Critically evaluate the significance of an ‘Arbitration Clause’ in the context of an Oil & Gas contract.
Every country is dependent on oil and gas for its economic development and its citizens can accomplish their day to day activities smoothly. After the second world war, along with the industrial revolution, the consumption of energy also increased. Not all countries have rich natural resources for exploration or they are not developed enough to explore them with advanced technology. Therefore, many international companies conduct exploration in the countries which are not well equipped to do it themselves. There comes the need for agreements between the host country and international oil and gas companies.
These projects involve a very high investment amount and so comes lots of risk with it. Since two governments are involved in it, so it becomes a matter of their relationship and terms and conditions on which they both agree. Also, the product involved is petroleum, which has a lot of strategic importance to both nations. So, most of the times they choose arbitration method to solve the disputes (Alqurashi, 2005).
Over the years, due to many laws and agreements between host countries and international companies, many arbitral awards have been published which are related to oil and gas industry. These laws and agreements became the raw material from which international law for oil and gas industry were drawn. There were lots of issues (investments, time period) which needs to be under some jurisprudence, in order to deal with them. To lure international petroleum companies, host countries try to generate their interest by various means as discussed below:
License to explore: Initially in order to lure foreign companies, nations uses to give various concessions or license to explore and produce from its petroleum resources. Due to this, later on they were left with very little control of their own country’s resources. This resulted in lower profits, disputes and frustration to the citizens of the host country.
Production sharing agreement: This is done mainly by those countries which lack technical and financial capability and so has to depend on someone to explore in their own land. The main benefit that the host country has that in case the foreign company fails to get any resource facility from the host country, then they have to bear all the failure cost. But if they get any suitable petroleum resource, they will share the profit with the host country (Otero & Castrillo, 2013).
Participation agreement: In this case, both the host country and foreign company invest to explore and locate for petroleum sites. For this they may form a new entity or can have a joint agreement.
Common contractual provisions: In order to protect the interest of the host country and to make them feel secure, there are some contractual provisions like: local labor, training, obligations of domestic marketing, transparency with data, insurance, management etc.
Key principles of contract formation in international commercial transactions and key international law principles and trends in the oil and gas sector: There are so many things that both international company and host countries have to consider before they make a deal. They both have to adjust to each other which is only possible if they understand each other’s requirements and interests. The deal may be of a long time period and they need to understand that environment does not remain same during that period. There can be a political turmoil, natural disasters, war, etc. they have to work for the mutual interests of each other. The host country has to understand that they have to provide safe and secure environment to the people of foreign oil company (Lake, 2007). Also the company has to keep in mind that there can be at times, some inevitable circumstances when things may not go there way, but still they should not compromise with the sovereignty like bribery, corruption, foul play. Some of the things to be considered are given below:
Political Unrest: Since these projects involve very high capital investment, foreign companies should have far sighted vision to evaluate expected risks and its effects. Political unrest can occur at times of war, riots terrorism. A very recent example is about Turkey, which is in Headlines due to lots of political unrest in the country which was not expected by many. There can be many reasons for it that can be beyond the vision of investor an so they should be prepared to face such issues. Under such circumstances, even the current contracts and agreements are of no value. So a company should only invest in foreign countries in case they have some provision to provide compensation for the damage they faced under unfavorable political conditions.
Export credit agencies: Some banks like Overseas Private Investment Corporation (US) give insurance on political risks. There are some countries that are coming out of dictatorship rules or market downfall and so are not very creditable to invest. In such countries, investors can seek insurance, though it can be very expensive and impose strict rules. Since they work with governments of host countries, they make a pressure on governments to protect investors and abide by the rules of the agreements (Talus, 2012). Also in case of dispute, both parties may want it to be settled in their respective courts. Therefore, they should finalize initially only about such issues.
Currency risks: These risks can arise the investment is done in a particular currency and its products are sold in another currency. This will result in abrupt changes in the project’s stability and profitability. This may not be revealed in accounts figures, but is actually happening.
Safety: Investing companies may have lots of safety concerns like kidnapping, robbery, terrorism, physical or mental torture, threat to ladies or children. So safety norms that a company wants should be formulated before like CCTV cameras at sites, guards, fenced sites and houses. The helpers and drivers given should be properly verified of their background.
Bribery: There can also be circumstances when foreign companies may try to bribe the officials of the host country to fulfil their vested interests. Some officials take the bribery and do the agreements as per the companies wish and then whole nation has to pay for it. To avoid such situations, many countries have made strict (FCPA law of the US) laws and fines along with imprisonment in case anyone has found guilty (Besche, 2016).
Trainings: Foreign companies cannot take all the staff from their own country and have to take some employees from the host country. For this they have to give some trainings to the people of the host country. The training is mandatory for them to give and to take some officials on key positions of the project. They have to take training for the employees of foreign companies. The salary and perks given to them should be equivalent to the one given to the staff of foreign companies.
Effectiveness of international law in addressing the environmental impact of oil exploration and exploitation: It became a very common practice for the oil and gas companies to abandon the land after exploiting it to the maximum and the cost to decommission it was very high. No one noticed this thing initially and this practice was continued for many years.
This issue grabbed a lot of attention when Shell Oil declared that they will abandon the Brent Spar (oil storage floating on water). Greenpeace, an environmental organization objected this decision and asked it to decommission the oil storage spot (Brent Spar). Therefore, Shell had to decommission the spot and the cost that they had to pay to do it was quite high.
Now, there are several international rules and conventions that ensure the decommission of the site by the oil and gas company. In 1958, UN passed a law that asks for removal of petroleum sites. Around 38 countries signed that convention since few countries were able to completely remove the offshore oil and gas facilities. Some countries faced few problems as they have some commitments to the petroleum companies by which they have to abide by. In 1982, the United Nations Convention on the Law of the Seas (UNCLOS) was passed, effectively superseding the 1958 Convention. UNCLOS contemplates the partial removal of offshore facilities (Alramahi, 2013).
