Harken v. Costa Rica: U.S. companies employ blackmail in free trade with Central America

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.

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.

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 2004, 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, 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.

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.

U.S. 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 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.



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, D.C. This article is reprinted with permission from Grist Magazine, March 26, 2004. *(See related stories below)



We can still stop CAFTA!

Our representatives and senators will be in their home districts through May 31. We need to hold our elected officials responsible and call on them to vote against the Central American Free Trade Agreement (CAFTA).

The United States Trade Representative and the trade ministers of the five Central American countries officially signed the CAFTA May 28. President Bush had officially notified Congress under the Trade Promotion Authority law (“Fast Track”) on Feb. 20 of the administration’s intention to sign the agreement.

This process could lead to a vote in the House and Senate before Congress’ summer recess July 23. But the momentum is on our side. Republican lawmakers on Capitol Hill in recent weeks have acknowledged that right now they do not have the votes to pass CAFTA in the House.

It is important to impress upon members of Congress the importance of speaking up against CAFTA now, if they are opposed to the trade agreement. It is possible that, if enough opposition is shown, the Bush administration will not introduce the enabling legislation before the November elections.

– Campaign for Labor Rights





Bush, a Harken insider

George W. Bush’s connections to Harken Energy are of the insider type that for lesser mortals like Martha Stewart resulted in jail sentences.

Bush long aspired to own an oil company. A hefty investment in Texas-based Harken seemed just the ticket. “By 1989, Harken was booking big losses but Daddy was president,” writes Molly Ivins in her best-seller, “Bushwhacked.” Harken used every kind of deceit to hide its losses while releasing reports to its investors that all was well.

Bush, on Harken’s board of directors, was named to a “fairness committee” and he told investors that Harken’s bottom line was “the interests and preservation of value for the small shareholders of the company,” Ivins writes. “A month later Bush left the small shareholders holding the bag; he dumped $848,560 of the stock without disclosing the sale” to the Securities and Exchange Commission.

The purpose of the SEC’s disclosure rule “is precisely to inform all shareholders that something may be wrong, by letting them know when someone with insider information sells a large block of stock.”

In September 1989, Harken secured a juicy plum, exclusive drilling rights in the waters off the Emirate of Bahrain. It was considered remarkable that Harken could obtain such a promising contract in the Persian Gulf, where half the world’s oil reserves are buried. But Bahrain was chummy with the first President Bush, whose son was then on the board of Harken Energy. A war was coming and many millions if not billions of dollars in profits could be reaped.

Who could tell then that the son would steal his way into the White House 11 years later and unleash another war for oil in the Persian Gulf?

– Tim Wheeler