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International Oil and Gas Arbitration

Arbitrating International Petroleum Disputes: an Analysis of Key Substantive Law Issues

by Dr. Zeyad A. Alqurashi

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ABSTRACT

The exploration and development of oil and gas in developing countries have often been conducted by international oil companies rather than the countries themselves. International petroleum companies and host governments and/or governmental agencies conclude agreements for this purpose. Such agreements have over time retained certain fundamental characteristics. They involve large, complex and risky investments. They involve a relationship between a host government and/or governmental agency and a foreign private company. In addition, due to the strategic importance of petroleum to both consumers and producers, such agreements have always been politically charged. These characteristics help to understand why international petroleum agreements have almost always provided for arbitration as a method for the settlement of disputes.

Over the past thirty years, an increasing number of international arbitral awards relating to the petroleum industry have been published. This jurisprudence provides the source material from which customary law may be drawn. The issues raised and decided in this jurisprudence are many and diverse. They are both procedural and substantive law issues. This research addresses specific substantive law issues pertaining to investment protection and examines how this jurisprudence has dealt with them. The study identifies and categorises the issues with each issue discussed on a case-by-case basis. It analyses the cases by examining the contentions of the parties and the tribunals' awards in order to provide an exposition of the issues discussed along with the factual context of each issue in which it was raised and decided. In addition, the work provides an understanding of the notions and rationale underlying the legal practices reflected in the arbitral jurisprudence.

The work is divided into five chapters and each chapter deals with a separate issue. Chapter one provides an examination of the evolution of international petroleum agreements followed by a brief discussion of the major petroleum arrangements in existence today. The legal nature of international petroleum agreements is also examined in this chapter. Chapter two and chapter four examine the question of direct and indirect expropriation. They discuss this ultimate host state control mechanism and its legitimate-as distinguished from its illegitimate-exercise. In chapter three the legal requirements for a lawful taking and the response of the petroleum arbitral practice to the areas of conflict arising out of the limitations on the state's right to take foreign property are examined. Chapter three addresses the question of what kind of interference short of outright expropriation constitutes expropriation. The chapter studies how this question has been addressed by the international arbitral practice relating to the petroleum industry. Chapter four addresses the question of the validity and efficacy of stabilisation clauses. It also examines to what extent such clauses can ensure that the contract will not be altered by a state legislative or regulatory action and the response of the petroleum arbitral practice to the question of stabilisation clauses. Chapter five discusses the issue of the renegotiation of international petroleum agreements when the contractual equilibrium changes due to unforeseen circumstances. It examines among other things the contribution of the petroleum arbitral practice to the concept of renegotiation.

The Structure of the Study

The study is presented in seven chapters. The significance of the study, objectives, scope of the study and the methodology are delineated in the introduction. Chapter one serves as a background to the study and introduces the subject of international petroleum agreements and their legal nature.

Chapter two examines the question of the risk faced by the foreign investor that the state may take all or a portion of the investor's property located in the host country. The aim of chapter three and chapter four is to examine the ultimate host state control mechanism over petroleum companies working within its territory and its legitimate - as distinguished from its illegitimate - exercise. The legal requirements for a lawful taking under international law are also discussed. This discussion is followed by an analysis the response of the petroleum arbitral practice to the areas of conflict arising out of the limitations on the state's right to take foreign property under international law.

Chapter three scrutinises the question of state measures affecting foreign investment in an indirect manner. This question has become increasingly prominent for a number of reasons laid down in the chapter. The chapter examines the question of what kind of interference short of outright expropriation constitutes expropriation and how this question has been addressed by the international arbitral practice relating to the petroleum industry. A number of recent non-petroleum arbitral awards were also discussed in this chapter.

The fourth and fifth chapters study the provisions inserted into individual petroleum agreements in order to eliminate the risk of state interference mentioned above. In particular, the two chapters address, among other thing, the question of the validity and efficacy of such provisions. The validity and effect of stabilisation clauses is examined in chapter four. The latter question is studied against both national law and international law. Finally the chapter addresses the question of how the effect of stabilisation clauses as articulated by the petroleum arbitral practice.

In chapter five the question of renegotiation clauses is examined. A number of issues relevant to the question of the renegotiation of international petroleum agreements are dealt with in this chapter. Such issues include: the question of how such clauses can contribute to the stability of the international petroleum agreements; problem areas of the renegotiation clauses; the renegotiation in the absence of a renegotiation clause and other related issues. This is followed by an examination of the effect of such clauses as articulated by the petroleum arbitral practice.