There are certain set standards that give guidelines for decommissioning of the abandoned facilities. For example International Maritime Organization says that something that is built in less than 100 mt. of water should be completely removed and in case it is built in deeper water then it should be partially removed.
Demonstrate a critical understanding of the importance of oil and gas law: Most of the disputes that occur in commercial transactions of petroleum products are between the international oil companies and the host country. Both belong to different countries and have different laws as per their respective interests. Hence comes the importance of an international law, which can address the interests of both parties like national sovereignty, treaties and laws.
Sovereignty: Sovereignty gives the right to nations to have their control of its natural resources and people of its country. Even if the government privatize certain things, but still it has every right to make nay changes in the ownership or taxes if required for the public and country’s benefit. This also gives them the power to expropriate the property of foreign companies. There can be times when the government changes and the new one wants changes and accordingly make legal changes which everyone has to abide by (Bowman, 2015). This gives a scope to a nation that it can take decisions for its own vested interests. Here comes the need for some international laws. International laws try to solve issues like this by refraining courts to make changes in laws that are dealing with international matters. Also, this law considers sovereign immunity according to which a nation and its resources cannot be sued in the other nation’s courts. So in case government wants to take a property from a foreign company, they cannot do this without appropriate compensation.
In case there is a dispute of violating some terms of a contract between some host country’s company and foreign oil company, most of the nation consider that it does not snoop into the nation’s integrity. This is called restrictive theory of sovereign immunity.
Treaties and Conventions: Agreements that are signed between countries can be in any form like conventions, protocols, pacts or treaties. Treaties are the agreements that are singed between either two countries (bilateral) or many nations (multilateral). Conventions just like treaties, but the number of nations signing it are very high. These all agreements form the basis of International law. All these treaties, conventions are the sources from where international law is made. Whenever there is any dispute, these treaties and international agreements help to solve the disputes (Balogun, 2001). Ratification of a particular convention represents the legal obligation of a participating nation to apply the convention. Some of the treaties are: Vienna Convention, United Nations Convention, the Hague Convention, New York Convention.
Civil Law and Common Law Legal Systems: Domestic laws of the host country and one or more countries that are involved in the oil and gas transactions are different. So has to be a common law or civil law which is capable to resolve the disputes fairly (Scott, 2009).
In case of a civil law, all the issues are solved by civil codes. There is no influence of their previous decisions or other courts. Whereas in case of common law courts, they do lots of probing into the matter before trials in court. The civil course doesn’t do much of probing or interrogatories in order to solve the dispute (Soni & Chatterjee, 2014).
So, it becomes very important to know these systems of law and decide prior to any dispute that which legal system will be followed.
Corrupt Practices Act: Some countries like The United States have domestic laws that regulate the foreign conduct of its citizens. It has an act called FCPA, which exclusively deals with such cases to protect its business. Many other nations also have such laws that control exports. Although this has discouraged the foreign companies to invest in the US. Such foreign controls has been decreased with the times as nations have understood the economic benefits of As free trade with their countries (Daintith, 2011).
Conclusion: So, we can say that international law emerged from various conventions, treaties, cultures, protocols, pacts etc., which are signed between different nations to come to some common consensus on issues related to trade and also to resolve disputes. Since different nations have different laws based on its culture and circumstances and when organization of one country work in another, a lot of issues needs to have a common law that governs its proceedings and disputes. Also, to get fair benefit from this association, some arbitration has to be involved. We studied various aspects of this law by which it helps international trade to happen smoothly with the benefit of everyone.
Alqurashi, Z. A., 2005. International Oil and Gas Arbitration. Arbitrating International Petroleum Disputes: an Analysis of Key Substantive Law Issues, January.
Alramahi, M., 2013. International oil and gas contracts and deal making, Available at: https://my.laureate.net/Faculty/webinars/Documents/2013June_International%20Oil%20and%20Gas%20Contracts%20and%20Deal%20Making.pdf
Balogun, O. A., 2001. Nigeria: Legal Framework Of The Nigerian Petroleum Industry. Nigeria: Legal Framework Of The Nigerian Petroleum Industry, 03 April.
Besche, A. D., 2016. Oil and gas – international law. Oil and gas – international law, Available at: https://www.adeb.no/en/system/oil-and-gas-international-law/
Bowman, J., 2015. International Arbitration. LEX PETROLEA: Sources and Successes of International Petroleum Law, February, Available at: https://www.kslaw.com/library/newsletters/EnergyNewsletter/2015/February/article1.html
Daintith, T., 2011. Principles of oil & gas Law: Sydney Law School, Available at: https://sydney.edu.au/law/news/docs_pdfs_images/2010/Dec/Principles_Of_Oil_and_Gas_Law.pdf
Lake, L. W., 2007. PEH:International Oil and Gas Law. PEH:International Oil and Gas Law, Available at: https://petrowiki.org/PEH%3AInternational_Oil_and_Gas_Law
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.
Scott, R. F., 2009. Oil supply, Oil security and environmental objectives in international law: EOLSS, Available at: https://www.eolss.net/sample-chapters/c14/E1-36-02-01.pdf
Soni, A. & Chatterjee, A., 2014. Governance of the Petroleum and Natural Gas Sector in India: A Status Note: TERI-NFA, Available at: https://www.teriin.org/projects/nfa/pdf/working-paper-15-Governance-of-the-petroleum-and-natural-gas-sector-in-india-a-status-note.pdf
Talus, K., 2012. OGEL Ten Years Special Issue: Internationalisation of Energy Law. OGEL Ten Years Special Issue: Internationalisation of Energy Law.
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