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International Energy Investment Law: The Pursuit of Stability [2 ed.]
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International Energy Investment Law

International Energy Investment Law The Pursuit of Stability Second Edition PETER D CAMERON

1

3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Oxford University Press 2021 The moral rights of the author have been asserted First Edition published in 2010 Second Edition published in 2021 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Public sector information reproduced under Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-government-licence/open-government-licence.htm) Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2021937960 ISBN 978–0–19–873247–1 DOI: 10.1093/law/9780198732471.001.0001 Printed and bound in the UK by TJ Books Limited Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

For my father, Stewart Cameron (1924–2021): The most reliable friend, the fiercest supporter and the wisest counsellor. With love, forever.

Foreword Disputes in the energy sector have contributed significantly to shape the current status of international investment law. They represent just under half of the cases commenced at ICSID, whether based on consent in international investment treaties, contracts, or foreign investment laws. Indeed, by June 30, 2021, 25% of ICSID cases had emanated from the oil, gas, and mining sectors, and another 13% came from electric power and other energy sources. To similar effect, 142 arbitrations to date have been based on the investment protections in the Energy Charter Treaty. The fact that disputes involving the energy sector have often resorted to international investment arbitration is perhaps not surprising when one considers their profile. Most of these cases involve complex commercial relationships between investors and governments; are expected to last for years, if not decades; require significant financial resources to build and operate; rely on advanced technological know-how; and usually require the development of a substantial fixed infrastructure in the host State. While some of these cases have interpreted industry-specific provisions in energy contracts such as stabilization clauses, many have been based on the obligations found in investment treaties. In particular, such investment treaty cases have considered allegations of breach of fair and equitable treatment, failure to meet legitimate expectations, direct and indirect expropriation, discrimination on the basis of nationality, and umbrella clauses. The number of investment cases arising from the energy sector also represents something very aptly highlighted in the title of this text and this revised second edition: the pursuit of stability. Governments and investors recognize that it is vital to create a stable business environment in the energy sector, and that investment in this sector may be foregone, postponed, or cancelled if the business and regulatory environment in a jurisdiction is unpredictable. The availability of peaceful and effective dispute settlement through arbitration serves a vital role in creating and maintaining stable investment climates. As the drafters of the ICSID Convention noted in 1966, the availability of dispute settlement between States and foreign investors “can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international capital into those countries which wish to attract it.” The stability of investment climates will be even more important in the coming years as governments grapple with unprecedented public policy challenges. These include ensuring access to modern and affordable energy, tackling the impacts of climate change, and quickening the transition to clean energy. Government regulation and private sector investment will be required to meet green investment needs in the energy sector. When these come into conflict, an effective and transparent rules-based dispute resolution mechanism is of paramount importance. Against this backdrop, International Energy Investment Law: the Pursuit of Stability provides a thorough account of the increasingly complex regimes that govern international

viii Foreword investment in the energy sector. It also offers an in-depth analysis of how these laws and regulations have been tested in investment arbitration. In doing so, it provides an invaluable roadmap for policymakers, counsel, and arbitrators as they navigate the field of international investment law and dispute settlement in this critically important sector. Meg Kinnear ICSID Secretary-General, Washington DC August 2021

Acknowledgements A number of people were kind enough to read chapters or sections and provide comments on them. Many of them were past or present colleagues from the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee: Daniel Behn, Stephen Dow, Abba Kolo, Rafael Macatangay, Xiaoyi Mu, and Ugur Ozgur. For the new Chapter on damages and enforcement, I am grateful to Ryan Bausch and Ugur Ozgur for their assistance. My PhD students, Rahmi Kopar and Ozge Varis, now graduated, were good sparring partners on a number of issues addressed in this book. I am also grateful for the insights provided by Robert Armour, John Bowman, Graham Coop, Paul Griffin, David Humphreys, Honore Le Leuch, Peter Leon, Mark Kantor, Antonio Parra, Laurence Shore, Elisabeth Sullivan, and Peter Styles. I have always believed that synergies between the academic world and legal practice can generate fresh insights into familiar problems. Happily, I am not alone in that view. At the Institute for Energy Law in Houston, Texas, David Winn has organized a succession of annual events on International Energy Arbitration which CEPMLP has co-sponsored and which have been an excellent means of bringing together some of the best legal minds engaged in this field. Participation in these events was helpful in the work for this edition, not least through my interviews with professionals and in-house counsel. Similarly, I benefited from participating in several arbitration events organization by the Association of International Petroleum Negotiators, the International Bar Association, and the Global Arbitration Review. While writing this book, I benefited from a professional link with the Scottish Arbitration Centre through the International Centre for Energy Arbitration, which I established with Brandon Malone and Andrew Mackenzie. I am grateful for their many invitations to SAC seminars and workshops and the support of its President, Sir David Edward. The events were both educational and congenial. In my activities as expert witness and more recently as arbitrator, I have benefited from the many professional relationships I have had with lawyers and associates in international law firms, in-house counsel, and barristers. These have greatly enriched my understanding of the practicalities in this field in ways I could never have grasped from a purely academic environment. I am sure that they will see evidence of this in chapters of this book, particularly in the case studies. Indirectly, my students at CEPMLP have been a great influence, and particularly the many students from Africa that I have had the privilege of teaching and supervising. Their enthusiasm for the study of energy, investment, and arbitration, made this Scotsman determined to include a case study on Africa that might—just possibly—meet their expectations. Of course, I am grateful to the assistance and continued support from the various editorial staff at Oxford University Press, most recently Brianne Bellio and Fay Gibbons. None of the above bears any responsibility for errors or shortcomings in the text.

Contents—Summary Table of Cases Table of National Legislation Tables of Treaties and Other International Instruments Abbreviations Glossary Introduction to the Second Edition

xxiii xli li lix lxv lxvii

PA RT I 1. Energy Investment Law

3

2. States, Investors, and Energy Agreements

25

3. Stability Based on Contract

92

4. The Classic Tests of Contract-Based Stability

141

5. Stability Based on Treaty

182 PA RT I I

6. Meeting Challenges to Investment Stability—Across the Energy Spectrum

247

7. Latin America: Treaty and Contract Stability in the Face of Policy Realignment and Crisis

310

8. Russia, Ukraine, and Central Asia: Treaty and Contract Stability in the Post-Soviet Space

400

9. Africa: Treaty and Contract Stability

462

PA RT I I I 10. The Limits to Investment Stability: Environmental and Human Rights Issues

555

11. Damages and Enforcement of Awards

611

12. Guarantees for Long-Term Energy Investments: Expectations and Realities 670 Appendices Select Bibliography Index

695 729 755

Contents—Detailed Table of Cases Table of National Legislation Tables of Treaties and Other International Instruments Abbreviations Glossary Introduction to the Second Edition

xxiii xli il lix lxv lxvii

PA RT I 1. Energy Investment Law A. Energy Investment Law

(1) Energy investments (a) International (b) Scale (c) Long-term (d) The State (e) Price volatility (f) Complexity (2) Context-based features (a) Transformation (b) The legacy factor (3) Frameworks as a legal response (4) The offer of stability

B. Overview of the Book (1) Aims (2) Approach (3) Scope (4) Structure

2. States, Investors, and Energy Agreements A. Introduction B. The Foundations of Partnership

(1) Host states (2) Energy investors (a) A typology (b) The investor: common issues (c) The ECT approach (3) The investment (a) The ECT approach (b) NAFTA (c) ICSID

C. Governance

(1) Energy contracts

1.01

1.04 1.05 1.07 1.10 1.11 1.12 1.15 1.16 1.16 1.20 1.23 1.32

1.42

1.42 1.45 1.49 1.55

2.01 2.05

2.05 2.21 2.24 2.37 2.45 2.47 2.48 2.56 2.60

2.65 2.67

xiv CONTENTS—DETAILED

(2) Sovereignty over energy (3) Arbitration

D. Energy Investment Agreements

(1) Hydrocarbons (a) The PSC (b) The licence or tax-royalty approach (c) The risk service agreement (d) Stability and petroleum agreements (e) The Joint Operating Agreement (2) Natural gas (a) Contract adjustment (b) Pricing and price review (c) Disputes over gas supplies (d) LNG contract variations (e) The state role and public service (3) Electricity and renewable energy (a) Conventional electricity (b) Renewable energy (4) Coal and energy-related mining (a) Extraction (b) Sale and trade (c) Uranium mining (d) Seabed mining (5) Unconventional energy (6) Nuclear energy

E. Conclusions

3. Stability Based on Contract A. Introduction B. Contract, Legislation, and Treaty

(1) Legislative support for contract stability (a) Nigeria (b) Israel (c) Legislature–executive interaction (2) Interplay with international law (3) Choice of law

2.71 2.84

2.94

2.101 2.102 2.111 2.118 2.120 2.122 2.125 2.126 2.128 2.134 2.138 2.139 2.140 2.141 2.147 2.151 2.152 2.155 2.157 2.158 2.159 2.164

2.169 3.01 3.06

3.07 3.10 3.12 3.14 3.15 3.20

C. Stabilization Clauses

3.22

D. Renegotiation: The Rules of Engagement

3.69

(1) Freezing (2) Prohibition on unilateral changes (3) Rebalancing of benefits (4) Allocation of burden (5) The four methods (6) Asymmetry (1) Clarity about aims (2) Triggering event (3) Precise obligations of the parties (4) Coercion (5) Contrasts with hardship

3.26 3.36 3.40 3.52 3.56 3.58 3.70 3.74 3.76 3.80 3.82

CONTENTS—DETAILED xv

E. Enforcement

(1) Can a state bind itself by an investment contract? (2) Arbitration: the powers of the tribunal (3) Remedies

F. International Pipeline Projects

G. Conclusions

(1) The West African Gas Pipeline project (2) The BTC pipeline project

4. The Classic Tests of Contract-Based Stability A. Introduction B. The Key Role of Arbitration C. Lena Goldfields D. Aramco E. Sapphire F. The Libyan Cases

(1) The concession terms (2) Unilateral actions (3) Procedure (4) Internationalization (5) States can bind themselves by contract (6) Compensation (7) Assessment

3.84 3.85 3.89 3.93

3.96

3.103 3.110

3.118 4.01 4.06 4.11 4.16 4.19 4.25

4.27 4.32 4.33 4.36 4.41 4.45 4.48

G. Aminoil

4.51

H. The Iran–US Claims Tribunal Cases

4.78

(1) The concession terms (2) The arguments (3) Renegotiations: content and conduct (4) The award (5) Compensation (1) Amoco International Finance (2) The Consortium Cases (3) Phillips Petroleum (4) Compensation

I. AGIP v Congo J. Conclusions

4.54 4.59 4.61 4.65 4.74 4.82 4.87 4.90 4.94

4.99 4.106

5. Stability Based on Treaty A. Introduction: Expansion of Guarantees to Investors

5.01

B. BITs and the Energy Sector

5.10

C. Stability and Treaty-based Standards

5.14

(1) The IIA framework (2) Scope of treaty-making and use (1) BITs (2) Practicalities

(1) Fair and equitable treatment (2) Legitimate expectations (3) Full protection and security (4) The umbrella clause

5.04 5.07 5.11 5.13 5.15 5.19 5.23 5.26

xvi CONTENTS—DETAILED

D. The Energy Charter Treaty

5.31

(1) Why an energy treaty? (2) Investment: definitions (3) Denial of benefits (4) Substantive protections (5) Transit (6) Dispute settlement (7) The tax carve-out (8) Fork in the road (9) Provisional application (10) The ECT in practice

5.31 5.43 5.47 5.52 5.69 5.76 5.85 5.92 5.98 5.102

E. USMCA & NAFTA Chapter 11

5.110

F. Treaties with Investment Provisions

5.128

G. The Paramount Role of ICSID

5.136

H. Conclusions

5.162

(1) The USMCA (2) The legacy of NAFTA

(1) ASEAN Investment Agreement (2) The Comprehensive Progress Trans-Pacific Partnership (CPTPP) (3) DR-CAFTA (1) The grand bargain (2) Arbitration procedures (3) The additional facility (4) Outcomes

5.111 5.115 5.129 5.131 5.134 5.141 5.143 5.153 5.155

PA RT I I 6. Meeting Challenges to Investment Stability—Across the Energy Spectrum A. Introduction: Rethinking Stability B. Five Challenges

(1) Regulatory acts (2) Taxation measures (a) Retroactivity: Cairn Energy v India (b) Exclusion from treaty scope (3) States of necessity (4) Procedural complexity (5) The energy transition (a) Renewable energy promotion (b) Mandatory closures and phase-outs (c) New energies and treaty disputes

C. Expropriation, Direct and Indirect

D. Stability and Legitimate Expectations

(1) The tests (a) The sole effect test (b) Effects on the investor: legitimate expectations (c) The purpose test (d) The proportionality test (2) Restrictive interpretations (3) Expropriation of contractual rights

(1) The broad scope of FET

6.01 6.09

6.10 6.19 6.23 6.28 6.32 6.45 6.53 6.56 6.62 6.67

6.70

6.76 6.77 6.86 6.89 6.92 6.95 6.99

6.100

6.102

CONTENTS—DETAILED xvii

(2) What is a stable and predictable framework? (3) The main questions (a) Are the investor’s expectations of stability based on contractual commitments? (b) Are the investor’s expectations based on the host state’s legal order? (c) Are the investor’s expectations based on representations? (d) Are the investor’s expectations based on circumstances or context? (e) If the ECT is applicable, what expectations about stability are legitimate?

E. Making Claims: Treaty versus Contract F. Investor Responsibilities G. System Reform and Energy Investment H. Conclusions

7. Latin America: Treaty and Contract Stability in the Face of Policy Realignment and Crisis A. Introduction B. The Pendulum Swings

(1) Venezuela (2) Bolivia (3) Ecuador (4) Argentina

(1) Duke Energy v Peru (2) Aguaytia v Peru (3) Noble Energy and Machalapower v Ecuador

6.108 6.122 6.123 6.126 6.130 6.131 6.134

6.137 6.144 6.158 6.167

7.01 7.11

7.14 7.20 7.24 7.27

C. The Legal Stability Agreement 7.31 (1) Peru7.33 (2) Venezuela7.40 (3) Colombia7.45 D. Testing LSAs: Peru and Ecuador 7.47

E. Treaty v Contract: Forced Renegotiations & Outcomes (Venezuela) (1) Recourse to international arbitration (2) The use of worldwide freezing orders (3) Further nationalization (4) Arbitration and remedies (a) ConocoPhillips (b) ExxonMobil (5) Assessment

F. Testing the International Investment Regime: Rejectionism (Bolivia) G. Treaty-based Protection: Ecuador (1) The VAT cases (a) Occidental (b) EnCana (2) The Law 42 cases (a) Common features of the Arbitrations (b) Use of provisional measures (c) Occidental II (d) Burlington (e) Murphy (f) Perenco (g) Assessment

7.48 7.70 7.76

7.83

7.95 7.100 7.106 7.108 7.110 7.117 7.119

7.122 7.130

7.131 7.134 7.140 7.148 7.151 7.154 7.167 7.176 7.185 7.189 7.196

xviii CONTENTS—DETAILED

(3) Electricity reform impacts (a) Duke Energy (b) MCI Power (c) Ulysseas Inc (4) Pipelines

H. FET, Stability, and Legitimate Expectations: Argentina

(1) CMS (2) LG&E Energy (3) Enron and National Grid (4) Sempra (5) Total (6) Assessment

I. Conclusions

8. Russia, Ukraine, and Central Asia: Treaty and Contract Stability in the Post-Soviet Space A. Introduction B. The Pendulum Swings

(1) Russia (2) Kazakhstan (3) Central Asia and the Caspian (4) Ukraine

7.197 7.198 7.205 7.207 7.209

7.210

7.214 7.215 7.218 7.221 7.225 7.233

7.234

8.01 8.13

8.14 8.27 8.37 8.40

C. Providing Legal Stability

8.44

D. Testing Stability Mechanisms

8.61

E. Stability and Gas Contracting

8.95

F. Engaging with the Energy Charter Treaty

8.109

G. Stability and Mining in the Region H. Conclusions

8.157 8.170

9. Africa: Treaty and Contract Stability A. Introduction

9.01

(1) The procedural approach (2) The multi-tiered approach (1) Contract renegotiations: Russia (a) Sakhalin-I (b) Sakhalin-II (c) Kharyaga PSA (2) Contract renegotiations: Kazakhstan (a) Kashagan (b) Karachaganak (1) Transitioning to a market-oriented framework (2) Transit disputes (3) Conflicts resolved (1) The early awards (2) The Yukos cases (a) Overview (b) Provisional ratification (c) Taxation and other issues (3) Further use of the ECT (a) Kazakhstan (b) Ukraine

8.49 8.54

8.62 8.64 8.66 8.69 8.81 8.83 8.88

8.96 8.100 8.107 8.113 8.120 8.122 8.129 8.134 8.136 8.139 8.149

CONTENTS—DETAILED xix

(1) Legal responses (2) Africa and BITs: South African ‘Rejectionism’ (3) Taxation measures (a) Arbitrability of taxation measures (b) Capital Gains Tax

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria (1) Algeria (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution (2) Egypt (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution (3) Nigeria (a) Political risk and attraction of capital (b) Legal response to risk (4) Disputes (a) The Abo Arbitration (b) The Erha Arbitration (c) The Bonga Arbitration (d) The Agbami Arbitration (e) Resolution

9.10 9.19 9.27 9.27 9.31

9.35

9.37 9.37 9.39 9.60 9.67 9.70 9.70 9.72 9.77 9.97 9.99 9.99 9.107 9.132 9.139 9.142 9.148 9.152 9.166

C. Energy Investment, Phase 2: New Approaches to Stabilization

9.173

D. Other Patterns of Investment Dispute E. Conclusions

9.270 9.275

(1) Uganda (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution (2) Ghana (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution (3) Tanzania (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution (4) Mozambique (a) Political risk and attraction of capital (b) Legal response to risk (c) Disputes (d) Resolution

9.174 9.174 9.184 9.197 9.211 9.213 9.213 9.215 9.223 9.228 9.230 9.230 9.234 9.250 9.256 9.258 9.258 9.259 9.264 9.268

xx CONTENTS—DETAILED

PA RT I I I 10. The Limits to Investment Stability: Environmental and Human Rights Issues A. Introduction B. How Concerns Arise—and Who Has Them C. Sources of Law

10.01 10.07 10.15

D. Raising the Standard of Environmental Protection

10.31

E. Decommissioning and Changes in Law

10.80

F. The Human Rights Debate

10.96

(1) Interrelations—with human rights law (2) Interrelations—with access to justice and public participation (3) The role of standards and liability

10.16 10.19 10.25

(1) Investment contracts 10.35 (a) Tanzania 10.37 (b) Kazakhstan 10.41 (2) Treaty protections 10.46 (a) Claims against states to enforce environmental law 10.48 (b) Claims by investors against takings/regulatory acts 10.49 (c) Environmental claims as counterclaims 10.51 (d) Environmental indemnities, permits 10.52 (e) The costs of a policy change: Vattenfall v Germany 10.53 (f) Responsibility for clean-up: Chevron and TexPet v Ecuador 10.56 (3) Benchmarking 10.63 (4) The Paris Agreement and Urgenda 10.69 (5) Case study: the Sakhalin-II gas project 10.74 (1) Offshore decommissioning (2) Asian exceptionalism (3) A change in law

(1) Energy contracts and stabilization (2) Treaty-based protections (3) Case study: the Chad–Cameroon oil pipeline

G. A Perfect Storm: Human Rights and Environmental Issues in the BTC Transnational Oil Pipeline Project H. Conclusions

10.84 10.88 10.93

10.97 10.111 10.126

10.138 10.151

11. Damages and Enforcement of Awards A. Introduction B. Damages: A Review of Principles and Compensation Standards

11.01 11.07

11.22

(1) Compensation and damages (2) International law applicable to damages (a) Treaty provisions (b) Chorzów (c) The ILC articles (d) Full reparation

C. Valuing Energy Investments

(1) Three main categories (2) Industry-specific aspects (3) Energy transition

11.08 11.10 11.10 11.12 11.15 11.20 11.23 11.35 11.36

CONTENTS—DETAILED xxi

D. Application of the Principles

(1) El Paso v Argentina (a) Overview (b) Standard of compensation (c) Valuation (2) CMS v Argentina (a) Overview (b) Standard of compensation (c) Valuation (3) Ioannis Kardassopoulos and Ron Fuchs v The Republic of Georgia (a) Overview (b) Standard of compensation (c) Valuation (d) Stabilization clauses and valuation (4) Mobil v Venezuela I and II (a) Mobil v Venezuela I (b) Mobil v Venezuela II (5) Tidewater v Venezuela (a) Overview (b) Standard of compensation (c) Valuation (6) Guaracachi v Bolivia (a) Overview (b) Standard of compensation (c) Valuation (7) Stati v Kazakhstan (a) Overview (b) Standard of compensation (c) Valuation (8) Yukos v The Russian Federation (a) Overview (b) Standard of compensation (c) Valuation (9) Occidental v Ecuador (a) Overview (b) Standard of compensation (c) Valuation (10) Murphy v Ecuador (a) Overview (b) Standard of compensation (c) Valuation (11) Union Fenosa v Egypt (a) Overview (b) Standard of compensation (c) Valuation (12) BayWa Renewable Energy v Spain (a) Overview (b) Standard of compensation (c) Valuation

11.38

11.39 11.39 11.40 11.41 11.44 11.44 11.45 11.47 11.54 11.54 11.55 11.61 11.63 11.65 11.65 11.73 11.78 11.78 11.79 11.82 11.85 11.85 11.86 11.88 11.91 11.91 11.93 11.94 11.98 11.98 11.100 11.101 11.109 11.109 11.111 11.112 11.117 11.117 11.118 11.119 11.122 11.122 11.123 11.124 11.128 11.128 11.129 11.130

xxii Table of Cases

E. Enforcement

11.131

F. Settlement

11.172

G. Conclusions

11.189

(1) New York Convention 11.134 (2) The ICSID system 11.136 (3) Practice 11.139 (a) The role of the US courts 11.141 (b) US practice I: the Erha arbitration 11.158 (c) US practice 2: BG Group v Argentina 11.167

(1) The content of a settlement (2) The practice of settling: Spain’s offer to investors

11.179 11.185

12. Guarantees for Long-Term Energy Investments: Expectations and Realities A. What is Energy Investment? 12.01 B. Risk and the State 12.07

(1) Regulation (2) Expropriation (3) Renegotiations (4) Intervention in the arbitral process

12.10 12.15 12.19 12.22

C. The Structure of Legal Stability

12.23

D. The Case Studies

12.51

E. The Energy Transition F. Summary of Findings

12.66 12.70

(1) Stability by contract (2) Stability and the investment law framework (3) Stability by national law

(1) Outcomes

Appendices Appendix I: Energy Charter Treaty (Part III: Investment Promotion and Protection, Articles 10–17) Appendix II: Stability Provisions—Examples from Investment Agreements Appendix III: Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act 1990, as amended in 1993 Appendix IV: Aguaytia-Ecuador LSA and Related Legislative Decrees Appendix V: Association Agreement between Mobil and PDVSA, Article XV Appendix VI: Legal Stability Agreement: Democratic Republic of Timor-Leste Select Bibliography Index

12.27 12.37 12.47 12.56

695 697 703 713 715 721 725 729 755

Table of Cases INTERNATIONAL 9REN Holding S.a.r.l. v The Kingdom of Spain, Award, ICSID Case No ARB/15/15, 31 May 2019�� 5.155, 6.29, 6.97, 6.129 ADC Affiliate Ltd and ADC and ADMC Management Ltd v Hungary, Final Award, ICSID Case No ARB/03/16, IIC 1 (2006), 2 October 2006�� 10.120, 11.56 AES Corporation and TAU Power B.V. v Republic of Kazakhstan, ICSID Case No ARB/10/16, Award, 1 November 2013�� 6.127, 8.139, 8.141 AES Summit Generation Ltd v Hungary, ICSID Case No ARB/01/4, 25 April 2001�� 5.78, 6.126, 6.153, 8.110 AES Summit Generation Limited and AES-Tisza Eromu Kft. v Hungary, Award, ICSID Case No ARB/07/22, 23 September 2010��5.25, 5.58, 6.97, 6.135, 8.110, 11.183 AGIP SpA v Congo, ICSID Case No ARB/77/1, Award, 21 ILM 726 (1982), 30 Nov 1979 ��3.23, 4.03, 4.99, 4.102, 4.105, 11.08 AMCO Asia Corp v Republic of Indonesia, Award (resubmission), ICSID Case No ARB/81/1, 31 May 1990��4.24 AMF Aircraftleasing Meier & Fischer GmbH & Co KG Hamburg (Germany) v The Czech Republic, Final Award, 11 May 2020��5.58 AMTO LLC v Ukraine, Final Award, SCC Case No 080/2005, IIC 346 (2008), 26 March 2008 �� 2.45, 5.30, 5.49, 5.50, 8.110, 8.118, 10.119 APCL Gambia BV v Republic of The Gambia, ICSID Case No ARB/17/40 ��9.271 Abaclat and Others v. Argentine Republic, Settlement Agreement, ICSID Case No ARB/07/5, 29 December 2016�� 11.182 AbitibiBowater Inc. v Government of Canada, Consent Award, ICSID Case No UNCT/10/1, 15 December 2010�� 2.57, 11.179 African Petroleum v Senegal; African Petroleum Gambia Limited and APCL Gambia BV v Republic of The Gambia, ICSID Case No ARB/17/38��9.271 African Petroleum Gambia Limited and APCL Gambia BV v Republic of The Gambia, ICSID Case No ARB/17/39��9.271 African Petroleum Gambia Limited (Block A1) v Republic of the Gambia, ICSID Case No ARB/14/6 ��9.05 African Petroleum Gambia Limited (Block A4) v Republic of the Gambia, ICSID Case No ARB/14/7 ��9.05 Aguas Argentinas SA, Suez, Sociedad General de Aguas de Barcelona SA and Universal SA v Argentina, ICSID Case No ARB/03/19, IIC 230 (2006) 14 April 2006 �� 10.114 Aguas Cordobesas SA, Suez, and Sociedad General de Aguas de Barcelona v Argentina, ICSID Case No ARB/03/18�� 10.113 Aguas del Tunari SA v Bolivia, Decision on Respondent’s Objections to Jurisdiction, ICSID Case No ARB/02/3, IIC 8 (2005), ICSID Review-FILJ 450 (2005), 21 October 2005��2.38, 7.124, 10.113, 10.122 Aguas Provinciales de Santa Fe SA, Suez, Sociedad General de Aguas de Barcelona SA and Interagua Servicios Integrales de Agua SA v Argentina, Order in Response for Participation as Amicus Curiae, ICSID Case No ARB/03/17, IIC 234 (2006) 17 March 2006�� 10.113 Aguaytia Energy LLC v Peru, Award, ICSID Case No ARB/06/13, IIC 359 (2008), 28 November 2008��7.70, 7.71, 7.237, App IV Ahmadou Sadio Diallo, Guinea v Congo, Judgment, Preliminary Objections, ICJ General List No 103, ICGJ 52 (ICJ 2007), 24 May 2007 ��5.05 Alapli Elektrik BV v Turkey, ICSID Case No ARB/08/13, Award 16 July 2012�� 2.44, 2.145 Alcoa Minerals of Jamaica Inc v Jamaica, Jurisdiction, 4 Yearbook of Commercial Arbitration 206 (ICSID, 1975) ��2.60, 4.39

xxiv Table of Cases Alex Genin, Eastern Credit Limited, Inc. And A.S. Baltoil v The Republic of Estonia, ICSID Case No ARB/99/2:��6.133 Alstom Power Italia SpA, Alstom SpA v Mongolia. ICSID Case No ARB/04/10, 18 March 2004 ��8.110 American Manufacturing & Trading Inc (AMT) v Zaire, Award and Separate Opinion, ICSID Case No ARB/93/1, IIC 14 (1997), 36 ILM 1531 (1997), 21 February 1997��5.24 Aminoil. See Kuwait v American Independent Oil Co Amoco International Finance Corp v Iran, Partial Award No 310-56-3 (14 July 1987), 15 Iran-US Cl Trib Rep 189�� 2.73, 2.75, 3.01, 3.23, 3.34, 4.79, 11.20, 11.26, 11.31 Amoco International Finance Corp v Iran, Award on Agreed Terms No 480-55-2 (15 June 1990), 25 Iran-US Cl Trib Rep 301�� 4.79, 4.81–4.83, 4.86, 4.94, 4.95, 4.97, 4.107 Ampal-American Israel Corporation and others v Arab Republic of Egypt, Decision on Liability and Heads of Loss, ICSID Case No ARB/12/11, 21 February 2017 �� 9.05, 9.79, 9.80, 9.96, 9.97 Anadarko Algeria Company LLC and Maersk Olie, Algeriet A/S v Sonatrach S.P.A., (settled March 2012)�� 9.60-9.63, 9.67, 11.172 Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Trading Ltd. v Kazakhstan, Award, SCC Case No V 116/2010, 19 December 2013��5.100, 8.138, 11.30, 11.91 Anglian Water Group v Argentina, UNCITRAL arbitration filed in 2003 �� 10.113 Anglo-Iranian Oil Co case (Jurisdiction), United Kingdom v Iran, Judgment, (1952) ICJ Rep 93, ICGJ 188 (ICJ 1952), 22 July 1952��4.07, 4.08 Anglo-Iranian Oil Co Ltd v Idemitsu Kosan Kabushiki Kaisha, 20 ILR (1953) 305��2.74 Anglo-Iranian Oil Co Ltd v SUPOR, 22 ILR (1955) 23 ��2.74 Antaris Solar GmbH and Dr Michael Goede v Czech Republic, Award, PCA Case No 2014-1, 2 May 2018�� 6.30, 6.150 Armed Activities on the Territory of the Congo, Congo v Uganda, Judgment, Merits, (2005) General List No 116; ICGJ 31 (ICJ 2005), 19 December 2005 ��2.73 Asian Agricultural Products Ltd (AAPL) v Sri Lanka, Final Award, ICSID Case No ARB/87/3, IIC 18 (1990), 4 ICSID Rep 246, 30 ILM 580, 27 June 1990 ��2.38, 5.24 Ayoub-Farid Michel Saab v United Republic of Tanzania, ICSID Case No ARB/19/8��9.248 Azpetrol International Holdings BV, Azpetrol Group BV, and Azpetrol Oil Services Group BV v Azerbaijan, Award, ICSID Case No ARB/06/15, IIC 389 (2009), 2 September 2009��8.110 Azurix Corp v Argentina, ICSID Case No ARB/03/30 �� 10.113 Azurix (J) Corp and ors v Argentina, ICSID Case No ARB/01/12, Decision on Jurisdiction, IIC 23 (2003), 8 Dec 2003, Award, IIC 24 (2006), 23 June 2006, Request for a Continued Stay of Enforcement, IIC 317 (2007), 28 Dec 2007, Decision on Application for Annulment, IIC 388 (2009), 1 Sept 2009��2.38, 6.94, 6.95, 6.118, 7.213, 10.113, 10.120, 11.40 BG Group plc v Republic of Argentina, UNCITRAL, Decision on Liability, 30 July, 2010��5.25 BG Group plc v Argentina, Final Award, Ad Hoc—UNCITRAL Arbitration Rules, IIC 321 (2007), 24 December 2007 ��6.84, 7.210, 7.211, 7.217, 11.30, 11.167 BP Exploration Co (Libya) Ltd v Libya, Award on Jurisdiction and Merits, 53 ILR 297 (1979)�� 3.23, 4.25, 4.33, 4.36, 4.37, 4.41, 4.47–4.49 Balkan Energy Limited (Ghana) v Republic of Ghana, Interim Award, 22 December 2010, PCA Case No 2010-7, Award on the Merits, 1 April 2014�� 9.224, 9.226, 9.228 Banro American Resources Inc and Société Aurifère du Kivu et du Maniema, S.A.R.L. v Congo, Final Award, ICSID Case No ARB/98/7, Award, IIC 26 (2000), 1 Sept 2000 ��2.39 Barcelona Traction, Light and Power Co Ltd, Belgium v Spain, Judgment, (1970) ICJ Rep 3, ICGJ 152 (ICJ 1970), 5 Feb1970��4.10 Barmek Holdings AS v Azerbaijan, Case No ARB/06/16, 16 October 2006��8.110 BayWa R.E. Renewable Energy GmbH and BayWa R.E. Asset Holding GmbH v Kingdom of Spain ICSID, Decision on Jurisdiction, Liability and Directions on Quantum, ICSID Case No ARB/ 15/16, 2 December 2019, Award, 25 January 2021��5.58, 5.60, 5.91, 6.97, 11.128

Table of Cases xxv Bear Creek Mining Corporation v Republic of Peru, Award, ICSID Case No ARB/14/21, 30 November 2017 �� 6.70, 10.117 Belenergia S.A. v Italian Republic, Award, ICSID Case No ARB/15/40, 6 August 2019�� 6.29, 6.150 Biwater Gauff (Tanzania) v Tanzania, Award, ICSID Case No ARB/05/22, IIC 330 (2008), 18 July 2008��2.61, 10.113, 10.114 Blusun S.A. Jean-Pierre Lecorcier and Michael Stein v Italian Republic, ICSID Case No. ARB/14/3, Award, 27 December 2016)�� 6.128, 6.135 Bogdanov v Moldova, SCC Arbitration No V 091/2012, Final Award 16 April 2013 �� 3.03, 6.123, 12.45 Bridas SAPIC v Turkmenistan, Interim Award, ICC Arbitration Case No 9151/FMS/KGA, 8 June 1999��8.39 Bureau Veritas, Inspection, Valuation and Control, BIVAC BV v Paraguay, ICSID Case No ARB/07/9 ��5.27 Burlington Resources Oriente Ltd v Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), Procedural Order, ICSID Case No ARB/08/5, IIC 379 (2009), 29 June 2009, Decision on Jurisdiction, 2 June 2010, Decision on Liability, 14 December 2012, Decision on Counterclaims, 7 February 2017, Annulment Proceeding, Decision on Stay of Enforcement of the Award, 31 August 2017�� 5.26, 5.30, 5.158, 5.161, 6.50, 7.150, 7.176, 7.177, 7.181, 7.182, 7.184, 7.192, 10.51, 12.18 CME Czech Republic BV v Czech Republic, Partial Award and Separate Opinion, Ad hoc— UNCITRAL Arbitration Rules, IIC 61 (2001), 13 Sept 2001, Final Award, Ad hoc— UNCITRAL Arbitration Rules, IIC 62 (2003), 9 ICSID Rep 264, 14 March 2003—Partial Award and Separate Opinion, IIC 61 (2001), 13 September 2001�� 3.81, 5.25, 6.80, 6.103, 7.215, 8.85 CMS Gas Transmission Co v Argentina, ICSID Case No ARB/01/8, Decision on Jurisdiction, IIC 64 (2003), 42 ILM 788 (2003), 17 July 2003, Award, IIC 65 (2005), 12 May 2005, Application for Annulment, IIC 66 (2005), 8 Sept 2005, Decision on Enforcement, IIC 67 (2006), 1 Sept 2006, Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic, IIC 303 (2007), 25 September 2007 �� 2.38, 2.85, 4.03, 5.27, 5.28, 5.30, 5.96, 5.151, 5.158, 6.36, 6.38, 6.40, 6.41, 6.43, 6.84, 6.95, 6.96, 6.103, 6.104, 6.106, 6.108, 6.109, 6.114, 6.118, 6.123, 7.201, 7.210, 7.212–7.215, 7.233, 10.120, 11.40, 11.44, 11.45, 11.82 CSOB v Slovak Republic, Decision on Jurisdiction, ICSID Case No ARB/97/4, 24 May 1999��2.64 Cairn Energy PLC & Cairn UK Holdings Limited (CUHL) v The Government of India, Award, PCA Case No 2016-7, 21 December 2020��6.23, 6.24, Tab 11.1, 11.03 Campos de Pese S.A. v Republic of Panama, ICSID Case No ARB/20/19��6.67 Caratube International Oil Company LLP and Mr Devincci Salah Hourani v Republic of Kazakhstan, Award, ICSID Case No ARB/13/13, 27 September 2017 �� 8.36, 8.141, 8.144 Canepa Green Energy Opportunities 1, S.a.r.l. and Canepa Green Energy Opportunities II, S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/19/4, Decision on the Proposal to Disqualify Mr Peter Rees QC, 19 November 2019��2.25 Cem Cengiz Uzan v Republic of Turkey, Award on Respondent’s Bifurcated Preliminary Objection, Arbitration V 2014/023, 20 April 2016 ��2.45, 5.35 Centerra Gold Inc. and Kumtor Gold Company v The Kyrgyz Republic, Termination Order, PCA Case No. 2007-01/AA278, 29 June 2009 ��8.158 Charanne and Construction Investments v Spain, Arbitration Institute of the Stockholm Chamber of Commerce, Final Award, Case No 062/2012, 21 January 2016��5.57, 5.97, 6.97, 6.123, 6.130, 6.150 Chevron Corp. and Texaco Petroleum Corp. v The Republic of Ecuador, UNCITRAL, PCA Case 2007-02/AA277��10.58 Chevron Corp. and Texaco Petroleum Corp. v The Republic of Ecuador, UNCITRAL, PCA Case No 2009-23�� 10.58, 10.60

xxvi Table of Cases Chevron Corp and Texaco Petroleum Corp v Ecuador, Interim Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 355 (2008), 1 Dec 2008�� 8.152, 10.58 Chevron Overseas Finance GmbH v The Republic of the Philippines, PCA Case No 2019-25 ��6.21 City Oriente Ltd v Ecuador, Decision on Provisional Measures, ICSID Case No ARB/06/21, IIC 309 (2007), 19 Nov 2007�� 7.150, 7.154, 7.155, 7.161–7.164 Commerce Group Corp and San Sebastian Gold Mines Inc v The Republic of El Salvador, ICSID Case No ARB/09/17, IIC 497 (2011) ��5.135 Commisa (Corporación Mexicana de Mantenimiento Integral) S. De RI de CV v Pemex Exploración y Producción, Final Award, ICC Case No 13631/CCO, 16 December 2009��9.168 Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal (‘Vivendi’) v Argentina (First Decision on Annulment) (2002) 6 ICSID Rep 327��7.69, 10.61, 11.59 Compañia de Aguas del Aconquija SA and Vivendi Universal SA v Argentina, ICSID Case No ARB/97/3, Decision on Annulment, IIC 70 (2002), 3 July 2002, Award, IIC 307 (2007) 20 August 2007��2.19, 2.38, 6.16, 6.99, 10.113 Compañia del Desarrollo de Santa Elena SA v Cost Rica, Final Award, ICSID Case No ARB/96/1, IIC 73 (2000), 10 ICSID Rev 69, 17 Feb 2000��6.92 ConocoPhillips Co and ors v Venezuela, Decision on Jurisdiction, ICSID Case No ARB/07/30, IIC 605 (2013), 13 December 2007, Decision on Rectification, 29 August 2019�� 2.41, 5.145, 5.155, 6.75, 7.19, 7.97, 7.110, 7.114, 7.115, 11.66 Continental Casualty Co v Argentina, Award, ICSID Case No ARB/03/9, IIC 336 (2008), 5 Sept 2008 ��6.41, 6.42 Continental Construction and Mining Company Ltd & Dunkwa Continental Goldfields Ltd v Government of the Republic of Ghana, Final Award, ICC Case No. 18294/ARP/MD/TO, 30 July 2015��9.229 Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C v. v Pemex Exploración Y Producción (1:10-cv-00206) District Court, S.D. New York ��11.155, 11.161, 11.163 Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v Republic of Kenya, Award, ICSID Case No ARB/15/29, 22 October 2018 ��6.157 Crystallex v Venezuela, ICSID Case No ARB(AF)/11/2, 4 April 2016�� 6.70, 7.119, Tab 11.1 Cube Infrastructure Fund SICAV et al v Kingdom of Spain, Award, ICSID Case No ARB/15/20, 19 February 2019�� 5.60, 6.150 Daniel W. Kappes and KCA v Guatemala, ICSID Case No ARB/18/43�� 5.135, 10.51 Dann (Mary and Carrie), Case No 11.140 (2000), Inter-American Ct of Human Rights �� 10.123 David Aven et al v Costa Rica, DR-CAFTA Case No UNCT/15/3��10.51 David Aven et al v Costa Rica, 2018, Final Award, 18 September 2018��10.51 Duke Energy Electroquil Partners and Electroquil SA v Ecuador, Award, ICSID Case No ARB/04/19, IIC 333 (2008), 12 August 2008�� 6.131, 7.139, 7.179, 7.180, 7.197, 7.198, 7.200, 7.201, 7.204, 7.215 Duke Energy International Peru Investments No 1 Ltd v Peru, ICSID Case No ARB/03/28, Decision on Jurisdiction, IIC 30 (2006) 1 February 2006, Award and Partial Dissenting Opinions, IIC 334 (2008), 25 July 2008, (Annulment Proceeding), Decision of the ad hoc Committee, 1 March 2011 �� 3.33, 3.35, 5.158, 7.34, 7.46, 7.48–7.50, 7.53–7.55, 7.59, 7.65, 7.70, 7.73, 7.237, 11.09, 12.44 EDF International S.A., SAUR International S.A. and Léon Participaciones Argentinas S.A. v Argentine Republic, Award, ICSID Case No ARB/03/23, 11 June, 2012�� 5.25, 7.233 EDF (Services) Ltd v Romania, Award, ICSID Case No ARB/05/13, IIC 392 (2009), 2 Oct 2009�� 6.92, 6.117, 12.38 EVN AG v Macedonia, Settlement Agreement, ICSID Case No ARB/09/10, 1 June 2011 ��8.136, 11.175, 11.182 East Mediterranean Gas SAE v Egyptian General Petroleum Corp, Egyptian Natural Gas Holding Co and Israel Electric Corp Ltd, ICC Case No 18215/GZ/MHM��9.80

