Growth of Arbitration in International Energy Sector

This blog is inscribed by Shreshth Srivastava.

Introduction

This blog provides a holistic analysis of the growth of arbitration in the international energy sector.

The importance of energy and natural resources for modern life cannot be overstated. Given the important economic, political, and societal issues at hand, energy-related disputes arise frequently throughout the world, and arbitration has been the most popular means to resolve international disputes in the energy sector. The preference to arbitrate international energy disputes is also reflected in the caseload of major international arbitral institutions, in which energy-related cases constitute a significant part. For e.g. the three related Yukos cases under the Energy Charter Treaty (ECT) has been described by the arbitral tribunal itself as ‘mammoth arbitration’.

Commercial Arbitration In The Energy Sector

International commercial arbitration is the dispute resolution process of choice for the upstream oil and gas industry. Arbitration is not the only mechanism adopted, as upstream contracts will frequently incorporate a multi-tiered dispute resolution procedure, which may provide for amicable negotiations, mediation, or conciliation as a prerequisite to any arbitration proceedings[i].

The advantages of resolving upstream oil and gas disputes through commercial arbitration, in comparison to the alternative of litigation, are largely the same as in the other sectors and contexts. Nevertheless, the benefit of resolving disputes in a non-partisan forum is feasibly prized even more highly in the upstream case; this is because many contracts are entered into by private parties with host states or state-owned entities, where the alternative submission before the courts of the host state, of disputes arising over the sovereign natural resources of that state, would be an unappealing proposition for almost any upstream investor[ii]. Arbitration regarding upstream typically involves disputes drawn from three broad categories, in varying proportions (1) disputes between an oil and gas exploration and production company and a host state under a concession agreement or, more commonly, a production- sharing agreement (PSA); (2) disputes between an oil and gas exploration and production company, or consortium, and its contractors- the most financially significant and high profile of which are invariable of high disputes; and (3) disputes between joint ventures under a joint operating agreement (JOA) between two or more oil and gas exploration and production companies.

Role Of Arbitration In Joint Operating Agreement

The Joint Operating Agreement creates a contractual overlay that serves to individualize the rights and obligations of each block participant and to share the risks and rewards of developing the relevant contract area.

Arbitration is the preferred dispute resolution mechanism in JOAs. In particular, institutional arbitration rules differ in the scope of the tribunal’s rights and duties. The parties to JOAs are generally reluctant to allow tribunals to depart from the clear words of their carefully negotiated agreement. But the question is which model does JOA uses in the Arbitration?

The most widely used model form JOA is probably the document issued by the Association of International Petroleum Negotiators (AIPN). The latest AIPN Model International JOA dates back to 2012, but am optional Exhibit G was published in 2014 to deal in more detail with gas extraction. The best thing about this model is that it is evolutionary and has been evolving since 1990 when its initial version was passed. AIPN is not only the single model which JOA follows apart from AIPN we have American Association of Petroleum Landmen (AAPL), Canadian Association of Petroleum Landmen (CAPL), Oil and Gas UK Limited (OGUK), Norwegian Petroleum Directorate (NPD) and Australian Mining and Petroleum Lawyers Association (AMPLA). The principal benefit of a model form, however, is that parties can expect these model forms to reflect industry practice and take account of significant events, disputes, or jurisprudence that have previously arisen in relation to particular issues under the JOA.[iii]

International Arbitration In The Mining Sector

Although some of the disputes discussed have yet to be completely resolved, many mining disputes, like Churchill, have been resolved by international arbitration. In general, the parties to a mining dispute involve the aforementioned key actors in the mining sector: majors, mid-tiers, nationals, and juniors and because, in essence, a nation is the state where the company is located, disputes with a national as a party will be an investor-state dispute.[iv]

There have been a number of mining arbitration cases, and they generally centre on some form of expropriation by the host state. A recent example of this is the Gold Reserve Case[v], where the Venezuelan Government (under President Hugo Chavez) announced their intention to nationalize the mining sector as it has other areas of the energy sector. The investment by Gold Reserve (a Canadian Company) in developing the mine was put at risk when, in 2009, the Venezuelan Government took control over and seized the mine.

