Harken vs Costa Rica:
US companies employ blackmail
in "free trade" with Central America

Mark Engler & Nadia Martine

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 mobilisation 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 US 
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 US$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(CAFTA).

With the US 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.

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.

Harken fails environmental test

Area residents, fishers, indigenous groups, and environmentalists 
learned of the deal by reading about it in the newspapers. They 
quickly realised 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 US$12 million in the deal, it turned to international 
investment treaties to sue Costa Rica — for US$57 billion.

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

Costa Rica defend sits sovereignty

In late September 2003, soon after the World Bank's International 
Centre 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 2004, former US Senator Robert Torricelli travelled to 
San Joe to negotiate on behalf of Harken. At the time, the Costa 
Rican Government appeared grateful to be eliminating the spectre 
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, 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.

New threat from CAFTA

As the Harken case has moved forward, so has CAFTA. In December, 
the US finished negotiations with Guatemala, Honduras, El 
Salvador, and Nicaragua on the regional free trade agreement. 
Costa Rica, which had held back over concerns about privatising 
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 US$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 US$13 million to 
Ethyl rather than risk US$251 million in damages.

US Trade Rep Robert Zoellick claims that CAFTA contains strong 
environmental protections. 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.

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 Joe 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 US, 
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.

Mark Engler is a commentator for Foreign Policy in Focus. He can 
be reached via 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, DC.

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Grist Magazine, March 26, 2004