Oiled Again

Free trade agreement threatens Costa Rican environmental protections

by Mark Engler and Nadia Martinez

26 Mar 2004

When most people think of Costa Rica, they don't imagine oil rigs stationed off the pristine beaches. Nor do they envision pit mines cutting into the cloud-forested mountains. But, despite the country's noteworthy conservation efforts, its scenic vistas and extraordinary biodiversity face ongoing threats from extractive industries -- and from international trade deals.

Nearly two years ago, Costa Rican nationals and admirers thought they'd been given reason to rest easy. In May 2002, responding to a large-scale mobilization of the country's environmentalists, President Abel Pacheco announced a moratorium on oil exploration and open-pit mining in Costa Rica. Legislators are currently working to give congressional backing to the executive order and repeal laws that expose the country to extractive industries.

At least one multinational interest isn't happy about the developments, however, and its model of corporate discontent may soon end the prospects of an activist siesta.

Harken Energy, a Texas-based oil company with close ties to U.S. President George W. Bush, had previously obtained rights to search for crude in Costa Rica. Before failing an environmental impact review in February 2002, it had planned to drill offshore. Now Harken is demanding that the Costa Rican government pay upwards of $12 million in reparations for its aborted exploits.

On March 11, Costa Rica announced that it would not accept a proposed out-of-court resolution to the dispute, delivering another blow to the bitter oil interest.

But that's not the last word on the subject. Even as the company contemplates sending the case back into international courts, the Bush administration is brokering a treaty that threatens to make the Harken suit into something more than an obscure legal grudge match. That treaty is the Central American Free Trade Agreement.

With the U.S. and five Central American countries working to ratify CAFTA, it's not just local environmentalists and Texas oil barons closely watching ongoing developments in the Harken dispute. International observers say the case is shaping up as the latest cautionary tale of how "free trade" agreements give corporations the power to trump local environmental laws.
Let Us Harken Back

In 1994, the Costa Rican legislative assembly passed a hydrocarbons law as part of a series of measures designed to comply with a Structural Adjustment Program sponsored by the World Bank and the International Monetary Fund. The law opened the way for foreign corporations to win concessions on oil exploration. Subsequently, a little-known Louisiana-based company named MKJ Xploration successfully bid to prospect in several blocks on the nation's Caribbean coast. The company later sold its Costa Rican interests to Harken Energy.

Area residents, fishers, indigenous groups, and environmentalists learned of the deal by reading about it in the newspapers. They quickly realized that lack of local consultation was only the first of the plan's many problems. Offshore drilling, they argued, would damage coral reefs and mangrove swamps and threaten endangered sea life. They waged a prolonged battle against the deal, and a national board came to take their side. It ruled that Harken's plan was not permissible under the country's environmental impact laws. Shortly thereafter, in denying Harken's appeal, the board cited more than 50 reasons why the company's impact statement did not make the grade.

Harken was furious. Arguing that it had already invested more than $12 million in the deal, it turned to international investment treaties to sue Costa Rica -- for $57 billion.

That's no misprint. Harken wanted $57 billion, a figure it said represented the total projected profits of the scuttled deal. Costa Rica's annual GDP is around $17 billion, and the government's entire annual budget around $5 billion.

Bush with Costa Rican President Pacheco and other parties to CAFTA.
Photo: White House.In late September 2003, soon after the World Bank's International Center for the Settlement of Investment Disputes notified the Costa Rican government of Harken's claim against it, Pacheco announced that his country would not submit to international arbitration. He refused to acknowledge any decision made by the bank's body, insisting instead that Costa Rica's national court system was the legitimate venue for the dispute. A few days later, Harken withdrew its claim and pursued plans to reach an out-of-court agreement.

In January of this year, former U.S. Sen. Robert Torricelli (D-N.J.) traveled to San Jose to negotiate on behalf of Harken. At the time, the Costa Rican government appeared grateful to be eliminating the specter of a costly international lawsuit. Environmental groups, however, greeted Torricelli with protests outside the Environment Ministry. They argued that the negotiations were a form of "oil extortion" -- that Harken was punishing the country for enforcing its environmental laws.