In terms of the environment, mining activities impose a significant environmental risk in many cases. Should environmental damage occur, it is often to the benefit of the entire mining industry that a resolution for potential action is reached very quickly between the parties-both for the environmental reasons and to preserve the reputations of the parties involved? Therefore, international arbitration has tended to occur where new legislation imposes hardship on the operator or, in essence, the mining company in question is denied fair and equitable treatment for its investment[vi]. A second major case arising out of environmental issues, and which involved a topic of more cases to come, relates directly to the IEA process, in this case, the Canadian authorities were accused of ‘second-guessing’, in many ways, the EIA process of the tribunal[vii].

Conclusion

Hence it can be said that the Arbitration in the Energy Sector has become the most prominent method of dispute resolution, for example, two energy-related disputes which have resulted in the largest awards in ICISD history, Dow Chemical Co v Petrochemical Industries[viii] and Occidental Petroleum Corp v. Republic of Ecuador[ix]are solved with the help of Arbitration only. Disputes relating to price review clauses in long-term GSPAs (Gas Supply and Purchase Agreements) have become common in recent years and can have very significant financial consequences given the volumes involved and the long term nature of these contracts. Most GSPAs provide that, if the parties are unable to reach an agreement with regard to a price review request, the dispute shall be resolved through International Arbitrations, it is to be noted that in this arbitration the model of Oil and Gas UK Limited is primarily followed because the laws regarding Gas Supply has been very well defined in this model.

A number of factors have resulted in a dramatic increase in price reviews disputes, particularly in Europe, and the kit is estimated that the numbers will increase gradually, for example, the Stockholm Chamber of Commerce Arbitration saw an increase of more than 100% of cases regarding the disputes in Gas Supply and its transactions. But the question is why such an increase in the number of cases, one of the cause could be the liberalization of the European gas markets and the development of gas hubs in Europe[x]. For example, a dispute may arise as to whether the conditions for the service of a valid notice of forfeiture have arisen, this was the key issue in the ICC arbitration case RSM Corporation v. Victoria Oil and Gas and Rodeo Development Ltd.[xi], a JOA dispute subject to Texas Law concerning the alleged forfeiture of a 38 per cent participating interest in the Logbaba project, in Cameroon. The award, issued in December 2013, is not available, but the outcome of the arbitration is in the public domain following a market announcement by Victoria Oil and Gas[xii]. The notice for forfeiture, in this case, was not upheld because the tribunal found that the available cure period for the alleged default was thirty days, and not the fifteen days contended for by the non-defaulting parties.

According to the author, this growth should not be looked at by the number of disputes solved but by the number of parties opting for this method of dispute resolution.

[i]International Arbitration In The Energy Sector 21 (Maxi Scherer ed. 1st ed. 2018).

[ii] Idat 21.

[iii] The Association of International Petroleum Negotiators, https://www.aipn.org/forms/store/Product/Form/Public/gas-balancing-agreement (last visited Feb. 12, 2019).

[iv] Toni Eerola, The recent uranium and current mining disputes within the framework of environmental protests in Finland (2015) 4 Mineral Resources in a Sustainable World 1515, http://virtual.vtt.fi/virtual/sam/files/Uranium%20and%20mining%20disputes.pdf. (last visited Jan 25, 2020).\

[v] ICSID Case No ARB (AF)/09/01.

[vi] Supra note 1 at 142

[vii] Clayton & Bilcon of Delaware Inc v. Government of Canada, UNCITRAL, PCA Case No 2009-14.

[viii]ICSID Case No ARB (AF)/05/10.

[ix]ICSID Case No ARB (AF)/08/11

[x]European traded gas hubs: An updates analysis on liquidity, maturity and barriers to market integration, Oxford Energy.org,https://www.oxfordenergy.org/publications/european-traded-gas-hubs-updated-analysis-liquidity-maturity-barriers-market-integration/?v=c86ee0d9d7ed (last visited May 21, 2019).

[xi]ICSID Case No ARB (AF)/06/01.

[xii]RSM v VOG and RDL Arbitration, Victoria Oil And Gas Public Domain, http:// www.victoriaoilandgas.com/sites/default/files/news/20131213VOGRNSreArbitrationFINAL.pdf (last visited May 27, 2019).

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