Table of Cases xxvii Eastern Sugar BV v Czech Republic, Final Award, SCC Case No 088/2004, IIC 310 (2007), 27 March 2007��6.96 Eco Oro Minerals Corp v Colombia, ICSID Case No ARB/16/41��10.49 Eiser Infrastructure Limited v Kingdom of Spain (1:18-cv-01686) District Court, District of Columbia�� 11.148, 11.150 Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, Award, ICSID Case No ARB/13/37, 4 May 2017�� 6.29, 6.108, 6.126 Eiser Infrastructure Limited and Energia Solar Luxembourg S.À R.L. v Kingdom of Spain 1:17-CV-03808, Document 11 order and judgment, May 23, 2017 �� 11.148 Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, Decision on the Kingdom of Spain’s Application for Annulment, ICSID Case No ARB/13/36, 11 June 2020�� 5.157–5.159, 11.147, 11.148 El Paso Energy International Co v Argentina, Decision on Jurisdiction, ICSID Case No ARB/03/15, IIC 83 (2006), 27 April 2006�� 3.16, 3.17, 5.29, 5.41, 6.46, 6.123, 7.211, 7.212, 11.21, 11.26, 11.39 Electrabel v Hungary, Decision on Jurisdiction, Applicable Law and Liability, ICSID Case No ARB/07/19, 30 November 2012 ��5.67, 6.123, 6.130, 6.132, 8.110 Electricity Companies case (1925), Recueil des cours 128 (1969-III) 169�� 4.04, 4.36, 4.38 Electricity Company of Sofia and Bulgaria, Judgment No 30, ICGJ 329 (PCIJ 1939), 4 April 1939��7.162 Emilio Agustin Maffezini v Spain, ICSID Case No ARB/97/7, Decision on Jurisdiction, IIC 85 (2000), 25 January 2000, Award, IIC 86 (2000), 11 Nov 2000, Rectification of Award, IIC 87 (2001), 31 Jan 2001��5.16, 5.151, 6.148, 7.154 Empresa Eléctrica del Ecuador, Inc (EMELEC) v Ecuador, Award, ICSID Case No ARB/05/9, IIC 376 (2009), 2 June 2009�� 6.48, 7.197 EnCana Corp v Ecuador, Award and Partial Dissenting Opinion, LCIA Case No UN3481, IIC 91 (2006), 45 ILM 895 (2006), 3 Feb 2006 �� 6.20, 7.48, 7.133, 7.139, 7.140–7.143, 7.161, 7.200, 12.38 Eni Dación BV v Venezuela, ICSID Case No ARB/07/04, 6 Feb 2007��7.19, 7.93 Eni International B.V., Eni Oil Holdings B.V., and Nigerian Agip Exploration Limited v Federal Republic of Nigeria, ICSID Case No ARB/20/41��9.157 Enron Corp and Ponderosa Assets LP v Argentina, ICSID Case No ARB/01/3, Decision on Jurisdiction, IIC 92 (2004), 14 January 2004, Award, IIC 292 (2007), 15 May 2007, Request for Rectification and/or Supplementary Decision of the Award, IIC 318 (2007), 3 Oct 2007�� 2.38, 5.96, 5.151, 5.158, 6.38–6.40, 6.110, 6.112, 7.210, 7.213, 7.214, 7.218–7.220, 7.233, 11.26, 11.40, 11.82 Eskosol SpA in liquidazione v The Italian Republic, ICSID Case No ARB/15/50��6.57 Esso Exploration and Production Nigeria Limited and Shell Nigeria Exploration and Production Company Limited v Nigerian National Petroleum Corporation, Final Award, 24 October 2011(‘Esso et ors v NNPC’)�� 9.128, 9.135, 9.144, Tab 11.1, 11.03 Ethyl Corp v Canada, 38 ILM 1347, 15 April 1997��6.72 Eureko BV v Poland, Partial Award (19 Aug 2005)��5.61 Europa Nova v Czech Republic, Award, 15 May 2019��6.30 F-W Oil Interests Inc v Trinidad and Tobago, Award, ICSID Case No ARB/01/14, IIC 395 (2006), 20 Feb 2006 ��3.78 Factory at Chorzów (Merits) (Germany v Poland) 1928 P.C.I.J. (ser. A) No 17, (Indemnities) Order of 25 May 1929 (Series A, No 19)��4.02, 11.12, 11.13, 11.15, 11.19, 11.41, 11.56, 11.189 Fedax NV v Venezuela, ICSID Case No ARB/96/3, Decision on Jurisdiction, IIC 101 (1997), 5 ICSID Rep 183 (1997), 11 July 1997, Award, IIC 102 (1998), 9 March 1998 �� 2.60, 2.61, 5.49, 7.19 Federal Elektrik Yatirim ve Ticaret A.S. and others v Republic of Uzbekistan, ICSID Case No ARB/13/9��8.138

xxviii Table of Cases Feldman Karpa v Mexico, Award, ICSID Case No ARB(AF)/99/1, IIC 157 (2002), (2003) 18 ICSID Rev—FILJ 488, (2003) 42 ILM 625, 16 Dec 2002��6.81 Fireman’s Fund Insurance Co v Mexican States, ICSID Case No ARB(AF)/02/01, Award, IIC 291 (2006), 17 July 2006 �� 10.120 Foresight Luxembourg Solar I S.A.R.L. and others v Kingdom of Spain, SCC Arbitration 2015/150��6.150 Fraport AG Frankfurt Airport Services Worldwide v Philippines, Award, ICSID Case No ARB/03/25, IIC 299 (2007), 16 August 2007�� 6.155, 6.156 Frontier Petroleum Services Ltd v The Czech Republic, UNCITRAL, Final Award, 12 November, 2010 �� 5.25, 6.126 Funnekotter et al v Republic of Zimbabwe, ICSID Case No. ARB/05/6 (award rendered 22 April 2009)��3.94, 6.35 Gabcikovo-Nagymaros Project (Hungary v Slovakia), Judgment, Merits [1997] ICJ Rep 7, ICGJ 66 (ICJ 1997), 25 Sept 1997��6.43 Gabriel Resources Ltd and Gabriel Resources (Jersey) Ltd and v Romania, ICSID Case No ARB/15/31��10.52 Galway Gold Inc. v Republic of Colombia, ICSID Case No ARB/18/13��10.49 Gas Natural SG SA v Argentina, ICSID Case No ARB/03/10, Decision on Jurisdiction, IIC 115 (2005), 17 June 2005��2.38 Genin (Alex), Eastern Credit Limited Inc. and A.S. Baltoil v Republic of Estonia, Award, ICSID Case No ARB/99/2, IIC 10 (2001), 25 June 2001��6.114, 6.133, 7.230, 8.11 Getma International and Others v Republic of Guinea, Award, ICSID Case No. ARB/11/29, 16 August 2016�� 9.17 Glamis Gold Ltd v United States, Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 380 (2009), 14 May 2009�� 10.124 Global Gas and Refinery Limited and Shell Petroleum Development Company of Nigeria Limited, Award, ICC Case No. 20331/TO, 30 May 2017��9.132 Goetz (Antoine) v Burundi, ICSID Case No ARB/95/3, IIC 16 (1999), 6 ICSID Rep 3, 15 ICSID Rev 457, 26 YB Com Arb 26, 10 Feb 1999 ��2.38, 6.18 Gold Reserve Inc v Venezuela (Award) ICSID Case No ARB(AF)/09/1 (2014)�� 2.44, 11.32 Gould Marketing Inc v Ministry of Defence, Award No 136-49/50-2, 6 Iran-US Cl Trib Rep 153��4.97 Grand River Enterprises Six Nations Ltd et al v United States, http://www.state.gov/s/l/ c11935.htm Inter Am Ct HR �� 10.124 Group Menatep: Hulley Enterprises Ltd; Yukos Universal Ltd; Veteran Petroleum Trust v Russian Federation PCA Case Nos. AA 226, 227 and 228 ��5.91, 6.70, 8.110, Tab 11.1, 11.98 Greentech Energy Systems A/S, Novenergia II Energy & Environment (SCA) SICAR, Novenergia II Italian Portfolio SA v The Italian Republic, SCC Arbitration V (2015/095), Final Award, 23 December 2018 ��5.60 Guadalupe Gas Products Corporation v. Nigeria, ICSID Case No ARB/78/1��9.162 Guaracachi America, Inc. and Rurelec PLC v The Plurinational State of Bolivia, UNCITRAL, Award, PCA Case No 2011-17, 31 January 2014��11.85 Helnan International Hotels A/S v Egypt, Decision on Objection to Jurisdiction, ICSID Case No ARB/05/19, IIC 130 (2006), 17 Oct 2006��2.61 Heritage Oil & Gas Limited v The Government of the Republic of Uganda, PCA Case No: 2011-12 and 2011-13��9.203 Highbury International AVV and Ramstein Trading v Bolivarian Republic of Venezuela, Decision on Annulment, ICSID ARB/11/1, 9 September 2019��5.158 Himpurna California Energy Ltd v PT.PLN (Persero), Fina Award, Ad hoc UNCITRAL Arbitration Rules, 4 May 1999��6.34 Holiday Inns SA and others v Morocco, ICSID Case No ARB/72/1��9.11 Hrvatska Elektropriveda v Slovenia, ICSID Case No ARB/05/24, 28 Dec 2005��8.110 Hulley Enterprises v The Russian Federation, Interim Award on Jurisdiction and Admissibility, UNCITRAL PCA Case No AA 226, November 30, 2009�� 5.47, 5.49, 5.96, 5.101, 8.123

Table of Cases xxix Hydro S.r.l., Francesco Becchetti and others v Republic of Albania, involving investment in a local hydroelectric project, ICSID Case No ARB/15/28, 27 August 2019��5.158 I.C.W. v Czech Republic, Award, 15 May 2019��6.30 I&I Beheer B.V. v Bolivarian Republic of Venezuela, ICSID Case No. ARB/05/4 (discontinued, 28 December 2007)��7.19 Impreglio SpA v Argentina, ICSID Case No ARB/07/17�� 10.113 Inceysa Vallisoletana SL v El Salvador, ICSID Case No ARB/03/26, Award, IIC 134 (2006), 2 August 2006�� 6.48, 6.154 Infrastructure Services Luxembourg S.a.r.l. and Energia Termosolar B.V. v Spain (formerly Antin Infrastructure Services Luxembourg S.a.r.l. and Antin Energia Termosolar B.V.), ICSID Case No. ARB/13/31, Award, 15 June 2018�� 11.148 Interocean Oil Development Co. & Interocean Oil Exploration Co. v Federal Republic of Nigeria, Decision on Preliminary Objection, ICSID Case No ARB/13/20, 29 October 2014�� 9.117, 9.157 Ioannis Kardassopoulos v Georgia, Decision on Jurisdiction, 3 July 2007, Award, ICSID Case No ARB/05/18 and ARB/07/15 3 March 2010 �� 5.67, 5.98, 5.100, 8.110, 8.119, 11.54 Isolux Netherlands BV v The Kingdom of Spain, Award, Arbitration SCC V2013/153, 17 July 2016��5.60, 6.128, 6.135, 6.150 Italia Ukrainia Gas S.p.A v Naftogaz, SCC Arbitration V 007/2008��8.98 James v United Kingdom, Judgment of 21 February 1986, ECHR Series A, no 98�� 6.72, 10.17 Jan de Nul NV and Dredging International NV v Egypt, ICSID Case No ARB/04/13, Decision on Jurisdiction, IIC 144 (2006), 16 June 2006 ��2.61 Joy Mining Machinery Limited v The Arab Republic of Egypt, Award on Jurisdiction, ICSID Case No ARB/03/11, 6 August 2004 ��5.27 Kaiser Bauxite Co v Jamaica, 1 ICSID Rep 296 (ICSID, 1975) ��2.60 Karaha Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and PT.PLN (Persero), Ad hoc—UNCITRAL Arbitration Rules, Final Award, 18 December 2000��3.32, 6.34 Khan Resources Inc, Khan Resources B.V. and CAUC Holding Co Ltd v Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012�� 2.46, 5.26, 5.47, 5.61, 5.97 Kuwait v American Independent Oil Co (AMINOIL), Award, 21 ILM 976 (1982), 24 March 1982 ��2.73, 3.77, 3.78, 3.80, 3.92, 3.95, 4.02, 4.51, 4.63, 4.66, 4.72, 4.74, 4.76, 4.82, 4.85, 4.89, 4.107, 4.109, 6.50, 6.70, 11.31, 12.20 LESI SpA et ASTALDI SpA v Algeria, Award, ICSID Case No ARB/05/31, IIC 354 (2008), 4 Nov 2008��2.63 LG & E Energy Corp & ors v Argentina, Decision on Liability, ICSID Case No ARB/02/1, IIC 152 (2006), (2007) 46 ILM 36, 3 Oct 2006 ��5.61, 5.151, 6.01, 6.40–6.43, 6.84, 6.95, 6.131, 7.01, 7.201, 7.210, 7.213–7.215, 7.217, 7.220, 7.222, 11.26, 12.20, 12.38 LSG Building Solutions GmbH and others v Romania, ICSID Case No ARB/18/19��6.63 Lanco International v Argentina, Decision on Jurisdiction, ICSID Case No ARB/97/6, IIC 148 (1998), Dec 8, 1998�� 2.38, 7.200 Lauder v Czech Republic, Final Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 205 (2001), 9 ICSID Rep 66, 3 Sept 2001 �� 5.151, 10.120 León Participaciones Argentinas S.A. v The Argentine Republic, Award, ICSID Case No ARB/03/23, 11 June 2012��7.233 Libananco Holdings Co Ltd v Republic of Turkey: ICSID Case No ARB/06/8, Award, 2 September 2011��2.45, 5.49 Liberian Eastern Timber Corporation v Republic of Liberia, Award, ICSID Case No ARB/83/2, 31 March 1986 ��4.24

xxx Table of Cases Liberian Eastern Timber Corporation (LETCO) v The Government of the Republic of Liberia, 26 ILM 647 (1987) 31 March 1986��4.105 Libyan American Oil Co (LIAMCO) v Libya, Award on Jurisdiction, Merits and Damages, 20 ILM (1981) 1, 62 ILR 140, 12 April 1977 �� 3.23, 4.24, 4.25, 4.32, 4.33, 4.36, 4.37, 4.41, 4.42, 4.45, 4.46, 4.48, 4.49, 4.89, 4.111, 6.99 Liman Caspian Oil BV & NCL Dutch Investment BV v The Republic of Kazakhstan, Final Award, ICSID Case No ARB/07/14, 22 June 2010��5.17, 5.47, 5.49, 5.58, 8.36, 8.110, 8.138 Lone Pine Resources Inc v Government of Canada, Response to the Notice of Arbitration, ICSID Case No UNCT/15/2, 27 February 2015��2.59, 5.06 Lopez-Goyne Family Trust and others v Republic of Nicaragua, ICSID Case No ARB/17/44��6.70 Luxtona Limited v The Russian Federation, Interim Award, PCA Case No. 2014-09, 22 March 2017 ��8.133 MCI Power Group LC and New Turbine Inc v Ecuador, Award, ICSID Case No ARB/03/6, IIC 296 (2007), 26 July 2007��2.61, 6.110, 6.113, 7.197, 7.204–7.206 MTD Equity Sdn Bhd and MTD Chile SA v Chile, Award, ICSID Case No ARB/01/7, IIC 174 (2004), 44 ILM 91 (2005) 25 May 2004��6.102, 6.108, 6.146, 7.206, 11.40 Maersk Olie, Algeriet A/S v People’s Democratic Republic of Algeria, ICSID ARB/09/14��9.61 Malaysia Historical Salvors, Sdn, Bhd v Malaysia, ICSID Case No ARB/05/10, Decision on Jurisdiction, IIC 289 (2007), 10 May 2007, Annulled, IIC 372 (2009), 28 Feb 2009�� 2.61, 2.63, 2.64 Mamidoil Jetoil Greek Petroleum Products Société SA v Albania, Award, ICSID Case No ARB/11/24, IIC 682, 30 March 2015 ��6.85 Masdar Solar & Wind Cooperatief UA v Spain, ICSID Case No ARB/14/1, Award, 16 May 2018�� 2.51, 6.130, 11.148 Mayagna (Sumo) Awas Tingui Community v Nicaragua, Judgment, Inter-Am Ct HR (Ser C) No 79, 31 August 2001�� 10.124 Mercuria Energy Group v Poland, SCC Arbitration Institute, 24 July 2008 ��8.110 Mesa Power Group LLC v Government of Canada, UNCITRAL, Award, 26 March 2016��6.64, 6.65 Metalclad Corp v Mexico, Award, Ad hoc—ICSID Additional Facility Rules, ICSID Case No ARB(AF)/97/1, IIC 161 (2000), 25 August 2000, Supplementary Reasons for Judgment, 2001 BCSC 1529, IIC 163 (2001), 31Oct 2001��2.19, 5.61, 5.154, 6.78–6.82, 6.86, 6.109, 7.144, 7.215, 11.40 Methanex v United States, Final Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 167 (2005), 3 August 2005 �� 6.72, 6.88, 10.50 Micula and ors v Romania, Decision on Jurisdiction and Admissibility, ICSID Case No ARB/05/ 20, IIC 339 (2008), 24 Sept 2008�� 10.120 Middle East Cement Shipping & Handling Co SA v Egypt, Award, ICSID Case No ARB/99/6, Award, IIC 169 (2002), 19 ICSID Rev (2003) 602, 12 April 2002��6.18 Mihaly International Corp v Sri Lanka, Award, ICSID Case No ARB/00/2, IIC 170 (2002), (2002) ICSID Rev—Foreign Investment LJ 142, 15 March 2002��2.39, 2.60 Mitchell v Congo, Decision on Annulment, 1 November 2006 ��2.63 Mobil Cerro Negro, Ltd v Petroleos de Venezuela, S.A. and PDVSA Cerro Negro, S.A., Final Award, ICC Case No ARB/15415/JRF, 23 December 2011�� 7.19, 7.117 Mobil Corp and ors v Venezuela, Decision on Jurisdiction, ICSID Case No ARB/07/27, IIC 435 (2010), 10 October 2007, Award, 9 October 2014 �� 2.40, 6.70, 7.97, 7.117, Tab 11.1, 11.03, 11.65, 11.66, 11.73 Mobil Exploration and Development Inc. Suc. Argentina & Mobil Argentina S.A. v Argentine Republic, ICSID Case No ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, Decision on Annulment, 8 May 2019 �� 5.158, 7.117, 7.233 Mobil Investments Canada Inc. v Government of Canada, Award, ICSID Case No ARB/15/6, 4 February 2020��6.17 Mobil Investments Canada Inc. and Murphy Oil Corporation v Canada, ICSID Case No ARB(AF)/07/4 ��5.127 Mobil Oil Iran Inc v Iran, Partial Award No 311-74/76/81/150-3, 16 Iran-US Trib Rep 3, 14 July 1987��4.79, 4.87

Table of Cases xxxi Mobil Oil Iran Inc v Iran, Award No 425-39-2, 21 Iran-US Cl Trib Rep 79, 29 June 1989��4.79, 4.81 Mohammad Ammar (MA) Al-Bahloul v Tajikistan, SCC Case No V 064/2008�� 5.60, 8.110 Mondev International Ltd v United States, Award, ICSID Case No ARB/(AF)/99/2, IIC 173 (2002), 11 Oct 2002�� 10.120 Moston Properties Limited v Public Joint Stock Company ‘Ukrgasvydobuvannya’, LCIA Arbitration No 153184��8.156 Murphy Exploration and Production Co International v Republic of Ecuador, ICSID Case No ARB/08/4, 15 April 2008, Award on Jurisdiction, 15 December 2010�� 7.150, 7.185 Murphy Exploration and Production Company International v Republic of Ecuador, Partial Final Award, PCA Case No 2012-16, 6 May 2016��7.185, 7.186, 7.188, 11.117 Nachingwea UK Limited (UK), Ntaka Nickel Holdings Limited (UK) and Nachingwea Nickel Limited (Tanzania) v United Republic of Tanzania, ICSID Case No ARB/20/38 ��9.255 National Grid plc v Argentina, Decision on Jurisdiction, Ad hoc—UNCITRAL Arbitration Rules, IIC 178 (2006), 20 June 2006, Award, IIC 361 (2008), 3 Nov 2008�� 6.41, 6.47, 6.147, 7.210, 7.212, 7.213, 7.217–7.219, 7.233 Natland v Czech Republic, Partial Award, Unpublished, 20 December 2017�� 2.45, 5.87, 6.129 NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v Kingdom of Spain, ICSID Case No ARB/14/11��5.159 Nigerian Agip Exploration v Allied Energy and Camac International (Nig) Ltd, LCIA Arbitration No 132498 ��9.134 Nigerian Agip Exploration Limited, Oando OML 125 & 134 Limited v Nigerian National Petroleum Corporation, Partial Award, 3 October 2011 (hereinafter ‘Agip et ors v NNPC’) �� 9.135, 9.138–9.140, 9.142, 9.172 Noble Energy Inc and Machalapower Cia Ltd v Ecuador and Consejo Nacional de Electridad, Decision on Jurisdiction, ICSID Case No ARB/05/12; IIC 320 (2008), 5 March 2008 ��2.38, 5.150, 7.76, 7.79, 7.197, 7.198 Nord Stream 2 AG v The European Union, PCA 2020-07�� 5.06, 12.54 North Sea Continental Shelf, Germany/Denmark/Netherlands, Merits, (1969) ICJ Rep 3, ICGJ 150 (ICJ 1969), 20 Feb 1969 ��3.77 Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v The Kingdom of Spain, Final Arbitral Award, SCC 2015/063, 15 February 2018�� 5.60, 6.97, 6.98, 6.129, 6.150, 12.22 Nykomb Synergetics Technology Holding AB v Latvia, Award, SCC Case No 118/2001, IIC 182 (2003), 16 December 2003 ��6.83, 6.153, 8.110, 8.114, 10.30 OAO Neftyanaya Kompaniya Yukos v Russia, Case No 14902/04��8.127 OPIC Karimun Corporation v Venezuela, Award, ICSID ARB/10/14, 28 May 2013��7.108 Obligation to Negotiate Access to the Pacific Ocean (Bolivia v Chile), Judgment, ICJ Reports, 2018��5.20 Occidental Exploration and Production Co v Ecuador, Final Award, LCIA Case No UN3467, IIC 02 (2004), 43 ILM 1248 (2004), 1 July 2004�� 2.118, 5.96, 6.123, 7.48, 7.133, 7.134, 7.137, 7.141, 7.200, 7.201, 12.38 Occidental Petroleum Corp and Occidental Exploration and Production Co v Ecuador, ICSID Case No ARB/06/11, Decision on Provisional Measures, IIC 305 (2007), 17 August 2007, Decision on Jurisdiction, IIC 337 (2008), 9 Sept 2008, Award, 20 September, 2012, Decision on Annulment of the Award, 2 November 2015�� 5.158, 6.70, 6.82, 6.95, 6.104, 7.134, 7.157, 7.161, 7.164, 7.167, Tab 11.1, 11.30, 11.110, 11.115, 11.189, 12.29 Odyssey Marine Exploration Inc v United Mexican States, ICSID Case No UNCT/20/1–Claimant’s Memorial, 4 September 2020��6.69 Oil Platforms, Iran v United States, Judgment, Preliminary Objections, (1996) ICJ Rep 803, ICGJ 73 (ICJ 1996), 12 Dec 1996��5.151 Operafund Eco-Invest SICAV PLC and Schwab Holding AG v Kingdom of Spain, Award, ICSID Case No ARB/15/36, 6 September 2019��5.60, 5.155, 6.129, 6.150 Oxus Gold v Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015��8.162

xxxii Table of Cases PJSC Tatneft v Ukraine, PCA Case No 2008-8 ��8.42 PJSC Uknafta (Ukraine) v The Russian Federation, PCA Case No 2015-34��8.42 PSEG Global Inc and Konya Ilgin Elektric Üretim ve Ticaret Ltd Sirketi v Turkey, Award and Annex, ICSID Case No ARB/02/5, IIC 198 (2007), 19 Jan 2007�� 6.96, 6.110, 6.111 Pac Rim Cayman LLC v El Salvador, ICSID Case No ARB/09/12 ��5.135 Pan American Energy LLC and BP Argentina Exploration Co v Argentina, Decision, Preliminary Objections, ICSID Case Nos ARB/03/3, ARB/04/8, IIC 183 (2006), 27 July 2006��5.29 Parkerings-Compagniet AS v Lithuania, Award, ICSID Case No ARB/05/8, IIC 302 (2007), 14 August 2007��3.03, 3.16, 6.99, 6.110, 6.114, 6.115, 6.117, 6.133, 8.01, 8.11, 9.92, 12.38, 12.45 Paushok (Sergei), CJSC Golden East Co and CJSC Vostokneftegaz Co v Mongolia, Order on Interim Measures, Ad Hoc—UNCITRAL Arbitration Rules, IIC 351 (2008), 2 September 2008�� 7.164, 7.165 Paushok (Sergei), CJSC Golden East Co, CJSC Vostokneftegaz Co v The Government of Mongolia, Award on Jurisdiction and Liability–UNCITRAL, 28 April 2011�� 6.114, 6.124 Perenco Ecuador Ltd v Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), ICSID Case No ARB/08/6, Decision on Provisional Measures, IIC 375 (2009), 8 May 2009, Decision on Remaining Issues of Jurisdiction and on Liability, 12 September 2014, Interim Decision on the Environmental Counterclaim, 11 August 2015, Award, 27 September 2019�� 5.158, 7.150, 7.164, 7.189, 7.190, 7.192, 7.194, 7.195, 10.51, 12.18 Petrobart Ltd v Kyrgyzstan, Award, SCC Case No 126/2003, IIC 184 (2005), 29 March 2005 �� 2.51, 2.60, 5.49, 5.95, 5.100, 8.110, 8.115, 8.116 Petroleum Development Ltd v Abu Dhabi (1951) 18 ILR 144�� 4.05, 4.15, 4.36 Petroleum Development Ltd v Qatar (1951) 18 ILR 161��4.36 Pey Casado and Présidente Allende Foundation v Chile, Award, ICSID Case No ARB/98/2, IIC 324 (2008), 22 April 2008��7.162 Phelps Dodge Corp v Iran, 25 ILM 619, Iran-US Cl Trib, 19 March 1986��6.92 Philip Morris Asia Limited v The Commonwealth of Australia, Award on Jurisdiction and Admissibility, PCA Case No 2012-12, 17 December 2015��2.39 Philip Morris Brands S.A.R.L., Philip Morris Products S.A. and Abal Hermanos S.A. v Oriental Republic of Uruguay, Award, ICSID Case No. ARB/10/7, 8 July 2016��8.152 Phillips Petroleum Co Iran v Iran, Award No 425-39-2 (29 June 1989), 21 Iran-US Cl Trib Rep 79��3.95, 4.81, 4.86, 4.94, 6.73, 11.56 Phillips Petroleum Co Iran v Iran, Award on Agreed Terms No 461-39-2 (10 Jan 1990), 21 Iran-US Cl Trib Rep 285��4.79 Phillips Petroleum Co Venezuela Limited, ConocoPhillips Petrozuata B.V. v Petroleos de Venezuela S.A., Final Award, ICC Case No 16848/JRF/CA (C-16849/JRF), 17 September 2012��7.110 Phillips Petroleum Co Venezuela Limited & ConocoPhillips Petrozuata B.V. v Petroleos de Venezuela, S.A., Corpoguanipa, S.A. & PDVSA Petroleo, S.A., Final Award, ICC Case No 20549/ASM/JPA (C-20550/ASM), 24 April 2018��7.110 Phoenix Action Ltd v Czech Republic, Award, ICSID Case ARB/06/5, IIC 367 (2009), 9 April 2009�� 2.39, 2.40, 2.62, 10.119 Photovoltaik Knopf v Czech Republic, Award, 15 May 2019 ��6.30 Piero Foresti, Laura de Carli and ors v South Africa, ICSID Case No ARB(AF)/07/1�� 5.153, 9.23 Plama Consortium Ltd v Bulgaria, Decision on Jurisdiction, ICSID Case No ARB/03/24, IIC 189 (2005), 8 February 2005, Award, IIC 338 (2008), 27 August 2008, Award, 31 October 2011�� 2.46, 2.55, 5.26, 5.41, 5.47–5.49, 5.51, 5.60, 5.100, 5.151, 6.135, 6.153, 8.110, 8.116 Pope and Talbot Inc v Canada, Interim Award, Ad hoc —UNCITRAL Arbitration Rules, IIC 192 (2000), 26 June 2000, Award on the Merits of Phase 2, IIC 193 (2001), 10 April 2001 �� 5.127, 6.81, 6.82 Process &Industrial Developments Limited v Nigerian Ministry of Petroleum of the Federal Government of Nigeria, Final Award, 31 January 2017��9.166, Tab 11.1, 11.29

Table of Cases xxxiii Qatar v International Marine Oil Co Ltd (1953) 20 ILR 534�� 4.05, 4.15, 4.36 Quiborax S.A., Non-Metallic Minerals S.A. & Allan Fosk Kaplun v The Plurinational State of Bolivia, Award, ICSID Case No ARB/06/2, 16 September 2015�� 6.91, 7.129, 11.33, 11.175, 11.182 RREEF Infrastructure (GP) Ltd and RREEF Pan-European Infrastructure Two Lux S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/30, Decision on Jurisdiction, 6 June 2016��2.38, 5.60, 5.159, 6.47, 6.135 RSM Production Co v Republic of Cameroon, ICSID Case No ARB/13/14��9.05 RSM Production Corp v Grenada, Award, ICSID Case No ARB/05/14, IIC 363 (2009), 11 March 2009 ��2.61, 2.62 RWE AG and RWE Eemshaven Holding II BV v Kingdom of The Netherlands, ICSID Case No ARB/21/4��6.63 Railroad Development Corporation v Republic of Guatemala, Award, ICSID Case No ARB/07/23, 29 June 2012��5.135 Railway Traffic between Lithuania and Poland (Railway Sector Landwarów-Kaisiadorys), Advisory Opinion No 21, ICGJ 289 (PCIJ 1931), 15 October 1931��3.77 Red Eagle Exploration Limited v Colombia, ICSID Case No ARB/18/12��10.49 Renco Group Inc. v Republic of Peru, UNCT/13/1, Final Award, 9 November 2016��10.52 Repsol S.A. and Repsol Butano S.A. v Argentine Republic, Settlement Agreement, ICSID Case No ARB/12/38, 20 March 2014��6.70, 11.175, 11.182 Repsol YPF Ecuador S.A. v Empresa Estatal Petroleos del Ecuador, Decision on Annulment, ICSID Case No ARB/01/10, 8 January 2007�� 5.157, 5.158 Repsol YPF Ecuador SA and ors v Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), ICSID Case No ARB/08/10, 8 August 2008�� 7.150, 7.152, 7.203 Revere Copper and Brass Inc v Overseas Private Investment Corp (OPIC), 17 ILM (1978) 1321, 56 ILR 258��3.91, 4.39, 4.40, 4.43, 4.44, 6.99, 7.143 Richard N Westbury, Paul D. Hinks and Symbion Power Tanzania Limited v United Republic of Tanzania, ICSID Case No ARB/19/17��9.251 Rockhopper Italia SpA, Rockhopper Mediterranean Ltd and Rockhopper Exploration Plc v Italy, ICSID Case No ARB/17/14 ��6.63 Rompetrol Group NV v Romania, Decision on Preliminary Objections, ICSID Case ARB/06/03, IIC 322 (2008), 18 April 2008�� 2.42, 10.120 RosInvest Co Ltd v Russian Federation, Decision on Jurisdiction, SCC Case No V (079/2005), October 2007�� 6.47, 8.120, 8.126 Roussalis v Romania, Award, ICSID Case No ARB/06/1, 7 December 2011 ��7.157 Rumeli Telekom A.S. and others v Republic of Kazakhstan, Award, ICSID Case No ARB/05/16, IIC 344, 29 July 2008�� 8.141, 11.09, 12.40 Rusoro Mining Limited v The Bolivarian Republic of Venezuela, Award, ICSID Case No ARB(AF)/12/15, 22 August 2016�� 6.51, Tab 11.1 SAUR International v Argentina, ICSID Case No ARB/04/4 �� 10.113 SD Myers Inc v Canada, Partial Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 249 (2000), 40 ILM 1408, 13 November 2000��5.127, 6.90, 10.50, 11.40 SGS Société Générale de Surveillance SA v Pakistan, Decision on Objections to Jurisdiction, ICSID Case No ARB/01/13, IIC 223 (2003), 6 August 2003��5.27, 5.61 SGS Société Générale de Surveillance S.A. v The Republic of Paraguay, ICSID Case No ARB/07/29, 10 February 2012 ��5.27 SGS Société Générale de Surveillance SA v Philippines, Decision on Objections to Jurisdiction, ICSID Case No ARB/02/6, IIC 224 (2004), 29 January 2004 ��5.27 SNUD v MALIBU, ICC No 12136 MS (C12137/MS)��9.160 SNUD v The House of Representatives and MALABU, CA/A/25M/2003 ��9.160 Saipem SpA v Bangladesh, Decision on Jurisdiction and Recommendation on Provisional Measures, ICSID Case No ARB/05/07, IIC 280 (2007), 21 March 2007��2.61 Salini Costruttori SpA and Italstrade SpA v Jordan, ICSID Case No ARB/02/13, Decision on Jurisdiction, IIC 207 (2004), 9 November 2004, Award, IIC 208 (2006), 31 Jan 2006�� 5.49, 5.151

xxxiv Table of Cases Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, Decision on Jurisdiction, ICSID Case No. ARB/00/04, 6 ICSID Rep 398 (2001), 23 July 2001 �� 2.61, 2.62, 9.86 Saluka Investments BV v The Czech Republic, Partial Award, PCA—UNCITRAL Arbitration Rules, IIC 210 (2006), 17 March 2006�� 5.20, 5.56, 6.95 Saluka Investments B.V. v. The Czech Republic, Settlement Agreement, UNCITRAL, 30 November 2006�� 11.182 Sandline International Inc v Papua New Guinea, Interim Award, (1998) ILR 552 (UNCITRAL, 1998)��3.91 Sapphire International Petroleums Co v National Iranian Oil Co, Award, 35 ILR 136 (1963), 15 March 1963 �� 3.19, 3.20, 4.04, 4.19, 4.24, 4.35–4.38, 4.44, 11.14 Saudi Arabia v Arabian American Oil Co (Aramco) (1958) 27 ILR 117�� 4.04, 4.15, 4.16, 4.35–4.38, 4.44, 4.68 Sawhoyamaxa Indigenous Community v Paraguay, Judgment of 29 March 2006, Inter-American Ct of Human Rights�� 10.123 Sea-Land Service Inc v Iran, Award No 135-33-1 (30 June 1984), 6 Iran-US Cl Trib Rep 149 (1984)��6.89 Sedco Inc v National Iranian Oil Co (NIOC), ‘October Interlocutory Award’ No ITL 55-129-3 (28 Oct 1985), 9 Iran-US CTR 248 ��4.79, 6.73 Sedco Inc v NIOC, Interlocutory Award No ITL 59-129-3, 27 March 1986, and Sedco Inc v NIOC, Award No 309-129-3, 7 July 1987��4.79 Sedelmayer (Franz) v Russian Federation, Award, Ad hoc Arbitration Rules, IIC 106 (1998), 7 July 1998��2.62 Sempra Energy International v Argentina, Award, ICSID Case No ARB/02/16, IIC 304 (2007), 18 September 2007��5.28, 6.36, 6.38, 6.96, 6.112, 7.210, 7.217, 7.221, 7.223, 7.224, 7.233, 7.237, 11.40 Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011 ��8.159 Shell Nigeria Exploration and Production Company Ltd, Esso Exploration and Production Nigeria (Deepwater) Ltd, Nigerian Agip Exploration Ltd, Total E&P Nigeria Ltd (Formerly known as Elf Petroleum Nigeria Ltd) v Nigerian National Petroleum Corporation, Partial Award, 30 May 2013 (‘SNEPCO et ors v NNPC’) �� 9.138, 9.148 Shell Nigeria Ultra Deep Limited v Federal Republic of Nigeria, ICSID Case No ARB/07/18�� 9.05, 9.104, 9.157 Shell Philippines Exploration B.V. v Republic of the Philippines, ICSID Case No ARB/16/22��6.21 Siemens AG v Argentina, ICSID Case No ARB/02/8, Decision on Jurisdiction, IIC 226, 3 August 2004, Award and Separate Opinion, IIC 227 (2007), 6 Feb 2007�� 2.38, 5.151, 6.99, 6.107, 7.213, 10.120, 11.57, 12.20 Social and Economic Rights Action Center & the Center for Economic and Social Rights (SERAC) v Nigeria (27 May 2002)��10.48 Societe d’Exploitation des Mines d’Or de Sadiola S.A. v Republic of Mali, Award, ICSID Case No ARB/01/5, 25 February 2003��9.274 Société des Mines de Loulo S.A. v Republic of Mali, ICSID Case No ARB/13/16��9.274 Société Générale v Dominican Republic, Award on Preliminary Objections to Jurisdiction, LCIA Case No UN7927, IIC 366 (2008), 19 Sept 2008 ��2.39 Société Rialet v Ethiopia (1928–29) Recueil des decisions des tribunaux arbitraux mixtes 8 742 ��4.36 SolEs Badajoz GmbH v Kingdom of Spain, Award, ICSID Case No ARB/15/38, 31 July 2019�� 5.155, 6.150 Slovak Gas Holding BV, GDF International SAS and E.ON Ruhrgas International GmbH v. Slovak Republic, Settlement agreement, ICSID Case No ARB/12/7, 14 December 2012�� 11.183 Sonatrach SpA v Total E&P Algerie SAS and Partex Oil and Gas (Holdings) Corporation, ICC Case No 22362/DDA��9.66 South 32 S.A. Investments Limited v Republic of Colombia, ICSID Case No ARB/20/9 ��10.49 South American Silver Limited (Bermuda) v The Plurinational State of Bolivia, Award, PCA Case No 2013-15, 22 November 2018 �� 6.44, 6.70, 6.157 Southern Pacific Properties v Egypt, ICSID Arb/84/3 1992 ��6.131 Sporrong and Lonnroth v Sweden, Judgment of 23 September 1982, ECHR Series A, no 52��10.17

Table of Cases xxxv St Marys VCNA, LLC v The Government of Canada, Consent Award, April 12, 2013 �� 11.180 Stabil LLC et al (Ukraine) v The Russian Federation, PCA Case No 2015-35��8.42 Stadtwerke München GmbH, RWE Innogy GmbH et al v Kingdom of Spain, Award, ICSID Case No ARB/15/1, 2 December 2019��5.60, 6.135, 6.150, 11.172 Standard Chartered Bank v United Republic of Tanzania, Award, ICSID Case No ARB/10/12, 2 November 2012 �� 9.05, 9.250 Standard Chartered Bank (Hong Kong) Limited v Tanzania Electric Supply Company Limited, ICSID Case No ARB/10/20, Decision on Annulment, 22 August 2018 �� 9.250, 9.256 Standard Chartered Bank (Hong Kong) Limited v United Republic of Tanzania, ICSID Case No ARB/15/41, Award, 11 October 2019 �� 9.250, 9.256 Stans Energy Corp. and Kutisay Mining LLC v The Kyrgyz Republic, UNCITRAL, PCA Case No 2015-32, 2019�� 6.70, 8.158 Statoil (Nigeria) Limited, Texaco Nigeria Outer Shelf Limited v Nigerian National Petroleum Corporation, Award, 17 March 2015�� 9.138, 9.152 Strabag SE, Erste Nordsee-Offshore Holding GmbH and Zweite Nordsee-Offshore Holding GmbH v Germany, ICSID Case No ARB/19/29��6.63 Sudapet Co Ltd v Republic of South Sudan, ICSID Case No ARB/12/26��9.173 Suez, Sociedad General de Aguas de Barcelona SA and Interagua Servicios de Agua SA v Argentina, ICSID Case No ARB/03/17, Decision on Jurisdiction, IIC 236 (2006), 16 May 2006��6.47 Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentina, ICSID Case No ARB/03/19, Order in response to amicus curiae, IIC 233 (2007), 12 Feb 2007�� 10.113, 10.122 TCW Group, Inc and Dominican Energy Holdings, L.P. v The Dominican Republic, Consent Award, UNCITRAL, 16 July 2009 �� 11.175, 11.182 TECO Guatemala Holdings, LLC v Republic of Guatemala, Award, ICSID Case No ARB/10/23, IIC 623 (2013), 19 December 2013, Resubmission Proceeding, Award, 13 May 2020�� 5.135, 11.138 TSK Invest LLC v The Republic of Moldova, Emergency Decision on Interim Measures, SCC No. EA 2014/053, 29 April 2014 ��8.152 Tanzania Electric Supply Co Ltd v Independent Power Tanzania Ltd, Decision on the Respondent’s Request for Provisional Measures, ICSID Case No ARB/98/8, IIC 240 (2001), 22 June 2001��7.156 Técnicas Medioambientales Tecmed SA v Mexico, Award, ARB(AF)/00/2, IIC 247 (2003), 10 ICSID Rep 130, 29 May 2003�� 3.81, 5.21, 6.87, 6.92–6.94, 6.103, 6.108, 6.109, 6.114, 6.131, 7.201, 7.215, 8.86, 10.50, 10.120, 12.38 Telenor Mobile Communications AS v Hungary, Award, ICSID Case No ARB/04/15, IIC 248 (2006), 22 June 2006��6.48 Tennant Energy LLC v Government of Canada, PCA Case No 2018-54, Notice of Arbitration, 1 June 2017��6.65 Tethyan Copper Company Pty. Limited v Islamic Republic of Pakistan, Award, ICSID Case No ARB/12/1, 12 July 2019�� 6.11, Tab 11.1, 11.29 Texaco Overseas Petroleum Co (TOPCO) and California Asiatic Oil Co (Calasiatic) v Libya, Award on Merits, 53 ILR 389 (1979)�� 2.73, 2.76, 2.79, 3.20, 3.93, 4.15, 4.25, 4.32–4.34, 4.37, 4.39–4.44, 4.47–4.49, 4.68, 4.85, 4.89, 4.104, 4.107, 11.07 Tidewater Inc., Tidewater Investment SRL, Tidewater Caribe, C.A., et al v The Bolivarian Republic of Venezuela, Award, ICSID Case No ARB/10/5, 13 March 2015 �� 7.106, 11.78 Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, Iran-US Claims Tribunal, 6 Iran–US CTR 219, 22 June 1984��6.77, 6.92 Togo Electricité and GDF-Suez Energie Services v Republic of Togo, ICSID Case No ARB/06/7 �� 5.158, 9.05 Tokios Tokelés v Ukraine, Decision on Jurisdiction, ICSID Case No ARB/02/18, IIC 258 (2004), 20 ICSID Rev—FILJ 205, 29 April 2004�� 2.19, 2.42, 2.43

xxxvi Table of Cases Total E&P Algerie SAS, Repsol Exploración Argelia, SA v Sonatrach SpA, ICC Case No 21969/DDA ��9.64 Total E&P Uganda BV v Republic of Uganda, ICSID Case No ARB/15/11�� 9.05, 9.210 Total S.A. v Argentina, Decision on Liability, ICSID Case No ARB/04/1, IIC 484 (2010) ��6.07, 6.128, 6.148, 7.225, 7.233 Total S.A. v The Argentine Republic, Decision on Stay of Enforcement of the Award, ICSID Case No ARB/04/01, 4 December 2014�� 11.137 Trans-Global Petroleum, Inc. v. The Hashemite Kingdom of Jordan, Consent Award, ICSID Case No ARB/07/25, April 8, 2009�� 11.182 Tullow Uganda Operations PTY LTD v Republic of Uganda, ICSID Case No ARB/12/34 ��6.22, 9.10 Tullow Uganda Operations Pty Ltd and Tullow Uganda Limited v Republic of Uganda, ICSID Case No ARB/13/25�� 9.05, 9.208 Ulysseas, Inc v Ecuador, UNCITRAL, Interim Award, UNCITRAL 28 September 2010, Final Award, 12 June 2012��5.51, 6.119, 7.197, 7.207 Union Fenosa Gas SA v Arab Republic of Egypt, Award, ICSID Case No ARB/14/4, 31 August 2018��6.44, 6.157, 9.05, 9.85, 9.96, Tab 11.1, 11.03, 11.122 Uniper SE, Uniper Benelux Holding and Uniper Benelux v The Netherlands, ICSID Case No ARB/21/22��6.63 United States Diplomatic and Consular Staff in Teheran, United States v Iran, Judgment, (1980) ICJ Rep 3, ICGJ 124 (ICJ 1980), 24 May 1980��4.34 Universal Compression International Holdings, S.L.U. v Bolivarian Republic of Venezuela, ICSID Case No ARB/10/9��7.106 Urbaser SA and Consórcio de Aguas Bilbao Biskaia, Bilbao Biskaia Ur Partzuergoa v Argentina, Award, ICSID Case No ARB/07/26, 8 December 2016�� 10.51, 10.113, 10.115, 10.116 Valeri Belokon v The Kyrgyz Republic, Award, 24 October 2014��11.33 Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co KG v Germany, ICSID Case No ARB/09/06, 17 April 2009��6.63 Vattenfall AB and others v Federal Republic of Germany, Decision on the Achmea Issue, ICSID Case No ARB/12/12, 31 August 2018 �� 2.168, 5.06, 6.49, 6.63 Veteran Petroleum Ltd (Cyprus) v Russian Federation, PCA Case No AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009�� 2.45, 5.49, 8.123 Voltaic Network v Czech Republic, Award, 15 May 2019 ��6.30 WEG Siag & C Vecchi v Egypt, ICSID Case No ARB/05/15, 1 June 2009��3.94 WalAm Energy LLC v Republic of Kenya, ICSID Case No ARB/15/7��6.68, 9.05 Waste Management Inc v Mexico (II), Award, ICSID Case No ARB(AF)/00/3, 11 ICSID Rep 361, IIC 270 (2004), 43 ILM 967, 30 April 2004��5.19, 6.26, 6.27, 6.99, 6.105, 6.114, 7.145 Watkins Holdings S.R.L. v Kingdom of Spain (1:20-cv-01081) District Court, District of Columbia�� 11.148 Watkins Holding S.A.R.L., Watkins (Ned) BV, Watkins Spain S.L., Redpier S.L., Northsea Spain S.L., Parque Eolico Marmellar S.L., and Parque Eolico La Boga S.L. v Kingdom of Spain, Award, ICSID Case No ArB/15/44, 13 July 2020��5.60, 5.155, 6.130, 6.150, 11.148 Westmoreland Mining Holdings, LLC v Canada, ICSID Case No UNCT/20/3�� 2.151, 6.66 Williams Companies et al v The Bolivarian Republic of Venezuela, ICSID Case No ARB/11/10��7.106 Williams Companies et al. v The Bolivarian Republic of Venezuela, ICSID Case No ARB(AF)/19/3 ��7.106 Windstream Energy LLC v Government of Canada, 27 September 2016, PCA��6.64 Winshear Gold Corp v United Republic of Tanzania, ICSID Case No ARB/20/25 ��9.255 Wintershall AG and ors v Qatar, Partial Award, 5 February 1988, Final Award, 31 May 1988, 28 ILM 795 (1989)��3.78, 6.13 World Duty Free Co Ltd v Kenya, Award, ICSID Case No ARB/00/7, IIC 277 (2006), 25 Sept 2006��6.154

