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Cutbacks by resource firms to spark disputes with governments: report

Empty trailers to house workers at the site of the gold and copper mine exploration project of Tethyan Copper Company (TCC) are seen in Reko
Empty trailers to house workers at the site of the gold and copper mine exploration project of Tethyan Copper Company (TCC) are seen in Reko

By Eric Onstad

LONDON (Reuters) - Disputes between resource groups and governments are likely to keep increasing as commodity prices fall and companies slash spending on new projects, according to a report by London-based think-tank Chatham House.

"In the current climate, companies are focused on cutting expenditures and cutting their investments, especially on big greenfield projects," Jaakko Kooroshy, a research fellow at Chatham House and an author of the report, told Reuters.

Over the first decade of this century, international arbitration cases between companies and governments in the oil and gas sector shot up tenfold compared with the previous decade while those in mining increased nearly fourfold, the report said.

Disputes ramped up during periods of high prices as many governments felt they were not getting a fair share of profits from their resources, but the current slump in commodity prices has not dampened the tension.

The price of copper is down by nearly a third since touching a record of $10,045 a ton in 2011 and gold has tumbled 35 percent since hitting a record of $1,920 an ounce the same year.

Chilean copper producer Antofagasta and Canada's Barrick Gold have gone to international arbitration to demand compensation after abandoning hope of mining the Reko Diq copper and gold project in Pakistan's poorest region of Baluchistan, where the provincial government refused a license for the venture.

In the energy sector, Argentina last year seized Repsol's majority stake in energy company YPF , but the Spanish company is expected this week to accept what sources close to the board said was a preliminary $5 billion compensation offer from Argentina.

"Higher prices have brought more disputes but the converse may not be true - falling prices could add more fuel to the fire," Paul Stevens, distinguished fellow at Chatham House and lead author of the report, said in a statement.

Companies increasingly face "use-it-or-lose-it" ultimatums from governments if they seek to delay or scale back projects in uncertain markets, he said.

The report suggests that contracts between firms and governments should be more flexible with built-in mechanisms for changing market conditions, such as sliding royalty scales.

"The idea has been around for a long-time and some countries are already practicing this, such as Chile, but if you take a global view, best practice in many countries is not being applied today," said Kooroshy.

"A lot of countries flip-flop between policies, which makes it very difficult for investors to know what they're getting themselves into."

(Reporting by Eric Onstad; Editing by Anthony Barker)

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