Evaluate the function and aims of stabilisation clauses and comment on how they seek to achieve the stability that parties’ desire.
Exploitation and Exploration process in the hydrocarbon sector are considered as one of the most regulated activities that operate in national legal systems because there are a number of public interests that occupies them and their significant role in the economy at the national level. Petroleum and its products are one of the international Commodities that are being traded since the 18th century. The development of international oil and gas industry was equivalent to the domestic development in the US in the 19th century. At present most of the oil companies exists in the regions where oil is produced and other small and medium oil companies operate in more than one region. Oil and gas industry is one of the largest growing sectors but is always surrounded by a number of conflicts. The fluctuation in the price of crude oil and oil based products requires an international law which should be applicable to all the countries. Every country has its own rules and regulations which are applied to the development of oil and gas in that country. There are some common concepts and approaches that can be applied to international laws for oil and gas industry. A number of disputes occur in the transaction of petroleum based products like Oil and gas amongst the Oil companies and the host countries. This usually happens because of the conflicts of government with government and private organizations of other countries (Roe, 2011). Witnessing such conflicts there is a great need to form international laws for oil and gas industry which must address the type of legal system used in the particular country, national sovereignty and international treaties and conventions. With respect to the substantive rules of international law applicable to oil and gas industry, the countries with the occurrence of oil and gas are free to change their laws and legal regimes that govern the natural resources. The sovereignty means freedom to make changes in the law but it does not allow violating the international laws for oil and gas sector.
The international law for Oil and Gas sector has surpassed the national borders over the past few years. With the restructuring, privatization, cross border trade of energy, the emergence of a cut-throat market, professional and industry associations, regional integration etc. affects each other for which there is a need for a legal framework that provides a guideline for regulatory implementation. The international law has been developed and expanded for oil and gas sector from the rules of formal diplomacy to handle a number of issues (Mansour & Nakhle, 2016). The international law for oil and gas industry is associated with EU energy Law and Lex Petrolea.
Lex Petrolea covers a broad area of the international law for which the size of the oil and gas industry and significance has to be specified. It can be referred as a specific lawful regime which has been developed to meet some specific requirements associated with oil and gas industry. It can also be viewed as an application of an international law in the area of Oil and gas sector.
EU energy law has grown exponentially in the last 20 years. The EU has issued some directives on the specific energy matters and they addressed particular situation only and had very less significance (Otero & Castrillo, 2013). The series of domestic market directives that accompanied the regulations started with the issues such as cross border transit and transparency and moved on to the discriminatory issues such as upstream licensing directives and utilities procurement etc. The first Directive for energy market appeared in the year 1996, which was followed by the Directive for the Gas market in the year 1998. These are the two legislative instruments that are being followed by two energy law packages from the security of supply Regulations and directives which also included the green energy packages. The green packages include renewable energy, emission trading, energy savings, carbon capture and storage etc.
There is a critical issue of energy security that usually prevails in Oil producing states that have a focus in attracting the investment from foreign countries that includes technical requirements and funding as well for the extraction and exploitation of the natural resources (Fanchi, 2007). Usually, states can either permit an exclusive license or they can permit a non- exclusive license for the growth of oil and gas industry. In the case of an exclusive license, an absolute ownership is granted to the State for underlying petroleum and bestows it for exploitation of petroleum to private entities. The other option that can be suggested is to take on private Companies or investors in a non-risk based or risk based contracts for the work. A risk Based contract e.g. Petroleum Sharing Agreement may engage state unit that may possess either an exclusive or non exclusive license for the exploitation of Petroleum resources. On another hand, a Non risk based contract for the work state may hire a paid Contractor to work under a contract. The region where petroleum is discovered and produced, it is usually shared amongst the Government and the company that has invested in it with respect to the terms and conditions that have been agreed to a contract (Visser & Larderel, 1997). It has been observed and analyzed over past decades that Developed Oil Producing countries usually employ exclusive license approach for the development of Oil and gas resources. Whereas for Developing Oil Producing Countries, they usually employ for risk based contracts under the Petroleum Sharing Agreements.
The exploration and exploitation of Oil and gas are accompanied by some environmental impacts such as air pollution, water pollution, damaged land, oil spills and accidents and fires. At present the social impact has also come into existence that the exploration process also affects the society. The Oil and Gas industry are making so many efforts to manage such environmental issues such as combating deforestation, managing sustainability of the land, atmosphere protection, conservation of biological diversity, protecting oceans and management of radioactive wastes etc. The Oil and Gas industry have actively participated in the development of an effective system to manage the harmful impact of the exploration and drilling process of Oil and Gas (OGEL Team, 2016).
The use of advanced and innovative technology in the management of the harmful effects of drilling process is the key tool that helps in minimizing and controlling the effects. Such initiatives made by the Oil and Gas sector for the management or environmental impacts have been defined in the UNEP and IPIECA. Such initiative includes the application of innovative technology in Malaysia which was applied by Mobil and Shell. The regulatory enforcement and control are the utmost responsibility of the national competent authorities. International law for environment consists of those, substantive, procedural and associational rules which have the rules and regulations for the protection of the environment (Nishith Desai Associates , 2014). It is very clear that because of human activities environment is affected at the very high rate for which it becomes important to safeguard it by some strict laws. Some of the international environmental regulatory frameworks include the Montreal protocol, Basel Convention, MARPOL, UN law of Sea etc.