Table of Cases xxxvii Yaung Chi Oo Trading Pte Ltd v Myanmar, Award, ASEAN Case No ARB/01/1, IIC 278 (2003), 42 ILM 540 (2003), 31 March 2003 ��5.130 Yemen Exploration and Production Company (US) v Yemen, Award, ICC Case No. 141108/EC, 1 October 2008��6.14-6.15, 6.50 Yosef Maiman, Merhav (MNF), Merhav-Ampal Group and Merhav-Ampal Holdings v Arab Republic of Egypt, PCA Case No 2012/26 ��9.80 Yukos Universal Ltd v Russia, Interim Award on Jurisdiction and Admissibility, PCA Case No AA 227, IIC 416 (UNCITRAL, 2009)�� 2.51, 5.49, 5.85, 5.96, 6.19, 8.119, 8.123, 11.10, 11.26, 11.30, 11.33, 11.98, 11.189, 12.58 Zelena N.V. and Energo-Zelena d.o.o. Indija v Republic of Serbia, ICSID Case No ARB/14/27��10.48 AUSTRALIA United Group Rail Services Ltd v Rail Corp New South Wales [2009] NSWCA 177��3.78 FRANCE EDF v Société Shell Française, JCP II No 18810, Cour d’Appel, Paris, Opinion of 28 September 1978, JCP II No 18810��3.79 GHANA Attorney-General v Balkan Energy Ghana Ltd. et al, Case No.17-cv-00584, 16 May 2012��9.226 INDIA Vodaphone International Holdings B.V. v Union of India & Anr [2012] 6 SCC 613��6.27 NETHERLANDS Russian Federation v Veteran Petroleum Limited, Yukos Universal Limited and Hulley Enterprises limited: Hague District Court, Judgment of 20 April 2016, C/09/477160/HA ZA 15-1; C/09/477162/HA ZA 15-2; C/09/481619/HA ZA 15-112 ��8.120 Ecuador v Chevron and Texaco Petroleum Company: Judgment, District Court of The Hague, Case No C/09/570029/HA ZA 19-268, 16 September 2020 ��10.60 Urgenda Foundation v The State of the Netherlands, Case 19/00135, Judgment, Supreme Court of The Netherlands, 20 December 2019�� 10.04, 10.72 NIGERIA Barr and ors v Shell Petroleum Development Co of Nigeria and ors, No FHC/CSB/1256/2005, Nigerian FHC��10.73 Niger Delta Development Commission v Nigeria Liquefied Natural Gas Co Ltd, Judgement of Justice RO Nwodo in, FHC/PH/CS/313/2005, 19, 11 July 2007�� 3.11, 9.119, 12.47 Shell Nigeria Exploration and Production Company Ltd, Esso Exploration and Production Nigeria (Deepwater) Ltd, Nigerian Agip Exploration Ltd, Total E&P Nigeria Ltd (Formerly known as Elf Petroleum Nigeria Ltd) v Nigerian National Petroleum Corporation: Suit No FHC/ABJ/CS/744/2011—FIRS v (1) NNPC, (2) Shell Nigeria Exploration & Production Company Limited, (3) Esso Exploration & Production (Deep Water) Limited, and (4) Total Exploration & Production Nigeria Limited��9.29 Shell Nigeria Exploration & Production Limited and three Ors v Federal Inland Revenue Service and Anr (unreported) CA/A/208/2012, Judgment, 31 August 2016�� 9.29, 9.169 Statoil (Nigeria) Limited and Anr v Federal Inland Revenue Service [2014] LPELR-23144 (CA)��9.28

xxxviii Table of Cases RUSSIA Yukos Oil Co, In re, 321 BR 396, Bankr. SD Tex 2005, No 04-47742, filed 14 December 2004��8.122 SOUTH AFRICA Agri South Africa and Annis Mohr Van Rooyen v Minister of Minerals and Energy, Judgment of 6 March 2009, High Ct of South Africa��9.25 SWEDEN Renta 4 S.V.S.A (Quasar de Valors) et al v Russian Federation, Judgment of the Stockholm District Court, Case No T 15045-09, 11 September 2014; Judgment of the Svea Court of Appeal, Case No T 9128-14, 18 January 2016��8.120 RosInvest Co UK Ltd v The Russian Federation, Judgment of the Svea Court of Appeal, Case No T 10060-10, 5 September 2013��8.120 UGANDA Heritage Oil & Gas Limited v Uganda Revenue Authority, Civil Appeal No. 14 Of 2011, 12 September 2011�� 9.148, 9.189, 9.202 UNITED KINGDOM BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352, [1982] 2 WLR 253, [1982] 1 All ER 925 HL��4.25 ETI Euro Telecom International NV v Bolivia [2008] EWCA Civ 880, [2009] 1 WLR 665, [2009] Bus LR 310, [2009] 2 All ER (Comm) 37, [2008] 2 Lloyd’s Rep 421, [2008] CP Rep 41, [2008] 2 CLC 153, (2008) 105(32) LSG 20 ��7.104 Ecuador v Occidental Exploration and Production Co [2007] EWCA Civ 656, [2007] 2 Lloyd’s Rep 352, [2007] 2 CLC 16��7.133 Federal Republic of Nigeria v Process & Industrial Developments Limited [2020] EWHC 2379 (Comm) ��9.166 Jones v Sherwood Computer Services plc [1992] 1 WLR 277, [1992] 2 All ER 170, [1989] EG 172 (CS) CA (Civ Div) ��2.93 Kensington International Limited v The Republic of Congo (2005) EWHC 2684 (Comm)��9.133 Lena Goldfields Ltd v Soviet Government (1930), Cornell Law Quarterly, (1950-I), 36��4.04, 4.11, 4.15, 4.36–4.38, 11.14 Mareva Compañía Naviera SA v International Bulk Carriers SA [1980] 1 All ER 213, [1975] 2 Lloyd’s Rep 509, [1980] 2 MLJ 71, (1981) 145 JPN 204, (1981) 131 NLJ 517, (1981) 131 NLJ 770, (1975) 119 SJ 660 CA (Civ Div) ��7.103 Mobil Cerro Negro Ltd v Petróleos de Venezuela SA [2008] EWHC 532 (Comm), [2008] 2 All ER (Comm) 1034, [2008] 1 Lloyd’s Rep 684, [2008] 1 CLC 542�� 7.102, App V Okpabi and others v Royal Dutch Shell plc and another [2021] UKSC 3, 12 February 2021��10.73 Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500 ��3.85, 3.90 Shell (UK) Ltd v Enterprise Oil plc [1999] 2 All ER (Comm) 87, [1999] 2 Lloyd’s Rep 456 Ch ��2.93 Slovak Republic v Achmea BV (Case C-284/16), Judgment, 6 March 2018 �� 5.09, 6.49, 11.141 Thames Valley Power Ltd v Total Gas & Power Ltd, 1 Lloyd’s Rep 441��2.133 Tullow Uganda Ltd v Heritage Oil and Gas Ltd and Heritage Oil Plc, [2013] EWHC 1656 (Comm); and on appeal, [2014] EWCA Civ 1048, Case No A3/2013/2175�� 9.200, 9.204, 9.205 Veba Oil Supply and Trading GmbH v Petrotrade Inc., [2001] 2 Lloyd’s Rep 731 ��2.93 Vereniging voor Energie, Milieu en Water et al v Directeur van de Dienst uitvoering, (Case C-17/03) June 2005��5.19

Table of Cases xxxix UNITED STATES Anatolie Stati v Republic of Kazakhstan, 302 F. Supp. 3d 187, (D.D.C. 2018), aff ’d sub nom. Stati v Republic of Kazakhstan, 773 F. App’x 627 (D.C. Cir. 2019), cert. denied, 140 S. Ct. 381, 205 L. Ed. 2d 219 (2019)�� 11.139, 11.157 BG Group plc v Republic of Argentina, 134 S Ct 1198 (2014)�� 11.168 Balkan Energy Ltd v Republic of Ghana, 302 F. Supp. 3d 144, 151 (D.D.C. 2018), appeal dismissed, No 18-7061, 2018 WL 5115572 (D.C. Cir. Oct. 12, 2018)�� 11.156, 11.157 Burma v UNOCAL Inc, 176 FRD 329 (CD California, 1997)��10.99 CEF Energia, B.V. v Italian Republic, No 19-CV-3443 (KBJ), 2020 WL 4219786, (D.D.C. July 23, 2020)�� 11.154 Chin-Ten Hsu v New Mighty US Tr, 288 F. Supp. 3d 272 (D.D.C. 2018) 2nd Circuit�� 11.148 ConocoPhillips v Venezuela: US District Court for the Southern District of New York, Case No 19-cv-07304-LGS, 2 December 2020��7.116 Constellation Energy Commodities Grp Inc v Transfield ER Cape Ltd, 801 F. Supp. 2d 211 (S.D.N.Y. 2011)�� 11.148 Cont’l Cas. Co v Argentine Republic, 893 F. Supp. 2d 747, 751 (E.D. Va. 2012)�� 11.150 Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v Pemex-Exploración y Producción, 962 F. Supp. 2d 642 (S.D.N.Y. 2013), aff ’d, 832 F.3d 92 (2d Cir. 2016)�� 11.155 Duke Energy Int’l Peru Investments No 1 Ltd v Republic of Peru, 892 F. Supp. 2d 53 (D.D.C. 2012)�� 11.150 Enron Nigeria Power Holding, Ltd v Fed. Republic of Nigeria, 844 F.3d 281 (D.C. Cir. 2016)�� 11.157 Esso Exploration and Production Nigeria Ltd et al v Nigerian National Petroleum Corp, US District Court, Southern District of New York, No 14-08445, 2014��9.168, 11.158, 11.165 Gater Assets Ltd v AO Gazsnabtranzit, 413 F. Supp. 3d 304, (S.D.N.Y. 2019)�� 11.156, 11.157 Infrastructure Services Luxembourg S.A.R.L. v Kingdom of Spain (1:18-cv-01753) District Court, District of Columbia�� 11.148 LLC Komstroy v Republic of Moldova, No 14-CV-01921 (CRC), 2019 WL 3997385, (D.D.C. Aug. 23, 2019) �� 11.156, 11.157 Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, 397 F. Supp. 3d 34, 38 (D.D.C. 2019)��11.148, 11.150, 11.172 Mobil Cerro Negro Limited v Bolivarian Republic of Venezuela 863 F.3d 96, (2d Cir. 2017)��11.145, 11.149, 11.150 Mobil Cerro Negro Ltd v PDVSA Cerro Negro SA, US DC SDNY Case 1: 07-cv-11590-DAB��7.101 Nigerian Agip Exploration Limited and Oando OML 125 & 134 Limited v Nigerian National Petroleum Corporation, US DC SDNY Civil Action No 17-cv-4483, 14 June 2017��9.170 Novenergia II—Energy & Env’t (SCA) v Kingdom of Spain, No 18-CV-01148 (TSC), 2020 WL 417794, (D.D.C. Jan. 27, 2020)�� 11.154 Pao Tatneft v Ukraine, No CV 17-582 (CKK), 2020 WL 4933621, (D.D.C. Aug. 24, 2020)�� 11.157 Phillips Petroleum Co Venezuela Limited & ConocoPhillips Petrozuata B.V. v Petroleos de Venezuela, S.A., Corpoguanipa, S.A. & PDVSA Petroleo, S.A., Petition to Confirm, Recognize and Enforce an Arbitration Award, Case No 18-cv-3716, 26 April 2018��7.110 Process & Indus. Developments Ltd v Fed. Republic of Nigeria, 962 F.3d 576 (D.C. Cir. 2020) �� 11.153 Republic of Argentina v BG Group plc: 665 F.3d 1363 (DC Cir 2012)�� 11.168 Shell Nigeria Exploration and Production Company Ltd, Esso Exploration and Production Nigeria (Deepwater) Ltd, Nigerian Agip Exploration Ltd and Total E&P Nigeria Ltd v Nigerian National Petroleum Corporation, Case 1: 16-cv-03939, 26 May 2016�� 9.169, 11.172 Stati v Republic of Kazakhstan, 199 F. Supp. 3d 179, 185 (D.D.C. 2016) �� 11.156 Statoil (Nigeria) Limited, Texaco Nigeria Outer Shelf Limited v Nigerian National Petroleum Corporation: Case No 1: 18-cv-02392-RMB��9.156 TECO Guatemala Holdings, LLC v Republic of Guatemala, 414 F. Supp. 3d 94, 105 (D.D.C. 2019)�� 11.150, 11.151

xl Table of Cases Tatneft v Ukraine, 301 F. Supp. 3d 175, (D.D.C. 2018), aff ’d, 771 F. App’x 9 (D.C. Cir. 2019), cert. denied sub nom. Ukraine v Pao Tatneft, 140 S. Ct. 901, 205 L. Ed. 2d 466 (2020)�� 11.156, 11.157 Thai-Lao Lignite (Thailand) Co Ltd v Government of the Lao People’s Democratic Republic (1:10-cv-05256) District Court, S.D. New York�� 11.155 Thai-Lao Lignite (Thai.) Co. v Government of Lao People’s Democratic Republic, 864 F.3d 172, 181 (2d Cir. 2017)�� 11.160 Tidewater Inv. SRL v Bolivarian Republic of Venezuela, No CV 17-1457 (TJK), 2018 WL 6605633 (D.D.C. Dec. 17, 2018) �� 11.149, 11.150 United States v Winstar Corp, 518 US 839 (1996) ��3.85, 3.86 Winstar Corp v US, US Sup Ct (1966)��2.10

Table of National Legislation Afghanistan Draft Model Production Sharing Agreement for Hydrocarbons Exploitation, Development and Production, 3 January 2005 Art XXX�� App II

Art 26.4 ��9.45 Art 26.8 �� 9.45, 9.47 Art 27��9.45 Art 27.1 ��9.47 Art 27.1 ��9.49 Annex E��9.45

Algeria Contract between Sonatrach and Oryx Algeria, 1998 Art 36��3.54 Decree No 06-440��9.58 Decree No 87-19 Art 8(c)��9.41 Law No 05-07 of 28 April 2005 regarding Hydrocarbons, JORA, 50, 19 July 2005�� 9.53, 9.54 Art 101�� 9.54, 9.58 Art 101bis �� 9.54, 9.55, 9.58 Law No. 86-14 concerning activities of prospection, exploration, production and pipeline transportation of hydrocarbons, Journal Officiel de la République Algérienne Démocratique et Populaire (JORA), 35, 27 August 1986�� 9.35, 9.37, 9.38, 9.39, 9.40, 9.43, 9.45, 9.47, 9.48, 9.53, 9.55, 9.58 Art 3��9.39 Art 4��9.39 Art 21��9.40 Art 22��9.40 Art 27��9.39 Art 29�� App II Art 39�� 9.41, 9.43, 9.45, 9.46 Art 57��9.41 Art 58��9.41 Art 101��9.53 Law 91-21, 4 December 1991�� 9.39, 9.43 Production Sharing Agreement Art 1.1 ��9.45 Art 2.22 �� 9.45, 9.46 Art 2.31 ��9.45 Art 2.34 ��9.45 Art 4.4 �� 9.45, 9.46 Art 6��9.45 Art 18.1 ��9.45

Angola Model Concession (Deep Water) (1999) Art 37�� 9.189 Model Production Sharing Contract Dated 31 March 2006 Art 37�� App II Argentina Constitution ��7.30 Convertibility Law, Law No 23, 928.��7.27, 7.28, 7.211 Decree No 1738/92, 18 September 1992.�� 7.211 Decree No 2255/92�� 7.221 Electricity Law, Decree 634/91, Law No 24,065.�� 7.211, 7.232 Emergency Law 25,561, 6 January 2002. �� 7.28, 7.213 Art 19��7.29 Gas Law, Law No 24,076, 20 May 1992. �� 7.211, 7.217 Public Emergency and Foreign Exchange System Reform Law�� 7.213 Australia North West Gas Development (Woodside) Agreement Act 1979 ��3.10 Azerbaijan Agreement on the Joint Development and Production Sharing for the Azeri and Chirug Fields and the Deep-Water Portion of the Gurashli Field in the Azerbaijan Sector of the Caspian Sea, 20 September 1994 Art 23.1 ��8.49 Art 23.2 �� 3.55, 8.49 Production Sharing Contract Art 12�� 2.105 Art 12.1(a)�� 2.105

xlii

Table of National Legislation

Bolivia Arbitration Act 2015 ��7.05 Constitution �� 7.128 s 26�� 7.125 s 27�� 7.125 s 120�� 7.125 s 121�� 7.125 Constitution (New) Art 366�� 7.128 Constitutional Tribunal Law No 1836 ss 68–70�� 7.125 Decree No. 29272��7.22 Decree No. 29586��7.22 Foreign Investment Law 1182, September 1990��7.20 Hydrocarbons Law, Law No 1689/96, Official Gazette No 1933, 30 April 1996�� 7.20, 7.21, 7.122 s 52��3.30 s 55�� 7.21, 7.148 Model Production Sharing Contract (1997) Art 12��3.30 New Hydrocarbons Law, Law No 3058, 17 2005, Offi cial Gazette, 19 May 2005. �� 7.21, 7.123 Supreme Decree No 28701, Offi cial Gazette, 1 May 2006��7.21 Cameroon Agreement is the Convention of Establishment between the Republic of Cameroon and Cameroon Oil Transportation Company, SA�� 10.129 Art 9�� 10.136 Art 13�� 10.131 Art 17��10.134, 10.135 Art 24�� 10.129 Art 30��10.129, 10.131 Art 30.2 �� 10.129 Law No 97-16, 7 August 1997, Official Gazette, 1 October 1997 ��10.128, 10.129 Law No 2000-3, 17 April 2000�� 10.128 Canada Foreign Investment Law 1993 Art 8.2 ��5.26 Green Energy and Green Economy Act 2009��6.64 Chad Law No 001/PR/99, 11 January 1999 �� 10.127 Chile Decree Law No 1089, 1975 Art 12�� 3.07, 3.30

(1)��3.30 Foreign Investment Statute: Decree Law No 600, 16 December 1993 Art 8��7.31 China Production Sharing Contract of 25 January 2002 for Exploitation of Coalbed Methane Resources in Enhong & Laochang, Yunnan Province, by & between China United Coalbed Methane Corp. Ltd. & Far East Energy Corp. Art 27�� App II Columbia Law 963, 8 July 2005��7.45 Art 1��7.31 Congo Constitution Art 33�� 4.101 Nationalisation Order, 1975 ��4.99 Democratic Republic of Timor-Leste Law No. 4/2003 of 1 July�� App VI s 1�� App VI s 2�� App VI s 3�� App VI s 4�� App VI Ecuador Civil Code s 1505�� 7.154 Constitution, 2008�� 7.80, 7.156, 7.207 Art 33��7.78 Art 249��7.78 Art 249(1) ��7.79 Art 271��7.79 Art 422�� 7.05, 7.25 Decree 754, 1996�� 7.198 Decree 1672�� 7.25, 7.150, 7.187 Electricity Law �� 7.207 Foreign Investment Law; Investment Promotion and Guarantee Law, Official Register (OR) No 129, 19 December 1997�� 7.24, 7.80 Title IV��7.79 Title VI��7.79 Title VII��7.79 Art 22�� 7.39, 7.79 Art 23��7.79 Art 30��7.31 Hydrocarbons Law, 1993. �� 7.24, 7.25, 7.187

Table of National Legislation xliii Law 2006-42, Law Amending the Hydrocarbons Law, May 2006 ��7.25, 7.131, 7.148, 7.151, 7.154, 7.155, 7.156, 7.158, 7.164, 7.165, 7.167, 7.168, 7.172, 7.173, 7.174, 7.175, 7.178, 7.179, 7.180, 7.185, 7.187, 7.190, 7.192, 7.193, 7.196, 11.117, 11.119, 11.120 Law on Arbitration and Mediation, Official Register (OR) No 417, 14 December 2006��7.24 Legislative Decree 662 Approving the Juridical Stability System for Foreign Investment, 2 September 1991. ��7.25, 7.150, 7.187, 7.190, 7.192, App IV Title II ��App IV Recital 5��App IV Legislative Decree 757, 13 November 1999 Title V, Ch 1�� App IV Art 39�� App IV Supreme Decree 162-92 EF Approving the Regulations Guarantee Systems, 12 October 1992�� App IV Title III��App IV Egypt Concession Agreement for Petroleum Exploration and Exploitation between Arab Republic of Egypt and Ganoub El-Wadi Holding Petroleum Co. and Centurion Petroleum Corporation on Komombo Area block 2 Art XVIII��9.72 Concession Agreement for Petroleum Exploration Exploration & Exploitation between Egypt & The Egyptian General Petroleum Corporation & Dover Investments Ltd (East Wadi Araba Area Gulf of Suez) (2002)��9.72 Art III (g)��3.53 Art XIX ��3.44 Art XVIII��9.72 Art XVIII(c) ��3.53 Art XXIV��3.44 (b) ��9.10 (f)��9.10 Concession Agreement of 1999 for Petroleum Exploration and Exploitation between Egypt and the Egyptian General Petroleum Corporation and Dublin International Petroleum (Egypt) Ltd, and Tanganyika Oil Ltd Art. XVIII ��9.72 Constitution Art 123��9.72

Investment Law No 8/1997��9.10 Investment Law 2017��9.76 Law 8/1997 ��9.82 Law 114/2008 �� 9.82, 9.92 Law No 20 of 1976��9.75 Petroleum Exploration and Exploitation Concessions Law No.66 of 1953��9.72 PM Decree No 1009��9.75 Presidential Decree No 61 of 1958��9.72 Presidential Decree No 164 of 2007��9.75 Sales and Purchase Agreement�� 9.86, 9.88 Art 21.1 �� 9.88, 9.89 Art 24.3 ��9.89 France Energy Transition Act and Law No 2019- 1147, 8 November 2019��6.63 Germany Offshore Wind Energy Act ��6.63 Renewable Energy Sources Act 2016��6.63 Ghana Constitution Art 181(5) �� 9.226 Model Petroleum Agreement 2000�� 9.216 Art 15�� 9.218 Petroleum Agreement among the Government of the Republic of Ghana, Ghana National Petroleum Corporation, and Tullow Ghana Ltd, Sabre Oil and Gas Ltd, Kosmos Energy Ghana 2006��9.216, 9.220, 9.221 Petroleum Agreement among the Republic of Ghana, Ghana National Petroleum Corporation, Kosmos Energy Ghana HC and the E.O Group, 22 July 2004��9.216, 9.220, 9.221 Art 10�� 9.218 Art 12�� 9.218 Art 12.1 �� 9.219 Art 26�� 9.217, 9.218 Art 26.2 �� 9.217 Art 26.3 �� 9.217, 9.220 Art 26.4 �� 9.217 Art 26.5 �� 9.220 Art 26.9 �� 9.217 Petroleum Exploration and Production Law 1984�� 9.215 s 96�� 9.215 s 97�� 9.215 Petroleum Income Tax Law 1987�� 9.215 Petroleum (Exploration and Production) Act No 919 of 2016�� 9.215

xliv

Table of National Legislation

Power Purchase Agreement (PPA)�� 9.224, 9.228 Art 7.2 �� 9.226 Unitization and Unit Operating Agreement �� 9.214 Guinea Production Sharing Contract Dated 22 September 2006 between the Republic of Guinea and SCS Corporation Art 26�� App II India Model Production Sharing Contract, 27 December 2007 (NELP VII) Art 17�� App II Production Sharing Contract 1995 Art 34��3.37 Indonesia Pertamina Law, Law No 8, 1971 Art 15�� 2.108 Regulation 17/1974 Art 12�� 10.88 Iraq Model Production Sharing Agreement dated July 2002 between Interim Joint Regional Government of Northern Iraq, Sulaymaniyah Regional Governorate & Genel Elektrik A.S. Art 27�� AppII Italy Act No. 11/2019 Art 11-ter ��6.63 Iran Oil Nationalisation Act, 1 May 1951�� 4.07, 4.20 Art 21��4.07 Art 26��4.07 Petroleum Act, 1957�� 4.20, 4.90 Petroleum Agreement entered into by a Government Agency, the National Iranian Oil Company (NIOC) and a Canadian company called Sapphire Petroleums (Sapphire) in June 1958��4.19 Art 2��4.19 Art 36(1) ��4.20 Art 38(3) ��4.20 Art 41��4.21 Single Article Act Concerning the Nationalisation of the Oil Industry of Iran, 8 January 1980�� 4.80, 4.82, 4.87

Ivory Coast Petroleum Code (1996) Art 18(m)��3.07 Jamaica Bauxite (Production Levy) Act, 1974. ��4.39 Kazakhstan Civil Code��8.49, 8.60, 10.43, 10.44 Art 383��8.54 Concessions Law, 2006, amended 2008. ��8.30 Constitution �� 8.46, 8.49 Decree of the President on Measures for Securing the State Interests in the Petroleum Sector, No 811, 20 February 2002��8.29 Art 2��8.29 Electricity Law, 1995�� 8.146, 8.147 Electricity Law, 2009�� 8.139 Foreign Investment Law, 1994�� 8.27, 8.30, 8.54, 8.55, 8.141, 8.143 Art 6��8.27, 8.54, 8.141, 8.144 (1)�� 8.144 Investment Law, 2003.�� 8.30, 8.33, 8.54, 8.55 Art 4��8.54 Art 6, Item 1��8.54 Law on Amendments to Certain Legislative Acts Regarding Matters of Subsoil Use and the Conduct of Petroleum Operations, 8 December 2004.��8.30 Law on Amendments to Certain Legislative Acts Regarding Matters of Taxation, 1 January 2005 ��8.30 Law on Offshore Production Sharing Agreements in Oil and Gas Operations No 68, 15 July 2005��8.30 Model Contract for Oil and Gas (Decree 108 of 17 January 1997)�� 10.42 Model Contract, 31 July 2001�� 10.42 Petroleum Law No 2350, 28 June 1996.��8.27, 8.30, 8.31, 8.33, 8.34, 8.46, 8.55, 8.60 Art 1(32) ��8.30 Art 2.5 ��8.31 Art 7-1 ��8.30 Art 57�� 8.27, 8.31, 8.54 Production sharing agreement between The Republic of Kazakhstan State Committee for Investments (the Competent Body) and the Zhaikmunai Limited Liability Partnership (the Contractor), 1997 Art 21��3.50 Art 21.1 ��3.50 Art 21.2 ��3.50

Table of National Legislation xlv Production sharing agreement dated 8 April 1993 between the Government of the Republic of Kazakhstan and the Oman Oil Company Limited (Atyrau Exploration Area) �� 10.41 Production Sharing Agreement Law, 2005. �� 8.27, 8.30, 8.46, 10.43 Art 4-1 ��8.30 Art 33-1��8.30 Production Sharing Agreement Art XIX �� 3.67, 8.90 Subsoil and Subsoil Use Code 2018 �� 10.45 Subsoil and Subsoil Use Law No 2828, 27 January 1996�� 8.27, 8.30, 8.31, 8.33, 8.34, 8.35, 8.46, 8.54, 8.55, 8.60 Art 45-2��8.35 Art 45-2.2��8.35 Art 45-3��8.35 Art 71�� 8.27, 8.31, 8.32, 8.54 Art 73.2 ��8.31 Tax Code, 1995, 2001, 2004�� 8.27, 8.56, 8.57, 8.60 Art 94-3�� 3.67, 8.90 Art 282��8.54 Art 285.1 ��8.57 Art 285.2 ��8.59 Tax Code, 2004��8.30 Kenya Model Production Sharing Contract Art 41(3) ��9.30 Production Sharing Contract of 1989 between Total/Amoco/Marathon/Texaco and the Government of Kenya (Block 1). Art 8�� 10.37 Kurdistan Region Model Production Sharing Contract between the Kurdistan Regional Government of Iraq and [] (2007)��3.41 Art 30�� 2.106 Art 31�� 2.106 Art 31.1 �� 2.106, 3.53 Arts 31.4–31.11�� 2.106 Art 42.1 ��3.41 Art 43��3.59 Art 43.3 �� 3.41, 3.64 Art 43.4 ��3.64 Art 43.5 ��3.59 Kuwait Constitution, 1961��4.66 Decree Law No 124, 1977�� 4.52, 4.54, 4.59

Liberia Model Petroleum Sharing Contract of 2000 Art 35�� App II Libya Petroleum Act, 1955��4.27 Art 9��4.27 Malaysia Continental Shelf Act 1966�� 10.88 Mexico IEPS Law Art 4(III)��6.81 Mozambique Law 14/2017 of 28 December �� 9.261 Mega-Projects Law, Law 15/2011�� 9.263 Mining Agreement, Art 11.9��3.64 Mining Code, 1991 Art 99�� 9.274 Model Exploration and Production Concession Contract, March 2006 Art 9.12 ��3.48 Art 11��3.48 Art 11.2 ��3.48 Art 11.3 ��3.48 Art 11.8 ��3.48 Art 11.9 ��3.48 Art 28��3.48 Model Production Sharing Contract (2001) ��3.39 Art 13�� 2.107 Art 30.7(d)��3.39 (e)��3.39 Oil and Gas Upstream Activities Law, Law No 21/2014�� 9.260 Petroleum Exploration and Production Concession Contract between the Government of the Republic of Mozambique and Eni Mozambico S.p.A. and Sasol Petroleum Mozambique Exploration Limitada and Empresa Nacional de Hidrocarbonetos, E.P. for EPCC Area A5-A, 17 October 2018�� 9.261 Art 34�� 9.261 Petroleum Tax Law 27/2014 �� 9.260, 9.268 Art 40�� 9.261 Petroleum Law 03/2001�� 9.259 Petroleum Law 21/2014 Art 68(1) �� 9.262

xlvi

Table of National Legislation

Netherlands Prohibition of Coal in Electricity Generation Act 2019 ��6.63 Nigeria Acquisition of Assets (British Petroleum Company) Act �� 9.100 Arbitration and Conciliation Act�� 9.28, 9.132 s 48 (b)(i)��9.28 (ii) ��9.28 Capital Gains Tax Act�� 9.115 Constitution ��9.104, 9.119, 12.47 s 162�� 9.114 Decree 1990 No 39�� 9.118 Decree 1993 No 113�� 9.118 Deep Offshore and Inland Basin Production Sharing Contracts Act 1999�� 9.111, 9.112, 9.115, 9.130, 9.135 s 16��9.113, 9.114, 9.115 s 16(1)�� 9.114 Deep Offshore and Inland Basin Production Sharing Contacts Act 2003�� 9.159 Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act�� 9.115 s 5(4)�� 9.115 Deep-Water Block Allocations to Companies (Back-in Rights) Regulations 2003, S.I. No 7 of 2003�� 9.112, 9.127 Sch 1 para 35�� 9.128 Finance Act�� 9.115 Investment Promotion Commission Decree No 15 of 1995�� 9.117 LNG (Fiscal Incentives, Guarantees and Assurances) Act, 1990 No 39, c N87, amended 1993 �� 3.10, 9.118 s 3��3.10 s 14��3.10 Second Schedule��App III para 2�� 12.47 para 6�� 12.47 LNG (Fiscal Incentives, Guarantees and Assurances) Act Cap N87 2004 Second Schedule�� 9.119 Model Offshore Production Sharing Contract of 1993 between NNPC and Contractor, Barrows Basic Petroleum Laws and Concession Contracts, Central and South Africa, Supplement 117�� 9.164 Art 19.2 ��9.128, 9.140, 9.142, 9.145, 9.146, 9.147, 9.149, 9.153 Art 21��9.128, 9.146, 9.153 Model PSC 2000�� 9.130 Niger-Delta Development Commission (establishment, etc.) Act of 2002 �� 9.123

NIMASA Act 2007�� 9.124 Petroleum Act 1969 �� 9.104 s 1�� 9.107 s 44(3)�� 9.107 Petroleum Profits Tax Act��9.115, 9.126, 9.130 Panama Law No 54, 22 July 1998��7.31 Peru Civil Code�� 7.34, 7.36, 7.59 Art 1357��7.35 Art 1362��7.59 Constitution Art 62��7.36 Foreign Investment Law, Legislative Decree No 662, 29 August 1991��7.34 Art 10�� 7.31, 7.49 (a)�� 7.37, 7.68 (b) ��7.37 (c)��7.37 Art 39��7.35 Art 52(1)(e)��7.69 Framework Law for the Development of the Private Investment, Legislative Decree No 757, 8 November 1991 Arts 38–45��7.31 Merger Revaluation Law�� 7.52, 7.58 Art 26��7.36 Regulation of the Guarantee Regimes for Private Investment, Supreme Decree 162–92, 9 October 1992�� 7.31, 7.50, 7.68 Art 19(a) ��7.37 (b) ��7.37 (c)��7.37 (d) ��7.37 Art 23��7.50 (a)�� 7.37, 7.68 Arts 24–28��7.31 Art 24��7.34 Art 26��7.36 Philippines Model Production Sharing Agreement of 11 April 2005 s XXI�� App II Qatar Model Production Sharing Agreement dated July 2002 between Interim Joint Regional Government of Northern Iraq, Sulaymaniyah Regional Governorate & Genel Elektrik A.S. Art 34.12 �� App II

Table of National Legislation xlvii Russian Federation Civil Code Art 124��8.14 Decree No 2285 On Issues of Production Sharing Agreements in Subsoil Use, 24 December 1993 �� 8.14, 8.16 Decree No 1055-r, 30 July 2009��8.25 Energy Strategy of the Russian Federation to 2020, Decree 1234–5 of the Russian Government, 28 August 2003��8.20 Federal Law No 225-FZ, On Production Sharing, 30 December 1995�� 8.14, 7.16 Art 17��8.16 (2)�� 3.47, 8.16 Federal Law No 35-FZ On the Electricity Industry, 26 March 2003��8.19 Federal Law No 117-FZ On the Export of Gas, 18 July 2006 ��8.18 Art 3��8.21 Federal Law No 46-FZ On Amendments to the Criminal Code of the Russian Federation, State Secrets Law, 9 April 2007��8.24 Federal Law No 57-FZ On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the National Defence and Security of the Russian Federation, Strategic Investments Law, 7 May 2008�� 8.15, 8.24 Federal Law No 115-FZ On Concession Agreements��2.85 Federal Law No 58-FZ On the Introduction of Amendments to Certain Provisions of Legislative Acts, 2008 ��8.23 Federal Law No 108-FZ Amending the Law on Concession Agreements, 2 July 2008 Art 17��2.85 Federal Law No N 160-FZ on Foreign Investments Law ��8.15 Federal Law ‘On the Protection and Promotion of Capital Investments and the Development of Investment Activity in the Russian Federation’��8.15 Gas Supply Law, 1999��8.18 Law on Subsurface, No 2395-1, 21 February 1992, amended 30 December 2008 ��8.14 Presidential Decree of 1992 On the transformation of the State Gas Concern ’Gazprom’��8.18 Production Sharing Contract 1996 Art 17.1 ��3.82 Art 17.2 ��3.47 Resolution No 526 On Restructuring the Electricity Industry��8.19 Tax Code��8.16

South Africa Constitution �� 9.21, 9.22 Art 9��9.22 Art 25��9.25 Mineral and Petroleum Resources Development Act, No 28 of 2002 (MPRDA)�� 5.153, 9.22, 9.23, 9.25 Ch 4 ��9.22 Petroleum Profits Tax Act��9.29 Protection of Investment Act 2018��9.26 Public–Private Partnership (Amendment) Act 2018 s 14�� 9.247 s 16�� 9.247 s 22�� 9.247 s 25A�� 9.247 Uniform Arbitration Act��9.15 South Sudan Production Sharing Contract Dated June 28, 2005 among Nile Petroleum Corporation, SET Energy GmbH, Industrial & Financial Group ASCOM S.A. Art XXVI�� App II Spain Law 54/1997 �� 6.129 Royal Decree-Law 17/2019�� 11.185 Sudan Exploration and Production Sharing Agreement Dated 15 January 2002 Between the Government of Sudan and Joint-Stock Oil and Gas Company Slavneft and Sudapet Ltd Art XXVI�� App II Tanzania Arbitration Act 2020 �� 9.244, 9.249 Anti-Money Laundering Act�� 9.253 Extractive Industries (Transparency and Accountability) Act�� 9.243 Insurance Act 2009�� 9.244 Mining Act 2010�� 9.242, 9.244 Mining (Local Content) Regulations 2018, amended in 2019�� 9.247 Mining (Mineral Rights) Regulations 2018�� 9.255 Model Production Sharing Contract of November 2004 �� 9.234 Art 30�� 3.64, App II Model PSA 1989�� 9.234 Model PSA 2008�� 9.240 Model PSA 2013�� 9.240

xlviii

Table of National Legislation

Art 1�� 10.40 Art 25(f)�� 10.40 Art 28(f)�� 9.240 Natural Wealth and Resources (Permanent Sovereignty) Act 2017�� 9.244, 9.247, 9.249 s 11(2)�� 9.244 s 11 (3)�� 9.244 Natural Wealth and Resources (Review and Re-negotiation of Unconscionable Terms) Act 2017��9.244, 9.245, 9.247 s 6(2)(i)�� 9.245 s 6(3)(i)�� 9.245 s 7(1)�� 9.245 Oil and Gas Revenue Management Act�� 9.243 Petroleum Act 2008 �� 9.241 Petroleum Act 2015 �� 9.243, 9.244 Petroleum (Exploration and Production) Act�� 9.234 Petroleum (Local Content) Regulations 2017�� 9.233 Production Sharing Agreement relating to the Songo Songo Gas Field between The Government of the United Republic of Tanzania, Tanzania Petroleum Development Corporation and PanAfrican Energy Tanzania Limited (2001) �� 10.39 Art 1.1 �� 9.235 Art 27�� 9.235 Art 28(f)�� 9.238 Art 28.17 �� 3.59, 9.235 Art 30�� 9.238 Public Private Partnership (Amendment) Act 2018 s 22��9.10 Texaco Production Sharing Agreement dated 7 May 1990 between the Government of Tanzania, Tanzania Petroleum Development Corporation and Texaco Exploration Tanzania Inc (Ruvuma Basin)�� 10.37 Written Laws (Miscellaneous Amendments) Act��9.232, 9.233, 9.244, 9.246 Tunisia Model Production Sharing Contract (1989) Art 24.1 ��3.29 Petroleum Law: Decree-Law Establishing Special Provision for Petroleum Exploration and Production, 14 September 1985 Art 36�� 2.108

Turkey Constitution �� 6.111 Host Government Agreement between the Government of Turkey and the MEP Participants governing the Baku- Tbilisi-Ceyhan (BTC) oil pipeline (October 19, 2000) Art 7.2 �� App II Art. 21.2�� App II Uganda Foreign Investment Law 1991�� 9.178 Income Tax Act 1997��9.183, 9.184, 9.196, 9.201, 9.206 s 89G(a)�� 9.201, 9.206 Income Tax Act 2009, 2010�� 9.202, 9.206 Model Contract for Production Sharing 1999��9.184, 9.185, 9.201 Art 26�� 9.189 Art 33.2 �� 9.189, 9.192 Art 33.4 �� 9.193 Model PSA 2018 Art 24.1 �� 9.195 Petroleum Exploration and Production Act 1985 (‘PEPA’) �� 9.184 Petroleum (Exploration, Development, and Production) Act, 2013�� 9.195 Production Sharing Agreement for Petroleum Exploration, Development and Production in the Republic of Uganda by and between the Government of the Republic of Uganda and Tullow Uganda Limited, in respect of the Kanywartaba Prospect Area, February 2012 �� 9.192, 9.207 Art 33.2 �� 9.207 Art 33.5 �� 9.207 Ukraine Law on Alternative Energy Sources, 2003 Art 9-1��8.43 Law on Electric Power Industry, No 575/97-BP, 16 October 1997 (amended 22 April 2009) Art 17-1��8.43 Resolution 647 �� 8.149, 8.150 United Kingdom Arbitration Act 1996 (c 23)��2.92 s 2(3)�� 7.104 s 38�� 7.154 s 44�� 7.102, 7.104

Table of National Legislation xlix s 67�� 7.133 s 68�� 7.133 Civil Procedure Rules 1998 (SI 1998/3132) �� 7.102 Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018�� 10.69 Energy Act 2013�� 2.166 Finance Act 2013 �� 10.94 Finance (No 2) Act 1997 (c 16)��2.08 United States Bankruptcy Code Ch 11 �� 8.123 Federal Arbitration Act�� 9.167 s 207�� 9.167 Foreign Assistance Act, 1961��4.40 Foreign Sovereign Immunities Act of 1976��11.145, 11.149 s 1650a�� 11.149 s 1605(a)(1)�� 11.150 s 1605(a)(6)��11.150, 11.156 s 1650a(b) �� 11.150 s 1330(b) ��11.149, 11.150 s 1391(f)�� 11.149 28 U.S.C. s 1608�� 11.150 s 1738�� 11.149 Uzbekistan Decree No 76, 10 August 2001 �� 8.166 Decree No 127-20, 30 March 1996�� 8.164 Decree No 266, 11 July 2000 �� 8.166 Decree No 477, 22 September 1994 �� 8.166 Cl 7�� 8.163 Law on Foreign Investment, 30 April 1998�� 8.165 Tax Code 2009, 2011�� 8.168 Venezuela Civil Code��7.17 Commercial Arbitration Law, 1998, Official Gazette No 36.430, 7 April 1994��7.14 Constitution ��7.44 Cl 258��7.14 Hydrocarbons Law, 1943, modified 1967, Official Gazette No 1149, 15 September 1967��7.17

