On Monday 27th June, Amati is co-hosting an event with Clean Trade and Kings College London which asks this question: “How did we find ourselves in a situation where Russia has been able to wage full scale war on Ukraine funded largely by oil and gas sales to European nations?” Whilst the frustrations of domestic UK politics continue to grab all the media attention, this question requires deep consideration. But instead, not only does it remain largely unaddressed, but the public discussion of energy supply, windfall taxes and net zero have been at best superficial and at worst, ignorant and irresponsible. This is dangerous.
Blood Oil and borders
In 2016 I had the good fortune to hear Leif Wenar discussing his book “Blood Oil: Tyrants, Violence, and the Rules that Run the World” The book illuminates the ways in which developing nations which discover huge natural resource wealth, instead of becoming rich, become afflicted with extraordinary oppression and violence through the workings of the natural resource curse.
A professor of law and philosophy, Wenar describes the impact of the post-WWII international settlement in bringing an end to the colonial era when strong countries would simply invade and take over weaker ones with desirable natural resources. Since 1945, thankfully, this has no longer remained the case. If one nation takes control of another by force it no longer follows that other nations will recognise the new boundaries. Russia’s partial invasion of Ukraine in 2014 threatened to bring an end to the post WWII settlement as overseen by the UN. Russia’s full-scale invasion in 2022 threatens to tear it up completely. If it does so, it is difficult to see how further wars will be avoided.
The Natural Resources Curse and how to identify it
The point about the natural resource curse is that it derives from a principal of sovereignty which is difficult to challenge. Whilst the post WWII settlement discourages one state from taking over another, it does nothing to prevent someone taking over a state from within by violent means, establishing a regime of total control, wiping out all opposition and managing affairs such that the vast majority of income from natural resource sales to other countries flow directly to the ruling elite, who use this money to further tighten their grip on power.
Witness, for example, the extraordinary and wildly disproportionate brutality which was meted out on the peaceful protests in Syria at the time of the Arab Spring in March 2011. At the time this was deeply shocking. But did we ever ask who funded Assad’s regime? In 2010 Syrian crude oil exports went mostly to the European Union, which spent over $4bn on them that year. So, the pattern of oil and gas sales leading to extreme violence and then sanctions being imposed by developed nations after the event, as we have seen with Russian this year, is nothing new. But we continue to avoid learning the lessons.
Wenar’s book made a series of proposals for how the natural resources curse might be avoided, and it is these that we want to explore with him in Monday’s consultation with investors, industry participants and policy makers. We gave it the title: “Breaking the Link Between Oil & Gas and War” to set out this ambition.
The solution proposed by Wenar arises out of human rights legislation. He suggests that the purchase of natural resources from states where freedom falls below critical levels contravenes Article 1(2) of the International Covenants on Human Rights.
This states “All peoples may, for their own ends, freely dispose of their natural wealth and resources without prejudice to any obligation arising out of international economic co-operation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.”
For Wenar, and the organisation he set up called Clean Trade, this article means that the sale of natural resources from one country to another requires more than compliance with national legislation – it requires that the people of that country disposing of its resources must in a tangible way and as a whole benefit from the sale. If the level of freedom in a country falls below a base level, we believe that the authoritarian regime will arrogate substantially all of the benefits to itself. Therefore the sale should be regarded as illegal. Were this change to be made in the way that Western nations buy oil and gas, we believe that the link between resources and war could be broken.
Amati’s Clean Trade Principles for Investment
How do we determine freedom? My firm Amati Global Investors adopts a simple and easy-to-use framework that we call Clean Trade Principles. When considering an investment in a natural resource project we will first look at the Freedom House Score for the country involved (others might prefer a different source). Freedom House publishes an annual report detailing a freedom score for each country. A score of 67-100 is classified as Free, 34-67 being Partially Free, and 1-33 being Not Free.
The UK scores 93. China scores 9. If a country scores 15 or below we will regard it as being off limits on human rights grounds. This sets the bar very low, and that is deliberate. We should be reluctant as fund managers to override market mechanisms. Investment into natural resource projects can bring significant benefits to the local population, and we consider the potential local benefits of these investments on a case-by-case basis.
Where a country scores between 16-33 we will ask three test questions which were suggested by Wenar to set the minimum conditions for natural resource projects.
1) Is reasonably full information about the proposed project and its terms available to the people in country?
2) Can they safely protest about it if they don’t wish the project to proceed?
3) Is there a realistic chance that such protests will be taken account of? Russia scores 19, but fails these three tests. If the answer to these questions is “yes” on the balance of probability, we will view the project as passing the human rights pre-conditions under Clean Trade principles, and then go on to review the project for all the normal investment criteria.
Security and affordability of energy are vital too
In 2021 the debate around energy in developed markets became focused on shutting down oil and gas production. An orthodoxy emerged in public debate that this would somehow help the journey to net zero. Fund managers advertised “low carbon” portfolios which would obviously exclude oil and gas. I argued that this was a profound mistake. Environmental issues are of course important – but so is the security of supply and affordability of energy.
Greenhouse gas emissions from oil and gas are not a supply problem, they are a demand problem. The demand problem is huge because almost every aspect of modern life in developed countries relies on oil and gas for power and will continue to do so for many years to come. If we shut down domestic production without first reducing demand, all that happens is we buy more oil and gas from overseas. What we don’t do is use less of it. Not only will the oil and gas we buy instead mostly come from resource cursed countries (which we should regard as lacking legal status to sell it to us), but it will also come with a higher carbon footprint and likely be produced with much lower environmental standards. We have ignored energy security at our peril.
There is no greater human disaster than war, and net zero ambitions are pointless without peace. The goal of peace requires us to set new conditions over where we buy oil and gas and the other strategic natural resources of the future from.
If you would like to attend “Breaking the Link Between Oil & Gas and War” with Leif Wenar and other eminent speakers on Monday 27th June at 14:00, Kings College London, please email email@example.com.
Paul Jourdan, CEO Amati Global Investors
See also: Junior oil and gas shares to consider