Commercial Contracts in International Oil and Gas Industry

Commercial Contracts in International Oil and Gas sedulousnessThis paper aims to address the issues associated with hanker term oil colour look ats concluded amidst the severalize and international oil companies in call of the political lucks investors tilt to face in such contracts as well as the risk of change of circumstances brought about non by the act of the parties exclusively rather by the time. In doing so, the efficiency of both stabilisation and renegotiation clauses, as means of mitigating these mentioned risks, atomic number 18 critically examined. It argues that stabilization clauses are highly arguable with regard to their validity and effect as they would normally conflict with the real well established principle of international honor of situate sovereignty, alike these clauses are limited only to the change of regulatory mannikin and does not take into consideration the effect of change of other circumstances which whitethorn have a considerable im pact on the parties obligations. Whereas, renegotiation clauses privy be useful to reduce the impact of changes not only the legal framework of the host state but also other circumstances which are beyond the control of the parties should good and clear mechanisms and criteria for implementing these clauses be provided for within the clause.It is widely recognised that regulatory stability of any assumption state is an of the essence(p) element of promoting and encouraging investment in general and to attract and well(p) the confidence of potential foreign investors in particular.1 This is certainly the cocktail dress for aught projects where investors are vulnerable to wide variety of risks throughout the projects life, given the enormous duration and the capital intensive characters of these projects. In addition, the vurnablity of petroleum contracts to the change of circumstances, which may be beyond their control such as price fluctuation in the international energy market, can make the contractual transcription that was one time profitable becoming highly undesirable a few years later.2 Not to mention the very fact that one of the parties of these contracts is state or its agency may well raise the investors concerns that the contractual arrangements once have been secured at the time of negotiating can be disregarded by unilateral states act later.Therefore, it has been the tendency of oil and gas investors to seek shelter against these risks by providing for legal mechanism in the contract in regularize to apologize their impact throughout the project period. These legal mechanisms tend to be in the form of stability guarantees offered by the state, either stabilization clauses or renegotiation clauses, as well as providing for arbitration to be the manner of junk resolution. However, period the latter has become a stable and widely recognized clause aiming to ensure the netiaulty and fairness of resolving disputes arising between the states and IOCs, the former has generated very much concern over their legal validity and effect, simply because of the fact that the main objective of these clauses is to fetter the states right to legislate and tone for reasonably dogged period of time.It is the aim of the second chapter to critically analyze the different views given to stabilization clauses in scholars writing and the relevant arbitration awards in terms of their legal validity under both national and international law and the extent to which these clauses can prevent the state from exercising its sovereign index within its territory. Arguing that the sharp divide among scholars and arbitrators in this regard proves the inadequate and uncertain nature of these clauses, which in turns makes the capability of these clauses to provide absolute protective cover to oil and gas investor questionable.Chapter three goes on to further affirm the refinement reached in the second chapter through using the example o f the Russian petroleum experiment, where the existence of stabilization clauses led to decreasing cooperation between the state and the perseverance and resulted in disrupting the parties relationship as the petroleum activities went on, given the fact that the Russian Petroleum integrity concerned only encouraging the exploration activities while lifting many essential aspects unregulated with the view that if the oil was to be found, sensitive legislation would be enacted. It is from this chapter where this paper comes to the conclusion that not only does stabilization clauses conflict with the principle of state sovereignty and may well be held invalid as a result, but also these clauses have appeared to be variable with the parties needs to flexible mechanism in order to mitigate the risk of changes of circumstances brought about by time rather than parties acts.Finally, chapter quaternity aims to advocate the recent trend of inserting renegotiation clauses into oil and ga s contracts as the proper manner to mitigate not only the political risk of state behavior but also other commercial risks associated with petroleum projects, which in the latter case even the host state can bonk the protection offered by this device. On the other hand, this chapter also recognizes the fact that renegotiation clause may be too flexible, and thus run the risk of the contract being open-ending. Therefore, this chapter argues that the success of this clause depends, to very large extent, on the proper(postnominal) drafting agreed by the parties and whether a clear mechanism and counselor-at-law have been provided to address potential disputes.Thus, this paper argues that the states right to legislate and to regulate should not be subject to negotiation, nor to be used as an inducement for the purpose of attracting investment as such commitment is difficult to be fulfilled in the long term. Furthermore, stabilization clauses have proved to be inefficient and difficu lt to predict as well as inconsistent with the parties needs in such a long term contract. Whereas, renegotiation clauses can achieve the parties aims and objectives of sustaining the agreed contractual arrangements and encouraging cooperation needed in long term contracts through flexible legal mechanisms.2. BIBLIOGRAPHY1. Primary Sources1.1 Judicial decisionsPreussenElektra case (PreussenElektra AG vs Schleswag AG) ECJ C-379/98, European Court reports 2001, I-02099Stardust Marine case (French Republic v Commission of the European Communities) ECJ C-482/99, European Court reports 2002, I-043971.2 European Union subaltern legislationRegulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity, OJ L176/37, 15.07.20032. Secondary Sources2.1 BooksCameron P. D., Legal Aspects of EU power Markets, (Oxford Oxford University Press, 2005).Helm D., strength, the State, and the M arket British Energy Policy since 1979 (Oxford Oxford University Press, 2003).Hunt S., fashioning Competition Work in Electricity (New York John Wiley Sons, Inc. 2002).2.2 ArticlesMeier, G.M., Impact of the power-market loosening on the operation of CHP-plants securing the competitiveness on the district heat market, 29(4) Euroheat and cater/Fernwarme International (2000).Klinge Jacobsen, H., Fristrup, P. and Munksgaard, J., Integrated energy markets and varying degrees of liberalisation Price links, bundled sales and CHP production exemplified by Northern European experiences, 34(18) Energy Policy 3527-3537 (2006).2.3 other2.3.1 Internet sourcesEuropean experience for the Promotion of Cogeneration (GOGEN Europe), Financial and Regulatory aid for Cogeneration in EU (2007) http//www.cogeneurope.eu/publications/reports_and_studies.htm (last visited on 31 November 2008)Lowe, Ph., Applying EU Competition Law to the new liberalized energy markets, (13 May 2003) http//europa.eu.i nt/comm/competition/speeches/text/sp2003_012_en.pdf (last visited on 1 December 2008)1 L. Cotula, Reconciling Regulatory Stability and Evolution of Environmental Standards in Investment Contracts Towards a Rethink of Stabilization Clauses, Journal of World Energy Law and Business, vol. 1 (2008), p1642 P. Thomas, Evaluating Stabilisation Clause in Venezuelas Strategic Association Agreement for Heavy-Crude Extraction in the Orinoco Belt The Return of a bury Contractual Risk Reduction Mechanism for the Petroleum Industry p.1