Law on the effects of the Migration Process of the Association Agreements of the Orinoco Belt and of the Exploration At- Risk and Profit Sharing Agreements into Mixed Companies, 8 October 2007. ��7.91 Migration Law, Decree Law No 5, Official Gazette No 38.632, 26 February 2007.�� 7.18, 7.89, 7.90 Art 4��7.90 Art 5��7.90 Model Operating Agreement for the Third Round 1997��2.92 Nationalization Act, 2009 Art 5��7.14 Oil Services Sector Law, Official Gazette No 39,174 of 8 May 2009�� 7.16, 7.107 Organic Law on Hydrocarbons (OLH), Official Gazette No 37.323, 13 November 2001 �� 7.17, 7.86 Art 1��7.17 Art 9��7.17 Art 22��7.17 Art 27��7.17 Art 56��7.17 Art 57��7.17 Organic Law that reserves to the State the Assets and Services related to Primary Hydrocarbons Activities, Official Gazette No 39, 173, 7 May 2009��7.19 Presidential Decree No 1.867 ��7.42 Promotion and Protection of Investments Law: Decree No 356, Special Official Gazette No 5.390, 22 October 1999.�� 7.14, 7.40 Art 17��7.31 Art 22��7.14 Regularization Law: Law of Regularization of Private Participation in Primary Activities: Decree No 1.510, 18 April 2006, Offi cial Gazette No 38.419, 18 April 2006 �� 7.18, 7.87 Vietnam Decree No 33/2013/ND-CP (Model PSC) Cl 18.1.3��3.46 Model Petroleum Production Sharing Contract of 2007 between Vietnam Oil & Gas Corporation and Contractor Ch XVIII�� App II Art 18.1.3��3.64

Table of Treaties and Other International Instruments [References in bold are to material reproduced in the text.] MULTILATERAL TREATIES AND OTHER INTERNATIONAL INSTRUMENTS ASEAN Agreement for the Promotion and Protection of Investments (ASEAN Agreement) (signed 15 December 1987) (1988) 27 ILM 612, III Compendium II 293 �� 5.129 Art 22��5.95 ASEAN Comprehensive Investment Agreement (ACIA), 2009�� 5.129 Art 4(a) �� 5.129 Art 17(1)(f )�� 5.130 Art 18�� 5.129 Art 19�� 5.130 Annex I �� 5.130 Aarhus Convention. See Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union, OJ L169/1, 29 May 2020��5.09 American Convention on Human Rights, OAS Treaty Series No 36, 1144 UNTS 123�� 10.18, 10.124 Basel Convention. See Convention on the Control of Trans-Boundary Movements of Hazardous Wastes and their Disposal CAFTA. See Dominican Republic-Central America Free Trade Agreement Canada Model Foreign Investment Promotion and Protection Agreement Annex B13(1)(c)��6.80 Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States��5.20 Art 8.10(4)��5.20 Art 8.22 ��5.90 Comprehensive Progress Trans-Pacific Partnership (CPTPP) �� 5.112, 5.132, 5.133 Preamble�� 5.131 Recital 6�� 5.131

Art 2�� 5.133 Convention Concerning Indigenous and Tribal Peoples in Independent Countries, Convention No 169, 2 International Labour Conventions and Recommendations 1919–1991 p 1436, entered into force 5 September 1991��10.19, 10.117, 10.123 Art 6�� 10.19 Art 7.4 �� 10.19 Art 15�� 10.19 Convention Concerning the Protection of the World Cultural Heritage and Natural Heritage, UNESCO, 1972�� 10.124 Convention Establishing the Multilateral Investment Guarantee Agency (MIGA), 11 October 1985��7.14 Convention for the Protection of Human Rights and Fundamental Freedoms, 4 November 1950, 213 UNTS 222; 312 ETS 5, entered into force 3 September 1953��8.123, 8.127, 10.17 Art 2�� 10.72 Art 6�� 8.123 Art 6(1) �� 10.120 Art 8�� 10.72 Art 41�� 8.127 Protocol 1 Art 1�� 8.123, 10.17 Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters, done at Aarhus, Denmark, on 25 June 1998.�� 10.19, 10.20 Art 1�� 10.20 Art 6�� 10.23 Art 9�� 10.20 (2)�� 10.23 (3)�� 10.21 Annex I �� 10.19, 10.20 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992�� 10.19 Convention on Environmental Impact Assessment in a Transboundary Context, done at Espoo, Finland, on 25 February 1991�� 10.19 Art 2.2 �� 10.19 App�� 10.19

lii Table of Treaties and Other International Instruments Convention on the Control of Trans- Boundary Movements of Hazardous Wastes and their Disposal (Basel Convention), 1989�� 10.19 Convention on the Elimination of All Forms of Discrimination against Women�� 10.18 Art 14(2)(h)�� 10.18 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) adopted 10 June 1958, entered into force 7 June 1959, 330 UNTS 38�� 2.85, 2.92, 5.06, 7.03, 7.14, 7.154, 8.155, 9.15, 9.17, 9.133, 9.167, 9.249, 11.131, 11.134, 11.136, 11.153, 11.154 Art V ��2.85 (1)�� 5.157 (c)�� 11.157 (e)��11.135, 11.160 (2)�� 5.157 (a)�� 11.135 (b) �� 11.135 Art VI�� 11.154 Convention on the Rights of the Child, GA Res 44/25, annex, 44 UN GAOR, 44th Sess, Supplement No 49 at 167, UN Doc A/44/49 (1989)�� 10.18 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention) (signed 18 March 1965, entered into force 14 October 1966) 575 UNTS 159�� 2.42, 2.43, 2.51, 2.60, 2.90, 4.99, 5.12, 5.49, 5.124, 5.136, 5.137, 5.138, 5.140, 5.141, 5.142, 5.148 ,5.153, 7.03, 7.05, 7.08, 7.09, 7.14, 7.18, 7.24, 7.64, 7.80, 7.126, 7.127, 7.128, 7.129, 7.159, 7.212, 8.33, 9.15, 9.20, 9.76, 9.80, 11.137, 11.153 Preamble��2.63 Recital 1�� 5.141 Art 9(3) �� 5.157 Art 25�� 2.42, 2.60, 2.61, 5.148 (1)�� 3.92, 5.139, 5.148 (4)��5.142, 7.05, 7.25, 7.126 Art 26�� 5.143, 6.140 Art 39�� 7.156 Art 42(1) �� 4.37, 5.149 Art 46�� 6.50, 10.51 Art 47�� 5.143, 7.154, 7.155, 7.158, 7.164 Art 49�� 5.144 (1)�� 5.145 (2)�� 5.157 Art 50�� 5.144 Art 51�� 5.144, 5.155 (1)�� 11.84 Art 52��5.143, 5.144, 5.157, 6.38

(1)�� 5.157 (b) �� 5.158 Art 53�� 5.157, 7.30 (1)�� 5.143 Art 54��7.30, 11.136, 11.137 (1)�� 5.141 Art 71�� 5.142, 7.25, 7.126 Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment [1985] OJ L175/40�� 10.19 Council Directive 97/11/EC of 3 March 1997 amending Directive 85/337/EEC on the assessment of the effects of certain public and private projects on the environment [1997] OJ L73/5 �� 10.19 Declaration of the Government of the Democratic and Popular Republic of Algeria concerning the Settlement of Claims by the Government of the United States of America and the Islamic Republic of Iran, 19 January 1981, 20 ILM 230��2.75 Art V ��2.75 Art VII para 2 ��2.75 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the fi eld of water policy [2000] OJ L327/1 �� 10.55 Directive 2001/42/EC Strategic Environmental Assessment Directive (SEA)�� 10.19 Directive 2003/35/EC of the European Parliament and of the Council of 26 May 2003 providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment and amending with regard to public participation and access to justice Council Directives 85/337/ EEC and 96/61/EC—Statement by the Commission [2003] OJ L156/17 �� 10.19 Directive 2009/28/EC Renewable Energy�� 2.147 Directive 2018/2001/EU �� 2.147 Dominican Republic-Central America Free Trade Agreement (DR-CAFTA)�� 5.134, 5.135, 6.70 Art 10, s A �� 10.51 Art 10.11 �� 10.51 Art 10.12(1)��5.51 Art 10.12(2)��5.47 Art 17.2 �� 10.48 Art 17.2 (2) �� 10.46 Art 1018 (2)(b)��5.95

Table of Treaties and Other International Instruments liii Energy Charter Treaty (ECT) signed 17 December 1994, entered into force 16 April 1998, 2080 UNTS 100�� 1.11, 1.23, 1.25, 1.26, 1.27, 1.29, 1.43, 2.01, 2.15, 2.23, 2.43, 2.48, 2.54, 2.60, 2.145, 2.157, 2.163, 3.97, 5.04, 5.07, 5.10, 5.15–5.17, 5.25, 5.31–5.55, 5.69, 5.71, 5.77, 5.79, 5.102, 5.104, 5.105, 5.124, 5.140, 6.04, 6.08, 6.28, 5.162, 6.45, 6.49, 6.58, 6.62, 6.63, 6.83, 6.118, 6.122, 6.136, 6.153, 6.158, 6.160, 6.164, 8.06, 8.09, 8.10, 8.12, 8.13, 8.25, 8.35, 8.36, 8.54, 8.86, 8.95, 8.109–8.112, 8.115, 8.117, 8.119, 8.120, 8.123–8.126, 8.130, 8.136–8.140, 8.142, 8.153–8.155, 9.13, 10.03, 10.53, 10.54, 10.119 Preamble�� 1.29, 2.52, 2.63 Recital 5�� 1.29, 2.63 Recital 14�� 10.46 Part II�� 5.163 Pt III��2.46, 5.39, 5.47, 5.52, 5.53, 5.54, 5.76, 5.95, 8.111, 8.124, App I Pt V��5.54 Art 1�� 2.50, 5.32 (2)��2.45 (c)��2.45 (4)�� 2.48, 5.40 (5)�� 2.48, 2.53, 5.40, 5.44 (6)��2.48, 2.49, 2.50, 2.51, 5.43, 5.44, 5.100, 5.103 (f)��2.51 (7)�� 2.45, 2.46, 5.103 (a)��2.45 (b) ��2.45 (9)��2.49 Art 2�� 5.35, 12.05 Art 6��5.40 Art 7�� 5.70, 5.71, 5.74, 8.105 (2)��5.72 (3)�� 5.73, 5.90 (4)��5.74 (5)��5.74 (6)��5.81 (7)�� 5.75, 5.81 (a)–(d)��5.82 Art 10��12.05, App I (1)�� 5.15, 5.23, 5.26, 5.52, 5.56, 5.58, 5.59, 5.61, 5.103, 6.58, 6.134, 6.135, 8.114, 8.115, 8.118, 8.138, 8.145, 8.148, 11.54, 11.91, 11.93, 11.128, 11.183 (2)�� 5.63, 5.90, 6.134 (4)��5.63 (7)��5.90 (12) �� 8.118 Art 11��App I Art 12�� 5.64, 5.103, App I (2)��5.64

Art 13��5.65, 5.90, 5.91, 6.97, 11.54, 11.55, 11.99, 11.183, App I (1)�� 5.65, 6.72, 8.120, 11.10, 11.55, 11.93 Art 14��5.68, App I (1)��5.68 Art 15��App I Art 16��7.126, App I Art.17�� 5.47, 5.48, 5.49, 5.51, 11.99, App I (1)��2.46, 5.47, 5.48, 5.49, 5.50, 5.51 (2)�� 5.118 Art 18�� 1.11, 1.28, 2.77, 5.38 (1)��2.77 Art 19�� 10.46 Art 21��5.47, 5.85, 5.86, 5.88, 5.89, 5.90, 8.173 (1)�� 5.86, 5.88, 5.91 (2)��5.88 (b) �� 5.88, 5.90 (3)��5.88 (a)�� 5.88, 5.90 (b) ��5.90 (4)�� 5.88, 5.90 (5)�� 5.89, 5.90, 5.91 (b) ��5.90 (7)��5.87 (a)(i)��5.87 (a)(ii)�� 5.87, 5.88 (b) ��5.88 Art 21��6.28, 6.29, 6.30, 8.134, 11.99 (1)�� 8.134 (5)�� 8.134 Art 23��5.84 Art 24��5.81 (2)(b)(ii)��5.81 Art 25�� 8.117 Arts 26–28��5.54 Art 26��2.46, 5.12, 5.76, 5.78, 5.90, 5.94, 5.100, 8.110, 8.111, 8.117, 8.132, 11.156 (1)��2.45 (2)�� 5.79, 8.111 (a)�� 5.93, 5.97 (b) ��5.93 (3)�� 5.93, 8.111 (b)(i) �� 5.94, 5.95, 5.96, 5.97 (4)�� 8.152 (b) �� 8.123 (6)��5.79 (8)��5.79 Art 27��5.80 Art 29��5.83 Art 33�� 5.106, 5.107 Art 34(3) �� 5.106 Art 34(7) �� 5.106 Art 44�� 5.100 Art 45��5.98, 5.100, 5.101, 8.132, 11.99 (1)��5.98, 5.101, 8.117, 8.119, 8.125, 8.129, 8.131, 8.132

liv Table of Treaties and Other International Instruments (2)�� 5.98, 8.130 (a) ��5.98, 5.101, 8.117, 8.129 (3)�� 8.124, 8.133 (a) ��5.99 (b)��5.99 Art 47(1) �� 5.108 (3)�� 5.108 (4)�� 5.108 Art 49�� 5.108 Annex 1A��5.59 Annex D��5.83 Annex EM�� 2.48, 2.53, 2.54 Annex ID�� 5.93, 5.94, 8.111 Protocol�� 5.107, 8.25 Energy Charter Treaty Rules Concerning the Adoption of Transit Disputes, adopted December 1998 ��5.82 Espoo Convention. See Convention on Environmental Impact Assessment in a Transboundary Context European Convention on Human Rights. See Convention for the Protection of Human Rights and Fundamental Freedoms General Assembly Resolution 626 (VII), 21 December 1952 ��2.74 General Assembly Resolution 1314 (XIII), 12 December 1958 ��2.74 General Assembly Resolution 1515 (XV), 15 December 1960 ��2.74 General Assembly Resolution on Permanent Sovereignty over Natural Resources. 1803 (XVII), 14 December 1962.��2.71, 2.73, 2.75, 2.76, 2.78, 2.79, 4.37, 4.60, 4.67 Art 4�� 2.73, 2.75, 4.75 Art 8��2.75 Ch 1, paras 1.57–1.61 ��3.94 Ch 5, paras 5.94–5.117��3.94 General Assembly Resolution 2158 (XXI), 25 November 1966��2.74 para 5��2.74 General Assembly Resolution 3171 (XXVIII), 17 December 1973��2.78 para 3��2.78 General Assembly Resolution 3281 (XXIX), 12 December 1974��2.78 Art 2�� 2.78, 2.79 (1)��2.78 (2)(c)��2.78 General Comment No 15 On the Right to Water, UN Doc E/C.12/2002/11, 26 November 2002 �� 10.18 Havana Charter, International Trade Organization, March 24 1948.�� 6.164 ICC. See International Chamber of Commerce ICSID Additional Facility Rules, Doc ICSID/ 11/Rev.1, International Centre for

Settlement of Investment Disputes, 1 January 2003�� 5.124, 5.154, 5.130, 5.140, 5.153, 7.129 ICSID Rules of Procedure for Arbitration Proceedings, Doc ICSID/15/Rev. 1, International Centre for Settlement of ICSID Convention. See Convention on the Settlement of Investment Disputes between States and Nationals of other States ILO Convention No 169. See Convention Concerning Indigenous and Tribal Peoples in Independent Countries International Chamber of Commerce (ICC) Arbitration Rules, 1998��7.97 Art 15��7.97 International Chamber of Commerce Arbitration Rules 2017 Art 16�� 11.174 Art 33�� 11.174 International Convention for the Prevention of Pollution from Ships 1973, as modified by the Protocol of 1978 (MARPOL)�� 10.78 Art 27�� 10.78 International Covenant on Civil and Political Rights, GA Res 2200A, UN GAOR 21st Sess, Supp No 16 at 52, UN Doc A/6316 (1966), 999 UNTS 171�� 10.18, 10.124 International Covenant on Economic, Social and Cultural Rights (ICESCR) GA Res 2200, 21 UN GAOR Supp 49, UN Doc A/6316 (1967), reprinted in 6 ILM 360 (1967) �� 10.18 Art 11�� 10.18 Art 12�� 10.18 International Energy Charter, 2015 Art 1(2) ��5.41 International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts �� 2.19, 6.35 Art 3�� 11.59 Art 4��9.96 (1)��2.19 (2)�� 11.57 Art 5�� 11.59 Art 25�� 6.38, 6.39, 6.43 Art 27��6.39 Art 31��11.13, 11.15, 11.94, 11.123 Art 34�� 11.16 Art 35�� 11.17 Art 36��11.18, 11.59, 11.123 (2)�� 11.42 Art 39�� 11.126 Investment Disputes, 10 April 2006.��2.90, 5.160, 7.128, 7.160, 9.97, 10.122

Table of Treaties and Other International Instruments lv r 37�� 10.122 r 39�� 7.154, 7.164 (1)�� 7.154 (4)�� 7.160 r 42(1)��7.53 r 43(2)��7.150, 11.174, 11.183 r 48(4)�� 5.152 r 54(3)�� 5.157 r 55�� 5.157 Kyoto Protocol. See Protocol to the 1992 Framework Convention on Climate Change London Court of International Arbitration Rules 2014��9.06 Art 26.9 �� 11.174 MARPOL. See International Convention for the Prevention of Pollution from Ships MIGA. See Convention Establishing the Multilateral Investment Guarantee Agency Montreal Protocol on Substances that Deplete the Ozone Layer, 1987�� 10.19 Multilateral Agreement on Investment, 1998. �� 6.164 New York Convention. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards North American Free Trade Agreement (NAFTA) (adopted 17 December 1992, entered into force 1 January 1994) 107 Stat 2057, CTS 1994 No 2, (1993) 32 ILM 289�� 2.15, 5.04, 5.110–5.116, 5.27, 6.64, 6.69, 6.81, 6.82, 6.164, 9.76 Preamble�� 5.116 Ch 11 ��5.114, 5.134, 5.116, 5.118, 5.119, 5.121, 5.127, 6.66, 11.179, 11.181 Art 201��5.46 Art 1102�� 5.119, 6.69 (3)�� 5.120 Art 1103�� 5.119 Art 1105�� 5.17, 5.119, 6.69 (1)�� 5.121, 6.64 Art 1106�� 5.119 Art 1107�� 5.119 Art 1109�� 5.119 Art 1110�� 5.119, 6.78, 6.90 (1)�� 6.69, 6.72 Art 1113�� 5.47, 5.118 (1)�� 5.47, 5.51, 5.118 (2)�� 5.47, 7.124 Art 1114�� 10.46 Art 1116�� 5.122 Art 1120�� 5.124 Art 1121�� 5.126 (1)(b)��5.95 Art 1128��2.59

Art 1134�� 5.126 Art 1135�� 5.126 Art 1136�� 11.181 Art 1139�� 2.56, 5.117 Art 1803��5.51 Art 2006��5.51 Annex 14-C�� 5.114 para 1 ��6.69 para 4 ��6.69 Annex 14-D para 5 �� 5.114 Annex 14-E�� 5.113 para 6(a)�� 5.113 para 6(b)�� 5.113 para 6(c)�� 5.114 OECD Draft Convention on the Protection of Foreign Property, 1967.�� 6.164 OECD Model Tax Convention��5.90 Paris Agreement on Climate Change 2015�� 1.19, 2.82, 2.147, 6.54, 6.63, 10.01, 10.03, 10.69, 10.70, 10.151, 11.36, 12.67 Art 4(8) �� 10.69 Art 4(13) �� 10.69 Art 8�� 10.69 Art 13�� 10.69 Permanent Court of Arbitration Rules of Arbitration and Conciliation for Settlement of International Disputes between Two Parties of Which Only One Is a State 1993 Art 34(1) �� 11.174 Protocol of Buenos Aires for the Promotion and Protection of Investments from Non-Member Countries, 1994��7.08 Protocol of Colonia for the Promotion and Reciprocol Protection of Investments in MERCOSUR, 17 January 1994��7.08 Art 1(1) ��5.43 Protocol to the 1992 Framework Convention on Climate Change, UNFCC, 1997 (Kyoto Protocol)�� 2.147, 10.19, 8.63 Rio Declaration on the Environment and Development, 1992�� 10.19 Statutes of the Permanent Court of International Justice, 26 June 1945, UKTS 67 (1946), 59 Stat 1055 Art 38�� 4.15, 4.37 (1)��4.14 Stockholm Chamber of Commerce Arbitration Rules, 1999�� 8.151, 8.152 Art 4�� 8.151 Stockholm Declaration, UNEP, 1972. �� 10.19 Treaty on the Functioning of the European Union (TFEU)��1.11 Title XXI, Art 194��2.81 Art 192(2)(c)��2.81

lvi Table of Treaties and Other International Instruments Art 194(2) ��2.81 Art 207��6.49 Treaty on the West African Gas Pipeline project between the Republic of Benin, the Republic of Ghana, the Federal Republic of Nigeria and the Republic of Togo�� 3.103 Treaty for the Promotion and Protection of Investments (with Protocol and exchange of notes), Germany and Pakistan, 25 November 1959, 457 UNTS 24 (entered into force 28 November 1962)��5.06 Art 7��5.60 UN Convention on the Law of the Sea (UNCLOS), 1982�� 2.80, 10.19 Art 56(1)(a)��2.80 Art 81��2.80 Art 151�� 2.158 Art 153�� 2.158 Art 187(c)(i) �� 2.158 Art 188(2)(a)�� 2.158 UN Framework Convention on Climate Change, 1992 �� 2.147, 10.19 Art 14�� 10.69 UNCITRAL Arbitration Rules, UN Doc A/ 31/98; 31st Session Supp No 17, UN General Assembly, 1976 �� 2.64, 2.87, 4.78, 5.12, 5.49, 5.77, 5.80, 5.124, 6.138, 6.139, 7.14, 7.161, 7.185, 8.25, 8.111, 8.123, 8.150, 9.17, 9.97 UNCITRAL Arbitration Rules 2010 Art 34(1) ��11.179, 11.181 Art 36(1) �� 11.174 UNCITRAL Model Law, 1985�� 7.14, 7.24, 9.15 Art 17�� 7.154 Art 35�� 7.154 Art 36�� 7.154 UNCITRAL Model Law on International Arbitration, 2006�� 7.154 Ch IVA�� 7.154 Art 17(A)(1) �� 7.154 UNCLOS. See UN Convention on the Law of the Sea United Nations Convention on International Settlement Agreements resulting from Mediation (the Singapore Convention on Mediation), 20 December 2018; entry into force on 12 September 2020:��2.91 United States-Mexico-Canada Agreement (USMCA)��5.110–5.114, 5.116, 5.133, 6.69 Preamble Recital (3)�� 5.111 Recital (7)�� 5.111 Art 4.2 �� 5.113 Protocol�� 5.110

Vienna Convention for the Protection of the Ozone Layer, 1985�� 10.19 Vienna Convention on the Law of Treaties (VCLT) (Signed 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331�� 3.107, 8.112 Art 18(a) ��8.25 Art 25�� 5.98, 8.117 Art 27��5.98 Art 31��2.52 Art 31(3)(c)�� 10.116 Art 46��5.98 Art 62��4.61 BILATERAL TREATIES Albania-Greece BIT, 1991��6.85 Austria-Macedonia BIT, 2001 �� 8.136 Barbados–Venezuela BIT, 1994 Art 5�� 11.78 Bolivia-Netherlands BIT, 1992�� 7.124, 7.127 Bolivia-UK BIT, 1988�� 7.127 Bolivia-US BIT, 1998�� 7.127 Brazil-Angola BIT, 2015��7.08 Brazil-Belgium-Luxembourg Economic Union BIT, 1999��7.08 Brazil-Chile BIT, 1994��7.08 Brazil-Colombia BIT, 2015��7.08 Brazil-Cuba BIT, 1997��7.08 Brazil-Denmark BIT, 1995��7.08 Brazil-Finland BIT, 1995��7.08 Brazil-France BIT, 1995��7.08 Brazil-Germany BIT, 1995��7.08 Brazil-Italy BIT, 1995��7.08 Brazil-Korea BIT, 1995��7.08 Brazil-Mexico BIT, 2015��7.08 Brazil-Mozambique BIT, 2015��7.08 Brazil-Netherlands BIT, 1998��7.08 Brazil-Portugal BIT, 1994 ��7.08 Brazil-Switzerland BIT, 1994��7.08 Brazil-United Kingdom BIT, 1994��7.08 Brazil-Venezuela BIT, 1995��7.08 Canada-Ecuador BIT, 1996�� 7.132, 7.161 Art VIII�� 7.145 Art XII�� 7.140, 7.141 Canada–United Republic of Tanzania BIT, 2013 Art 23(1) ��9.16 Canada-USSR BIT (later, Russian Federation), 1989�� 2.157 Canada-Venezuela BIT, 1996 �� 2.44, 6.51 China-Turkey BIT, 2015�� 10.03 Art 4�� 10.03 Denmark-Russian Federation BIT, 1993�� 8.126 Egypt-Somalia BIT, 1982��9.11 Egypt–US BIT, 1986��9.83 El Salvador-Spain BIT, 1995 �� 6.154

Table of Treaties and Other International Instruments lvii France-Argentina BIT, 1991 �� 6.16, 7.213, 7.228, 7.232, 7.233 Art 3�� 7.227, 7.231 France-Ecuador BIT, 1994 ��7.190, 7.191, 7.196 Germany-Pakistan BIT, 1959�� 5.06, 5.60 Germany-Paraguay BIT, 1993�� 10.123 Germany-Philippines BIT, 1997�� 6.155 Georgia–Israel BIT, 1995 �� 11.54, 11.61 Art 2(2) �� 11.54, 11.59 Greece-Georgia BIT, 1994�� 8.119 Italy–Panama BIT, 2009 ��6.67 Japan–Mozambique BIT, 2013 Art 17(4) ��9.16 Kazakhstan-France BIT, 1998��8.27 Kazakhstan-Germany BIT, 1992��8.27 Kazakhstan-Italy BIT, 1994��8.27 Kazakhstan-Netherlands BIT, 2002��8.27 Kazakhstan-UK BIT, 1995��8.27 Kazakhstan-US BIT, 1992��8.27 Luxembourg-Bolivia BIT, 1990�� 7.125 Morocco-Nigeria BIT, 2016��9.16 Art 18(2) �� 10.125 Morocco-Tunisia BIT, 1994��9.11 Mozambique-UK BIT, 2004 �� 9.263 Mozambique-US BIT, 1998�� 9.263 Netherlands-Kazakhstan BIT, 2002�� 8.140 Netherlands-Nigeria BIT, 1992 �� 5.15, 9.157 Art 3(1) ��5.15 Netherlands–Philippines BIT, 1985��6.21 Netherlands-Turkey BIT, 1986�� 2.145 Netherlands-Venezuela BIT, 1991 �� 2.40, 5.156, 7.98, 7.114 Art 1(b)(iii)��2.40 Art 6��7.118, 11.68, 11.70 (c)�� 11.67 Art 14.3 ��7.19 Norway-Hungary BIT, 1991 ��6.48 Norway-Lithuania BIT, 1992��8.11 Poland-Egypt BIT, 1995 ��9.83 Russia-Mongolia BIT, 1995�� 7.165, 8.158 Russia-Venezuela BIT, 2008 ��8.25 South Africa–Italy BIT, 1997��9.25 Spain-Argentina BIT, 1991��6.36 Spain-Ecuador BIT, 1996 �� 7.209 Spain-Egypt BIT, 1992��9.85 Art 4(1) ��9.89 Spain-Mexico BIT, 2006��6.92 Spain-Russian Federation BIT, 1990 �� 8.126 Switzerland-Philippines BIT, 1997 ��6.21 Tanzania-Netherlands BIT, 2001�� 9.248 Art 14�� 9.248 Tanzania-UK BIT, 1994�� 9.251 Thailand-Egypt BIT, 2000��9.80 UK-Argentina BIT, 1990�� 6.41, 7.213, 7.217, 11.167 Art 4��6.41 UK–India BIT, 1994��6.23

Art 3(2) ��6.25 UK-Russia BIT, 1989 �� 8.123, 8.126 UK–Slovenia BIT, 1996�� 2.163 UK-Ukraine BIT, 1993 �� 8.150 UK-Vietnam BIT, 2002 ��6.22 UK Model BIT, 2008 Art 2(2) ��5.60 Ukraine-Lithuania BIT, 1994 ��2.43 Ukraine–Netherlands BIT, 1994 �� 8.150 Ukraine–Russia BIT, 1998 ��8.42 US-Argentina BIT, 1991�� 3.17, 6.35, 6.36, 6.41, 6.46, 7.200, 7.213, 7.221, 7.228, 7.233 Preamble�� 7.233 Art II�� 11.45 Art II (2)(a)�� 11.39 Art II(2)(c)�� 7.220 Art IV (1)�� 11.40 Art IX��6.37 Art XI�� 5.157, 6.38, 6.41, 6.43 US–Bolivia BIT, 1998 �� 11.85, 11.86 US-Ecuador BIT, 1993�� 3.17, 5.51, 6.119, 7.76, 7.78, 7.132, 7.134, 7.139, 7.140, 7.141, 7.170, 7.185, 7.191, 7.197, 7.199, 7.204, 7.205 Preamble�� 7.201 Art II(3)(a) �� 7.168 Art II(3)(c)�� 3.17, 7.202 Art III(1)�� 7.169, 11.118 Art VI(1)(a)�� 7.200 Art X��7.139, 7.172, 7.180, 7.200 Art X(2)�� 7.151 (a)�� 7.139 (b) �� 7.139 (c) �� 7.139, 7.200 US-Kazakhstan BIT, 1992��8.36 US Model BIT, 2004, 2012�� 5.12, 5.27, 5.88, 6.80 Art 12��5.12 Art 12(3) �� 10.46 Art 17��5.47 Art 17(1) ��5.47 Venezuela-Belarus BIT, 2008��7.14 Venezuela-Iran BIT, 2005 ��7.14 BILATERAL AGREEMENTS Agreement between Canada and the Republic of Peru for the Promotion and Protection of Investments (2006) Art 18��5.47 Agreement between the Lebanese Republic and the Republic of Austria on the Reciprocal Promotion and Protection of Investments (2001) Art 10��5.47

lviii Table of Treaties and Other International Instruments Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Federal Republic of Nigeria (1992) Art 3 (1)��5.15 Agreement on Reciprocal Promotion and Protection and of Investments between _and the Kingdom of The Netherlands (2019) �� 5.102 ASEAN–Hong Kong, China Investment Agreement (2017)�� 5.128 China-Hong Kong, China Closer Economic Partnership Arrangement Investment Agreement (2017)�� 5.128 Claims Settlement Declaration (Iran-US), 19 January 1981��4.86 Art 2(2) ��4.86 Art VII, Paragraph 2��4.08 Gas Agreement between Ukraine and the Russian Federation (1994) �� 8.41, 8.96 Free Trade Agreement between the Argentine Republic and the Republic of Chile (2017) �� 5.128 Inter-State Memorandum of Understanding (MoU)(Egypt and Israel), 2005 ��9.78 Art 2��9.79 Art 7��9.79 Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments (1986) Protocol ��5.51 UK–South Africa Investment Promotion and Protection Agreement (1994)��5.13 US-Iran. Treaty of Amity, Economic Relations and Consular Rights Between the United States and Iran (1955),��4.92 Part 1, 899–914��4.92

US–Peru Trade Promotion Agreement (2006) �� 10.52 REGIONAL TRADE AGREEMENTS African Caribbean Pacific (ACP)–EU Partnership Agreement 2003 (Cotonou Agreement)��9.12 Agreement Among the Azerbaijan Republic, Georgia and The Republic of Turkey Relating to the Transportation of Petroleum Via the Territories of The Azerbaijan Republic, Georgia and The Republic of Turkey Through the Baku- Tbilisi-Ceyhan (BTC) Main Export Pipeline, 18 November 1999 (hereinafter IGA)�� 10.140 Art IV�� 10.141 Art V �� 10.141 Agreement Establishing the African Continental Free Trade Area, effective 2019 ��9.12 Common Market for Eastern and Southern Africa (COMESA) Treaty��9.12 Economic Community of West African States (ECOWAS)�� 9.12, 9.110 Supplementary Act on Foreign Investment, 2008�� 9.12, 9.110 Intra-Mercosur Investment Facilitation Protocol (2017) �� 6.163 Pacific Agreement on Closer Economic Relations (PACER Plus) 2017�� 5.128, 6.161, 6.162, 6.163 South African Development Community (SADC) Protocol on Finance and Investment ��9.12 Trans Pacific Partnership (TPP)�� 5.132 Preamble �� 5.131 Annex 9-L�� 5.133 Tripartite Trade Agreement (2015) ��9.12, 9.78, 9.80

Abbreviations AAA AAPL ACG ACIA AG AGIP AIOC AIPN AJIL ALBA AMINOIL AMPLA AMT API ARAMCO ARE ASEAN BEE BIICL BIT BOO BOOT BOT BOTAS BP BTC BYIL CAMMESA CEO CEPMLP CERA CGT CIS CLHB CN CNOOC CNPC CONELEC COTCO CPI CPTPP CPR CVP

American Arbitration Association Asian Agricultural Products Limited Azeri-Chirag-Guneshli (oilfield) ASEAN Comprehensive Investment Agreement German corporate designation Italian oil and gas company Azerbaijan International Operating Company Association of International Petroleum Negotiators American Journal of International Law Alternativa Bolivariana para la América Latina y El Caribe American Independent Oil Company Australian Mineral and Petroleum Law Association American Manufacturing & Trading Inc American Petroleum Institute Arabian American Oil Company Arab Republic of Egypt Association of South-East Asian Nations Black Economic Empowerment British Institute of International and Comparative Law Bilateral Investment Treaty Build Own and Operate Build Own Operate and Transfer Build Own and Transfer Turkish state oil company British Petroleum Baku-Tbilisi-Ceyhan (oil pipeline) British Yearbook of International Law State regulator (electricity wholesale market; Argentina) Chief Executive Officer Centre for Energy, Petroleum and Mineral Law and Policy Cambridge Energy Research Associates Capital Gains Tax Commonwealth of Independent States Bolivian liquids pipeline and logistics company Cerro Negro (region in Venezuela) China National Offshore Oil Company China National Petroleum Corporation State electricity regulatory authority (Ecuador) Cameroon Oil Transportation Company Consumer Price Index (US) Comprehensive Progress Trans-Pacific Partnership Conflict Prevention and Resolution (Institute for Dispute Resolution) Subsidiary company of PDVSA

lx ABBREVIATIONS DC DCF DEI DHT DR-CAFTA EBR EBRD EC ECJ ECT ECHR EDF EGAS EGPC EI EIA EIB EITI ELEM EMELEC EMG ENARGAS ENARSA ENEL Eni ENRE E.On EPA EU EVN FDI FET FHC FI FiT FMV FOB FTA GA GAR GATT GdF GmbH GML HGA IBRD ICAC ICC ICESCR ICJ

District of Columbia Discounted Cash Flow Duke Energy International Direct Hydrocarbons Tax (in Spanish: IDH) Dominican Republic-Central American Free Trade Association Bolivian refinery company European Bank for Reconstruction and Development European Commission European Court of Justice Energy Charter Treaty European Court of Human Rights Electricité de France Egyptian Gas Holding Company Egypt General Petroleum Corporation Energy Institute Environmental Impact Assessment European Investment Bank Extractives Industries Transparency Initiative Macedonian power company Empresa Eléctrica del Ecuador East Mediterranean Gas State gas regulatory authority (Argentina) Energía Argentina SA Ente Nazionale per l’Energia Elletrica Ente Nazionale Idrocarburi State electricity regulatory authority (Argentina) German energy group (acronym used only) Economic Partnership Agreement European Union Austrian energy supplier Foreign Direct Investment Fair and Equitable Treatment Federal High Court (Nigeria) Foreign Investment Feed-in Tariff Fair Market Value Free on board (used in transport of oil) Free Trade Agreement General Assembly Global Arbitration Review General Agreement on Trade and Tariffs Gaz de France German corporate designation Yukos’ shareholder company Host Government Agreement International Bank for Reconstruction & Development International Commercial Arbitration Court (Moscow) International Chambers of Commerce International Covenant on Economic, Social, and Cultural Rights (UN) International Court of Justice

ABBREVIATIONS lxi ICSID International Centre for the Settlement of Investment Disputes IEA International Energy Agency IEL Institute of Energy Law IELTR International Energy Law and Taxation Review IFC International Finance Corporation IGA Inter-Governmental Agreement IIA International Investment Agreement IIC International Investment Claims IIED International Institute for Environment and Development IISD International Institute for Sustainable Development ILC International Law Commission ILM International Legal Materials ILO International Labour Organization ILR International Law Reports IMF International Monetary Fund IMO International Maritime Organization INECEL State electricity utility (Ecuador) IOC International Oil Company IPIECA International Petroleum Industry Environmental Conservation Association IRCAN Iranian Canada Oil Company IRENA International Renewable Energy Agency ITA Institute of Transnational Law IUGAS Italia Ukraina Gas (company) JENRL Journal of Energy and Natural Resources Law JOA Joint Operating Agreement JSA Joint Structure Agreement (Iran) JV Joint Venture JWELB Journal of World Energy Law & Business KGM Kyrgyzgazmunaizat (Petrobart case) KMG Kazmunaigaz KRG Kurdistan Regional Government LCIA London Court of International Arbitration LETCO Liberian Eastern Timber Corporation LIAMCO Libyan American Oil Company LLC Limited company status LNG Liquefied Natural Gas LSA Legal Stability Agreement MARPOL International Convention for the Prevention of Pollution from Ships MEP Main Export Pipeline MFN Most Favoured Nation (treatment) MIT Multilateral Investment Treaty MOU Memorandum of Understanding MPRDA Mineral & Petroleum Resources Development Act MVM Rt Hungarian electricity transmission utility MVMT Hungarian Electricity Trust NAFTA North American Free Trade Association NGO Non-Governmental Organization NIOC National Iranian Oil Company NNPC Nigerian National Petroleum Corporation NOC National Oil Company

lxii ABBREVIATIONS NPC NRGI NT NV OECD OEPC OGEL OGP OHADA OIES OLH OML ONGC OPEC OPIC OPL OSA OSPAR PACER PCA PCIJ PDVSA PEMEX PIATO PIR PLN PPA PPI PSA PSC PV RF RMMLF RMP RSA RWE SA SCC SCP SEIC SG SIA SIAC SOCAR SPA SPE SRC SRI

National Petrochemical Company (Iran) Natural Resource Governance Institute National Treatment Nederlands Vereiniging (company designation = limited liability company) Organisation for Economic Cooperation and Development Occidental Exploration and Production Company Oil and Gas Energy Law (online journal) Oil and Gas Producers (association) Organization for the Harmonization of Business Law in Africa (French acronym) Oxford Institute of Energy Studies Organic Law of Hydrocarbons Oil Mining Licence Oil and Natural Gas Company (India) Organization of Petroleum Exporting Countries Overseas Private Investment Corporation Oil Prospecting Licence Operating Services Agreement (Convenios Operativos) Oslo Paris Convention (regional maritime treaty) Pacific Agreement on Closer Economic Relations Permanent Court of Arbitration Permanent Court of International Justice Petróleos de Venezuela SA Petróleos Mexicanos Concessionnaire in Fraport case Private Investment Regulations Indonesian electricity utility Power Purchase Agreement Producer Price Index for industrial goods (US) Production Sharing Agreement Production Sharing Contract Photo Voltaic Russian Federation Rocky Mountain Mineral Law Foundation Revenue Management Plan Republic of South Africa Formerly Rhenisch-Westfälische Elektrizitätswerke AG (now known only by its acronym) Limited company status Stockholm Chamber of Commerce (Arbitration Institute) South Caucasus Pipeline (change in text from SPC) Sakhalin Energy Investment Company Secretary General Social Impact Assessment Singapore International Arbitration Centre Azeri state oil company Sale and Purchase Agreement Society of Petroleum Engineers Shared Risk Contract Servicio de Rentas Internas

ABBREVIATIONS lxiii SUNAT TANESCO TCO TDM TEAS TGN TNK-BP TOPCO TOTCO TPDC TPP TRANSENER TVO TVPEE UK UN UNCITRAL UNCLOS UNCTAD UNESCO UNIDROIT UNTS US USDC USMCA USSR VAT WACC WAGP WTO WWF YEPC YPF YPFB

Peruvian tax authority Tanzania Electricity Supply Company Tenghiz Chevron Oil (company) Transnational Dispute Management Turkish Electricity Generation and Transmission Corporation Transportadora de Gas del Norte (Argentina) Joint venture between BP and Russian private entity Texaco Overseas Petroleum Company Tchad Oil Transportation Company Tanzania Petroleum Development Corporation Trans Pacific Partnership Compañía de Transporte de Energía Eléctrica en Alta Tensión SA Finnish nuclear power company A Spanish energy tax United Kingdom United Nations United Nations Centre for Investment Trade and Law United Nations Conference on the Law of the Sea United Nations Centre for Trade and Development United Nations Educational, Scientific and Cultural Organization United Nations International Law Association United Nations Treaty Series United States United States District Court United States Mexico Canada Agreement Union of Soviet Socialist Republics Value Added Tax Weighted Average Cost of Capital West African Gas Pipeline World Trade Organization Name of NGO (formerly World Wildlife Fund) Yemen Exploration & Production Company Yacimientos Petrolíferos Fiscales SA (Argentina) Yacimientos Petrolíferos Fiscales Bolívianos

Glossary Abu Dhabi formula A mechanism developed by OPEC in 1974 to recover the windfall profits accruing to international oil companies as a result of large price increases in crude oil. amicus curiae Friend of the court: advice formally offered to the court in a brief filed by an entity interested in, but not, a party. Back-in rights The right of an entity (usually a government or a state-owned entity) to acquire an equity stake in a licence subject to specific terms and conditions. damnum emergens Loss, quantifiable in money, suffered to property and caused by extrinsic circumstances. Farm-in A transaction that allows a company to purchase a share of the acreage of a block from another company, usually in return for some consideration and for taking on a share of the seller’s work obligations. Farm-out A transaction that allows a company to sell a share of the acreage of a block to another entity Feed-in tariff Fixed electricity prices paid to generators of renewable energy for each unit of energy projected and injected into the electricity grid, with payment guaranteed for a certain period usually linked to the lifetime of the project. force majeure An Act of God: performance of a legal obligation is prevented by a natural and unavoidable catastrophe that interrupts the expected course of events. fork in the road A clause in an investment treaty which presents the investor with a choice between investment arbitration or litigation before the local courts of the host state. If the investor chooses the latter or an alternative procedure provided for in the contract, it loses forever the right to pursue its claim(s) in international investment arbitration. fumus boni juris Appearance of good law or prima facie case. Gold plating A practice of carrying out additional work on a project that exceeds the requirements of good or best practice and for which payment is to be sought. Grandfathering A provision in a legal instrument that allows exemption from a new rule or rules in some circumstances and allows continued application of the old rule or rules to a category of persons. Green certificates These are issued to wind, hydro and solar power generators who may sell them directly to distributors or trade them on the power market, with the cost of purchasing the certificates usually passed on to their customers by distributors. in bonis Solvent or not in receivership. in statu nascendi In the process of being born. jus cogens A fundamental principle of international law which is accepted by the international community of states as a norm from which no derogation is ever permitted.

lxvi Glossary lucrum cessans Loss of a reasonable profit or earnings which may constitute part of a claim for damages or compensation. Mixed Companies Latin American joint venture companies. Monte Carlo simulation A mathematical technique to estimate the possible outcomes of an uncertain event. net book value A method of valuing fixed assets on a balance sheet which reflects the original cost of the asset minus an allowance for depreciation. obsolescing bargain The theory that a shift in bargaining power occurs between investor and host state after the investment has been made, creating the conditions for a demand for revisions by the state. pacta sunt servanda Agreements must be kept; a basic principle of civil and international law. periculum in mora Danger in procedural delay. Pesification Abandonment of the pegging of the peso to the dollar. rebus sic stantibus A legal doctrine allowing for treaties to become inapplicable because of a fundamental change of circumstances. restitutio in integrum Remedy granted to erase the effects of specific circumstances such as duress or fraud on the performance of an obligation. R Factor A formula for calculating payments, usually contained in a petroleum agreement; for example, cumulative revenues, net of royalties, divided by cumulative costs. S Curve A mechanism in gas contracts with oil price linkage that limits the price response of gas when the linked oil prices fall outside fixed limits, using a floor and a ceiling (and thereby reduces the risk of a very large rise due to a spike in oil prices). siège réel The doctrine that a company is subject to the law of the country in which it has its real seat (usually where its central administration is located), rather than the law of the country in which it is incorporated. siège social A concept in international law for determining the nationality of companies where priority is given to effective rather than ‘paper’ nationality, requiring a genuine link to the corporate activity. stay The act of temporarily stopping a judicial proceeding by the order of a court or tribunal. thin capitalization A situation in which the capital of a company comprises a greater proportion of debt than equity. trigger letter Formal notice of dispute under an international investment agreement, sent to host state by investor, specifically identifying alleged breaches (and opening up a period of amicable negotiations without prejudice to contractual rights). windfall profit A profit that results from an increase in the price of the product rather than from any increased effort on the part of the producer.