The resort to the renegotiation and stabilization clauses for investment contracts in international oil and gas industry are acceptable when one may consider the area of conflicts that usually lies amongst the respective domains of Parties under a contract for international Oil and Gas investment. As per the statement of Business professionals the main objective of any multinational company is to increase the profit whereas the government of the Oil producing state basically targets on increasing the revenue. Additionally the host countries under any normal condition need to protect the interest of their citizens against the interest of the multinational investors. Seeking such conditions has led the oil producing state to implement the sovereignty claims for access to resources and take action against the oil and gas investors that may range from complete confiscation of interests of the investor.
The stabilization clauses are defined as the clause that helps to maintain the Multinational investors’ interest by confining the administrative power and legislative laws of the State that aim at the independent modification or ending the original agreement that was entered by the parties without the permission of the Multinational Investors or companies. The Stabilization clause has two variants namely “stricto sensu” and “intangibility”. The “intangibility clause” offers that Government of the host country should not modify the contract of their own or end up the contract (Nliam, 2014). Whereas the “strict sensu” clause generally offers that any Governing Law of the Contract for Investment should belong to that contracting state where the contract was accomplished. This helps in preventing the undesirable application of any successive changes in the state law of contracts. The outcome of the implementation of stabilization clause is to prohibit the application of any laws and regulations in the future which help in tying the contracts for investment permanently to the rules and regulations that were put at the time when an investment contract was being entered.
There are four types of stabilization mechanism which can be employed such as freezing clause, hybrid clause, good will clause and intangibility clause. A typical stabilization clause may freeze the law of the state to make sure that the positive conditions that encouraged the multinational companies or investors to invest in this sector are preserved (Bayode, et al., 2011). Therefore the stabilization clause is referred as a discriminatory weapon for the stability of contract which is mainly positioned in the developing countries and not in the developed and industrialized countries to which the main multinational oil and gas investors belongs. The real meaning that lies with the application of stabilization clause is to offer an advantageous measure for the stability in the contracts which is the critical concern for the investors. Therefore, the stabilization clause can be viewed as a great need for the developing countries of Oil and Gas who relies mainly on the revenue from the sales of Oil and Gas industry with a purpose to undertake the economic projects such as investments in energy security. To a great level, the alternative to the stabilization clause has been originated from the demands and requirements of the multinational companies and investors and the financial organizations with which they are associated to safeguard their investment from any kind of risk which may be political, fiscal, environmental, regulatory etc.
The effectiveness of the renegotiation and stabilization clause is confined with the implication that it is not regarded as the protection for the absolute investment that guarantees the investment in Oil and Gas industry and the parties in contract with Oil and Gas sector and they can work together for an effective indulgence of stabilization and investment protection with the help of these clauses (Khodykin, 2016). For the countries that are developing in the Oil and Gas sector has the ability to get on the modern methods of energy security are dependent on the revenues which can be invested for the exploration of oil and gas resources. The renegotiation and stabilization clause occupies an important position that only attracts investments but also ensures security (Okuthe, 2015).
Bayode, O. J., Adewunmi, E. A. & Odunwole, S., 2011. Environmental implications of oil exploration and exploitation in the coastal region of Ondo State, Nigeria: A regional planning appraisal. Journal of Geography and Regional Planning, March, 4(3), pp. 110-121.
Fanchi, J. R., 2007. PEH:International Oil and Gas Law: Society of Petroleum Engineers, Availble at: https://petrowiki.org/PEH%3AInternational_Oil_and_Gas_Law#International_Law_and_Legal_Systems
Khodykin, R., 2016. Applicable Substantive Law – Chapter 15 – Arbitration Law of Russia: Practice and Procedure: JURIS PUBLISHING LLC, Available at: https://www.jurispub.com/Applicable-Substantive-Law-Chapter-15-Arbitration-Law-of-Russia-Practice-and-Procedure.html
Mansour, M. & Nakhle, C., 2016. Fiscal Stabilization in Oil and Gas Contracts: Evidence and Implication, Available at: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/01/Fiscal-Stabilization-in-Oil-and-Gas-Contracts-SP-37.pdf
Nishith Desai Associates , 2014. Oil and Gas Industry in India: Nishith Desai Associates, Available at: https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Oil_and_Gas_Industry_in_India.pdf
Nliam, S., 2014. INTERNATIONAL OIL AND GAS ENVIRONMENTAL LEGAL FRAMEWORK AND THE PRECAUTIONARY PRINCIPLE: THE IMPLICATIONS FOR THE NIGER DELTA. African Journal of International and Comparative Law, 22(1), p. 22–39.
OGEL Team, 2016. Oil, Gas & Energy Law: Legal & Regulatory documents by Country. [Online]
Available at: https://www.ogel.org/legal-and-regulatory-countries.asp
Okuthe, I. K., 2015. Environmental and Social challenges of oil and gas exploration in Kenya. International Journal of Innovation and Scientific Research, Ausgut, 17(1), pp. 164-174.
Otero, C. & Castrillo, G., 2013. Reflections on the law applicable to international oil contracts. The Journal of World Energy Law & Business Advance, 14 March.pp. 1-34, Available at: https://eprints.sim.ucm.es/20470/1/jwelb.jwt004.full.pdf
Roe, M., 2011. International arbitration: substantive, procedural and mandatory rules. International arbitration: substantive, procedural and mandatory rules, August, Available at: https://www.out-law.com/en/topics/projects–construction/international-arbitration/international-arbitration-substantive-procedural-and-mandatory-rules/
Visser, J. P. & Larderel, J., 1997. Environmental management in oil and gas exploration and production: UNEP, Available at: https://www.ogp.org.uk/pubs/254.pdf
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