and to make an investment." It was probably no coincidence that his remarks came as the White House and armies of U.S. lawyers were busy dismantling BP.
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