Introduction to the Second Edition The subject of this book is the law on international investment relating to the energy sector, and particularly the guarantees it offers investors for making long-term commitments. Through a study of energy contracts and investment treaties, it asks whether the law is successful in delivering the kind of long-term stability for the business environment that energy investors typically seek, and further, what limits there may be on those guarantees and why. A subordinate question the book addresses is whether there are distinct features of the legal protection of international investments in the energy sector that justify the use of the term ‘international energy investment law’. A single sector of the world’s economy contributes disproportionately to the volume of international investment disputes involving states or their agencies. Between forty and fifty per cent of the disputes submitted annually to the International Centre for Settlement of Investment Disputes (ICSID) have concerned energy and mining, including energy related minerals1. If one considers the overlap between energy and infrastructure, the share of investment disputes about energy or related issues is even higher. Of course, not all arbitral institutions will have the same ratio of energy to non-energy cases and not all energy disputes involve states or their agencies, but many do. The origin of this contemporary fact can be readily identified. In energy investments the state or its agencies has an unusually pervasive role, as owner or custodian of resources, as regulator of activities and infrastructure, as beneficiary and allocator of revenues and often as participant in the energy activities themselves. The forms of state involvement can be highly diverse and, as governments change, they can vary greatly in purpose and intensity. Investment flows also have a strongly international character, creating relationships of mutual dependence between investors focused on value creation across borders and ‘host’ states, often with a development or growth agenda in which energy plays a crucial part, creating a powerful recipe for tension in a sector where the public interest—defined in national, sub-national or local terms—has always been high. Investment law provides both a framework for the making of investments in energy and a toolkit for the management of problems that may arise from the investment, including differences that lead to disputes. Given such ambition, investment law faces particular challenges when the planned duration of an investment is measured in decades and the state or its agents is a party to it. Lawyers in the energy industries have often been asked to identify enforceable guarantees that investors might seek to obtain from states to address the risk profile of their investments and support their forward planning and modelling of costs for the years ahead when they expect to make their return. The lawyers’ response has often been to utilize or adapt stabilization clauses in contracts with states or their agencies, to utilize legal stability agreements or 1 In 2020 it reached fifty per cent but in preceding years it has usually averaged around 43-44 per cent: ICSID Annual Report, 2020, World Bank Group, 25.

lxviii INTRODUCTION TO THE SECOND EDITION other protections offered by the host state in its domestic investment legislation or to recommend corporate structuring so as to benefit from the substantive protections of any relevant international investment treaty. Given the frequency with which such guarantees are sought and made in energy and energy-related investments, and the legal tests to which they have been subjected, as well as the very extensive body of scholarship and commentary that they have attracted, it seems promising to choose the frequent use of stability guarantees in the energy sector as a prism through which to understand the wider legal dynamics of investment protection. * * * The first edition of this book saw the provision of legal guarantees for energy investments as serving a pursuit of stability by investors, an enterprise that would challenge lawyers to craft and if necessary defend legal mechanisms that investors seemed to require to take a decision to invest, especially on the large scale and long duration that is common in this sector. The idea was to assess the international energy industry’s attempts to draw upon both the familiar contract and the then largely untested treaty mechanisms to achieve this goal of legal stability. The focus of the study was appropriate to the context of the time: many governments around the world were taking actions to revise the terms of existing contracts for energy investments against a background of rising oil prices, a phenomenon often referred to as ‘resource nationalism’. Through a case study approach to laws and policies in regions where such actions were especially prevalent, Latin America and the post-Soviet or transitional economies of East Europe and Central Asia, it asked if there was evidence that the international investment law regime, bolstered and expanded by more than 3,000 bilateral and multilateral investment agreements, was likely to enhance traditional contract protections and provide investors with greater stability than before. The result inevitably had the character of an interim report since many tests of the legal guarantees through international arbitration were still pending. The context—of widespread claims by investors that their rights had been breached—also encouraged an emphasis on the legal protection these mechanisms offered to investors rather than on the benefits that their investments offered to the states that had consented to host them. This second edition retains the focus on stability but the emphases are different in two ways: firstly, greater attention is given to the other side of the ‘investment bargain’, the way in which states benefit (or not) from their consent to the rule of international investment law, and, secondly, more attention is paid to investment issues arising from the use of non-fossil fuel sources of energy. With respect to the first, the approach in this edition is a conscious departure from a tendency in the literature to address issues of investment law largely from the point of view of the investor. As the investment treaty regime has evolved and matured at a time of dramatic growth of inward investments in the international economy, States’ calculations of the risks and expectations of the benefits of such investment have changed. In the energy sector, the transformational potential of investments is clearer than in most other sectors, offering the prospect of accelerated social and economic development over a relatively short timescale. Yet, the risk of disappointment is vividly evident to many States, their communities and their citizens generally, especially in the southern hemisphere, where the ‘resource curse’ has negatively impacted on many economies and societies after development of their oil, gas and minerals sectors. The connection between international investment and ‘development’, however defined, has been an important one for many states and will be an element in the case studies in Part II of this book. In a different sense, state calculations of

INTRODUCTION TO THE SECOND EDITION lxix risk and benefits from energy investments have been affected by a growing concern that the existing legal framework may impose too many constraints on states’ police power or ‘right to regulate’. Some of the implications of this are discussed in the present edition. The second emphasis that is new to this edition is its wider examination of energy issues in international investment law. For many years legal scholarship was primarily concerned with issues that had arisen from disputes about investments in the international oil and gas and the minerals industries. Few published awards extended beyond investment in these industries. In recent years, the rapid expansion of renewable forms of energy in recent years has led to a qualitative change in the materials available to legal scholars of international energy investment. These newer forms of energy have demonstrated a capacity to trigger claims by investors against states about the stability of the legal and business framework: indeed, to do so in as robust a manner as older forms of energy ever did. Many states in OECD countries that host energy investments have themselves become respondents in investment claims, shifting the balance in the origin of states involved in investment disputes as respondents for the first time. Other kinds of energy dispute, involving nuclear energy and pipeline infrastructure, have underlined this shift. It can no longer be said that energy investment disputes largely follow a north-south route but have become genuinely global. Further, the root of an energy investment dispute is no longer typically linked to a physical resource owned by a sovereign state. This greater complexity of the investment context infuses the content of this second edition of the book. * * * In carrying out the research for this edition, it is striking how the availability of primary source material is quantitatively so much greater than it was a decade ago, and that it comes from a wider range of publicly available sources. Many awards have been published and reported that are relevant to the subject matter of this study, sometimes originating from years before 2010 but only recently becoming available. Although many awards remain confidential, the role of ICSID in publishing awards and the contributions in this respect from specialist websites, such as OGEMID, the Investment Arbitration Reporter, Investment Claims, and GAR, as well as the disclosure of awards through enforcement actions in national courts has yielded a treasure trove of legal materials for the researcher. Many awards are now publicly available in which the substantive protections offered by the investment treaty regime are examined by eminent tribunals, offering new opportunities for an investigation of the contribution made by the investment treaty regime to the long-term pursuit of stability. There is then a body of published awards from the first generation of disputes about energy investment arising under the treaty-based international investment regime, but also a qualitative improvement in the availability of awards generally in this and closely related areas, such as mining and construction, that offers researchers an opportunity to improve the depth and the quality of their work. So too does the availability of a considerable body of scholarship on the investment treaty regime itself, and a growing interest in energy law and how it relates to international investment law. On the horizon, a harder challenge is now visible for the scholar and researcher on investment stability. Any long-term energy project faces the prospect of impacts from an uncertain and unprecedented shift in consumer demand away from fossil fuels: the so-called Energy Transition. For most of the twentieth century the mix of energies in the world economy was overwhelmingly weighted towards fossil fuels such as oil, gas and coal. They were intimately

lxx INTRODUCTION TO THE SECOND EDITION associated with economic growth and social progress. This energy mix was reflected in many of the early disputes about energy that went to international arbitration. It is revealing about the energy balance at the time of these early awards that they were thought by some to have produced a specialist body of law called ‘lex petrolea’2. The influence of these fossil fuel cases was such that awards in international energy investment arbitration, from Aminoil to Yukos, have become part of the common currency of modern international law and familiar to students of its principles and doctrine. Yet, the investment context that gave birth to this body of law and the doctrines on which it is based appears to be increasingly historical, as more and more states adopt ever-more vigorous low carbon incentive policies, in response to a variety of ever-more serious environmental threats. In both commercial and policy terms, this presents a challenge not only to the internationally operating energy companies but also to state producers of oil and gas, whether emerging ones such as Guyana and Uganda, or established ones, such as those in the Organization of Petroleum Exporting Countries. It is also a challenge to investors in other forms of energy such as wind and solar power, and to producers of minerals such as cobalt and lithium which the lower carbon forms of transport will require in very much larger quantities than in conventional combustion engine vehicles. As the value of these and other minerals is re-assessed, disputes over the terms of business have grown. These are evolving trends, with legal impacts still mostly located in the future. In a study of how investment law provides for stability over the long-term, this is an emerging trend that appears likely to have great impacts. It is noted in the chapters of this edition, but for now this is at the level of ‘best efforts’ on my part, since the impacts on international investment law are as yet quite modest. Familiar sources of instability to energy investments remain. Experience in the 21st century provides plenty of evidence of extreme and sudden reversals of fortune in energy markets and sudden reactions to them from both investors and states. Normally, this process is associated with the international oil markets, but in recent years it has been very evident in the natural gas industry and in the evolving renewable energy sector. Liberalization of natural gas markets and reliance on price mechanisms linked to oil have resulted in several waves of arbitrations about the terms of gas sale and purchase agreements in Europe. As the renewable energy sector has become increasingly established in many countries, underwritten and promoted by government support schemes in most cases, changes in those schemes have in some cases led investors to make a multitude of claims that—for example—their legitimate expectations have been violated by governments. It is this combination of market, political and social risks that makes the legal provision of stability of long-term investments in energy as challenging today as ever. * * * Given the very wide range of material available to the international investment lawyer, I have chosen to limit the scope of the present study in two ways: firstly, it focusses on energy or energy related subjects and awards, and secondly it is primarily concerned with energy disputes between investors and states. In my view, these limiting features allow a sharper focus on how international investment law seeks to provide guarantees of long-term stability to commercial projects, and to assess their efficacy. For substantive and procedural aspects of international investment law, there are many excellent general studies available, textbooks,

2

An idea discussed in Chapter 1.

INTRODUCTION TO THE SECOND EDITION lxxi as well as a host of scholarly articles and papers. The quality of much of this work is outstanding and needs no supplement from this author. This study adopts several familiar methods to tackle its subject: doctrinal analysis, especially through the analysis of arbitral awards; review of the considerable body of secondary literature by scholars and practitioners, as well as the few empirical studies relevant to this subject; and case studies organized on a geographical basis to draw out regional variations. The regions included in the case studies in the first edition are all extensively updated and supplemented by a new one based on a study of energy disputes in Africa. Regions such as the Middle East and Asia were not included as case studies mainly due to a lack of reliable source material. I am also happy to acknowledge a debt to several internet sources for making available to researchers copies of awards and commentary: apart from the excellent ICSID website with its treasury of awards and related documents, there is Andrew Newcombe’s ITA Law; Luke Petersen’s Investment Arbitration Reporter, IIC and TDM/OGEMID. The daily reporting service of GAR has been another particularly useful tool. These are invaluable sources for the researcher not only because many arbitral awards remain confidential; the lack of a doctrine of precedent in the international investment regime means that consultation of the growing body of arbitral awards is an important way of identifying patterns of thinking about key issues. In addition, the study benefits from the author’s professional work as an arbitrator and expert in nearly 30 energy-related cases, in Europe, Africa, Asia and Latin America, several of them involving issues of stability in energy investments, on behalf of both private investors and governments. Inevitably, the insights gained from practice are ones that can only be filtered into this study after a careful review of the limits imposed by the duty of confidentiality. There are also welcome insights gained from a professional context that is—irrespective of the adversarial character of the disputes themselves—ultimately a collegial one. The result is a contribution that is I hope a useful one, and any shortcomings that remain are mine alone. Peter D Cameron Edinburgh, March 2021

PART I

1

Energy Investment Law

A. Energy Investment Law

(1) (2) (3) (4)

Energy investments Context-based features Frameworks as a legal response The offer of stability

10.1 10.4 1.16 1.23 1.32

B. Overview of the Book

(1) (2) (3) (4)

Aims Approach Scope Structure

1.42 1.42 1.45 1.49 1.55

It is idle to try to freeze the position of the parties for long periods to conditions that become so out of date . . . Our attention, then, should be focussed not on stopping change but only making it more orderly, more equitable, and less likely to cause the sort of panic that disrupts international economic cooperation. Detlef F. Vagts1

A. Energy Investment Law Investments in various kinds of energy comprise a higher proportion of total international investment than any other sector of the global economy. Accordingly, they require a very extensive body of law to facilitate commercial transactions and provide for the settlement of any disputes that may arise. The strategic sensitivity of energy investments to nation-states has also guaranteed a strong state interest in the flow of these investments, and in establishing sound legal arrangements among states to support these transactions and the resolution of differences. States, then, take responsibility for the allocation of rights to investors, regulate the resulting activities, and often participate to some degree in them. The uneven geographical distribution of energy resources, investment capital, and markets for consumption also give energy investment a highly international character. The result has been a combination of commercial law, administrative law, and public international law meshed in ways that vary greatly according to the activity, the type of energy, and the stage of the energy cycle itself.

1.01

If we were to take a step back and try to discern those features of energy investments that are both typical and have significant legal implications, there are at least six that are commonly

1.02

1

Vagts, D.F. (1978) ‘Coercion and Foreign Investment Rearrangements’, AJIL 72, 17–36 at 22.

4 Chapter 1: Energy Investment Law noted by observers.2 Energy investments are usually (but not always) international, large scale, longer in duration than most, demonstrate a pervasive state presence, operate in a context of price volatility, and have a degree of complexity. To this list we may add two other features, extrinsic to the investments themselves, but relevant to the context in which most energy investments operate: the transformational potential in economic and social terms, and the legacy of investment history. 1.03

This unusual combination of features leads to a risk profile for energy investment that in turn requires all parties to lay considerable emphasis on the design of a stable and predictable legal framework for the investments concerned.3 In most cases, the absence of such a framework, which allows for calculations of risk and expected return on the investment over time, will prove fatal to an investment proposal. Yet, clearly some of those features—volatility and policy changes for example—require any such framework to contain flexibility of some kind. This book examines the legal responses to this tension between the need for some flexibility mechanisms in energy investment and the overall imperative of stability guarantees backed by law. It does so conceptually, and through an examination of specific legal mechanisms, mostly in contract and treaty, and then tries to concretize this analysis through specific case studies of regions that have strongly promoted inward investment into their energy sectors by offering—among other incentives—a stable and predictable legal framework. It argues that two linked ideas can help us to explain how the design and operation of legal stability can be achieved in this sector. These are the notions of partnership and adaptation. Greater awareness of their significance may improve our capacity to understand and test the robustness of legal responses to the parties’ interest in the preservation of these long-term relationships in which the ‘stability imperative’ often plays a key part. It may also assist the parties to investment relationships to cooperate more successfully with each other and achieve their respective goals. These notions will be discussed later in this chapter and elaborated in subsequent chapters of this book. The results, including the case studies in Part II, may contribute to an argument for energy investment law as a distinct field of study. More immediately, they should assist scholars and practitioners of international investment law in their understanding of the structure and operation of law in a sector that forms a large part of their

2 The following list is based on the literature on various kinds of energy investments referred to in the footnotes of this book and descriptions of energy projects in the various arbitral awards it examines. Some may argue for the inclusion of other features in the list, such as innovation and national security. Innovation is certainly emphasized in most energy sectors, especially in reducing the carbon footprint. It is also directed at reducing costs and increasing energy efficiency and identifying new or alternative forms of energy (commercialization of hydrogen, and fusion, for example). Nonetheless, this seems to have an optional character rather than being a defining feature of energy investments compared with others, such as telecommunications. National security concerns are also evident in the energy sector, although these vary a great deal from one region to another. They are most evident in countries with import dependence on another or others, and in M&A transactions. The energy-specific character is arguably not unique since such concerns arise in other economic sectors such as IT/telecoms which are central to the workings of a nation-state economy. 3 Whether or not these six features (with or without the two additional contextual features) are sufficient to support a claim that the resulting combination of legal measures, principles and procedures applicable to energy investments constitutes an autonomous or emerging body of law unique to this sector of the international economy—a sort of lex specialis for energy investments, a lex energia—is not the main concern of this book. Individually, these features are not unique to the energy sector, even if collectively they have a presence in this sector that contrasts with most, and perhaps any other. For some, the existence of these features will not be enough to persuade them that this body of ‘energy law’ is any more than a subset, even if an important one, of international investment law in general. Even so, the assumption in this book is that, where there is an energy aspect to international investment law, its specialized usage, practice, or conceptual apparatus is very likely to influence the relevant law and its application to the settlement of disputes.

A. Energy Investment Law 5 field of interest and one which will—almost certainly—continue to generate issues of principle and practice for many years to come.

(1) Energy investments The volume of energy investment worldwide has been estimated at over US$1.8 trillion annually, accounting for 2.2 per cent of global gross domestic product and 10 per cent of global gross capital formation.4 This very large body of investment typically exhibits many or all of six characteristics, and two important contextual features. They merit some elaboration.5

(a) International

Much energy investment is international. A significant proportion of it is destined for countries that export non-renewable forms of energy and related minerals comprising around 20 per cent of world GDP and global exports.6 A mix of high-, middle-, and low-income countries holds a large share of the world’s natural resources, including about 90 per cent of crude oil reserves and 75 per cent of copper reserves.7 This uneven distribution of resources creates a necessity for cross-border cooperation in almost all cases if economic development of these resources is to occur on a scale that brings maximum advantage to the countries concerned. The resulting uneven spread of investment locations follows from necessity as much as investor choice. Nor should it be assumed that the ‘resources model’ of energy is the sole driver here. In an international pipeline project, such as one transferring oil from the Caspian Sea area to Turkey and beyond, the project crosses the borders of three countries, involves seventy-eight different parties from several countries, and required 208 finance documents along with 17,000 signatures, to commence.8 This cross-border feature of energy investment has persisted for many decades and has an important north–south feature to it, even if that is more nuanced by south–south capital flows in the twenty-first century than it was two or three decades ago.9 Among the newer forms of energy, investment in renewable sources has begun to follow a similar pattern, with capital and expertise exported from a 4 International Energy Agency (IEA) (2019) World Energy Investment, Paris: OECD at 11. This includes all sources of energy from coal, hydropower, solar, and nuclear power to oil and gas. The statistics for global gross domestic product and global gross capital formation are from 2018 (ibid, at 20). As such, they predate the effects of the COVID-19 pandemic. 5 This approach builds upon earlier work done by Cameron, P.D. & Malone, B. (2015) Dispute Resolution in the Energy Sector: Initial Report, Edinburgh: International Centre for Energy Arbitration (ICEA). 6 International Monetary Fund (IMF) (2015), Riding the Commodities Roller Coaster, Washington DC: IMF, 1. 7 The IEA statistics suggest much variation here among the different forms of energy, with overall a very large proportion (90 per cent) of total energy investment concentrated in high-and upper-middle income countries and regions. This category includes Brazil, Mexico, China, parts of the Middle East, and some Southeast Asian countries. 8 See c hapter 10, paras 10.138–10.150. 9 There has been a growth of investment by entities based in China, India, Russia, and the Middle East which challenges the north (and largely Western) flows of investment to the global south. However, statistics show that where such flows can be described as ‘south–south’, they remain significantly less than those from the north to the south. Indeed, UNCTAD data reveals that a significant part of the FDI between developing countries is ultimately owned by developed country multinational enterprises. When measured based on ultimate ownership, the share of south–south investment in the total investment (2018 data) falls from 47 to 28 per cent: UNCTAD (2019) World Investment Report 2019, Geneva. Whatever its scale, the south–south axis of investment has impacts on energy disputes: for example, India’s Oil and Natural Gas Corporation (ONGC) registered a claim against Sudan in 2018 to recover funds lost from an oil project when part of Sudan seceded in 2011, the first arbitration claim ever filed by ONGC against a government: GAR, 17 April 2018, ‘Indian state energy company brings claim against Sudan.’

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6 Chapter 1: Energy Investment Law limited number of countries and regions in response to welcoming signals from governments keen to broaden their energy mix. Here, the necessity might lack geological roots, but the economic ones are just as compelling to drive cross-border investment. Similarly, with nuclear energy, the international aspect of the industry has long been evident but is less related to the uneven geographical distribution of its raw material, uranium, than to the limited distribution of the necessary technical and commercial expertise. 1.06

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This international character of energy investment has encouraged investors to explore and utilize pioneering forms of corporate structuring, involving global supply chains, and requiring a risk calculation about the long-term behaviour of the host state. In doing so they have pioneered the use of international contracts and treaties addressing investment and taxation. The resulting global chain and use of special purpose corporate vehicles in diverse jurisdictions have raised questions for host states about the ultimate owner of the investment and the corporate seat. Given the strategic character that energy investments often have for a host state, as well as their implications for profit shifting and tax avoidance, the network of interdependence established by this international aspect is very important for policymakers to understand when planning what may seem on their face largely domestic energy policies and legal measures.10

(b) Scale

In terms of scale, energy investments are often large, with commitments being made over distinct periods following bespoke decision-making processes by the investors concerned, often after some consultation with and assurance from the host state. For example, a nuclear power plant might cost between US$6 billion and US$9 billion from construction to operation; a natural gas pipeline like Nord Stream 2 can cost US$10.5 billion and a gas liquefaction and export terminal in Mozambique has an estimated cost of around US$20 billion. Given this scale, the social and economic impacts will vary from one phase to the next and usually have a visible local footprint in the communities near the physical location prior to and during any significant revenue being generated for the host state. The investors too can often be very large. In the international oil industry, there are examples ranging from private companies such as Shell and Exxon to state companies such as Aramco (Saudi Arabia) and the China National Petroleum Corporation.11 For example, Shell’s capital investment in a single year has reached US$25 billion.12 In addition to providing capital for investment, these companies offer the specialist management skills required to carry out a large, long-term, complex project with many dozens of sub-contractors. In the renewables sector too, the scale can be large and is increasing—for example, the Norwegian Government Pension Fund Global has a legal mandate to invest up to US$20 billion.13 10 This is underlined by the joint work of four international organizations: the IMF, the OECD, the United Nations, and The World Bank in the Platform for Collaboration on Tax, which aims at framing technical advice to developing countries as they seek more capacity support and greater influence in the design and implementation of standards on international tax matters: (accessed 25 May 2021). 11 More than 90 per cent of energy investment is financed from the balance sheets of investors (using retained earnings from business activities, including those with regulated revenues), ‘suggesting the importance of sustainable industry earnings, which are based on energy markets and policies, in funding the energy sector’: IEA (2017) 13. Project finance (which involves external lenders that share risks with the project sponsor and depends on cash flows for a given asset) has a small role but is especially significant in integrated LNG projects, some oil refining projects and a growing amount of power generation investment, including the use of solar PV and wind. 12 Royal Dutch Shell Annual Report and Form 20-F for the year ended 31 December 2018, 9. 13 ‘World’s Biggest Sovereign Wealth Fund To Ditch Fossil Fuels’, The Guardian, 12 June 2019.

A. Energy Investment Law 7 Large investments such as these raise questions about the timing of a return to cover costs and generate a reward. The period between the initial commitment of the investment and the first return on it can take several years. However sound the calculations in the investment plan, this time-lag between investment and return including recovery of the investment cost ensures that there is a notable risk associated with an investment of this size. It contrasts with other economic sectors such as international banking, which enjoys a shorter period of infrastructure and capital investment, with expenditure being relatively limited and the return occurring earlier. It also ensures that the claims made in international energy arbitrations are among the largest made, and in some cases the awards are also among the very largest issued in international arbitral proceedings.

(c) Long-term

Energy investments also tend to be long-term in character, often with a duration of at least twenty to twenty-five years or more, reflected in the very high incidence of long-term contracts evident in petroleum, natural gas, power, and many energy-related mining activities. For example, in 2019 a petroleum agreement awarded in 1966 to a US oil company, American Oil, was permitted to continue in force subject to a change in character from production sharing to a so-called gross split form in Indonesia. Commercial contract design is therefore challenged by the need to provide the investor with assurances that the legal instrument or package of measures makes the project viable and yet also allows for adjustments or termination that may be required in the light of changed circumstances at unknown points in the life of the contract.14 To preserve an ongoing relationship, the parties may activate contractual mechanisms to adjust the contract or concession to the effects of a dramatic change in the commodity price, for example. In the sale and purchase of natural gas, provisions for price review and re-openers are common, allowing for such adjustments of the obligations in the basic agreement. In recognition of this need to preserve long-term relationships, the OECD has produced a set of non-binding Guiding Principles for Durable Extractive Contracts, which declare that such contracts need to be ‘anchored in a transparent, constructive long- term commercial relationship and operational partnership between host governments, investors and communities, to fulfil agreed and understood objectives based on shared and realistic expectations that are managed throughout the life-cycle of the project.’15 In other energy contracts, as is evident from examples in this book, there are provisions for adjustment on an amicable basis and for third party dispute settlement if that fails. Preservation of this long-term relationship may be a reason for the parties to prefer an arbitral forum for settlement of any disputes over recourse to courts, where the greater formality in examining differences may accentuate division.

(d) The State

In energy investment, the role of the state is evident not only in attracting the investment but also in the post-investment phase, as participant, regulator, and monitor or overseer, as well as protector of the investor’s rights. The very high degree of public interest in most or all phases of energy activity means that the state’s presence—directly, or through one or more 14 The term of a typical energy or natural resource project will normally be much longer than the term of office of the host state government that welcomed the initial investment and committed the state to its terms and conditions. Achievement of the investor’s objective is therefore vulnerable to the effects of a change of policy by a successor government, or a broader political realignment in the host country, perhaps following some dramatic economic change of circumstances, prolonged conflict, or even an abrupt regime change. 15 OECD Development Centre Policy Dialogue on Natural Resource-based Development (2019), p. 4.

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8 Chapter 1: Energy Investment Law of its agencies—is ubiquitous. Moreover, the public interest may be concentrated on a single investment or series of investments since in many countries a single hydrocarbons field or a mine may have overwhelming importance for the national economy. Examples could include the Pande-Temane gas field in Mozambique and the Oyu Tolgoi mine in Mongolia. This feature creates vulnerability to host state actions at a later date and is exacerbated by the fact that an energy project is often legally based on a long-term contract or series of contracts and licences linked to a physical location, making production or generation facilities hard to move. A policy or legal measure may be adopted by the state and cast in general terms but in practice it may be relevant only to a single or to very few investments. If negative in character, it can easily appear to be discriminatory, and be prone to legal challenge. This pervasive role of the state in the energy sector is fundamental in most countries and is given recognition and support in multilateral treaty instruments such as the Energy Charter Treaty (ECT) in its provision on sovereignty over energy resources16 and in the division of competences in the chapter on Energy in the Treaty for the Functioning of the European Union (TFEU). For the investor, it is a persisting feature that creates a high level of political risk.

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(e) Price volatility

For the discerning lawyer, it is the volatility in the pricing of energy outputs that is a magnet for attention and concern. Whatever the parties have agreed upon in an investment contract, a sharp, sudden movement in price, due to the operation of international energy markets, represents an external factor that directly or through a chain of events threatens the commercial bargain at its core. A negative movement throws into jeopardy both months or years of investment planning and calculations of a return, with default on obligations to follow, activation of force majeure defences, reductions in capital expenditure plans, and disputes among a wide variety of parties involved in the investment chain. A positive movement will usually highlight the investor’s vulnerability to unilateral measures by the host state such as so-called windfall taxes; while for states, a decline will often trigger financial disruption and an increase creates opportunities for some who want to renegotiate the original bargain. As a recurring feature with significant legal implications, this feature is commonly noted. An IMF report states: ‘Commodity prices are highly volatile and unpredictable, posing significant challenges to policymakers in resource-rich economies. Shocks to commodity prices are often large and persistent. Booms and busts can involve prices moving by as much as 40–80 percent for as long as a decade.’17

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In some energy markets, volatility may derive from the impact of government policies such as liberalization or deregulation of markets, such as has triggered several waves of gas price arbitrations in Europe between suppliers and buyers. The price of gas set by the parties under long-term contracts can suddenly look expensive compared with the price of gas on the short-term, or spot market.

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The outcome of such vulnerability to price swings is to encourage long-term contracts to provide for mechanisms that allow adjustment and flexibility, albeit usually within certain parameters. In most of the investment agreements discussed in chapter 2, such adjustments 16 ECT, Art 18. 17 IMF (2015) The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times, 2. Oil price volatility has attracted research interest among energy economists. For overviews of the trends in research, see Kilian, L. (2010) ‘Oil Price Volatility: Origins and Effects’, Staff Working Paper ERSD-2010-02, World Trade Organization, January 2010; Stevens, P. (2005) ‘Oil Markets’, Oxford Review of Economic Policy 21, 19–42; Energy Charter Secretariat, Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas, 2007.

A. Energy Investment Law 9 are provided for to enhance the prospects of a robust long-term relationship between the parties.

(f) Complexity

Complexity is a feature of energy investments for several reasons and takes several forms: energy contracts can be closely linked, with performance of obligations in one contract, such as a gas sales and purchase agreement, dependent upon the operation of another contract, such as an exploration and production agreement (legal complexity); the body of technical knowledge can be extensive and reach far beyond that of a conventionally educated lawyer or legal academic (technical complexity); each energy industry can, and usually does, claim it has a special approach to its investment related activities, with specific industry usage, rendering disputes complex and requiring the involvement of experts in arbitral proceedings (commercial complexity); and often energy projects rely on specially designed equipment to operate in challenging natural environments (technological complexity). In this respect, comparisons may be drawn with the kind of projects that form the subject matter of construction law and which often leads to the use of and reliance on engineering or similar specialist skills in arbitral or court proceedings. Taken together, these forms of complexity can support an argument that energy disputes are better suited to arbitral than court proceedings, where a specialist knowledge on the part of at least one of the arbitrators is more likely to be available than in most court proceedings.

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(2) Context-based features (a) Transformation

The powerful and far-reaching social and economic effects of energy investment are particularly evident in two ways, one positive and one negative: its role as a catalyst for accelerated development and its linkage to environmental problems such as increasing CO2 emissions and climate change.

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With respect to the first, the linkage of energy investment to the promotion of social and economic benefit, particularly in low-and middle-income countries, is a familiar one in international aid programmes. In recent years, these positive benefits have tended to be assumed as conditioned on successful anti-corruption or governance programmes. The emphasis on a particular set of energy sources—especially oil and coal—can obscure the fact that this connection of social and economic benefits is of importance to all countries for their growth no matter what their current economic status and no matter what their choice of energy sources. Even as many countries stimulate a new balance in their energy mix away from traditional sources, a feature of an energy investment that is likely to persist is the notion that such investment will contribute positively to the national and local economy.

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The wealth from natural resource extraction has allowed many countries to accumulate substantial assets, giving them an opportunity to provide fundamental social services and to share the benefits with future generations. In principle, it allows them an opportunity to tackle one of the United Nations Sustainable Development Goals: access to affordable, reliable, sustainable, and modern energy for all. Investments can also be linked to the provision of much needed infrastructure in countries where ports, transport and power plants are few

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10 Chapter 1: Energy Investment Law or absent. Examples of transformation in countries from different ends of the income spectrum are the impact of energy from unconventional sources on the US economy, and the discovery and development of hydrocarbons in Guyana, a very low-income country, as it adjusts to a new role as a major petroleum exporter. Many international and national aid development entities and banks have long seen the potential in energy and minerals development to act as engines for low-income countries to escape from poverty. In practice, the responsible and sustainable use of these resources has revealed a path which many countries have followed but only a few have done so successfully.18 The reasons for this disappointing result are many and diverse but the challenge of a ‘catch up’ on development is usually accompanied by a variety of other challenges such as a tendency to prioritize short-term gain or ‘rent-seeking’, the pressures of a growing population with high expectations, minimal infrastructure, and a trend to become over-dependent for growth on a very few kinds of energy investment.19 1.19

The transformative role of energy investment in the second area—as a contributor to the negative and non-sustainable effects of the dominant kind of energy mix in which the major part is played by fossil fuels—has a more recent origin. In contributing to rising CO2 levels globally, energy consumption has become a target for policies aimed at addressing this problem and for achieving objectives aimed at lowering carbon intensity. The scale, extent and impact of these policies is such that the overall process is commonly described as an ‘energy transition’.20 Among the already visible effects are a redefinition of ‘energy investment law’, at least in terms of the forms of energy that comprise its subject matter, and an expansion to include investments in energy-related minerals. Contextual developments include: energy investments are becoming more diverse than ever before with investments in renewable power and fuels reaching more than US$280 billion a year in the five-year period between 2014 and 2018;21 linkages to non-energy sectors such as mining and infrastructure are being reshaped;22 and the regulatory role of the state in this reshaping of the energy mix is already showing evidence of becoming fundamental and pervasive. Further, if the terms of the UN Paris Agreement are implemented (with its overall goal of a reduction of global warming to two degrees centigrade), this would leave 29 per cent of oil reserves stranded and by one estimate would destroy US$360 billion from the value of the largest IOCs measured by reserves, over one sixth of their total enterprise value.23 The threat posed by a shift in investment priorities is evident when it is recalled that in a single year banks provided about 18 For example, see the literature cited in chapter 1 of Cameron, P.D. & Stanley, M.C. (2017) Oil, Gas and Mining: A Sourcebook for Understanding the Extractive Industries, Washington DC: World Bank Group, 3–17; and BGR (Bundesanstalt fuer Geowissenschaften und Rohstoffe/Federal Institute for Geosciences and Natural Resources), CCSI (Columbia Centre for Sustainable Investment), and Kienzler, D. (2015) Natural Resource Contracts as a Tool for Managing the Mining Sector, Hannover: BGR. 19 Karl, J. (2014) ‘FDI in the Energy Sector: Recent Trends and Policy Issues’, in de Brabandere, E. & Gazzini, T. (eds) Foreign Investment in the Energy Sector: Balancing Private and Public Interests, Leiden: Brill/Nijhoff. 20 The International Renewable Energy Agency (IRENA) describes it in these terms: ‘The energy transition is a pathway toward transformation of the global energy sector from fossil-based to zero-carbon by the second half of this century. At its heart is the need to reduce energy-related CO2 emissions to limit climate change’: (accessed 25 May 2021). 21 Renewables 2019 Global Status Report: see (accessed 25 May 2021). This figure does not include hydropower projects larger than 50 MW. Much of this investment has been in solar power. 22 Further, energy-related claims can also extend to the various minerals such as lithium and cobalt that are essential to modern batteries to run electric vehicles. Mining disputes no longer fall neatly into a different, largely unrelated category, and are more obviously part of an energy supply chain. 23 Jenkins, P. (2020) ‘Energy’s Stranded Assets are a Cause of Financial Stability Concern’, Financial Times, 2 March 2020 (based on FT data).

A. Energy Investment Law 11 US$654 billion in financing to fossil fuel companies.24 In this respect, the energy transition factor has two important impacts on future investment flows: it creates a perception of reduced risk associated with investment in lower carbon technologies and subsidized public programmes to promote the shift to lower carbon usage, allowing a shift in capital allocation into these areas; at the same time, it creates a perception that traditional sectors such as fossil fuels or financing coal assets, have become riskier, since a long-term project of around twenty-five years encounters scenarios of peaking markets for these energy resources. It also creates a new set of political risks arising from policy shifts, as governments take measures to promote low carbon with no prior experience of tackling this sort of problem, stimulating the application of still-evolving technologies. This ‘transition’ factor is not found in other major economic sectors such as banking or finance.

(b) The legacy factor

Until recently, international energy investment has been focused largely on hydrocarbons with a view to their production and export as a commodity on the global or regional market, and the building and operation of network infrastructure, such as pipelines or grids, often across several national borders. For many countries, the legacy of their first encounters with international investors has shaped not only the current policies of the countries that hosted them, but also those of new entrants into the market for energy investment, particularly in low-and medium-income countries. From Latin America to Africa, this legacy has often been negative, in fact as well as in perception, since it has been associated with disproportionate benefits to local elites, repatriation of profits to parent companies, and legal arrangements that supported unequal or asymmetric partnerships between investors and states. The voluminous literature on the so-called ‘resource curse’ testifies to this negative perception and is supported by ample evidence of negative effects on economies and societies. Deeper down in the historical memory, there is sometimes a legacy of colonial relationships, often economic rather than political, still influential in Latin America, parts of Asia, and Africa. In many of the countries of Central Asia, or Eastern Europe, the legacy has a different character, enmeshed with a transition to—and often a suspicion of—market-oriented economies. In many countries that have actively fostered investment in electricity generation from renewable energy, a different kind of legacy is less visible but is rapidly evolving from the impacts of the first wave of investment. This ‘legacy’ factor will be evident in the case studies presented in Part II of this book.

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The investment culture in all but the youngest nation-states is shaped by the past: so too with investors, even if the past is usually referred to in coded language such as ‘track record’. Calculations of risk are shaped by the past as well as the present. A good track record will lower the supply price of capital in terms of the rate of return that an investor is looking for, and conversely a poor track record with nationalizations or unilateral changes in law will increase the price. In energy investments, this historical feature will be present in many hydrocarbons investments but as yet is largely absent from renewable energy investment.

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The outcome is a high-risk profile Where an energy investment is international in character, in almost all cases it will not be made until guarantees or assurances have been offered to investors by the host state through its laws and/or contractual arrangements for

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24 Ibid. The year was 2018. The report also notes that if traditional private capital investors such as banks and large asset funds withdraw from the sector, ‘non-banks’ (less regulated and less accountable) may fill the gap if the cash flow is attractive. The capital flow need not simply cease altogether.

12 Chapter 1: Energy Investment Law sufficiently long periods to allow for recovery of their costs and a pre-calculated expected gain. This gives investors—and those willing to lend funds to them—a reasonable expectation that their calculations of financial viability should prove robust over the long-term. Without a dispute settlement mechanism that allows differences to be addressed away from the national courts of the host country, any such assurances are likely to be treated as hollow. Historically, the paradigm case of the international energy investor was the hydrocarbons company, driven by high returns, able to manage a high cost of capital and to tackle a high degree of price volatility. This has shifted to a more diverse energy sector for investment with a growth in the more capital-intensive power industry which has enjoyed lower profitability, lower cost of capital, and less market volatility as is common among regulated assets. Yet, one of the above features has a continuing, special significance for a potential investor in calculating the risk profile of an investment. The state will nearly always have an extensive set of roles in the life of a project, as regulator, owner, and participant, either directly or through one of its agencies or through local components as are common in devolved or federal systems. For foreign investors, this often-overlapping series of roles implies a higher than usual degree of vulnerability to policy reorientations and indeed to policy inconsistency.

(3) Frameworks as a legal response 1.23

In designing a legal response to the risks that typically arise from energy investment, lawyers in the investment community and in government circles have often been pioneering. Their work has contributed to an energy industry that has been one of the earliest industries to benefit from and engage continuously with globalization, seeking innovative legal and financial responses to the risks that accompany its activities. Prior to making an investment, it has developed or drawn upon a wide range of techniques to mitigate many of the six features of energy investment that generate risk: structuring its investments by using, for example, special project vehicles; aggressive tax planning, and locating offices in favourable states for treaty protection. It has been able to rely on the rules and principles of international law which will apply to energy investments in the same way as to any other investments, as well as a range of contracting practices, some of them peculiar to the energy industry. Additionally, it can rely upon the provisions of the Energy Charter Treaty (ECT), a treaty instrument specifically designed to apply to investments made in the energy sector of its contracting parties, and matters such as energy trade and transit. It offers basic guarantees to investors about their treatment in the territory of its contracting parties, including non-discrimination, protection in the face of expropriation, the right to transfer capital, and access to international arbitration in the case of an investment dispute. An increasing number of scholars have noted the influence of the ECT, and awards made under it on the general body of international investment law.25 It lies at the heart of the legal framework for international energy investment. At the same time, many of the concepts in the ECT are readily familiar to any international investment lawyer since they are in common use (substantive protections such as Fair and Equitable Treatment, the doctrine of legitimate expectations, the use of investor-state arbitration to settle disputes, for example).

25 For example, many of the contributions in Leal-Arcas, R. (ed) (2018) Commentary on the Energy Charter Treaty, Cheltenham: Edward Elgar; see also citations in the footnotes in c hapter 4 below.

A. Energy Investment Law 13 It may be asked whether the legal response to the special features of energy investment has led to the creation of a distinct or special legal regime. An early attempt to do so was the thesis advanced by Doak Bishop that a special regime was emerging called lex petrolea, an argument based largely on a series of published arbitral awards concerning the international oil and gas industry.26 This has not stood up well over time.27 However, it invites the question whether it was made too early, before the energy sector had matured and evolved beyond its carbon-intensive roots. Can it be said that a special legal regime for energy investments exists today, based upon the responses of governments, industry, and other parties to the kind of features outlined in the preceding section?

