Arbitration, especially when it involves parties that come from around the world, has become increasingly popular the past decade. In the years 2000 through 2008, reports showed that international arbitrations administered by the ICC have increased by as much as 22.5% and those administered by the Singapore International Arbitration Centre by 73%.
Gas and oil are two of the world’s most prized commodities. Interestingly, they are abundantly found in some of the most sensitive countries in the world.
Arbitration, specifically following the UNCITRAL rules, is generally the most commonly adopted method for the settlement of disputes in the oil and gas industries. Several factors have led to this. They include:
1. The technical nature of disputes means an arbitrator who has specialized knowledge is required; 2. The contracts involved anticipate disputes and thereby require provisions for resolution proceedings; 3. Arbitration is more favored by multinational oil and gas companies around the world; and 4. Commercial interests overlap and the contractual relations between the parties prefer arbitration over litigation as litigation is known to be time consuming, adversarial and expensive.
B. Key Issues of Oil and Gas Projects
Investing in gas and oil is risky and complex, and such investments generally involve a relationship between the host government, the governmental agency and the foreign company. The importance of petroleum around the world affects both the consumer and the producer, not to mention that the situation always involves political overtones.
Jurisprudence has shown that the issues involving gas and oil arbitration are diverse, and most comprise both substantive and procedural issues. The following are some of the more popular issues that are constantly present in this kind of arbitration:
1. Expropriation of the host country whether direct or indirect.
This involves determining the kind of control that the host state or the host government will implement. The legal requirements of expropriation and lawful taking is often seen as the basis for drafting the limits of control together with the state or the government’s right of taking foreign property as provided for under international law. Outright expropriation will always be an issue and defining the limits is what should be discussed and decided upon.
2. Validity and enforceability of the stabilization clauses in the contract.
Each state or government has its own legislation, regulatory actions, and jurisprudence. International contracts must, in one way or another, conform to these rules and regulations for their enforceability and also take into consideration the international standards in their formulation.
3. Renegotiation of oil and gas arbitration agreements.
While the main contract is in effect, it is a given that unforeseen circumstances can occur. In cases like this, the question arises as to whether or not these contracts will be renegotiated or whether renegotiation clauses are imperative to the contract’s validity.
4. Resource nationalism.
This is the placing of a country’s energy reserves under the control of national companies to keep these reserves away from the hands of international oil companies except for service contracts and low margin basis agreements.
C. Lead case law
Most parties submit to arbitration due to the simplicity of the process, the speed of the process, and the technical know how of the arbitral tribunal or the arbitrator regarding the subject matter. An arbitration award cannot be set aside simply because the court has a different view of the matter.
ICPO (Nigeria) vs. Nigerian National Petroleum Corporation (2005); 2 Lloyd’s Report 326
IPCO is a subsidiary of a Hong Kong company engaged in the business of constructing gas and oil facilities in Nigeria. It entered into a contract with the Nigerian National Petroleum Corporation which is the state oil company of Nigeria. The project subject of the contract was for IPCO to design and construct a petroleum terminal in Nigeria’s Port Harcourt area. It was stated in the contract, including its arbitration clause, that it would be governed by Nigerian laws and that, in case of a dispute, the arbitration seat would be in Lagos in accordance with the Nigerian Arbitration and Conciliation Act of 1990.
IPCO sought that the award in the amount of USD $ 152,195,971.55 made by the International Commercial Arbitration in Lagos, Nigeria in March 14, 1994 be enforced against the Nigerian National Petroleum Corporation. The company invoked the New York Convention as basis for its enforcement. It appealed the case before the High Court in London for the enforcement of the award. The High Court and the London Court of Appeals held that the award could be partially enforced. Specifically, the courts held, in part, that when it comes to matters of gas and oil contracts, the terms should mandatorily state that Nigerian laws will govern the contract, its arbitration clause, and the seat of arbitration, which is in Nigeria. Considering that the arbitration proceedings were held in Nigeria, the enforcement of the award should also be in that place instead of being taken abroad.
Chevron Corporation and Texaco Petroleum Company vs. Government of Ecuador (December 2006)
Chevron is known to be one of the leading energy companies in the world. The company is engaged in the exploration, production and manufacture of crude oil and natural gas, refining, marketing, distributing and transportation of lubricants and fuels, manufacturing and selling petrochemical products, and power generation through geothermal energy production, among others. Based in San Ramon, California, it filed an international arbitration case before the Permanent Court of Arbitration in The Hague together with Texaco Petroleum Company, a subsidiary. The dispute revolved around seven commercial claims that Texaco had filed in Ecuador from 1991 through 1993.
The tribunal held that the Ecuadorian courts delayed the case with a continuous refusal to rule on these seven cases in violation of the country’s obligation under the bilateral investment treaty with the United States for providing US investors with effective means in asserting their claims and enforcing their rights. It awarded Chevron and Texaco the amount of $96 million taking into account the taxes, compounded interest, and costs related to the preliminary award that was previously announced in March 2010.
Ownership title; Expropriation
RosUkrEnergo vs. Naftogaz (2009)
The case stemmed from the expropriation by Naftogaz of 11 bcm of gas located in a Ukrainian storage after the 2009 Russia-Ukraine gas dispute was ended by a political deal. The Stockholm Arbitration Tribunal ruled, in March 2010, that RosUkrEnergo (or “RUE , a Swiss gas company owned the expropriated gas and further awarded 1.1 bcm of gas instead of damages.
Compensation for the nationalization of oil industries
Exxon Mobil Corp. and ConocoPhillips vs. Government of Venezuela (November 2010)
In 2007, the Venezuelan government nationalized the oil industry, and that resulted in minority stake holdings of foreign corporations in the multi-billion dollar projects located in the crude region of the Orinoco Belt. Because of this, Exxon Mobil Corp. and ConocoPhillips, two US oil companies, sought payment for the nationalization of these assets. The two companies rejected the terms of the government and pursued international legal proceedings against the country through the arbitration panel of the World Bank.
International mechanisms governing oil and gas disputes continuously evolve. The enforcement of these arbitral agreements is given paramount importance due to their effectiveness together with the cohesive application of international law versus national law and international litigation versus national litigation. Energy development by foreign companies or investors in the exploitation of the energy resources of a host country gives rise to national concerns involving access to natural resources as well as politics.
Furthermore, countries strongly encourage foreign investment for economic growth and, because arbitration is the preferred procedure for dispute resolutions.
Robert Neron is a private arbitrator and is the founder and CEO of Simner Corporation, an international arbitration firm located in Ottawa, Canada. You can visit him to get his advise on your related businesses. His Website: www.neronlaw.com