TABLE OF CONTENTS

• TABLE OF CASES
• ACKNOWLEDGMENT
• ABBREVIATIONS
• INTRODUCTION
• 1. General Considerations Relating to International Petroleum Agreements
• 2. Background to the Study
• 3. Significance of the Study
• 4. The Scope of the Study
• 5. The Objective of the Study
• 6. Research Methodology
• 7. The Structure of the Study

CHAPTER ONE: DEVELOPMENT AND NATURE OF INTERNATIONAL PETROLEUM AGREEMENTS

• 1. Introduction
• 2. Development of International Petroleum Arrangements
  • 2.1. Oil Concessions Prior to the 1950s
  • 2.2. The Major Changes in the Concession System
    • 2.2.1 The Financial Improvement
      • 2.2.1.1. The Equal Sharing of Oil Profits
      • 2.2.1.2. Price control
      • 2.2.1.3. Other financial terms
    • 2.2.2. The relinquishment concept
    • 2.2.3. Working obligations
    • 2.2.4. State Participation
  • 2.3. Major Factors leading to the change
  • 2.4. Emergence of New Contractual Arrangements
    • 2.4.1. The Modern Concession Contracts
    • 2.4.2. The Production Sharing Contracts
    • 2.4.3. Participation Agreements (Joint Venture)
    • 2.4.4. Service Contracts
      • 2.4.4.1. The Pure Service Contracts
      • 2.4.4.2. The Risk Service Contracts
• 3. The Legal Nature of International Petroleum Agreements
  • 3.1. The Importance of Determining the Legal Nature of International Petroleum Agreements
  • 3.2. Contractual and Regulatory Elements in the Petroleum Agreement
    • 3.2.1. Contractual Elements
    • 3.2.2. Regulatory Elements
  • 3.3. The Contrasting views
  • 3.4. The Legal Nature of International Petroleum Agreements: An Appraisal
• 4. Conclusion

CHAPTER TWO : DIRECT EXPROPRIATION AND THE INTERNATIONAL PETROLEUM INDUSTRY

• 1. Introduction
• 2. Terminology
• 3. Property Rights Capable of Being Compensated
• 4. Host States Control Mechanisms over Oil Companies
• 5. The Legal Rights of the Host State to Take Private Property
• 6. The Legal Requirements for a Lawful Taking
  • 6.1. Public Purpose
  • 6.2. Non-Discrimination
  • 6.3. Compensation
• 7. Conclusion

CHAPTER THREE : INDIRECT EXPROPRIATION AND THE INTERNATIOAL PETROLEUM INDUSTRY

• 1. Introduction
• 2. Terminology
• 3. Direct and Indirect Expropriations: Distinction and Examples
• 4. The Test for Indirect Expropriation
• 5. Indirect Expropriation and Modern Investment Treaties
• 6. The Contribution of International Petroleum Arbitral Practice to the Question of Indirect Expropriation
• 7. Conclusion

CHAPTER FOUR : STABILISATION CLAUSES AND INTERNATIONAL PETROLEUM AGREEMENTS

• 1. Introduction
• 2. Stabilisation Clauses Defined
• 3. Petroleum Development Agreements: the Need for Stability
• 4. Typology of Stabilisation Clauses
• 5. Validity and Efficacy of the Stabilisation Clause
  • 5.1. Stabilisation Clauses and the Applicable Law
  • 5.2. The Effect of Stabilisation Clauses under National Law
  • 5.3. The Effect of Stabilisation Clauses under International Law
  • 5.4. Scholarly Opinion
  • 5.5. The Effect of Stabilisation Clauses as Articulated by the Petroleum Arbitral Practice
• 6. Conclusion

CHAPTER FIVE: RENEGOTIATION OF INTERNATIONAL PETROLEUM AGREEMENTS

• 1. Introduction
• 2. The Renegotiability of International Petroleum Agreements: Stability v. Flexibility
• 3. The Renegotiation of International Petroleum Contracts in the Absence of a Renegotiation Clause
  • 3.1. The Adaptation Concepts Provided by the Law Applicable to International Petroleum Agreements
    • 3.1.1. The Major Legal Systems of the World
      • 3.1.1.1 Common Law Systems
      • 3.1.1.2. Civil Law
      • 3.1.1.3. Arab Laws and Islamic Law
    • 3.1.2. International Law
  • 3.2. The Renegotiation of Contracts through Force Majeure and Hardship Clauses
• 4. The Renegotiation of Contracts that Contain a Renegotiation Clause
  • 4.1. The Effect of Renegotiation clauses Used in the International Petroleum Agreements and their Problem Areas
    • 4.1.1. The Triggering Events for Renegotiation
    • 4.1.2. The Extent of Contract Change by Virtue of renegotiation Clause
    • 4.2. Problem Areas of the Renegotiation Procedure
      • 4.2.1. The Duty to Renegotiate
      • 4.2.2. Failed Renegotiations
• 5. The Contribution of International Petroleum Arbitral Practice to the Concept of Renegotiation
• 6. Conclusion
• CONCLUSION
• BIBLIOGRAPHY
• TABLE OF CASES
• ACKNOWLEDGMENT

Published: January 2005
Pages: 340
Price: 225 Euro

Order your copy

Price: 225 Euro.
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