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Of course, not all legal issues that arise from the workings of the energy economy are ones that concern investments, even if one considers only issues that have an international character rather than purely domestic ones, of which there will be many. In her survey of the international law that governs energy activities, Catherine Redgwell reviews,28 among others, the Law of the Sea Convention, the role of the International Energy Agency in energy security, and the regulation of maritime transport and energy trade. While they clearly have an investment aspect, these areas of law are far removed from the kind of economic activities considered in this book. From the Redgwell perspective, the international law on energy is essentially a subset of public international law rather than a self-contained regime and is concerned with the regulation of any energy activities. By contrast, much of the subject matter of international energy investment law is facilitative, helping to establish and sustain relationships between private parties and between private and public parties, with familiar legal institutions such as property rights and contract playing a leading role. Its commercial law roots are robust, as is the influence of international commercial practice developed for contract-based transactions. At the same time, its dependence on general investment law is evident by providing for the settlement of disputes in the same way as under general investment law, by the same international arbitral tribunals, drawing upon the same international investment rules, principles, and procedures as are applied to non-energy investment disputes. States make contracts with investors but do so in a quasi-commercial manner even if the contracts themselves contain regulatory elements.29 The part-commercial aspect

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26 The most robust claims in defence of a sui generis discipline have been around the notion of a ‘lex petrolea’ or international oil and gas law. See Bishop, R.D. (1998) ‘International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea’, YB Comm Arb 23, 1131; Childs, T.C.C. (2011) ‘Update on Lex Petrolea: The Continuing Development of Customary Law relating to International Oil and Gas Exploration and Production’, JWEL&B 4, 1; Talus, K., Looper, S. & Otillar, S. (2012) ‘Lex Petrolea and the Internationalization of Petroleum Agreements: Focus on Host Government Contracts’, JWEL&B 5, 181–93; Martin, T. (2012) ‘Lex Petrolea in the International Oil and Gas Industry’, in King, R. (ed) Dispute Resolution in the Energy Sector: A Practitioner’s Handbook, London: Globe Law and Business. 27 For different kinds (and tones) of criticism, see Bowman, J.P. (2015) ‘Lex Petrolea: Sources and Successes of International Petroleum Law’, Texas State Bar Oil, Gas & Energy Res L Sec Rep 39, 81–94; Wawryk, A. (2015) ‘Petroleum Regulation in an International Context: The Universality of Petroleum Regulation and the Concept of lex petrolea’, in Hunter, T. (ed) Regulation of the Upstream Petroleum Sector: A Comparative Study of Licensing and Concession Systems, Cheltenham: Edward Elgar, 3–35; Daintith, T. (2017) ‘Against “lex petrolea”’, JWEL&B 10, 1–13. 28 Redgwell, C. (2016) ‘International Regulation of Energy Activities’, in Energy Law in Europe (3rd edn), Oxford: OUP, 13–144. At an even further remove from investment law is the focus on energy justice that fits into and builds on the energy transition discussion: For example, Benjamin K. Sovacool and M.H. Dworkin (2014), Global Energy Justice: Problems, Principles and Practices, Cambridge: CUP. 29 This contrasts with the perspective offered by Stephan Schill who argues that energy investment law ‘epitomizes a regulatory approach to investment relations, embedding them in a broader governance framework of economic, environmental and social governance’: Schill, S. (2014) ‘Concluding Observations: Foreign Investment in the Energy Sector: Lessons for International Investment Law’ in De Brabandere, E. & Gazzini, T. (eds) Foreign Investment in the Energy Sector: Balancing Private and Public Interests, 259–282 at 261. Indeed, one can find evidence of this governance framework in the ECT, for example, but it is striking how much of the non-investment

14 Chapter 1: Energy Investment Law of energy investment law gives it much more in common with what is usually associated with international investment law. In this sense, there is a notable difference with the rapidly emerging discipline of international energy law, which embraces all the legal issues arising from the diverse energy sub-sectors, in all their phases of activity and methods of delivery, and among each of the diverse actors or parties.30 International energy law, on this view, is a highly complex, transnational discipline, embracing many ‘soft law’ instruments such as guidelines, standards (such as the UN Guidelines on Business and Human Rights), network codes, and regulatory instruments as well as industry practices, and more conventional binding legal instruments. This is a broad scope that extends well beyond that of ‘energy investment law’ as used in this study. 1.26

At present, the legal framework for energy investment would comprise the large number of international investment treaties or agreements (IIAs), including the multilateral ECT; arbitral awards made under them; tens of thousands of investor–state contracts governing a variety of energy activities; national energy laws, and related legislation, mostly specific to energy sub-sectors; a host of model or standard form agreements, used by industry and associations as templates in thousands of transactions; and many non-legally binding instruments such as standards, guidelines, and voluntary codes of practice, developed by governments, international agencies, industry associations, and increasingly by civil society.31 Such a wide collection of conventional international and national law, contracts, awards, and less conventional but nonetheless influential instruments falls within the scope of international energy investment law, as a category that includes national, sub-national, private, and soft law instruments. Within this sweeping body of rules, principles, and standards, there is a very wide diversity and limited examples of standardization, although where industry standards have been agreed these are usually highly influential on practice. Apart from the ECT, there are no special legal instruments that might justify the description of a special regime, still less a self-contained one. The foundations of a sui generis body of law in this area are at present elusive, even if this does not detract from the claim, surely justified, that energy as an economic sector has an unusual degree of influence on international investment law. Nonetheless, the bedrock of public international law, commercial law, and administrative law, on which this broad edifice rests, is a familiar one for international investment lawyers. provisions of the ECT that can be taken to support its governance aspiration have become irrelevant (trade and transit) or are very weak in their content (competition, environment). The ECT is on stronger ground when it provides for protection of pro-market measures such as access to capital markets, and investment promotion. Even then, such provisions have a uniqueness that is explicable more in terms of the context from which the ECT emerged than an attempt at ‘economic governance’. 30 cf. Schill (2014) 267. The most influential definition of energy law sees it as the ‘allocation of rights and duties concerning the exploitation of all resources between individuals and the government, between governments and between states’: Bradbrook, A. (1996) ‘Energy Law as an Academic Discipline’, J En Nat Res L 14, 194. This is implicitly nation-based (there are few international bodies that allocate rights, except under the Law of the Sea Convention and various Joint Development Zones), regulatory in approach (it does not capture international gas contracts, for example) and public law in orientation, understating the extensive role of international commercial law in energy transactions (oil trading, for example). Since this definition was offered, ‘energy law’ has become highly internationalized in some areas (EU energy law, energy investments under international treaties, for example), limiting further the definition’s ability to capture its subject matter. More recent work has taken a consciously consolidationist approach, represented largely by the work of R. J. Heffron (2021) Energy Law: An Introduction (2nd edn), New York: Springer, and especially R.J. Heffron, A. Ronne, J.P. Tomain, A. Bradbrook and K. Talus (2018), ‘A Treatise for Energy Law’, JWEL&B 11(1), 34-48. 31 In this context, the comprehensive overview of model contracts in the hydrocarbons sector may be noted: Martin, A.T. & Park, J.J. (2010) ‘Global Petroleum Industry Model Contracts Revisited: Higher, Faster, Stronger’, JWEL&B 3, 4.

A. Energy Investment Law 15 The ECT remains a source of some doubt about the soundness of the above conclusion. At first sight, it appears to set up a special regime for energy investments, although it addresses other subjects in its scope, such as trade and transit, and even competition and environment. Most commentators agree however that the ECT provisions on investment have been taken from then existing BITs that have generic application to all kinds of investment.32 It is almost correct to state that there is nothing in the basic ECT rules and principles on investment that would surprise an international investment lawyer other than their application to an energy subject matter. The result would seem then to be better described as a subset of international investment law. It is moreover one that applies to a large but still limited number of states parties. As far as the ECT itself is concerned (and not its two related Declarations) the number of ratifications is limited both quantitatively and geographically.

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One caveat may be made to this. All energy investment, domestic as much as international, must come to terms with the high profile of the state in this economic sector. Energy is usually considered to be the basis for any farther-reaching economic activity, such as production of goods and rendering of services. Moreover, it is also commonly understood to be a socially sensitive sector, because energy supply as a basic good must remain affordable for the population. Investments in energy also have potentially important impacts on public health, safety, human rights, and the carbon footprint of a society. For this reason, we see the otherwise odd provision in the ECT—Article 18, on sovereignty over energy—that is not expressly evident in a typical BIT or IIA. For a treaty addressing energy subject matter this blunt reiteration of state rights is de rigeur. From a legal point of view, this provision contains nothing new and is otherwise redundant.

1.28

In another sense, the special character of energy investment is evident in the very existence of the ECT. Its characteristic as an instrument intended to help catalyse rapid and extensive growth in a country’s economy is evident in the Preamble of its text,33 in its rapid negotiation and ratification, and in the sense that the large-scale transformation of Eastern European and Central Asian economies into market-oriented ones was one that would benefit from a special multilateral treaty instrument. There is probably no other economic sector that has within it the promise of such transformative social and economic impacts.

1.29

The search for evidence of a special regime in international energy investment law needs to explore its interaction with municipal law. Like any such investment it will have to interact with municipal or national legal systems. Such legal regimes are likely to be extensive, however. Where energy resources require to be extracted from the subsoil on land or below the seabed, ownership almost always lies with the state itself, qualified in the case of the seabed and inland waters by the relevant international law, and is accessible to investors only subject to a regime for administrative allocation of rights by concession, licence, lease, production sharing contract or similar arrangement. Further, the state will also typically be responsible for regulatory oversight of energy network and distribution activities, through national regulations and enforced by ministries and public bodies. In many cases, the state is also a participant in activities such as production, transportation, and supply. This can involve the establishment of a national or mixed-owned company and the use of joint venture arrangements with foreign and/or domestic investors, and strategic acquisitions of assets. The courts

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32 For example, Bamberger, C. (1996) ‘The Energy Charter Treaty and Beyond’ in Waelde, T.W. (ed) The Energy Charter Treaty and Beyond: An East–West Gateway for Investment & Trade, London: Kluwer Law International. 33 Recital (5) of the Preamble: ‘Wishing to implement the basic concept of the European Energy Charter initiative which is to catalyse economic growth by means of measures to liberalize investment and trade in energy.’

16 Chapter 1: Energy Investment Law are likely to place a role in the review of state action and enforcement of any protections due to investors under domestic investment law and relevant jurisprudence. Given the centrality of energy supply to economic growth, this pervasive role for the state and its administration is hardly surprising. It does, however, give investment in these energy industries a unique sensitivity to political risk, with no parallel in, for example, telecommunications or manufacturing. Since energy investments are usually made for long periods of time, the probability that public policy on the state’s diverse roles will evolve or change during the life of an investment is very high. 1.31

This potential for tension between investors and states is further underlined in two ways. For some states, the need for a domestic special legal regime for energy will be a recent phenomenon. In contrast to legal regimes for mining, which may date from many decades or even centuries ago (the various Napoleonic codes in Europe are examples of this), those applicable to hydrocarbons or renewable sources of energy have a much more recent vintage. The need to adapt such regimes to greater complexity as the demands on it grow, is likely to create more investment uncertainty for investors, existing and potential. Secondly, in certain parts of the world energy occupies a greater role in the Gross National Product than in others, underlining its sensitivity.

(4) The offer of stability 1.32

To promote and protect inward investment, States have frequently offered specific, legally binding assurances of long-term stability in varying forms. Such assurances can be in the form of customized contractual provisions, domestic laws, regulations, or administrative measures, bolstered by accession to international investment treaties, offering investors substantive guarantees. As an UNCTAD report has noted, [w]‌hen entering highly regulated or government-controlled markets or industries with huge investments—which is typically the case in infrastructure and extractive industries— foreign investors often seek government promises in investment contracts to ensure predictability and stability of key parameters.34

These assurances are common currency in the world of international investment.35 Such commitments by States have an unusual significance for energy investments. Without offering them in some form, it is likely that many of these large, long-term investments will not be made, with a resulting loss to the States concerned of revenues, employment, and related benefits.36 34 United Nations (2009) ‘The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries’, UNCTAD Series on International Investment Policies for Development, Geneva: UNCTAD/ DIAE/IA/2009/5, 24. 35 However the UNCTAD Report goes on to add that ‘[i]‌n competitive and less regulated industries, foreign investors have to rely on the host country’s overall laws and regulations, its track record and general reputation as regards predictability and stability of key policies that matter for FDI’: ibid, at 24–25. 36 A leading light in the early drive by international organizations to support investment in developing countries was the late Ibrahim Shihata, General Counsel to the World Bank. In one of his many publications, (1987) ‘Factors Influencing the Flow of Foreign Investment and the Relevance of a Multilateral Investment Guarantee Scheme’, Int’l L 21, 671 at 686–687, he noted: ‘There are quantitative and qualitative costs attached to perceptions of instability in developing countries. Quantitatively, if the risk profile is perceived to be too high, the projected investment would not be made, thus decreasing the overall volume of capital inflows into the host country . . . Investments will also be carried out at a higher cost, to the detriment of the host country, for a premium will be charged for the added risks, and anticipated returns will have to be much higher to compensate for such risks’.

A. Energy Investment Law 17 For many years international organizations have also been keen to emphasize that there are benefits to the host state from the offer of investment stability. Among the incentives for them is that the grant of such commitments enables them to attract investment at the lowest possible cost. An authoritative statement on the underlying reasons for the obligation to respect legitimate expectations is in the 2005 World Bank Development Report:

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Governments and firms can both benefit. Governments benefit from a commitment device that can address concerns from investors, and thus help them attract more investment at lower cost, and also reduce the risk of any later dispute becoming politicized. Firms benefit from reduced risks and a more reliable mechanism for protecting their rights if the relationship with the host government deteriorates.37

The assumption here is that the fiscal terms governing an investment project together with stabilization provisions would represent the bargain negotiated and agreed between the foreign participant and the host government. Assurances of long-term stability have then a dual aspect: to promote investment in a particular setting and to protect investments once made. Typically, States will offer them in competition with their neighbours to attract scarce capital. They have value to investors since they offer a level of protection to their investments from the risk that at some future date a government or an agency of government may take actions that modify the legal and business framework in ways that are economically disadvantageous to the investor. To be credible, the assurance offered to the investor must be linked to a mechanism for redress of grievances and compensation for loss that will usually require more than reliance on the local courts. In this respect, international law offers support by means of the many investment treaties that states have concluded over the past thirty years.

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When a prospective investor assesses such assurances it will be aware that the party giving them is the State. Even without any grasp of international investment history, the investor will be aware that there is a risk that the host State may take unilateral measures at some future date that are detrimental to the investment’s value and potential. Given the extreme sensitivity of energy investments in national economies, it is not hard to imagine circumstances arising in which the state might believe it appropriate to take some action that impacts upon established investments. Moreover, in contrast to the typical investor with its defined set of commercial goals, a state is likely to have a more varied and not always cohesive (or constant) set of goals in response to different constituencies. Even without the national development aspect of an energy investment, most states are likely to identify a strategic interest in all or parts of their energy sector that will encourage them to take some interest in the evolution of the investment.

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For the investor, this is a source of concern about possible interference by the state at some future date in ways that are economically damaging to its investment.38 This arises in

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37 World Bank, World Development Report 2005 (‘A Better Investment Climate for Everyone’) at 179, available at: http://siteresources.worldbank.org/INTWDR2005/Resources/FNL_WDR_SA_Overview6.pdf (last accessed 27 December 2019); Paulsson, J. (2010) ‘The Power of States to Make Meaningful Promises to Foreigners’, Journal of International Dispute Settlement 1, 341 at 348. 38 Studies have been carried out into the impacts of policy-related economic uncertainty: Baker, S.R., Bloom, N. & Davis, S.J. (2013) ‘Measuring Economic Policy Uncertainty’, Chicago Booth Research Paper No 13-02: (accessed 27 May 2021) (the authors developed an aggregate index to measure the overall level of policy uncertainty in an economy); Gulen, H. & Ion, M. (2016) ‘Policy Uncertainty and Corporate Investment’, The Review of Financial Studies 29, 523–564 (empirical support provided to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to

18 Chapter 1: Energy Investment Law addition to the conventional business or market-related risks, which any investor must face. For the host state, this ‘risk’ is likely to be understood rather as a potential need to intervene at some future date to protect a key national interest and a reflection of the custodian role it ultimately plays in most energy investments. For the energy lawyer, this presents a challenge to identify mechanisms that—in very particular contexts—allow both parties to reach agreement on the making of an investment which over time may promise to have potentially transformative effects on the State from an economic and perhaps also a social point view. 1.37

The timing of potential interventions by the State has received much attention in the literature on energy investment. The risk facing investors has been described by Professor Vernon as one of an ‘obsolescing bargain’. The prospective investor concludes a formal agreement with the host state to carry out exploration and/or extraction, or to invest in fixed transmission and distribution networks, or in power generation facilities, on the basis of guarantees and incentives offered by the host state, usually expressed in contractual form, and supported by a wide ranging legal and regulatory framework.39 After the bulk of the investment has been made, the allocation of risk shifts rapidly from the capital-hungry host state to the investor. Negotiating leverage shifts to the State during the project life cycle: the investors require a long period to achieve their expected return while, once the investment is made, the host state has at least received the first instalment of what it is seeking. From that moment on, the theory goes, the bargain struck with the foreign investor has a declining value until a point when it may conclude that the original bargain is obsolete and invites the investor to discuss a revision of its terms. These reasons may include a change of government40 and the introduction of new policies; the discovery of natural resources in commercial quantities and commencement of development, offering the prospect of large and speedy accumulation of wealth, and the social and economic implications for the host state of the operation of the pricing or tariff regimes for electricity and gas. In the years following the making of investment irreversibility); Fabrizio, K.R. (2012) ‘The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation’, The Journal of Law, Economics and Organization 29, 765–798 (a US-focused study, following the implementation of Renewable Portfolio Standard policies; perceived regulatory instability reduces new investment and undermines policy goals). 39 The notion of the obsolescing bargain was developed by Raymond Vernon, a former Professor at Harvard Business School and Director of Harvard University’s Centre for International Affairs: Vernon, R. (April 1967) ‘Long-Run Trends in Concession Contracts’, Proceedings of the American Society for International Law. It denotes ‘the process that leads governments repeatedly—almost predictably—to reopen the issues involved in the exploitation of raw materials’: Vernon, R. (1971) Sovereignty at Bay: The Multinational Spread of US Enterprises, New York: Basic Books, 53–60 at 53. It has been used extensively as a model of investor-state relations: for example, Wells, L.T. Jr. & Gleason, E. (1995) ‘Is Investment in Foreign Infrastructure Still Risky?’, Harvard Business Review (Sept/Oct), 1–12; Post, A.E. & Murillo, M.V. (2014) ‘Revisiting the Obsolescing Bargain in Post-Crisis Argentina: Investor Portfolios and Regulatory Outcomes’: ; Becker, E. (2018) ‘Saudi Arabian Oil: The Obsolescing Bargaining Model’, TCNJ Journal of Student Scholarship, 20. For applications of the idea to energy infrastructure investment, especially ‘greenfield’ independent power generation, see Woodhouse, E.J. (2006) ‘The Obsolescing Bargain Redux? Foreign Investment in the Electric Power Sector in Developing Countries’, NY J Int’l L & Policy 38, 121; Gould, J.A. & Winters, M.S. (2007) ‘An Obsolescing Bargain in Chad: Explaining Shifts in Leverage between the Government and the World Bank’, Business and Politics 9(2): http://www.bepress.com/bap/vol9/iss2/ art4; and Wells, L. & Ahmed, R. (2007) Making Foreign Investment Safe: Property Rights and National Sovereignty, Oxford: OUP, 66–74. 40 Vernon (1971) at 59–60 is emphatic that a change of government can add a decisive momentum to this process: ‘even when the original agreement between foreign investors and the government is modern and well balanced, this fact adds only marginally to the security of the investor’. Changes in policy usually have a reactive character; they presuppose a prior, effective policy in persuading investors to make significant commitments, at which time the obsolescing bargain process kicks in, creating the conditions that a later, incoming government may choose to characterize as unsatisfactory and requiring remedial action.

A. Energy Investment Law 19 an investment—often a very large, fixed one in this sector—the investor therefore faces an increasing risk that the host state may exercise its sovereign powers to modify the terms of the contract in ways that achieve a new government’s policy goals. Such sovereign powers are likely to be used in more subtle ways to reduce the value of a project than through outright expropriation of the asset, although that risk still exists. The theory has been criticized as being time-bound to a context of nationalization and expropriation in the natural resources industries, and ill-suited to applications in non-energy- related fields of investment.41 In several case studies carried out subsequently, evidence presented suggests that internationally operating companies have been able to retain relative bargaining power and prevent opportunistic behaviour by host governments so that the bargains in practice did not obsolesce over time.

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Some economists have described the same phenomenon in slightly different terms. In their view, guarantees of stability arise as a legal response to the problem of ‘time inconsistency’ or ‘dynamic inconsistency’ in government policies.42 This problem arises when a government announces a policy in advance but finds later than it is ‘welfare-increasing’ to go back on the commitment generated by the policy. The cost of acting in this way is that the government is perceived by investors as one that reneges on its promises, and it loses credibility. In dealing with ‘time-inconsistent’ actions such as a unilateral tax change, the adoption of legal rules helps to produce a better outcome. At least, it can contribute to improving the adaptability and progressivity of a state’s fiscal regime. However, in practice it is rarely a change in government policy that initiates a new stage in relations with the investor(s): more usually, it is a change in the government itself, bringing in new policies.

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It should not be forgotten that the greatest risk to the value of the investment lies in the investors’ appraisal of the potential and actual operation of the market: the business risk. This is particularly vivid in the commodities sector, which is subject to spikes and troughs in price: the ‘commodities rollercoaster’.43 The investor concludes an agreement based on assumptions about price that are within a specified range, appropriate to the project and linked to expectations about future international market conditions. Subsequently, the international price rises or falls dramatically, leading to unexpectedly consequences for the investor. Where gains are involved, the host state may deem these to be unearned and by implication unfair. If the contract has not been designed to capture this possible outcome, the host state may seek to capture these gains by, for example, imposing a special tax or initiating a (possibly forced) renegotiation of the terms of the original contract. Clearly, this is a scenario that is more relevant to those commodities that have their prices set by an international market, such as oil and many hard minerals (gold, silver, platinum), but it also applies to natural gas since many international sales and purchase contracts link the price of natural

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41 Eden, L., Lenway, S. & Schuler, D.A. (2005) ‘From the Obsolescing Bargain to the Political Bargaining Model’, in Grosse, R. (ed) International Business and Government Relations in the 21st Century, Cambridge: CUP, 251– 272. For a less critical appraisal, see Serik Orazgaliyev’s study, Orazgaliyev, S. (2018) ‘Reconstructing MNE-Host Country Bargaining Model in the International Oil Industry’, Transnational Corporations Review 10, 30–42. 42 Daniel, P. & Sunley, E.M. (2010) ‘Contractual Assurances of Fiscal Stability’, in Daniel, P., Keen, M., McPherson, C., et al. (eds) The Taxation of Petroleum and Other Minerals: Principles, Problems and Practice, New York: Routledge. 43 IMF (2015) ‘The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times’, Fiscal Monitor October 2015, IMF (available at ). It notes that commodity prices are volatile, unpredictable, and subject to long-lasting shocks, and examines the conduct of fiscal policy under the uncertainty caused by dependence on natural resource revenues.

20 Chapter 1: Energy Investment Law gas to that of crude oil. The justification for state action may be couched in terms of ‘fairness’, but the driver on this scenario is the price. Where the price has fallen, the state’s concern may lie more in mitigating the negative consequences and persuading the investor not to take advantage of its contractual freedom to make an early exit. Where renewables are involved, the situation is yet more complex since the price is artificially established through state intervention in the first place (through feed-in tariffs, for example). The result is similar in terms of volatility, however. In this respect, the investor’s commercial judgments, often linked to its overall international business operations, can, when mistaken, have negative consequences not only for the investor but also for the host State or States in which it has invested. For the State, it is therefore important to try to identify investors with a track record of sound business skills as well as technical and financial capacity. This is the mirror image of ‘political risk’. 1.41

In the light of this potential for tension arising in relations between governments and investors over the life of an investment, we can expect energy investment agreements to make provision for maintaining and adjusting the initial agreement within certain defined parameters. Where they do so, stability acquires a dynamic character and underlines the continuous interdependence of the parties which—at least in terms of design—is to be a fact of life throughout the investment. As Professor Detlef Vagts once wrote: ‘[e]‌ither parties will include renegotiation provisions in their contracts or they will act as if they were there.’44 However, the question then arises, when the relationship comes under strain, does this mean the parties to the contract can recalibrate the relationship or do they require the intervention of a third party, an arbitrator? B. Overview of the Book

(1) Aims 1.42

This book has two principal aims. Firstly, it aims to provide a comprehensive map of one segment of international investment law, that concerning the energy sector, and particularly, the way in which that body of law tries to provide for stability of the long-term business environment for energy investments. Secondly, it asks whether the extensive treaty protections that have been introduced into international investment law have enhanced the stability provided by contract or not. In providing an answer to this question evidence is gathered and assessed through case studies of unilateral state actions taken in three regions—Latin America, Central Asia/Russia, and Africa—and through an examination of the relationship of this body of law to the various issues known as Environment, Sustainability, and Governance (ESG).

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The first and most fundamental legal mechanism that provides for stability is found in the investment agreement itself (stability by contract). This includes dedicated contractual instruments as well as specific clauses in wider commercial contracts. The second mechanism is the extensive global network of international investment agreements, whether bilateral or multilateral in character (stability by treaty). This has superseded the old diplomatic protections provided by international law and offers an investor a degree of protection which is of a quite different order of importance and assurance. However, there is also a significant

44

Vagts (1978) at 22.

B. Overview of the Book 21 measure of stability provided by the legislative frameworks for energy investment and the legal doctrines of the host state, such as the doctrine of actos proprios in Latin America (stability by domestic law). Too often this is understated or even ignored by scholars and commentators in the rush to emphasize foreign investors’ preferences not to subject their disputes to the jurisdiction of local courts. The international investor can—and often does— rely upon all three of these sources of legal stability in structuring the legal framework for its investment. Of the three sources of stability, it is the large number of investment treaties now in effect that constitutes the novel feature of the international legal context in which investor- state disputes unfold. The impact of this factor—tested in the specific regional settings of the case studies—is the main focus of this study. This legal context provides a new setting for an in-depth analysis of the various contractual forms of stabilization and for their overall goal of providing investors with mitigation against political risk. To what extent has the international legal framework of treaty protection enhanced and strengthened the more familiar protections offered to investors by contract in the face of these actions by host states? In answering this question, account has to be taken of the fact that the first generation of treaties (we might call it Investment Treaty Law 1.0) is already more than twenty years old and is now being replaced by a new generation of treaties that often include a more restricted scope for investor protections. Even the ECT is in the process of being ‘modernized’. This study aims to provide the first in-depth analysis of this still evolving legal architecture for international investment in the context of the energy sector. For the investor in the international energy industry, the addition of the international treaty structure to its bedrock of contracts with the host state constitutes the latest phase in a long- term ‘pursuit of stability’ in relations with states which host their investments. Behind such a pursuit is a sense that for many years there was a trend towards a weakening of the bargaining position of foreign investors vis-à-vis many, if not all, host states and their national energy companies. On the face of it, the expanded international investment regime constituted a major step forward in mitigating the cyclical developments in political risk to which investors in the international energy industry have been exposed. If so, its high point may have peaked, and an assessment is timely as it moves into a new phase.

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(2) Approach The approach of this book to its subject matter combines several familiar elements in legal research. It is international and comparative and in part historical; it uses a case study method to examine groups of countries from a particular region, and it analyses important arbitral awards in some detail. This eclecticism of method is a response to challenges presented by the subject matter and will be—the author argues—justified by the results.

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Two key challenges face any researcher in this area. The first concerns the quality of available data. The contracts which investors and states conclude with respect to a particular investment will sometimes be in the public domain but often they are not or are hard to obtain. Fortunately, over the past ten years there has been a significant increase in the volume of contracts that are available. There may be additional barriers imposed by the language of the contract. In the event of a dispute between the parties that is subject to arbitration, the proceedings will normally be heard in private and if there is an award on the merits, it is not certain that it will be published (with the exception of most ICSID awards), although more and more awards are being made available in the course of enforcement proceedings. Two

1.46

22 Chapter 1: Energy Investment Law key sources of data are therefore available only on an incomplete basis, which recommends caution in making generalizations that rely upon legal materials in the public domain or are accessible to the researcher through other means. A second challenge arises from the fact that the application of international investment law is heavily dependent upon the facts of a particular case and indeed on the wording of the particular BIT or MIT that provides the legal frame of reference. The diversity of circumstances and heterogeneity of international investment agreements means that an empirical, case-by-case approach (what has been called by the legal theorist William Twining as the classic legal method in the social sciences, the ‘method of detail’) is unavoidable if one seeks to identify trends. There is also some evidence that patterns are emerging in the development of international investment law (see chapters 4 and 5). Nonetheless, the real differences in culture, history and circumstances among the states involved require careful attention and appreciation; this has been attempted in the case studies in c hapters 7, 8, and 9. 1.47

Case studies There are many illustrations and examples in this book from practical experience, but Part II is concerned mostly with three extended case studies of disputes from different regions—Latin America, East Europe/Central Asia, and Africa. In each case there have been many disputes over the stability of long-term energy investment agreements in the period when international investment law had expanded to offer greater protection to investors than ever before. In contrast to countries in some regions (Asia and the Middle East are the obvious examples), there is sufficient published material on many of the disputes for an in-depth analysis. Europe might have been an obvious selection for a case study since materials are available, but the linkage between energy investment and development, a sub-theme of this book, is absent, and in addition, the investment scene for energy and more generally is in an unprecedented state of flux, due to a still-evolving evolution of European Union policy on investments, making the legal framework for this region something of a ‘moving target’ and detailed study premature.

1.48

Energy and international investment law While the focus of this book is upon energy investment, there are inevitably many references to institutions, concepts, principles, and procedures common to international investment law in general. Given the ready availability of literature on international investment law, this study will provide only references to works on such common areas, rather than attempt to cover ground that has been well-researched and is likely to be familiar or accessible to many readers already.

(3) Scope 1.49

Energy The leading energy industries are the focus of this book, with the incidence of investor-state disputes over the terms of long-term contracts (and public knowledge of such disputes) increasingly evident in all sectors. Where appropriate, consideration is given to non-energy natural resource industries such as hard minerals (for example, copper, cobalt, lithium) or water, which play an important role in the energy transition. Within the group of energy industries, it is the investments in oil and gas extraction that have so far generated the largest share of known awards in disputes between investors and states in the international energy and natural resources industry.

1.50

Operational considerations can help to explain imbalances in the investor–state disputes we know of that arise from diverse energy industries. By and large, oil companies appear in this

B. Overview of the Book 23 study as investors engaged in the exploration for and extraction of oil and sometimes gas. Buyers and sellers of piped or liquefied natural gas constitute a smaller group and one that has demonstrated a much lower incidence of disputes with host states. In practice, the discovery of a large gas field under one of the principal kinds of petroleum contract requires the design of supplementary and quite different contractual arrangements to develop and market the commodity. The host state will certainly be involved in its development, whether it is destined for local consumption, perhaps to generate electricity, or for export or both; issues of long-term contract stability will arise at this stage and require a clear contractual solution, not least because the project will require the construction of pipeline networks, large-scale fixed infrastructure, possibly liquefaction facilities, and the participation of international banks. For the investor in renewable energy, the assurances offered by support schemes for long periods of operation have been an attraction, but disputes over the state guarantees for such schemes have burgeoned in recent years, raising important questions of law in investment treaty cases; where reported, these are considered in this book. Law The subject matter of this book comprises three distinct but often interrelated sources of legal stability. Firstly, it examines and assesses the variety of contractual mechanisms used to promote stability in long-term contracts in the international energy industry. These include both dedicated contract provisions such as stabilization clauses, and specific contractual instruments such as the legal stabilization agreements used in certain Latin American countries. Secondly, it considers in some detail the BITs and MITs which provide investors with recourse to international arbitration in the event of a dispute. Finally, it considers the stability provided to investors by the domestic legal setting which in many countries provides for various forms of stability guarantees for the contracts which investors make with host states or state entities. This tripartite setting is the legal context for ‘stability’ as it is understood in this book. Inevitably, there is an interface with wider trends in international investment law, but the reader is reminded of a caveat already made: the focus of this study is energy-specific, and the result is not intended to be a treatise on international investment law, even if it contributes to an understanding of it.

1.51

Arbitral awards This study makes use of arbitral awards from several sources. However, it should be emphasized that many disputes in the international energy industry are settled before they reach the stage of an arbitral award, reflecting the importance of both commercial realities and the need to preserve a long-term relationship between investor and host state. Materials relevant to cases that do not reach the award on the merits stage are nevertheless included in this study, not least given the insights that may be gleaned from the frequent challenges made by parties at the jurisdiction stage.

1.52

Environment and human rights Looking to the future, this study examines the growing challenges presented by environmental and ‘social’ risk to the stability of long-term energy investment agreements (chapter 10). If an investor seeks to stabilize core economic provisions of a long-term investment agreement, does this mean that a host state’s actions will be so limited that it may not implement its human rights obligations in international law? Does that extend to the social and environmental obligations of a state and if so, how? From a legal point of view, this is an area fraught with definitional questions and replete with the language of aspiration. Several arbitral awards have also been obliged to consider how the protections offered to investors through BITs fit with the protections of human rights offered in international law or the scope of sovereign powers to act in support of environmental protection.

1.53

24 Chapter 1: Energy Investment Law 1.54

Chapter 10 also reviews the hardening of environmental obligations and their potential impact given the dynamic potential of such obligations: changing attitudes may be reflected in international treaty obligations and a more onerous set of commitments during the life of the contract. Is it necessary for investors to seek stability of contract in non-economic areas such as environmental protection and social issues? These developments, especially when seen in the context of the development of climate change law, appear likely to generate a further, important source of constraint on the stability of investor–state relations.

(4) Structure 1.55

This book has a tripartite structure. Part I examines the relevant parts of the international investment regime to the pursuit of stability in long-term energy contracts. It considers the basic problem of investor vulnerability to unilateral change by the host state after the investment has been made and how investors have, by cooperating with states, developed contract-based mechanisms such as stabilization clauses, and treaty-based mechanisms in international investment law to mitigate this risk. It also examines in some detail the rules that emerged from a set of ‘classic’ arbitral awards many years ago but which retain considerable influence in legal doctrine. Different legal responses have emerged since then, particularly those that are treaty-based, and have now been widely tested, including how they interact with contract-based stability, supplementing and reinforcing it. This treaty-based framework which has emerged over the past twenty-five years or so is currently being reformed but enough material is available to assess its impact on the stability of long-term investments in the energy and natural resources industries.

1.56

Part II is concerned with the tests which the new investment regime has faced and the impact of these tests upon contract-based stability. It reviews this through a general overview of treaty practice, and a case study approach to three geographically large energy regions. In a separate chapter, it addresses new challenges that are emerging in investor–state relations in areas such as environmental protection, human rights, and enforcement. These risks to the stability of long-term agreements are of recent origin.

1.57

Finally, Part III examines two important areas relevant to the stability of investments: the prospect and practice of damage awards in the event of a breach of state assurances, and the enforcement of arbitral awards, before concluding with an overall assessment and a look ahead. The question addressed is whether the various steps taken in pursuit of stability have in fact led to an improvement in the investors’ ability to mitigate risk: for example, by smoothing out the cycles which generate investor vulnerability, while protecting state interests. If so, have they done so at the price of harming the sense of mutual benefit that states and investors need to have about the operation of the international investment regime? Have they depoliticized the legal relationship between the investor and the host state, or failed in this objective?

2

States, Investors, and Energy Agreements

A. Introduction B. The Foundations of Partnership

(1) Host states (2) Energy investors (3) The investment

C. Governance

(1) Energy contracts (2) Sovereignty over energy

2.01 2.05 2.05 2.21 2.47 2.65 2.67 2.71

(3) Arbitration

D. Energy Investment Agreements

(1) (2) (3) (4) (5) (6)

Hydrocarbons Natural gas Electricity and renewable energy Coal and energy-related mining Unconventional energy Nuclear energy

E. Conclusions

2.84 2.94 2.101 2.125 2.140 2.151 2.159 2.164 2.169

[T]‌he concept of the permanent sovereignty over natural resources . . . has ‘settled down’. It now stands for norms that command a significant common consensus, which I would summarize thus: states have a very special position in regard to their own resources. Rosalyn Higgins1

A. Introduction In making energy investments, a key objective for foreign investors and host states is to enter into a relationship that appears to the parties as both durable and mutually beneficial. The challenge they face is not so much that this relationship is forward-looking, a common feature indeed, but rather that it looks very far forwards, perhaps twenty-five to thirty years, and that it can be so arranged that stability of at least the economic fundamentals agreed by the parties is in prospect and, if adjustments are required at some point, they will not threaten those fundamentals. It is no accident that the ECT specifically mentions in its first proper Article that its purpose in establishing a legal framework is ‘to promote long-term cooperation in the energy field’. Clearly, the design and operation of legal arrangements to support cooperation over such long periods would be an ambitious goal in any economic sector. For investments in energy, the need to do so is complicated by the wide-ranging social and economic significance that the sector has in any modern economy, creating a public interest in the arrangements themselves.

1

Higgins, R. (1994) Problems & Process: International Law and How We Use It, Oxford: OUP, 141.

2.01

26 Chapter 2: States, Investors, and Energy Agreements 2.02

In the following sections, the three basic elements of any energy investment relationship— the investment triangle—are considered in this dynamic context (section B). The State is the sovereign and fundamental to the international system; in the energy sector however, the state is also usually an umpire or regulator and often a participant or commercial partner. Investors too have a more complex identity than may at first seem the case, especially when they operate internationally. The debates about ‘protected investors’ in international investment law provide many examples of the complex issues surrounding the notion of ‘investor’ in the globalized economy. The particular features of several ‘energy investors’, albeit in stylized form, are presented separately. What they invest, the ‘investment’, has rightly generated much debate among arbitral tribunals, as they strive to interpret the wording in treaties concluded several decades ago with current, fact-specific investment situations, often of great complexity. This debate is briefly examined here in relation to the kind of investments found in the energy sector.

2.03

Energy governance is the glue that makes the main elements stick together in relationships of mutual dependence and allows for peaceful ways of settling disputes among the parties (section C). In many of the discussions of investor–state relations this mutual dependence tends to be at best understated and at worst, forgotten. Most of the time, the parties have an interest in keeping the relationship alive as well as in ensuring that their legal obligations are performed. It is no accident that after a disagreement, however fierce in appearance, a working relationship can resume after a settlement or even continue while an arbitration is proceeding.

2.04

Finally, there is an overview of the main investment agreements in the various energy sub- sectors (section D). The differences in the legal arrangements are many but the prevalence of the six characteristics of energy investment is also evident as a driver to innovation and design in these concessions, contracts, agreements, and licences. B. The Foundations of Partnership

(1) Host states 2.05

The classic view of the state in international investment law is one of a monolithic structure with sovereign powers that present a latent threat to investors.2 The state, as Judge Schwebel once remarked, not only has policing powers, it has the police. In energy investments, the state has a contradictory role. It is at once unifying, as the guardian of sovereignty or sovereign rights over finite or renewable resources, and as regulator and participant in energy activities on behalf of its citizens. At the same time, it is prone to: capture by particular domestic and/or foreign interests; fragmentation, as individual agencies, ministries, and state companies compete for competence over energy activities; and corrosion in the face of the quantities of largesse that energy activities can open up for those responsible for the state machine.

2 Of course, modern surveys of international law readily acknowledge the limits of such a focus on the nation- state, rooted in nineteenth-century views. Today no international lawyer would deny the importance of non-state actors such as international organizations, individuals, and companies, as well as human groups or peoples (see eg Lowe, V. (2007), International Law, Oxford: OUP, 14–18 (the emergence of new international actors).

B. The Foundations of Partnership 27 The majority of states around the globe act as hosts to foreign investments made in energy or energy-related activities. This applies in the northern as well as the southern hemisphere. The impacts of this large-scale investment can be expected to vary, given the diversity of the states concerned, as well as the scale and the manner of individual investments. Petroleum development can have a highly varied impact upon states (understood here as nation-states and not as units within a federal system) and may have positive transformative effects, with Norway being the most frequently mentioned country example.3 However, many commentators have seen a negative side with the country’s dependence being described as a resource curse, sometimes creating ‘petro-states’.4 This may be less evident in the impacts of investments in non-extractive forms of energy.

2.06

Classifications of states for the purpose of understanding better their role in international energy investment tends to be a challenging one as the global economy evolves away from a West-centric model. Distinctions based on ‘development’ tend to require some qualification since some ‘developing’ states are capital exporters and significant investors. For the modest purposes of this chapter, we shall retain a familiar distinction between developing states, states in transitional economies and OECD-based member states. The transitional economies include the former communist states of Central and Eastern Europe, Central Asia, and the various countries that have emerged from the break-up of the former Yugoslavia. Their specific challenges to investors are examined in c hapter 8 of this book. They have some features that distinguish them from the developing countries that have for long been the actual or potential destinations of choice for investors from the OECD countries when investing outside the OECD block.

2.07

Who offers stability guarantees? If the reasonable expectation is that, given specific features of energy investments, a host state will typically offer guarantees of long-term stability, there is an anomaly to explain. A significant number of host states around the world do not offer a specific stabilization clause or any contract-based equivalent. Most strikingly, this is the default situation among virtually all states in the northern hemisphere.5 On a number of occasions when governments in these countries have introduced higher tax burdens for producing companies operating under concession (sometimes called licences or leases) terms

2.08

3 The literature on this topic tends to be overshadowed by the more extensive writings and research on the negative impacts of hydrocarbons development. Beyond the direct contribution of revenues, hydrocarbons and mining development may generate benefits through its links to other sectors: it can act as a catalyst to job creation, poverty reduction, support for local or national small and medium-sized enterprises in building a role in the investors’ supply chains and developing non-resource dependent clusters of industrial activity, process the resources, or contribute to infrastructure gaps. For an overview of the literature on both positive and negative features of ‘extractives’ development, see Cameron, P.D. & Stanley, M.C. (2017), Oil, Gas and Mining: A Sourcebook for Understanding the Extractive Industries, Washington DC: The World Bank, 19–37. 4 The classic studies in this vein are those of Karl, T. (1997) The Paradox of Plenty: Oil Booms and Petro-States, Berkeley: University of California Press, and Sachs, D. & Warner, A.M. (2001) ‘Natural Resources and Economic Development: The Curse of Natural Resources’, European Economic Review 45(4–6) 827–838, which argued that there is a robust inverse relationship between growth and resource riches. Later studies adopted a longer historical time series on resource development and reached more positive conclusions. For a review of the academic literature, see van der Ploeg, F. (2011) ‘Natural Resources: Curse or Blessing?’ Journal of Economic Literature 49(2) 366– 420. An accessible overview of the literature on this subject was compiled by the German aid bodies, BMZ and GIZ (2011) Curse or Blessing—Development or Misery: Scrambling to the Bottom or Scrambling to the Top: Natural Resources, Economic Growth and Conflict, A Literature Review, Bonn: GIZ. 5 At the same time, we must note that all of these states are part of the investment treaty network so that the substantial protection of Fair and Equitable Treatment applies to investments made in these countries to the extent they benefit from any of these treaties. This includes the doctrine of legitimate expectations and the expectation of a stable legal and business framework for investments.