Whether the protests worked or, more likely the case, Costa Rica and Harken were unable to agree on a settlement amount, it now appears that the talks have failed. On March 11, the government announced its position that Harken did not have legal grounds to demand compensation and that Costa Rica is not obliged to pay anything. The dispute, freshly reignited, is on course to return to international arbitration in the near future.

Kill the Fattened CAFTA?

Bigwigs from Central America and the U.S. talk trade.

Photo: U.S. State Department.As the Harken case has moved forward, so has CAFTA. In December, the U.S. finished negotiations with Guatemala, Honduras, El Salvador, and Nicaragua on the regional free trade agreement. Costa Rica, which had held back over concerns about privatizing public industries, was brought into the accord in January. Now, each country must ratify the treaty if it is to become law.

For opponents of CAFTA, the Harken case is a paradigmatic example of how corporations use international agreements to bully countries into dropping environmental protections. CAFTA's investor protections, which are similar to NAFTA's notorious Chapter 11, allow companies to bring complaints directly to international tribunals. Under the new agreement, Costa Rica would not be able to rebuff efforts to bypass its national courts. Instead, it would have to allow deliberations about Harken's astronomical $57 billion "compensation claim" to move forward on the international level.
Regardless of whether such corporate claims are upheld, the threat of a multi-billion-dollar lawsuit is enough to persuade many developing countries to back down on enforcing their environmental laws. The example of NAFTA shows that even powerful countries are susceptible to what activists dub environmental "blackmail." In one famous 1998 case, the Ethyl Corporation sued Canada over its public health ban on MMT, a fuel additive. Canada chose to overturn its environmental provision and pay $13 million to Ethyl rather than risk $251 million in damages.

With such cases on record, Australia refused to include a provision in its trade agreement with the U.S. that would let investors bypass national courts and take disputes to international bodies. But that's something poorer nations, who feel they cannot afford to risk losing access to U.S. markets, do not have the power to do.

Bob says CAFTA is planet-friendly.

Photo: Office of the U.S. Trade Representative.U.S. Trade Rep. Robert Zoellick claims that CAFTA contains strong protections for the environment. Likewise, Costa Rica's minister of energy and environment, Carlos Manuel Rodriguez, argues that CAFTA "presents an opportunity for [Costa Rica] to seriously apply its environmental legislation."

It is true that the agreement includes provisions for citizens to submit charges regarding violations of environmental laws. However, while there are clear consequences for violating the agreement's investor provisions, there is no clear enforcement mechanism to ensure action on public complaints.
Moreover, CAFTA will affect legislative efforts to solidify Pacheco's extractive industries ban. Environmental groups such as the Costa Rican Federation for Environmental Conservation have warned that CAFTA could complicate if not thwart efforts by the assembly in San Jose to reverse the 1994 hydrocarbons law.

"Costa Rica of course can repeal its hydrocarbons law. But under the final CAFTA text, the oil companies would be empowered to sue for lost profits," says Lori Wallach, director of Global Trade Watch at Public Citizen. "Plus, governments could claim that a repeal would infringe on their rights to market access in the service sector."

It remains to be seen if the Costa Rican legislature will continue with existing plans to reverse the law. But it is clear that CAFTA bodes ill for environmental protection in the participating countries. Should a subsequent administration make the decision to go oil-rig-free two or three years from now, it may be nearly impossible to implement.

Of course, that's only if CAFTA gains ratification. In the U.S., the deal faces a bruising battle in Congress if the Bush administration tries to push it through in an election year.

Back in Costa Rica, legislators committed to extending the country's conservationist tradition may yet prove hesitant to subject their environmental laws to the threat of corporate attack -- a threat that the ongoing dispute with Harken has made all too vivid.
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Mark Engler, a writer based in New York City, is a commentator for Foreign Policy in Focus. He can be reached via the website DemocracyUprising.com. Nadia Martinez is a research associate with the Sustainable Energy and Economy Network, a project of the Institute for Policy Studies in Washington, D.C.
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