28 Chapter 2: States, Investors, and Energy Agreements (with no contract or stability provisions) and on utilities in the electricity and gas industries,6 the only recourse open to those companies has been to lobby the government to abandon the proposed change or at least try and persuade it to reduce the impact of the proposed measure. Occasionally, a government will seek these opinions in open debate prior to introduction of the new tax/royalty rates (eg in Alaska, or Alberta), but often it will not (eg in the UK). In any event, the investors will warn the government that such changes to fiscal conditions will threaten future investment. This threat then materializes, or it does not.7 2.09

The absence of contract-based restraints tends to be noted in the literature but not further examined. In practice, it is a generalization limited to the petroleum sources of energy. As we shall see, governments in these northern states have been willing to accept legal constraints in certain ‘priority’ energy sectors where the attraction of investment has proved particularly difficult, such as renewable energy and nuclear energy. The form of the guarantee on offer may differ but the intent is the same.

2.10

The traditional defence of governments in the face of pleas for fiscal stability has been that they cannot bind a future government to policies of the current administration since this would infringe sovereign rights and is almost certainly impossible in the context of their domestic legal traditions. At best, a government official might announce that any increase in the state share of the economic rent will be the last one for the duration of its term in office (as the UK Chancellor of the Exchequer did in 2005). If the government breaks this promise, however, it cannot be held liable in its own courts and, therefore, the unhappy investor is often left with few options other than to scale down its future investment plans.8 6 In the UK a one-off windfall profit tax was imposed on 2 July 1997 through the Finance (No 2) Act 1997 on certain privatized utilities, including gas and electricity utilities. It amounted to 23 per cent of the difference between the value of the company in profit-making terms and the company’s flotation value. This difference represented the estimated appreciation in a utility company’s value over the initial period after privatization, rather than an additional direct tax on the utility company’s income. For the purposes of the tax, the value of a company in profit-making terms was defined as nine times the company’s average annual after-tax profits, as reported for UK tax purposes, for the four years immediately following flotation. A sum of £5.2 billion was collected in two equal instalments and used to fund welfare and youth employment programmes. The tax was justified on the grounds that investors in the privatized utilities had earned excess profits and the shares had been underpriced when first offered. It was deemed not to be eligible for a credit against a company’s US income tax liability. The tax was not challenged under customary or treaty-based international law. The UK Treasury may have chosen a valuation formula that used published, readily available information in order to avoid any legal challenges under existing tax treaties. No further windfall taxes have been imposed in the UK, in spite of calls for them during the period of rising oil prices between 2003 and 2008. In the USA a Crude Oil Windfall Profit Tax was adopted in 1980. This was not a profit tax stricto sensu, being imposed on the difference between the market price and the base price set by the federal government. It was repealed in 1988 but is believed to have earned the US government a sum of US$80 billion in gross revenues: see the discussion in a publication of the Energy Charter Secretariat, ‘Taxation along the Oil and Gas Supply Chain: International Pricing Mechanisms for Oil and Gas’ (2008): (accessed 26 December 2019). 7 This does not mean that a legal challenge in the courts is unheard of. An example of such a challenge was made successfully by Anadarko Petroleum Corporation in the USA when the US government tried to withdraw royalty relief for drilling on federal leases. This was granted as a financial incentive to oil companies in the 1990s to make drilling in the deeper waters of the Gulf of Mexico more profitable (when oil prices had fallen to US$10 a barrel). When prices increased significantly the Department of the Interior sought to end that relief. In January 2009 the Circuit Court in New Orleans ruled that Anadarko (one of the companies affected by the proposed measure) did not have to pay US$150 million in royalties on leases issued between 1996 and 2000. Although the Department appealed to the Supreme Court, its appeal was rejected: ‘Supreme Court rejects DOI appeal of Anadarko deepwater royalty ruling’, 5 December 2009: (accessed 26 December 2019). 8 To encourage compliance with its policies, a government is able to use its discretionary powers over licence allocation. This use of discretionary power has been the subject of several studies: Dam, K.W. (1977) Oil Resources: Who Gets What How, Chicago: University of Chicago Press; Daintith, T.C. (2006) Discretion in the Administration of Offshore Oil and Gas: A Comparative Study, Melbourne: AMPLA. However, it should be noted that in certain circumstances, domestic courts have held that a government can bind a future government through

B. The Foundations of Partnership 29 Yet in such countries there are precedents for governments offering investors forms of stability. Many years ago, the UK government considered legislation on the amendment of standard terms in licences already awarded to IOCs in the UK sector of the North Sea. To answer the criticism of its proposed measures, it gave a set of assurances in Parliament (known as the ‘Varley Assurances’ after the energy minister at the time) about the limited impact of the proposed measures and undertakings about their operation. They were never tested in the courts but did much to encourage investors to proceed with their investment at the time.9 If contract-based assurances are not legally possible, a government may benefit from offering non-legally binding soft-law forms of assurance such as this.

2.11

If we return to the contract-based stability often found in the petroleum sector, we may ask why investors appear to be willing to accept contract terms which do not include stability in many northern hemisphere states but insist upon them in their negotiations with governments in many developing countries (and indeed with the governments of states in the transitional economies). The answer is in three parts. Firstly, the legal context is quite different. In a number of developing or transitional states, the Rule of Law is either not firmly entrenched or simply does not operate in the predictable way that an investor typically seeks. In Nigeria, for example, the record of the judicial system is generally supportive of investor rights, but the executive has a long tradition, crossing different governments, of unilaterally altering terms and introducing large tax liabilities without notice.10 Russia is another example, where the operative legal rules are often inconsistent, not always publicly available or require a level of compliance that is very hard for a foreign investor to achieve. As a result, it is an easy matter for the authorities to impose fines or other penalties on a recalcitrant investor for environmental, tax, or other violations. Moreover, in large parts of Latin America, Africa, and the Middle East, there is a historical legacy of anti-colonialist sentiment or populist suspicion of foreign investment that an incoming government can tap into by linking foreign investments in strategic energy sectors to notions of ‘economic exploitation’, to advance demands for a higher share of the economic rent.

2.12

Such opportunistic behaviour is made easier by a second point of difference between these states and their northern counterparts. In many developing countries, the petroleum and mining sectors are strategically important as the principal source of government revenue. Indeed, this factor is central to the argument of those who have written about ‘petro-states’ and the ‘resource curse’: instead of being dependent on their citizens for tax revenues, the governments in such cases depend only or largely upon foreign energy companies and as a result can ignore pressures from their citizenry, especially where democracy is not entrenched. This strategic factor is largely absent in the northern states, where there are normally other, comparably important industries in their economies (although there are exceptions such as Norway). It may however be argued that there are similarities between the situation of a

2.13

contract: for example, see Winstar Corp v US, US Sup Ct (1966). In the UK the long-term undertakings given to suppliers in the nuclear energy sector add support to this (see below). 9 See the account of this renegotiation of existing petroleum rights in Cameron, P.D. (1983) Property Rights and Sovereign Rights: The Case of North Sea Oil, chapter 5. London: Academic Press. 10 Abba Kolo, ‘Legal Issues Arising from the Termination of Oil Prospecting Licences by the FGN’, J Energy & Nat Resources L 19, 164 at 175 (2001); Olujobi, O.J. & Oyewunmi, O.A. (2017) ‘Annulment of Oil Licences in Nigeria’s Upstream Petroleum Sector: A Legal Critique of the Costs and Benefits’, International Journal of Energy Economics and Policy 7(3), 364–369 available at (accessed 28 April 2019). A significant caveat is the interventionist behaviour of the Nigerian courts in setting aside the awards in the ‘overlifting’ cases examined in c hapter 9 below.

30 Chapter 2: States, Investors, and Energy Agreements sub-unit of a federal state such as Alberta in Canada and Alaska in the US and a developing or transitional state with significant energy resources. 2.14

A third point of difference is geology. Where there is a large element of technical and commercial risk in addition to political risk, as in for example exploration in deep water areas, new areas on the frontier of existing operations or in other ways geologically complex, it is an easy matter to address the political risk factor and mitigate it by the introduction of stabilization clauses in the basic agreement in which the state grants rights to the investor (see chapter 3). Other risks will have to be addressed by different incentives and are likely to remain significant, nonetheless.

2.15

Arguably, this feature of a dearth of contractual commitments by ‘northern’ or developed states has been overtaken by events. International investment treaties with each other as well as to states in other parts of the world, and to the various multilateral instruments such as the ECT and USMCA/NAFTA, offer substantive protections to investors and involve consent by states to investors to bring claims against them in the event of a breach, which in a growing number of cases is exactly what they have done (see Chapters 5 and 6 for example).

2.16

Complexity: states with federal structures Several energy-abundant states have the constitutional structure of federations which may affect the kind of guarantees they can give to investors with respect to stability.11 Examples are Argentina, Australia, Brazil, Canada, India, Malaysia, Mexico, Nigeria, Pakistan, Russia, the United States, and Venezuela. Potentially, this feature cuts across the threefold distinction between states made above. Each category can yield examples of a federal state. Typically, a political system is federal if legislative power is divided between a central or federal legislature and a few sub-units such as regional or provincial legislatures (or both) that have some degree of internal self-governance and in a few cases even limited treaty-making powers. The federal government will have jurisdiction over the entire national territory and population, while a regional or provincial government will normally only exercise jurisdiction over portions of territory and sections of the population. Both levels of government normally draw their authority from a written constitution. There are different types of federation, however. Some are centralized federations, in which the powers of the regional or provincial governments are defined in a relatively narrow manner, and others are decentralized federations in which the regional or provincial sphere of authority is wider. In energy terms, there can be wide differences too. From a national point of view, energy resources may be of secondary significance to other drivers of the economy while they can be of crucial significance to regions and their governments. One example is the UK experience with North Sea oil and gas: secondary to financial services in the economy as a whole but for many years of primary significance for the Scottish economy.

2.17

The axiomatic relationship in a federal setting is the way the constitutional arrangements allocate powers between the central and the regional institutions. In Canada’s case, the federal model has been a decentralized one, with significant powers allocated to the sub-units (provinces). This has allowed the main petroleum producing province, Alberta, a relatively 11 For a comprehensive overview of federal systems in countries that produce oil and gas, see George Anderson’s empirically driven collection of twelve case studies: Anderson, G. (2012) Oil & Gas in Federal Systems, Canada: OUP. He distinguishes Nigeria and Venezuela, where the economies are dominated by petroleum from Russia, Malaysia, and Mexico, where petroleum is ‘exceptionally important . . . but not fully dominant’ (at 372– 373). Of these five ‘petro-federations’, only Nigeria provides producing states with a significant special share of petroleum revenues. Of these five, he concludes: ‘there is no doubt about the centralizing dynamic when petroleum is vital for the economy and the public finances’ (at 403).

B. The Foundations of Partnership 31 large degree of freedom in designing and implementing its legal regime for petroleum management, including revenue sharing. By contrast, the federal model in Nigeria is one that has a remarkably high degree of centralization, particularly with respect to the management of petroleum resources, and sharing of revenues; in effect, it is a unitary state. However, on closer inspection it appears that a transformation took place since the discovery of petroleum from a balanced federal regime with a high degree of decentralization to the current structure. The result is one that has been subject to challenge from local communities within the country, involving the use of violence, and leading sometimes to significant disruption of petroleum operations in parts of the country, especially the Niger Delta area.12 In a few countries, the federal structure of government has been established very recently. Iraq is an example of this.13 As a result, the relationship between regions and the central authorities has sometimes been characterized by considerable tension with respect to the management of petroleum resources and revenue sharing. This is particularly apparent in the relations between the central government and the Kurdistan Regional Government, which adopted a different approach to the management of foreign investment in its embryonic petroleum sector, characterized by using production sharing contracts and incentives for rapid exploration for and development of new fields.14 It may therefore be useful to distinguish ‘settled’ from ‘unsettled’ federal regimes. Examples of regimes with a settled form of federalism include Australia and Canada. In such cases one would expect the discovery of large-scale petroleum resources (with the prospect of relatively quick financial rewards) to be easily accommodated into the existing federal structure. However, there are cases where petroleum development has triggered forces that have contributed to undermine a settled federal regime, generating significant security risks to investors as a result: Nigeria is an example.15 In other cases, the regulation and management of the domestic petroleum sector by a federal government has been seriously questioned.16 Such federal regimes therefore tend to experiment with measures to accommodate the centrifugal pressures within a still highly centralized regime.

2.18

An issue that may arise for energy investors concerns the extent to which the central government, as the representative of the state, is or ought to be held responsible for actions taken by regional and local governments within that state. In the US and Australia, states at the sub-federal level and provinces in Canada may levy royalty and excise taxes while the federal governments raise income tax. Even if one administration (either federal or state/province) were to provide assurances of fiscal stability, the other may make significant future changes. Where this results in an unacceptably high level of take, the investors may be forced to seek reductions in the fiscal take from the ‘stable’ administration to compensate for the

2.19

12 See Egede, H. & Egede, E. (2016) ‘The Force of the Community in the Niger Delta of Nigeria: Propositions for New Oil and Gas Legal and Contractual Arrangements’, Tul J Int’l & Comp L 25(1) 45 at 78–82; Odumosu-Ayanu, I.T. (2014) ‘Governments, Investors and Local Communities: Analysis of a Multi-Actor Investment Contract Framework’, Melb J Int’l L 15, 473. 13 For a comprehensive overview of the legal and constitutional relations in modern Iraq, see Zedalis, R. (2009) The Legal Dimensions of Oil and Gas in Iraq: Current Reality and Future Prospects, Cambridge: CUP; for a collection which examines federal issues from the Kurdistan perspective, see O’Leary, B., McGarry, J. & Salih, K. (eds) (2005) The Future of Kurdistan in Iraq, Philadelphia: University of Pennsylvania Press. 14 For an analysis of petroleum contracts in Iraq, see Cameron, P.D. (2011) ‘Contracts and Constitutions: The Kurdish Factor in the Development of Oil in Iraq’, Journal of International Studies on Iraq 5(1), 81–99. 15 See Bristol-Alagbariya, C. (2009) Participation in Petroleum Development: Towards Sustainable Community Development in the Niger Delta, Dundee: University of Dundee Press. 16 Examples of such conflict are many: see the case studies in Anderson, G. (ed) (2010) Oil and Gas in Federal Systems, Oxford: OUP.

32 Chapter 2: States, Investors, and Energy Agreements actions of the ‘unstable’ one. There are rules on attribution (the basis for all international claims against a state) with respect to federal states in the Draft Articles on Responsibility of States for Internationally Wrongful Acts, drafted under the auspices of the International Law Commission (ILC).17 The conduct of any state organ ‘whatever its character as an organ of the central government or of a territorial unit of the state’ is attributable to the state.18 On this view, for the purposes of attribution, the state is treated as a unity. As Professor Hobér notes, this conclusion is hardly surprising ‘given the fact that the structure and power of federal states vary significantly and . . . most units of a federal state lack legal personality and treaty making power under international law’.19 2.20

Yet, even in such states, there appears to be nothing unreasonable about a request by an investor or investors for assurances that the contract and/or fiscal regime will remain stable over a specified period.

(2) Energy investors 2.21

One of the most controversial notions in international investment law is that of the ‘investor’, the legal or natural person from one country who invests in business in another country. In a global context there are millions of investors with trillions of dollars, euros and other currencies to invest. In Salacuse’s view, investors can be classified as private, state, mixed, or as international organizations.20 Dolzer and Schreuer place more emphasis on the private foreign investor as the subject of international investment law, extending to state-controlled entities ‘as long as they act in a commercial rather than in a government capacity’.21 Whatever its ownership status, nationality is a key test of the foreign character of the investor. In the energy sector, most foreign investors are likely to be private or state-owned or part-state- owned entities that are acting in a commercial capacity ‘as if ’ they are private entities. Very few international organizations are active as investors, such as the International Finance Corporation or the European Investment Bank and will typically only participate as a minority shareholder with a group of investors, taking a minority stake in a consortium.

2.22

A non-legal but fundamental consideration should also be noted. Why is the entity— however defined—an investor at all? The main drivers here are return and risk.22 Other motives may exist, such as gaining access to new markets or technologies, protecting sources of raw material or denying advantages to potential competitors. Ultimately, however, they 17 Crawford, J. (2002) The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries, Cambridge: CUP. 18 Ibid, Art 4, para 1. 19 Hobér, K. (2008) ‘State Responsibility and Attribution’, in Muchlinski, P., Ortino, F. & C. Schreuer (eds.) The Oxford Handbook of International Investment Law, 549–583 at 572. Studies in this area of attribution include (in relation to state enterprises) that of Albert Badia (2014) Piercing the Veil of State Enterprises in International Arbitration, Alphen aan den Rijn: Wolters Kluwer, and more generally, Kovacs, C. (2018) Attribution in International Investment Law, Alphen aan den Rijn: Wolters Kluwer. Key awards that discuss these issues are Metalclad Corporation v The United Mexican States, ICSID Case No ARB (AF) /97/1; Tokios Tokelés v Ukraine, ICSID Case No ARB/02/18; Compañía de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic (ICSID Case No ARB/97/3); Vivendi ICSID Case No ARB/97/3, and the decision of the Annulment Committee of 3 July 2002: 41 ILM (2002) 1135 (a second annulment proceeding was concluded in 2008). 20 Salacuse, J.W. (2013) The Three Laws of International Investment, Oxford: OUP, 7. 21 Dolzer, R. & Schreuer, C. (2012) Principles of International Investment Law (2nd edn), Oxford: OUP, 44. 22 J Salacuse is one of the few writers who gives considerable weight to these two considerations which although obvious can be taken for granted and understated: Salacuse, J.W. (2010) The Law of Investment Treaties, Oxford: OUP, 26–27.

B. The Foundations of Partnership 33 are likely to be elements of a strategy that is driven by the need to maximize the profit of the investing company. The investor’s expectation is that a return of some kind will not only accrue but can be reasonably estimated in advance, at least within certain parameters. However, every investment will face the risk that the expected return will either not materialize or not do so on the expected scale. Although there are many kinds of risk that may arise in energy investments, and variation from one energy sub-sector to another, a common concern to all of them is political risk. This form of risk plays an exceptionally large part in investment planning by investors in the energy sector. In the vast network of international investment treaties there is no standard definition of ‘investor’. This lacuna has generated much discussion about certain issues that commonly arise in relation to the notion of ‘investor’. Clearly, where a treaty claim is being made, the tribunal will scrutinize whether the claimant is a protected investor within the meaning of the relevant treaty and whether it may therefore proceed with its claim.23 The nationality of the investor has come under scrutiny in many investment cases concerning energy, including cases involving the ECT. Some of these are considered below and at length in c hapter 5.

(a) A typology

2.23

In the light of the characteristics of energy investments offered earlier in this Chapter, and the evident differences between energy sub-sectors, such as oil and gas on the one hand and renewable energy on the other, we might expect to find differences among energy investors arising from their business models and risk profiles. For example, there may be differences with respect to the goal of long-term stability for investments. To assist understanding of this, an illustrative typology is provided of the kind of investors typically found in the various energy sub-sectors, with a view to capturing the energy specifics that lie behind the notion of investor in energy investment cases, noting any differences of approach to the making and management of an investment.

2.24

Investor Type 1 The classical type of foreign investor in energy projects is the International Oil Company (IOC)(which also typically explores for and produces natural gas), of which there were at one time only a small number of large firms. This investor is overwhelmingly focused on oil and gas investments, is mostly based in the USA or Europe, and for many years it epitomized the risk-taking, entrepreneurial investor of the market economy, a role now taken over by companies in the IT sector. For an illustration of their scale, a former legal counsel to Shell has noted that ‘Shell entered into approximately one million contracts each year involving annual capital expenditure of approximately USD 30 billion each year’ and had ‘over 10,000 pieces of litigation and arbitration [at] any one time’.24

2.25

However, within this category there are important nuances. The larger IOCs are likely to be long-term investors, focused on the kind of large projects that require many years to develop and yet are likely to yield a high rate of return. This is not the universal business model, however. Some medium to small IOCs may take a shorter-term perspective on an investment in

2.26

23 Among the many discussions of the notion of ‘investor’ in international investment law, see Yannaca-Small, K. (2018) ‘Who is Entitled to Claim? The Definition of Nationality in Investment Arbitration’, in Arbitration under International Investment Agreements: A Guide to the Key Issues, 223–265, Oxford: OUP; McLachlan, C., Shore, L. & Weiniger, M. (2017) International Investment Arbitration (2nd edn), Oxford: OUP, 156–216; and Baltag, C. (2012) The Energy Charter Treaty: The Notion of Investor, Alphen aan den Rijn: Wolters Kluwer. 24 ICSID Case No ARB/19/4, Canepa Green Energy Opportunities 1, S.a.r.l. and Canepa Green Energy Opportunities II, S.a.r.l. v Kingdom of Spain, Decision on the Proposal to Disqualify Mr Peter Rees QC, 19 November 2019, paras 68, 20.

34 Chapter 2: States, Investors, and Energy Agreements the hydrocarbons sector. For example, there are IOCs that take risks on the exploration for hydrocarbons and if successful, they would normally seek to realize a gain as soon as possible, by selling a de-risked asset to a willing and better capitalized buyer and moving on to another prospect, rather than engaging in the search for significant investment capital to develop, produce and transport the deposit to the market. The business model of such a ‘first mover’ investor is not new, and this pattern of behaviour is well established . In mining the equivalent practice is commonly known as ‘flipping’.25 2.27

A different twist to the linkage of IOCs with the notion of long-term investment is becoming more evident in oil and gas projects. After many years of investment, the IOC may lose interest in what has become a ‘late-life’ investment. It may seek to exit by selling its investment to an investor with an interest in mature assets, often described as the midstream segment of the industry (covering the transportation, storage and processing of oil and gas and derivative products). If one takes the UK North Sea as an example of this, it is private equity firms that have taken on this role as buyers of these assets.26 Ownership of assets such as transportation networks, and storage and processing facilities for oil and gas has been carved out of integrated upstream businesses and made available to third parties such as infrastructure fund buyers, sometimes jointly with operating companies, a phenomenon also evident in the USA. Such transfers generate immediate cash for the seller and offer potential for fresh capital investment in the infrastructure. The long-term perspective of such companies is likely to differ from that of a typical IOC,27 not least since the assets themselves are already at a late-life stage. This kind of exit strategy for large IOCs is likely to become more common with the maturity of offshore hydrocarbons fields in various parts of the world, and a reduction in retained projects as a response to the energy transition.

2.28

There are two further observations that may be made about the classic IOC energy investors. Firstly, their operations co-exist with those of large internationally operating state-owned or controlled energy companies from the Middle East, China, India and Russia, which have a predominant share of global oil and gas reserves and regionally in most of the established producing areas of the globe. These state entities also compete for prospective and producing oil and gas acreage with privately-owned oil and gas firms in many parts of the developing world. Secondly, all fossil-fuel based energy companies are now operating in a context of long-term energy transition, in which their business model—irrespective of corporate ownership or control—is thought by some investment fund managers, international banks, shareholders, and civil society groups to be vulnerable to its impact on environmental and 25 This can give rise to tax issues if the host government does not have a fiscal regime in place for capturing some of the gain realized by such sales (see c hapter 8). Arguably, an exit tax should not be imposed on such ‘first movers’, because it would discourage investment in future by similar risk-hungry investors. This argument becomes less persuasive however when the capital gain reaches an exceptionally large amount, driven by a rise in the commodity price for example. 26 A private equity firm raises its capital from institutional investors such as pension funds, insurance companies, endowments and high net worth individuals, rather than from selling shares in the stock market. It provides finance (including borrowed money) in return for an equity stake in potentially high growth companies and helps to build them to achieve that potential. Typically, they will seek to monetize their investments quickly (within say three years), have the freedom to repatriate funds, and seek attractive tax terms. 27 The traditional investment approach of private equity involved investment in assets that produce consistent, low-risk dividends to investors, such as bridges, toll roads, and ports. This has expanded to non-transport related sectors such as energy infrastructure, pipelines and renewable projects. These are assets that resemble core infrastructure and produce long-term, stable cash flows underpinned by long-term contracts, are capital intensive, and have high barriers to entry, making it hard for other companies to compete. The funds established for such investments can be exceptionally large, such as US$22 billion: Goldman Sachs, ‘The Evolution of Infrastructure Investing’, 4 February 2020.

B. The Foundations of Partnership 35 social sustainability, and to actions to mitigate it, at least in the medium to long term. Clearly, this view has implications for prudent decision-making with respect to long-term commitments to invest. Investor Type 2 A second kind of international investor in energy is the utility for the provision of public services such as electricity and gas supply. This is usually subject to extensive government regulation. For many years, such utilities were state-controlled monopolies and were the most domestic or nationally focused of energy investors. This pattern changed with widespread liberalization and privatization of electricity and gas transmission and distribution in many countries in the 1990s. This triggered a wave of foreign investment in a few countries in Latin America and in Central and Eastern Europe. International companies that specialize in the supply of these forms of energy, including the provision of new infrastructure, have become increasingly prominent. An indication of the change can be gained from the fact that while only seven figured among the top one hundred in 1997, this had increased to twenty by 2006, including EU-based utilities such as EDF, E.On, Suez, and RWE.28

2.29

Natural gas is commonly transported through pipeline networks, which exhibit marked natural monopoly characteristics. As a result, transportation is often carried out either by government monopoly companies or by a regulated utility company. Much of the continental European gas trade, for example, is in the hands of state-owned or controlled companies, such as Gazprom or Naftagaz, as sellers or buyers, giving the trade an inherently political character, which impacts on investment patterns and dispute resolution. Some state-owned companies play an important role as transit companies and a portion of the gas supplied may be treated as a payment ‘in kind’ for transit to other states. This political character of the transportation sector is taken a step further when transnational gas pipeline networks are involved, such as Nord Stream 2 in Europe. It sometimes leads to the conclusion of complex state-to-state agreements with stability provisions (see chapter 3 for examples from West Africa and Europe).

2.30

Natural gas and liquefied natural gas (LNG) have grown dramatically in importance largely because of the use of gas in the generation of electricity (as a less polluting alternative to coal). This has encouraged investment in the transmission and distribution networks for gas and electricity in some parts of the developing world, making utility provision part of the international energy investment scene. Many of these investments were made possible by supporting the grant of licences and concessions to foreign investors with assurances of stability, legal guarantees of a rate of return in a highly regulated sector, and treaty-based protections, such as BITs and other IIAs. In contrast to the energy investors engaged in oil and gas exploration and production, these investors commit capital to industries that are subject to detailed regulation, are relatively indifferent to geology, affect large numbers of consumer/citizens through their operation, and cannot produce the kind of rent or super- profit that creates competition among the parties for shares of it. In addition, the investors require the state to retain responsibility for the management of safety and quality standards over the long term, as well as pricing formulae, in contrast to industries that are private and competitive. The risk profile of investments made under a regulatory regime is very different from those made by Investor Type 1.

2.31

28 UNCTAD (2008) World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, 84.

36 Chapter 2: States, Investors, and Energy Agreements 2.32

Investor Type 3 Another category of utility investor has emerged as governments have created access to or established their renewable energy sector. Typically, these investments are much smaller in scale than conventional energy projects (whether power projects or fossil fuel ones). They tend to cluster projects in wind farms or solar parks and are also more local in their operations, not least since their customer base is local or regional. Where they have a joint venture character, one or more of the investors may be foreign. Investors are often institutional ones,29 such as pension funds, insurance companies, endowments, and sovereign wealth funds. Investment has been driven by policy incentives offered by states, such as tax credits, capital subsidies, feed-in tariffs, feed-in premiums, and tradeable green electricity certificates. In the UK, a system of ‘contracts for differences’ offers a fixed price system so that renewable generators are offered protection from power price volatility. Some investors have established vehicles for investment in wind or solar power schemes, mostly in developed economies and China. These may be entirely new companies with complex forms of ownership, involving institutional investors such as insurance companies or pension funds. The companies may have a significant state shareholding, albeit originating from a sovereign wealth fund.

2.33

Apart from conventional risks in building and operating renewable energy assets, these energy sources have high up-front capital requirements and a significant variability, as well as policy and operational risks.30 Generally, the cost of managing intermittency in generation is borne by ratepayers who fund additional investment in grid networks, back-up capacity, and local distribution systems. This is quite different from the risk profile of Investor Type 1 above, for example, which sells hydrocarbons into an international market.

2.34

Investor Type 4: joint ventures Typically, most investors will spread the investment risk by forming joint ventures. Even the very largest IOC will join with another IOC of similar or smaller scale if there are perceived advantages in risk sharing or where one has a greater technical expertise or capital resources or strategic interest than the other: for example, in deep water development and production from a particular country or region. Energy investors generally are also prone to involving other investors as stakeholders to deter host states from making decisions that are adverse to their interests. This participation by what one observer calls ‘prominent victims’ can take one or more of four main forms.31 It can involve the participation of international financial institutions such as the World Bank or the

29 These institutional investors are ‘large-scale investing entities which pool money to purchase securities and real property or investment assets, or to provide loans’: International Renewable Energy Agency (IRENA) (2016) Unlocking Renewable Energy Investment: The Role of Risk Mitigation and Structured Finance, Abu Dhabi: IRENA, 25. The authors note the long-term investment horizon of these groups. Insurance companies ‘generally purchase medium and longer-term assets and are less sensitive to liquidity issues than banks. Their investment horizon is well matched to longer-term renewable energy projects (15–20 years).’ Pension funds manage liabilities that are ‘rather long-term, in some cases extending over more than 40 years’. Endowments and foundations receive capital from trusts, donations and investment returns: this kind of investor ‘has actively advocated renewable energy investment because many endowments and foundations seek to align their interests with their clients, who are sensitive to environmental and social governance issues’. Sovereign wealth funds ‘receive capital from government taxes or central bank reserves. These funds typically make long-term investments that will benefit the country’s economy or citizens’: ibid. 30 There are four main risk categories: policy (retroactive support cuts, for example); construction (loss, damage and start-up delays); operation (loss, damage and failure; business interruption); and market (weather creating the risk of variability in revenue due to variability in output; curtailment due to regional grid oversupply; power price where the revenue varies according to wholesale price volatility; counterparty (default by counterparty in a power purchase agreement): Swiss Reinsurance (2013), ‘Profiling the risks in solar and wind’, Zurich. 31 Woodhouse, E.J. (2006) ‘The Obsolescing Bargain Redux? Foreign Investment in the Electric Power Sector in Developing Countries’, NY J Int’l L & Policy 38, 121.

B. The Foundations of Partnership 37 European Bank for Reconstruction and Development (EBRD), either directly or as guarantors of commercial loans; political risk insurance such as the US OPIC; co-investment in the form of equity with an international financial institution; and involvement of commercial banks, which have a stake in financing host states around the world. So, the energy investor may well be a joint venture company rather than a single corporate entity. The contractual arrangements that result from such joint ventures are discussed below. Other examples of such joint ventures are found in the construction and operation of international pipelines. For example, the Baku-Tbilisi-Ceyhan oil pipeline involved international oil companies, the European Bank for Reconstruction and Development and the Turkish state company, BOTAS. Investor Type 5: the mining company Although mining companies do not strictly speaking fall within the category of ‘energy investors’, with the notable exception of investors in coal, they are increasingly engaged in supplying a range of materials, such as cobalt, manganese, and lithium, that are essential to the production of wind turbines, solar panels, batteries, and electric vehicles that are part of the ‘energy transition’ to a low carbon global economy. Renewable energy technologies are much more material-intensive than their traditional fossil fuel counterparts. Mining companies also engage in ‘extractive’ activities very similar to those of oil and gas exploration and production companies, and hence are often classified by international aid donors along with such investors to flag up the resource-based character of their core activities.32 With such similarities, it is not surprising that their operations often generate disputes between investors and host states and arbitral awards that have relevance to the kind of issues arising in the study of energy investment. Many of the issues of governance, transparency, and sustainability are as common to mining as they are to oil and gas. They will therefore be referred to from time to time in this book. One caveat should be entered, however: mining investors have a propensity to become parties to disputes with local communities or indigenous peoples, a feature that is quite rare in the hydrocarbons sector or indeed energy generally unless large networks are involved.

2.35

Briefly, the mining investor can be grouped into large, internationally operating companies with a mid-tier level below it; so-called junior companies which are numerically the largest group, and national or state mining companies of which there are around eighty.33 In the first category, typical examples are Anglo American, BHP Billiton, Rio Tinto, Vedanta, and Glencore, which are involved at every stage of the supply chain and have an interest in one or several types of minerals. They focus on projects that have ‘large mineral deposits, long operational life, and low producing costs, which remain competitive throughout business and commodity cycles’. Below this is a second tier of mining companies that have annual revenues of between US$50 million and US$500 million, less geographically spread and focused on fewer commodities. The junior mining company is formed, sometimes by venture

2.36

32 Extractives activities take resources from below the ground in contrast to renewable industries that typically rely on natural resources located above the surface such as the sun and wind. Examples of international organizations’ usage include Eleodoro Mayorga Alba (2009), Extractive Industries Value Chain, Extractive Industries for Development Series 3, Washington DC: The World Bank, (applying Michael Porter’s approach to the oil, gas, and mining industries); Cameron & Stanley (2017) (which built on Alba’s work in a comprehensive analysis of the three sectors); and the UK Department of International Development’s Extractives Hub project: (an example of engagement with developing country governments built on the idea that such industries have development potential for low-income countries). Most famously, there is the multilateral body, The Extractives Industry Transparency Initiative: . 33 This paragraph draws on data from Burnett, H.G. & Bret, L.A. (2017) Arbitration of International Mining Disputes, Oxford: OUP, 11–18; and Cameron & Stanley (2017) at 49–51.

38 Chapter 2: States, Investors, and Energy Agreements capital or private equity, to explore for and mineral deposits and potential mines, often in high-risk areas, with a view not to developing or operating them but rather to selling on a successful discovery. National mining companies vary in size, commodity focus, geographical reach, and degree of independence from the state. Some operate internationally such as Chinalco (China), Vale (Brazil), and Norilsk Nickel (Russia).

2.37

2.38

(b) The investor: common issues

Indirect claims In energy investments there are many examples of companies structuring their investment in a country in such a way that the parent company is separated from the investor by an intermediate level (or levels) of ownership. The investor may create a string of affiliates and subsidiary companies as investment vehicles to ensure that the maximum legal and economic benefits will accrue to its shareholders from that investment. In doing so, an investor may certainly be seeking favourable BIT protection, but it may also be seeking protection under double taxation treaties: ‘aggressive’ structuring to gain benefits under the latter has long been common in the international oil industry (and in many other internationally operating industries), as many tax authorities are aware. This practice may also be driven by attempts to limit or prevent the parent company from exposure to corporate liability. The use of intermediate or special purpose vehicles in a protected jurisdiction has become increasingly common as a way of treaty shopping (as distinct from forum shopping) by investors (using a specific treaty as a ‘gateway’ through which to channel an investment to obtain the particular benefits it offers), and is evident in several of the cases examined in Part II.34 This kind of prudent ex ante planning often starts when the home state of the investor does not provide a level of protection that the investor deems satisfactory. It does raise an issue of whether an investor incorporated in one state (eg Germany) but controlled by a company in another state (eg the USA) can acquire protection under a BIT concluded between the first state and another, third state (eg Bolivia), without having any significant presence in the first country (Germany in this example) as a business, attracting the pejorative description of a ‘briefcase company’. The answer will depend upon the substantive provisions of the applicable BIT and whether it contains wording relevant to an indirect investment. In several arbitrations, challenges have been made against the standing of claimants because the claimant is only an indirect shareholder in the business that had a contract with the state that had concluded the relevant BIT. There is a string of ICSID cases that have established that indirect (as well as direct) shareholders may bring a claim under a BIT.35 However, it 34 Many of the legal issues relating to the ‘investor’ are discussed comprehensively by McLachlan, Shore, and Weiniger (2017) at 267–358; also Yannaca-Small, K. (2018) ‘Who is Entitled to Claim? The Definition of Nationality in Investment Arbitration, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP, 223–265. 35 Enron v Argentine Republic, ICSID Case No ARB/01/3. Decision on Jurisdiction, 14 January 2004, IIC 92 (2004); Siemens AG v Argentine Republic, ICSID Case No ARB/02/8, Decision on Jurisdiction, 3 August 2004; Azurix v Argentine Republic, ICSID Case No ARB/01/12, Decision on Jurisdiction, 8 December 2003, IIC 23 (2003); Gas Natural SG SA v Argentine Republic, ICSID Case No ARB/03/10, Decision of the tribunal on Preliminary Questions on Jurisdiction, 17 June 2005, IIC 115 (2005); Noble Energy Inc and Machalapower Cia Ltd v Ecuador and Consejo Nacional de Electricidad, Decision on jurisdiction, ICSID Case No ARB/05/12; IIC 320 (2008), 5 March 2008; Compañia de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment, 3 July 2002, IIC 70 (2002), para 50; Asian Agricultural Products Ltd v Republic of Sri Lanka, ICSID Case No ARB/87/3, Final Award, 27 June 1990, para 3 (where the tribunal found an investment when the claimant was merely ‘participating in the equity capital’ of a host state entity); Antoine Goetz v République du Burundi, ICSID Case No ARB/95/3, Award, 10 February 1999, IIC 16 (1999), para 89 (the tribunal upheld the right to sue under a BIT not only by a wronged company but also by its shareholders, described as the ‘true investors’); Lanco International v Argentine Republic, ICSID Case No ARB/97/6, Decision on Jurisdiction, 8 December 1998, IIC 148 (1998), para 10 (where the tribunal found an investment despite the fact that the Claimant

B. The Foundations of Partnership 39 may be asked how indirect can a shareholder be and still qualify as an investor for treaty purposes? In the case of Enron v Argentina, the tribunal held that there should be a cut-off point in the string of companies that had to be considered. In this case, the Tribunal also found that the cut-off point had not been reached since Argentina had expressly invited the shareholders to make the investment and, moreover, the investors had decision-making power in the management of the local company. There does not appear to be any authority on where such a cut-off point might lie, except that it is not reached if there are only two intermediate layers of corporations between the direct shareholders and the indirect investor (that is, Company X is wholly and directly owned by Company Y, which is in turn wholly and directly owned by Company Z).36 Restructuring to benefit from treaty protection Relevant to this assessment is the point at which a company has carried out its restructuring to benefit from treaty protection. This can be decisive. In the case of Phoenix Action v Czech Republic,37 the investor restructured from a Czech entity (involved in the metal-trading business) to an Israeli one while a dispute was ongoing with the Czech government. The tribunal refused to accept jurisdiction on the ground that this was not a bona fide transaction and amounted to an abuse of the system of international ICSID investment arbitration; the transaction was ‘simply a rearrangement of assets within a family, to gain access to ICSID jurisdiction to which the initial investor was not entitled’.38 Other ICSID cases have reached a similar conclusion: that a corporation may not restructure for the sole purpose of gaining access to ICSID jurisdiction, once the acts which the investor considers to be causing damages to its investment have occurred.39 The decisive question for a tribunal will be the moment at which an investor acquires protection (because of restructuring).40 In circumstances such as these, when a question arises,

owned only 18.3 per cent of the capital stock of the host state entity); Aguas del Tunari SA v Republic of Bolivia, ICSID Case No ARB/02/3, ICSID Review-FILJ 450 (2005) paras 206–333. In CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/8, Decision on Jurisdiction, IIC 64 (2003), 17 July 2003, the tribunal held that there was ‘no bar in current international law to the concept of allowing claims by shareholders independently from those of the corporation concerned . . . even if those shareholders are minority or non-controlling shareholders’ (at para 48). This issue is discussed by Schreuer, C. (2005) ‘Shareholder Protection in International Investment Law’, TDM 2(3). 36 Noble Energy, para 82. The pattern of holdings that is implied here underlines another point: it would make no sense to argue that there can be only one investor to each investment. The tribunal in RREEF v Spain held that ‘[t]‌he very concept of an indirect investor and an indirect investment contains within it the concept that there will be a chain of ownership and control that involve more than one entity’: RREEF Infrastructure (GP) Ltd and RREEF Pan-European Infrastructure Two Lux S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/30, Decision on Jurisdiction, 6 June 2016, para 142. The first claimant indirectly controlled, and the second claimant indirectly owned and controlled the assets, making each of them an investor under the ECT (para 147). 37 Phoenix Action Ltd v The Czech Republic, ICSID Case ARB/06/5, IIC 367 (2009), 15 April 2009. 38 Phoenix Action, para 140; compare the decision in Société Générale v Dominican Republic, UNCITRAL, LCIA Case No UN7927, Preliminary Objections to Jurisdiction, IIC 366 (2008), September 19, 2008 (‘the transaction in question must be a bona fide transaction and not devised to allow a national of a state not qualifying for protection to obtain an inappropriate jurisdictional advantage otherwise unavailable by transferring its rights after-the-fact to a qualifying national’: para 110). 39 Banro American Resources Inc and Société Aurifère du Kivu et du Maniema, SARL v Democratic Republic of the Congo, ICSID Case No ARB/98/7, Award, IIC 26 (2000), 1 September 2000; Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, Award, IIC 170 (2002), 15 March 2002. 40 In Philip Morris Asia Limited, for example, the tribunal held that ‘the commencement of treaty-based investor-State arbitration constitutes an abuse of right (or abuse of process) when an investor has changed its corporate structure to gain the projection of an investment treaty at a point in time where a dispute was foreseeable’. It defined the latter as ‘when there is a reasonable prospect that a measure that may give rise to a treaty claim will materialize’: Philip Morris Asia Limited v The Commonwealth of Australia, Award on Jurisdiction and Admissibility, 17 December 2015, PCA Case No 2012-12, para 585.

2.39

40 Chapter 2: States, Investors, and Energy Agreements tribunals must ask when or whether an investor is entitled to treaty protection. Usually, they will address this by examining the wording of the treaty under which the claim is being made. 2.40

Some of these issues appeared in Mobil v Venezuela at the jurisdiction stage of the case.41 ExxonMobil, a US company, restructured its holdings so that it owned a company in The Netherlands, which in turn owned a US company, which in turn owned a company based in the Bahamas. The latter owned an interest in an oil project in Venezuela. When the dispute reached arbitration, Venezuela claimed that the indirect character of the interest held by the Dutch holding company disqualified it from relying upon the Netherlands-Venezuela BIT. The objection failed, and the tribunal held that: Venezuela Holdings (Netherlands) owns 100% of its US and Bahamian subsidiaries. Those subsidiaries are thus controlled directly or indirectly by a legal person constituted under the law of the Netherlands. Accordingly, they must be deemed to be Dutch nationals under article 1(b)(iii) of the BIT.42

There was no doubt that the restructuring was carried out to gain access to ICSID arbitration through the Netherlands-Venezuela BIT, but the tribunal found this to be a ‘perfectly legitimate goal as far as it concerned future disputes’.43 It would not be acceptable however if it had been carried out with a view to gaining jurisdiction for pre-existing disputes44 (such as was the case in Phoenix Action v Czech Republic, deemed by the tribunal to be ‘an abusive manipulation’45 ). 2.41

In ConocoPhillips v Venezuela the tribunal faced a similar situation and concluded that a corporation was not precluded from changing its nationality to benefit from the protection of another country’s laws.46 However, they added that ‘in all systems of law whether domestic or international, there are concepts framed in order to avoid misuse of the law’, including good faith and abuse of right.47 The circumstances in which the restructuring took place had to be examined carefully to ensure that good faith was respected.

2.42

Corporate nationality A more clear-cut example of a practice that challenges the limits of treaty protection arises when a national of one state restructures as a foreign entity and subsequently brings an action against its own state through the vehicle incorporated in another state with which its ‘home’ state has a BIT. In other words, a domestic investor makes a claim against its own state, using a foreign incorporated structure and rules that were designed to promote and support foreign investment. This practice, sometimes referred to as ‘round- tripping’,48 was a factor in the case of The Rompetrol Group v Romania49 and a little earlier in Tokios Tokelés v Ukraine.50 In the former case, the Respondent argued that the dispute 41 Mobil Corp Venezuela Holdings BV v Venezuela (Decision on Jurisdiction) (ICSID Case No ARB/07/27, IIC 435 (2010). 42 Ibid, at para 153. 43 Ibid, at para 204. 44 Ibid, at para 205. 45 Phoenix Action v Czech Republic, at para 144. 46 ConocoPhillips Petrozuata BV v Venezuela (Decision on Jurisdiction) ICSID Case No ARB/07/30, IIC 605 (2013). 47 Ibid, at para 273. 48 Maria Borga describes ways of measuring such investment flows, drawing upon OECD experience: ‘Not all foreign direct investment is foreign: the extent of round-tripping’: Borga, M. (2016) Columbia FDI Perspectives, no 172, 25 April 2016. 49 The Rompetrol Group NV v Romania, ICSID Case ARB/06/03 18 April 2008, IIC 322 (2008), Decision on Respondent’s Preliminary Objections on Jurisdictional Admissibility. 50 Tokios Tokelés v Ukraine, ICSID Case No ARB/02/18, Decision on Jurisdiction, IIC 258 (2004), 29 April 2004. A Lithuanian corporation owned by Ukrainian nationals was held to be a foreign investor in a claim against the

B. The Foundations of Partnership 41 by TRG, a holding company incorporated in the Netherlands, was not brought by a foreign investor nor did it concern a foreign investment, since the source of its funds was Romania and the complaint was being made by a Romanian national in relation to business activities in Romania. It therefore fell within the jurisdiction of Romania and its courts and not that of an ICSID tribunal. The tribunal held that since the ICSID Convention did not define ‘nationality’ in Article 25, it was left to the contracting parties to the relevant BIT to determine which persons and entities would be treated as their ‘nationals’. The test to be applied by the tribunal was therefore one of applying the definition of national status in the BIT to establish its jurisdiction. In this respect, none of the alternative tests advanced by the Respondent— corporate control rather than ownership; effective seat (siège réel rather than siège social) or origin of capital—had any part to play in the way in which nationality was determined under the BIT.51 In the Tokios case the majority held that international law did not permit it to apply a control test. In the ICSID Convention no method was prescribed for assessing the nationality of juridical entities nor did the relevant BIT in this case, other than establishment under Lithuanian law (the BIT was one between Ukraine and Lithuania). The tribunal was able to note that under other BITs and the ECT Ukraine was a party that had expressly denied the benefits of treaty protection to corporations owned or controlled by nationals of a third state when there was no evidence of substantial business activities in the contracting state in which they were organized. This had not been done in this BIT, leaving the tribunal no choice but to interpret the BIT literally, consistent with its context and consistent with the concept in the ICSID Convention (that is, that nationality is determined on the basis of the law and the place of incorporation).

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This approach was followed in a mining case, Gold Reserve v Venezuela, when the tribunal rejected the respondent’s argument that Gold Reserve, while incorporated in Canada, was not entitled to claim under the Canada-Venezuela BIT because its management was headquartered in the USA and it was effectively a shell company.52 The BIT’s nationality requirement for juridical persons was incorporation in Canada, which it met. The tribunal’s assessment was clear: ‘As many previous ICSID tribunals have found, where the test for nationality is “incorporation” as opposed to control of a “genuine connection”, there is no need for the tribunal to enquire further unless some form of abuse has occurred’.53

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(c) The ECT approach

On the face of it, the ECT takes a broad approach to the definition of ‘investor’ in Article 1(7) (a): a natural person ‘having the citizenship or nationality of or who is permanently

Ukraine since it was ‘manifestly’ not created for the purpose of gaining access to ICSID arbitration under the BIT against the Ukraine: para 56. 51 Rompetrol, para 110. Of course, the Respondent could have included a definition in the BIT that limited protection to legal persons constituted under a contracting state with substantial activities or real economic activity in that state, but it did not do so. 52 Gold Reserve Inc v Venezuela (Award) ICSID Case No ARB(AF)/09/1 (2014). 53 Ibid, at para 252. However, this view was not taken by the tribunal in an ECT case, Alapli Elektrik BV v Republic of Turkey, ICSID Case No ARB/08/13, Excerpts of Award, 16 July 2012: ‘to establish status of an Investor, such as to create jurisdiction pursuant to these investment treaties, something more is required than simple incorporation under Dutch law . . . [lacking] an actual contribution to some Turkish investment, however, the Dutch incorporation creates no entitlement to protection as an Investor subject to the jurisdiction of this Tribunal’ (at paras 356–358). On this view, an investor is a person that makes an investment ‘in the sense of an active (meaningful) contribution’ (at paras 349–530).

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42 Chapter 2: States, Investors, and Energy Agreements residing’ in the contracting party in accordance with its applicable law, and a company or other organization ‘organized in accordance with the law applicable in that Contracting Party’. Under Article 1(7)(b), investor means ‘with respect to a ‘third state’, a natural person, company or other organization’, which fulfils the conditions set out in (a) for a contracting party. The reference to ‘the law applicable’ in that Contracting Party’ follows an established principle of international law: nationality is defined by each state’s domestic laws. The extension of coverage to permanent residents is in line with the notion of a common energy space that guides the ECT.54 The investor only has to be ‘organized’ in accordance with the applicable domestic law and is not subject to additional requirements such as having its effective management in the state, or its headquarters there.55 Some countries will only extend protection to companies incorporated in third states56 if control or ownership is exercised by investors located in a contracting state. In the ECT however, the requirements are minimal. As Professor Crawford has noted: The Treaty imposes no further requirements with respect to shareholding, management, siege social or location of its business activities . . . Companies incorporated in Contracting Parties are embraced by the definition, regardless of the nationality of shareholders, the origin of investment capital or the nationality of directors or management.57 2.46

Article 17(1) qualifies this protection of the investor by allowing a contracting party to deny the benefits of the treaty to a legal entity ‘if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized’. Several tribunals have considered the denial of benefits provision in relation to the notion of a covered investor under the ECT (see c hapter 5). The first case to do so was Plama v Bulgaria, where the tribunal noted that Article 17(1) did not operate to deny all benefits to the ECT but was expressly limited to a denial of the 54 The Guide to the Energy Charter Treaty in the 1996 official edition of the ECT notes that the Charter’s original concept included the goal ‘to build an energy community between the two sides of the former iron curtain, based on the complementarity of Western markets, capital and technology and the natural resources of the East’, at p. 12. It has its limits, however. As the tribunal in Cem Cengiz Uzan v Republic of Turkey noted, the claimant may have been permanently resident in another country but that did not allow him to commence an arbitration against a contracting state of which he is a national or citizen (in this case, Turkey). He still had to establish that he was an ‘Investor of another Contracting Party’ or ‘an international Investor’ by virtue of Article 26(1): SCC Case No V 2014/023, 20 April 2016, para 146. 55 This differs from the ASEAN Agreement’s provision on the investor at Article 1(2). There, the ‘company’ means ‘a corporation, partnership or other business association, incorporated or constituted under the laws in force in the territory of any Contracting Party wherein the place of effective management is situated’ (cited in E. Gaillard, ‘Investments and Investors covered by the ECT’, in Ribeiro, C. (ed) Investment Arbitration and the Energy Charter Treaty (2006), Washington DC: Juris, 54-73, at 68); and Mercosur, Article 1(2) (c) which states that investor shall mean inter: ‘all legal persons established in the territory where the investment is made, and which are effectively controlled, directly or indirectly, by legal or natural persons as defined in (a) and (b) above’. Cited in Gaillard (2006). 56 The term ‘third state’ is not defined in the ECT, but the tribunal in Amto v Ukraine tried to provide it. The term ‘is used in Article 1(7) in contradistinction to ‘Contracting Party’ which suggests that a third state is any state that is not a Contracting Party to the ECT’: Limited Liability Company Amto v Ukraine, Arbitration No 080/2005, Final Award, 26 March 2008, para 42. A similar view was confirmed by the tribunal in Libananco Holdings Co Ltd v Republic of Turkey: ICSID Case No ARB/06/8, Award, 2 September 2011, para 552. 57 Veteran Petroleum Ltd (Cyprus) v Russian Federation, PCA Case No 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para 126. The tribunal is quoting Crawford’s on the ECT: ‘Energy Charter Treaty Arbitration: Jurisdiction Issues, 22 June 2006, at para 126 (cited in Geraets, D. & Reins, L. (2018), ‘Definitions’, in Leal-Arcas, R. (ed) Commentary on The Energy Charter Treaty, 14–48, at 39); a similar view was taken by the Swiss Federal Tribunal in an unsuccessful attempt to set aside the award in Natland et al v The Czech Republic: the ECT definition of investor requires only that it be foreign so incorporation of a corporate entity in a foreign state is sufficient to qualify as an investor: GAR, 13 July 2020: ‘Swiss Federal Tribunal sees no abuse of rights in corporate restructuring, and declines to set aside liability award in Czech renewables dispute’.

B. The Foundations of Partnership 43 advantages under Part III of the ECT,58 and therefore did not work to exclude the arbitration clause of Article 26 (which would have eliminated a whole class of investors from the scope of the ECT). A different issue was whether the denial of benefits clause operated automatically and requires no further action by the host state. The tribunal in Plama rejected this,59 an approach that has been affirmed subsequently.60 In its view, the covered investor enjoys the advantages of Part III unless the host state exercises its right under Article 17(1) ECT; and a putative covered investor has legitimate expectations of such advantages until that right is exercised. A putative investor therefore requires reasonable notice before making any investment in the host state whether or not that host state has exercised its right under Article 17(1) ECT . . .61

As Gaillard notes, Article 17(1) ‘establishes the conditions under which a State may deny the benefits of Part III of the Treaty to a covered investor’.62

(3) The investment The notion of what constitutes an investment in international law has proved highly controversial,63 affecting how it is understood in relation to specifically energy investments. Treaties applicable to investment define the term ‘investment’ differently, but for the most part they adopt an asset-based definition. Generally, an investment is a ‘commitment of resources by a physical or legal person to a specific purpose in order to earn a profit or to gain a return’.64 An international or foreign investment is ‘a transfer of tangible or intangible assets from one country to another for the purpose of their use in that country to generate wealth under the total or partial control of the owner of the assets’.65 Many of the usual tests of ‘investment’ apply in particularly vivid ways to energy investments: how and why they are made, how they operate and how they may generate disputes, although lawyers, economists, and lenders may apply the tests differently.66 The reasons for this lie in those six characteristics identified in chapter 1 as typical features of energy investments (their international character; the large size and the sunk nature of the investment once made; the long period that is usually required before there is a recovery of the investment and a projected return on it; the direct or indirect participation or significant influence of the state or some of its agencies; its vulnerability to price volatility; and their complexity). Some of these features remind us that in practice investment is often a process or series of actions, with the value and risk profile of 58 Plama Consortium Limited v Bulgaria (Plama), Decision on Jurisdiction, 8 February 2005, para 149. 59 It argued that denial of benefits required the right to deny being exercised by positive action taken by the host state: Plama, paras 155–158. 60 Khan Resources Inc, Khan Resources B.V. and CAUC Holding Co Ltd v Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012, at para 420: ‘[i]‌f Article 17(1) were to provide an automatic denial of benefits, it would effectively create an exception to this broad definition (ie of the investor in Article 1(7) ECT). Such exception would more logically be found within the definition at Article 1(7) itself.’ 61 Plama, para 161. 62 Gaillard (2006) at 73. 63 cf. ‘. . . the question of what constitutes an investment [. . . is . . .] a question that continues to elicit a complex, and at times uncertain, answer’:Yannaca-Small, K. & Katsikis, D. (2018) ‘The Meaning of “Investment” in Investment Treaty Arbitration’ in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements, Oxford: OUP, 266. 64 Salacuse (2010) at 18. 65 Sornarajah, M. (2017) The International Law on Foreign Investment (4th edn), Cambridge: CUP, 11. 66 Among the many available discussions of ‘investment’ in international investment law, see McLachlan, Shore, and Weiniger (2017) 217–263; and Yannaca-Small and Katsikis (2018), 266–301.

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44 Chapter 2: States, Investors, and Energy Agreements the commitment significantly higher at some stages of the process than at others. Given the very long duration typically present in making and operating energy investments, investors often have concerns about the credibility of host state promises and legal guarantees vis-à-vis those investments. The significance of these features—and this concern—is that an energy investment will very often be buttressed by robust and complex legal arrangements designed to manage the investor–state relationship and sustain the bargain struck at the outset.

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(a) The ECT approach

The ECT provides an obvious starting point from which to define the legal meaning of ‘investment’ in the energy sector. The text strives to be both comprehensive and clear. An investment, according to the ECT, covers ‘every kind of asset, owned or controlled directly or indirectly by an Investor’,67 and is associated with an Economic Activity in the Energy Sector; in Article 1, paragraph 5, such economic activity comprises ‘the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products’.68 These activities are declared in Article 1, paragraph 4, as meaning the items listed in Annex EM. The latter covers nuclear energy, coal, natural gas, petroleum and petroleum products, and electrical energy. There are a few, barely significant, exceptions such as certain types of oil products and fuel wood, as well as charcoal in Annex NI. It should also be noted that the second of the ‘Understandings’ with respect to the ECT provides seven illustrations of what economic activity is in the energy sector. The list includes familiar activities such as prospecting and exploring for oil, gas, coal and uranium, and construction and operation of power generation facilities, but also includes the removal and disposal of wastes from energy-related facilities and decommissioning of energy-related facilities, including oil rigs, oil refineries, and power generating plants. As a defined term in Article 1(6) ECT, an investment includes: (a) tangible and intangible, and moveable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; (b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; (c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment; (d) Intellectual Property; (e) Returns;69 (f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.70

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Article 1 notes that a change in the form in which assets are invested does not affect their character as investments. Further, Article 1, paragraph 6, of the ECT expressly states that the term ‘Investment’ ‘refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting 67 Article 1(6). 68 ECT, Article 1(6) and (5). 69 This is further defined in Art 1(9) as ‘the amounts derived from or associated with an Investment, irrespective of the form in which they are paid, including profits, dividends, interest, capital gains, royalty payments, management, technical assistance or other fees and payment in kind’. 70 Upper case used in the ECT text but not here.

B. The Foundations of Partnership 45 Party in its Area as “Charter efficiency projects” and so notified to the Secretariat.’ However, while these provisions on investment protection for energy efficiency projects do exist, they have never been utilized by the Contracting Parties, and no notification to the Secretariat has taken place. With such a broad definition of investment, it may be wondered whether the scope of an investment under the ECT can extend beyond that in ordinary usage of the term.71 Discussions on the meaning of ‘investment’ have most often occurred in the context of cases brought under the ECT before ICSID since the ICSID Convention leaves the term undefined. In the ECT context, the text of Article 1(6) and especially 1(6)(f) suggests an overly broad interpretation is intended. Some indications of a more limited scope are available. The third of the Understandings refers to the investor’s ability to exercise substantial influence over the management and operation of the investment, suggesting that an investment is more than a mere right to receive money. This is however only a clarification about the meaning of control of an investment, not the meaning of ownership. A wide definition of investment has been upheld in at least one notable award, Petrobart v Kyrgyz Republic.72 Further, in Yukos v Russia the tribunal found that the ECT did not include requirements on either the origin of capital or the need to inject foreign capital.73

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Low carbon In recent years, there has been some discussion of the ECT’s application to low carbon investments.74 As low-carbon and climate-change-related investments (such as various forms of renewable energy) often require incentivization, there is a need to balance the promotion of these investments with the core provisions on investment protection in the ECT, such as non-discrimination. The ECT text includes several provisions with direct applicability to the promotion and protection of low-carbon and climate change-related programmes. For example, the Preamble to the ECT expressly recalls the UNFCCC. This reference to the UNFCCC in that part of the ECT is significant since, according to Article 31 of the Vienna Convention on the Law of Treaties, the interpretation of provisions in the ECT should be read in the context of other international obligations. In relation to low-carbon investments covered under the ECT, the Preamble indicates that climate change-related commitments should not be read in isolation when analysing ECT commitments.

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The provisions of Article 1 (5) and Annex EM are sufficiently broad to cover many of the current known GHG mitigation measures, including coal gasification and carbon capture and storage (CCS), as well as nuclear energy if that is deemed to fit this category. ‘Electrical energy’ can be interpreted to include forms of renewable energy such as solar power, wind energy, whether on-land or offshore, biomass, tidal or wave power, hydropower, and probably also electric cars. Since ‘electrical energy’ constitutes an ‘economic activity concerning’

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71 See the discussion on this in Roe, T. & Happold, M (2011) Settlement of Investment Disputes under the Energy Charter Treaty, Cambridge: CUP, 54–63. 72 Petrobart Ltd v Kyrgyz Republic, Award, 29 March 2005: ‘a right conferred by contract to undertake an economic activity concerning the sale of gas condensate is an investment according to the Treaty. This must also include the right to be paid for such a sale. The Arbitral Tribunal thus concludes on this point that Petrobart was an investor having an investment in the Kyrgyz Republic . . .’ 73 Yukos Universal Ltd v Russia (Interim Award on Jurisdiction and Admissibility) PCA Case No AA 227, IIC 416 (UNCITRAL, 2009); Masdar Solar & Wind Cooperatief UA v Spain, ICSID Case No ARB/14/1, Award, 16 May 2018, para 201. 74 See Cameron, P.D. (2013) ‘The Energy Charter Treaty Provisions on Low Carbon Investment: Final Report’, available at (since that time, the energy transition has accelerated significantly). For a critical view, see Bernasconi-Osterwalder, N. & Brauch, M.D. (2019) ‘Redesigning the Energy Charter Treaty to Advance the Low- Carbon Transition’, TDM 1 1–28.

46 Chapter 2: States, Investors, and Energy Agreements energy items listed in Annex EM, it can also be read as including energy efficiency, green building construction, and similar measures such as geothermal energy of combined heat and power which each serve to reduce the demand for energy. However, while there appears to be considerable evidence that low-carbon investments are protected under the ECT, there is no de jure definition of what constitutes a low carbon investment in the treaty text (or in any international agreement for that matter). 2.54

The above provisions suggest that the ECT can be read broadly as encompassing technological improvements relating to improvements in energy efficiency. For example, improvements in cement production or aluminium manufacturing (both require energy intensive processes) can have the effect of reducing the ‘trade’ or ‘sale’ of GHG emissions through energy efficiency. They, therefore, constitute ‘economic activity concerning products specified in Annex EM’.

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In general, it may safely be said that no other international investment treaty has a definition of investment that is specifically linked to economic activity in the energy sector. Further, no other multilateral treaty has such a broad definition of investment. It ‘encompass(es) virtually any right, property or interest in money or money’s worth’.75

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(b) NAFTA

By comparison with the ECT, Article 1139 of the North American Free Trade Association (NAFTA) Treaty has a much more limited definition of ‘investment’ (see Chapter 5 for discussion of the transition from NAFTA to USMCA). In six out of eight of its examples of the meaning of investment, it refers to ‘enterprise’, while the eighth refers to the commitment of capital. It expressly stipulates that an investment ‘does not mean claims to money that arise solely from commercial contracts for the sale of goods or services . . . or . . . the extension of credit in connection with a commercial transaction . . . or . . . any other claims to money’.

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In a claim of expropriation of a US-incorporated company’s investment in the Canadian Province of Newfoundland and Labrador, this definition would have included all of the hydro-electric generation facilities that the company operated in the Province, and all of the rights it enjoyed to harvest timber or which it enjoyed under contract with the Province for the generation of electricity; or any other licences or permits provided to it over the years, which are capable of valuation by a NAFTA tribunal.76

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In 2005 an external review of the investment provisions in NAFTA in relation to renewable energy drew attention to the National Treatment provision in Chapter 11.77 It allows a private right of damages against a NAFTA party through investor–state arbitration. The NT provision requires that no less favourable treatment be accorded to investors and investments of other NAFTA parties than is given to domestic investors and investments (‘with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments’). ‘Like circumstances’ can be determined by means of an inquiry, but not along the lines of whether the investors or investments being compared are in the same economic sector or compete in the same marketplace. Electricity generated by means of renewable energy could serve the same purposes or functions as electricity 75 Plama, para 125. 76 AbitibiBowater Inc v Canada (2008): see (accessed 16 December 2009). 77 Opportunities and Barriers in Renewable Energy in NAFTA, 2005 at 47–48.

B. The Foundations of Partnership 47 generated by non-renewable energy, but there are differences that make the market for renewable energy different from the market for fossil-fuel generated energy, such as the environmental preferences of consumers. In what may be the very first international investment claim related to hydraulic fracturing, a US-registered company called Lone Pine Resources filed a claim under NAFTA Article 1128 against the Government of Canada in 2011.78 The Province of Quebec had revoked an exploration permit to a company called Junex on environmental grounds, and Lone Pine, a contractor of Junex, argued that this amounted to an expropriation of its rights deriving from the permit holder, Junex. The notion of what constituted an ‘investment’ under NAFTA was a central issue in the case. Both the Governments of the USA and Mexico made submissions which are in the public domain and which appear to support the Canadian position that contingent interests (such as this) do not amount to protected investments under NAFTA.79 While most of the publicly available documentation shows that the claim was focused on issues familiar to claims about expropriation (for example, whether the alleged expropriation is concerned with a protected investment or not), Canada in its arguments did argue that underwater fracking was an untested technique and that a further change in regulations would in any case be required if horizontal drilling were to proceed. With respect to the damages part of the claim, Canada also pointed out that revenues from fracking were uncertain and doubted the appropriateness of a DCF model for an untested project.80 In an interesting argument against the claim of an FET violation, Canada argued that policymakers had to take into account when regulating that fracking had a ‘deficit of social acceptability’81 and that the investor assumed the risks of conducting a previously unknown activity in Quebec. It should, therefore, have expected that new regulations on fracking might endanger its project.

(c) ICSID

Many discussions of ‘investment’ have been triggered by the open-ended approach taken to it by the most influential investment treaty of all, the ICSID Convention. Although many ICSID cases concern claims arising from the energy or energy-related sectors, the ICSID Convention does not provide a specific definition of energy investments, or even investment generally. Article 25 limits ICSID’s jurisdiction to legal disputes arising ‘directly out of an investment’. This has included disputes about investments in the mining of minerals, the exploration, exploitation of petroleum and distribution of petroleum products, rights under concession agreements, the operation of an aluminium smelter and the maritime transport of minerals.82 Early ICSID tribunals were surprisingly casual about how ‘investment’ should be defined, finding it sufficient that a company had invested substantial amounts in a foreign country for this to justify classification as an investment.83 However, this has given way to a 78 Lone Pine Resources Inc v Government of Canada, ICSID Case No UNCT/15/2. 79 NAFTA Article 1128 Submission of the United Mexican States; NAFTA 1128 Submission of the United States of America, 16 August 2017. A separate part of the NAFTA definition of ‘investment’ refers to ‘interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under (i) contracts . . .’. The US submission noted that this does not encompass every economic interest that comes into existence because of a contract. 80 Investment Arbitration Reporter, ‘In NAFTA fracking case, Canada lays out full defence and defends province of Quebec’s environmental choices’, 29 February 2016. 81 Lone Pine Resources Inc v Canada, Response to the Notice of Arbitration, 27 February 2015, para 98. 82 But curiously, power generation has been excluded: Mihaly International Corp v Republic of Sri Lanka, Award, ICSID Case No ARB/00/2, IIC 170 (2002), 6 ICSID Rep 308. 83 Kaiser Bauxite Co v Government of Jamaica, 1 ICSID Rep 296 (ICSID, 1975); Alcoa Minerals of Jamaica Inc v Jamaica (Jurisdiction), 4 Yearbook of Commercial Arbitration 206 (ICSID, 1975).

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48 Chapter 2: States, Investors, and Energy Agreements more rigorous approach evident in, for example, the criteria set out in the case of Fedax NV v Republic of Venezuela84 (where the respondent raised a jurisdictional objection based on the alleged lack of an ‘investment’; the first time that this is known to have happened), in which the tribunal stated that the ‘basic features of an investment have been described as involving a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host state’s development’.85 It distinguished the transaction before it from an ‘ordinary commercial transaction’, which would not have met the threshold required to be an investment.86 In one of the first cases under the ECT, Petrobart v Kyrgyz Republic,87 an arbitral tribunal of the Stockholm Chamber of Commerce agreed with the Fedax tribunal that investment could have a wide meaning but ignored the Fedax criteria in favour of the definition of ‘investment’ in the ECT, which expressly includes marketing and sales. 2.61

The Fedax criteria were largely restated in Salini v Morocco in 2001,88 which considered whether major construction contracts could be investments, omitting the fifth criterion, a certain regularity of profit and return. The four criteria have been applied in subsequent decisions as the ‘Salini test’.89 Essentially, they are: duration, risk, substantial commitment, and contribution to the economic development of the host state. However, other tribunals have not taken an uncritical approach to this test in defining an ‘investment’ for purposes of ICSID jurisdiction. In MCI Power Group LC v Ecuador,90 the elements in the Salini test were treated by the tribunal as ‘mere examples and not necessarily as elements that are required’ for the existence of an investment for the purposes of Article 25. In another case, the tribunal offered a compromise approach in the form of a ‘fact-specific and holistic assessment’ of whether an alleged investment (a ship salvage contract) fell within the scope of Article 25.91 It seems then that the criteria amount to no more than benchmarks or yardsticks to assist an ICSID tribunal in assessing the existence of an investment, and which need not be present in all cases when the notion of investment is being considered.92 84 Fedax NV v Republic of Venezuela, Decision on Jurisdiction, 11 July 1997, IIC 101 (1997), 5 ICSID Rep 183 (1997). The promissory notes issued by Venezuela were acquired by the claimant from the original holder in the secondary market; the tribunal accepted them as qualifying as an investment; there was a ‘significant relationship’ between the transaction and the host state’s development (ibid, at para 43). 85 Ibid, at para 43. 86 Ibid, in which the tribunal relies on C. Schreuer et al.’s Commentary on the ICSID Convention. 87 Petrobart Ltd v Kyrgyz Republic (Award), SCC Case 126/2003, IIC 184 (2005). The dispute concerned a contract to sell 200,000 tons of gas condensate over a twelve-month period. However, see the Observations by Petrochalos and Rubins on this award in Petrochilos, G. & Rubins, N. (2005) ‘Comments on Petrobart v Kyrgyzstan’, Stockholm International Arbitration Review, 100, 107–115. 88 Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, Decision on Jurisdiction, ICSID Case No. ARB/00/04, 23 July 2001, 6 ICSID Rep 398 (2001). The five elements are: a certain regularity of profit and return; a certain duration; an assumption of risk usually by both sides; the commitment made is substantial, and the economic activity must contribute to the host state’s development. 89 For example, it was applied in Saipem SpA v Bangladesh, Decision on Jurisdiction and Recommendation on Provisional Measures, ICSID Case No ARB/05/07, IIC 280 (2007); Jan de Nul NV v The Arab Republic of Egypt, ICSID Case No ARB/04/13, IIC 144 (2006), Decision on Jurisdiction, 16 June 2006, para 91; Helnan International Hotels A/S v The Arab Republic of Egypt, ICSID Case No ARB/05/19, Decision on Objection to Jurisdiction, IIC 130 (2006), 17 October 2006, at para 77. 90 MCI Power Group LC and New Turbine Inc v Ecuador, ICSID Case No ARB/03/6, Award, IIC 296 (2007), 31 July 2007 at 165. 91 Malaysia Historical Salvors, SDN, BHD v Malaysia, ICSID Case No ARB/05/10, IIC 289 (2007), Decision on Jurisdiction, 17 May 2007; this decision was annulled however: Decision on the Application for Annulment, IIC 372 (2009), 16 April 2009. The majority in the annulment committee criticized the Sole Arbitrator for inter alia elevating the Salini criteria to the status of jurisdictional conditions, citing favourably the approach taken by the tribunal in Biwater Gauff v Tanzania, ICSID Case No ARB/05/22, Award, IIC 330 (2008), 24 July 2008. 92 RSM Production Corporation v Grenada, ICSID Case No ARB/05/14, Award, IIC 363 (2007), 13 March 2009, para 241.

B. The Foundations of Partnership 49 Other tribunals have taken a sceptical view of the ‘development’ criterion in the Salini test—the significance of the investment for the host state’s ‘development’—since it may be understood as implicit in the previous criteria.93 It is vulnerable to the criticism that there is no consensus about what a contribution to the economic development of the host state might mean; indeed, notions of ‘development’ are notoriously prone to partisan interpretation. The tribunal in Phoenix Action v Czech Republic therefore opted for what it deemed to be a ‘less ambitious’ approach, based on the contribution of the international investment to the economy of the host state.94 However, it added that a protected investment needed to be one made in accordance with the laws of the host state and made in good faith.95

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Several tribunals have explored the nexus between the notion of international investment and the idea of ‘development’ or ‘growth’. Given the potentially transformational character of many energy and mining investments, especially in low-and middle-income countries, this feature is likely to be of great importance to the governments concerned. The ECT in its Preamble refers to the parties’ wish ‘to catalyse economic growth by means of measures to liberalize investment and trade in energy’.96 Given the diverse composition of the parties to the ECT it is hard to interpret the idea of development as being part of its investment promotion mandate. However, it is less challenging to link investment in a low-income country with development, particularly given the transformative potential of very large energy investments. Often, investments in the energy industry are associated with development in countries that are well behind those of, for example, the OECD countries, in their economic and social growth. Such investment represents a way of accelerating the catch-up process. It is therefore hardly surprising to find that the ICSID Convention in its Preamble has as one of its aims ‘the need for international cooperation for economic development and the role of private international investment therein’. In Schreuer’s view, this suggests ‘that development is part of the Convention’s object and purpose’, but is less of a jurisdictional requirement than merely a typical characteristic of investments under the Convention.97 The difficulty lies in establishing that a contribution has taken place to the country’s social or economic circumstances. In one case, Malaysian Historical Salvors Sdn Bhd v Malaysia,98 the notion that a putative investment cannot qualify as such without evidence that it has contributed to the development of the host state was successfully advanced to the sole arbitrator only to be rejected by the ad hoc annulment committee. In LESI and ASTALDI v Algeria,99 the tribunal considered that a contribution to the host state’s development was ‘a condition . . . difficult to establish and implicitly covered by the three other elements’. In Mitchell v Congo,100 an

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93 LESI SpA et ASTALDI SpA v Algeria, ICSID Case No ARB/05/31, Decision, IIC 354 (2008), 12 July 2006. For an interesting discussion of this and other points in relation to the notion of investment in the Convention, see Gaillard, E. (2009) ‘Identify or Define? Reflections on the Evolution of the Concept of Investment in ICSID Practice’, in Binder, C., Kriebaum, U., Rheinisch, A., & Wittich S. (eds) International Investment Law for the 21st Century, Oxford: OUP, 403–416. 94 Phoenix Action, at para 85, explicitly following the tribunal in Sedelmayer v Russian Federation, ad hoc arbitration under SCC arbitration rules, Award, IIC 106 (1998), 7 July 1998, at para 224; see also RSM Production Corporation v Grenada, ibid. 95 Phoenix Action, at para 114. 96 Fifth Recital. 97 Schreuer, C. (2009) The ICSID Convention: A Commentary (2nd edn) Cambridge: CUP, 128. 98 Award on Jurisdiction, 10 May 2007. 99 Decision on Jurisdiction, 12 July 2006. 100 Decision on Annulment, 1 November 2006.

50 Chapter 2: States, Investors, and Energy Agreements ICSID ad hoc committee annulled a decision of an ICSID tribunal because it had made no finding of any contribution to the development of the Congo. 2.64

Beyond the scope of specifically energy-related investments, issues about the meaning of ‘investment’ have tended to arise in jurisdictional challenges to investment arbitrations. Tribunals have usually adopted a dual test for the existence of an investment and therefore whether the tribunal has the competence to consider the merits of the claim: whether the dispute arises out of an investment within the meaning of the Convention, and, if so, whether the dispute relates to an investment as defined in the Parties’ consent to ICSID arbitration, in their reference to the BIT and the pertinent definitions contained in Article 1 of the BIT.101

This is sometimes referred to as the ‘double barreled’ test.102 This approach is peculiar to ICSID and absent in ICC or SCC cases, or indeed ad hoc arbitrations under UNCITRAL Rules. Tribunals will in such cases rely upon the definition of investment in the relevant investment treaty and will not usually have recourse to tests to determine whether it qualifies as an investment or not. C. Governance 2.65

In Chapter 1 it was argued that international energy investment law has several characteristics which collectively provide it with a distinct character, and which make a focus on the legal provision of investment stability potentially illuminating for our understanding of investment protection more generally. Of fundamental importance to the establishment of stability in international energy investment are three conditions: the relationships laid down by contract; the permanence of state sovereignty over energy resources and indeed many other aspects of the energy business; and the availability of arbitration as the principal form of settling disputes. In different ways, each plays an important role in the structure of legal stability.

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Their inter-relationship can be characterized in the following manner. A prudent investor will typically seek to minimize the political risk to a long-term investment by including undertakings and assurances given in good faith by the host state in contractual form prior to the making of the investments. The purpose of the host state in offering them is to make the investment more attractive. This is in addition to the existence of any treaty-based protections. The value of these contractual protections is nonetheless qualified by the recognition in international law of the inalienable rights over natural resources which the host state retains. In turn, these sovereign powers are qualified by conditions attached to their exercise. In the event of disputes about their proper exercise, there are well-established channels for the review and settlement of investors’ claims against a host state. International arbitration is central to the settlement of these claims in the energy sector. Such claims may also be activated by the provisions of international investment treaties.

101 102

CSOB v Slovak Republic, Decision on Jurisdiction, ICSID Case No ARB/97/4, 24 May 1999, para 68. Malaysian Historical Salvors v Malaysia, Award, 17 May 2007, para 55.

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(1) Energy contracts Energy and natural resources contracts often receive a descriptive treatment in the available literature that demonstrates their common features and sometimes similarities with commercial contracts in other fields.103 There are no widely accepted models of the fundamental contracts between investors and host states for oil, gas, and mining, even though there is general acceptance that many features are common to the contents of the contracts typically in use. Among these commonly used contracts, models are more likely to be developed by industry since they have obvious advantages in efficiency to the parties in serving as templates on which actual contracts can be based. However, the variety of contracts involving investors and states have an additional feature (at least for states) that relates to the process of economic development,104 arising from the fact that they are typically concluded with host states or their agencies in poorer parts of the world where promotion of national growth has some urgency.105 For any state, however, the strategic significance of energy in its economy means that the success of the contract is likely to impact on its plans for economic growth. For the host state, whatever its circumstances, this factor is often critical.

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Typical features of international energy contracts relevant to investment are the following:

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• the foreign investor commits to investing large amounts of capital over a long period of time, implying a close cooperation between the state and the investor, and requiring the establishment of plant and infrastructure and the acceptance of responsibilities by the investor. • the subject matter is broad, setting out the ground rules for the investment which have wide-ranging implications for the host state. • the host state is often a developing country or a transitional (that is, post-communist) economy, and hence the investment has wide-ranging implications in terms of capital and expertise for the country’s economic development. • guarantees for security of the investment over long periods, such as ‘stabilization’ clauses or specialized agreements, price formulae, and so on, are common to protect the economic core against taxes, exchange controls, and other key provisions that might adversely affect the projected rate of return. • host states are usually willing to provide significant incentives on tax (for example) for limited periods of time to promote a particular economic development or sector; • there is often a provision in which the host state limits its sovereign powers in certain areas. • questions of breach of contract often rely upon international law for a resolution, limiting the parties’ exposure to the municipal law and the related court system. • in the event of a loss, compensation may be required under international law. 103 For example, Roberts, P. (2016) Petroleum Contracts: English Law and Practice (2nd edn), Oxford: OUP; (2009) International Petroleum Exploration and Exploitation Agreements: Legal, Economic & Policy Aspects (2nd edn), Barrows: New York. In fact, there are few contractual arrangements unique to the energy sector. Examples would be the production sharing contract in the oil industry, unknown in mining; and the joint operating agreement; for electricity, the power purchase agreement is an example. 104 OECD (2019) ‘Guiding Principles for Durable Extractive Contracts’, available at . 105 Obviously, there are many such contracts concluded between host states and investors in the OECD countries, particularly in the USA, Canada, Australia, and the North Sea area. Relative to their needs as energy consumers however, the OECD countries are net importers, and in most cases their production of fossil fuels is in long-term decline: Norway is an exception. Contractually, they all favour a form of relationship for petroleum operations that is based on the concession model (see D(1) below), usually called a licence or a lease, and lacking a stabilization clause.

52 Chapter 2: States, Investors, and Energy Agreements 2.69

Any stability guarantees are generally elements of a policy of promoting foreign investment and attempt to secure the investment from changes in governmental policies on foreign investment in future years (and if that fails to increase the likelihood and amount of compensation). For countries with no track record or a poor track record of dealing with foreign investors these guarantees are usually required for projects that have a long term and involve capital expenditure of hundreds of millions of dollars. Assumptions about royalties, taxes and other fiscal payments will have to be made by the investor to project a cash flow over the life of the project under consideration, and hence the need for guarantees. At the same time, many such governments, unfamiliar with the ways that investors reach decisions, may be unaware what they need to offer investors to attract the investments they are looking for.

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Against the benefits of the contractual relationship between the parties, there is an in-built vulnerability of the relationship that follows from the fact that a state has the power under its municipal law to unilaterally alter the terms of a contract and even to terminate it entirely. Indeed, we might call this contract vulnerability a structural characteristic of the investor– state relationship since it is long-term and intrinsic to it. This applies even though in international law the host state is still bound by the contracts which it has entered into in good faith, and to pay appropriate compensation to the investor for losses arising. It may also be noted that most contracts will include provisions that allow the investor to withdraw from the relationship in defined circumstances, an important feature as we shall see in the context of the so-called energy transition.

(2) Sovereignty over energy 2.71

In the contemporary setting state concerns about sovereignty over energy activity manifest themselves in two broad ways. The classic treatment of sovereignty over energy investments takes as its starting point the UN Resolution of 1962 that emerged from the discussion of a New International Economic Order,106 following many nationalizations of hydrocarbons assets by host states, mostly in the Middle East. This is a standard point of reference for discussions of sovereignty in international investment law, at least insofar as energy is concerned. There is another focal point, however. It is less coherent and focused not on a single legal document but rather on a system of international investment treaties. Its central theme is that the state has a ‘right to regulate’, and that this treaty network and the investor–state arbitration regime they support have the potential to constrain the scope for public interest interventions. Like the investment treaty regime itself, the debate on the state’s power to regulate has developed over the years since the UN Resolution was adopted, albeit in reaction to the operation of that investment treaty regime rather than in tandem with it. The implications for the energy sector are varied and will feature throughout the chapters of this book. This section will sketch out the contours of the classic doctrine which has a much longer vintage and has implications that are both easier to identify and to assess.

106 For a general discussion of this topic, see Schrijver, N. (1997) Sovereignty over Natural Resources: Balancing Rights and Duties, Cambridge: CUP. A more recent treatment of the issues is contained in Arvik, I. (2011) Contracting with Sovereignty: State Contracts and International Arbitration, Oxford: Hart Publishing.

C. Governance 53 Permanent sovereignty The emergence of the doctrine of permanent sovereignty over natural resources several decades ago marked the beginning of a shift in bargaining power from large, internationally operating energy resources companies, based entirely in the West, towards the energy producing states in the Middle East, Latin America, Asia, and Africa. Many of these were enjoying a recent independence from colonial rule. It proved an irreversible shift and was given a fresh geographical dimension by the highly independent stance of the Russian Federation after the dissolution of communism, demonstrating in its law and its policy a willingness to restrict the participation of foreign investors to the margins of its vast natural resources sector. Given the crucial linkage of the permanent sovereignty doctrine to this long-term geopolitical transformation, it is worth examining its origins and basis in international law.

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The UN declarations Controversy has long been associated with the various United Nations (UN) declarations on this subject. The most important of them is the General Assembly’s Resolution on Permanent Sovereignty over Natural Resources. Resolution 1803 provides that ‘the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the state concerned’.107 In paragraph 4 it states also that nationalization, expropriation, or requisitioning is to be accompanied by the payment of appropriate compensation to the owner ‘in accordance with the rules in force in the state taking such measures in the exercise of its sovereignty and in accordance with international law’. It adds that where a dispute arises from this, the first step is to exhaust the national jurisdiction of the state taking such measures and then, if the parties agree, settlement of the dispute should be made by arbitration or international adjudication. This principle of permanent sovereignty over natural resources has been endorsed by the International Court of Justice in the case of Democratic Republic of Congo v Uganda.108 There are other cases decided earlier on the nationalization of oil company assets that support the view that this principle constitutes customary international law (Texaco v Libya; Kuwait v Aminoil; Amoco International Finance v Iran: see c hapter 4, paras [4.79]–[4.107].

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This Resolution built upon one made ten years earlier, Resolution 626,109 which was the first Resolution to anticipate the idea of ‘permanent sovereignty over natural resources’ in its assertion that ‘the right of peoples freely to use and exploit their natural wealth and resources is inherent in their sovereignty’. Several years later, Resolution 2158110 recognized that all states, but particularly those in the developing countries, have the right to secure and increase their share in the administration of enterprises fully or partly owned by foreign capital operating in their territory and to have a greater share in the advantages and profits derived

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107 GA Resolution 1803 (XVII) of 14 December 1962. 108 Case Concerning Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v Uganda), judgment of 19 December 2005. 109 GA Resolution 626 (VII) of 21 December 1952; cited in Anglo-Iranian Oil Co Ltd v SUPOR, 22 ILR (1955) 23 at 40; Anglo-Iranian Oil Co Ltd v Idemitsu Kosan Kabushiki Kaisha, ibid, vol 20 (1953) 305 at 313. Also relevant are Resolutions 1314 (XIII), 12 December 1958, and 1515 (XV), 15 December 1960. In 1955 the General Assembly adopted a draft article (in its Third Committee: Social, Humanitarian and Cultural Matters) as part of its Human Rights Covenants, on the right of self-determination. It included the statement that: ‘The peoples may, for their own ends, freely dispose of their natural wealth and resources without prejudice to any obligations arising out of international economic cooperation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.’ 110 GA Resolution 2158 (XXI) of 25 November 1966.

54 Chapter 2: States, Investors, and Energy Agreements from them on an equitable basis (‘with due regard to the development needs and objectives of the peoples concerned and to mutually acceptable contractual practices’).111 2.75

Resolution 1803 is more than an assertion of rights, however. It strives to balance two key elements. On the one hand, recognition is given to the state’s inalienable sovereignty over its natural resources; while on the other hand, exercise of that sovereign power for the purpose of nationalization, expropriation, or requisitioning may be based only on grounds or reasons of public utility, security, or the national interest which are recognized as overriding purely private interests, both domestic and foreign. A check is included in paragraph 8 that foreign investment agreements which are freely entered into by or between sovereign states are to be observed ‘in good faith’.112 Where expropriation measures are used, the owner has to be paid ‘appropriate compensation, in accordance with the rules in force in the State taking such measures . . . and in accordance with international law’.113 ‘Appropriate’ is clearly not synonymous with ‘full’ compensation, however. As one scholar has put it, there was ‘a clear effort in the resolution to change the existing norms of international law relating to compensation for nationalization and the usage of the word was intended to signal that change’.114 Where the question of compensation gives rise to a dispute, this may be dealt with by recourse to arbitration or international adjudication if the parties have agreed to such an option.

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To a large extent, Resolution 1803 settled any doubts in international law about state sovereignty over petroleum (but not necessarily about its exercise). The Resolution was passed by eighty-seven votes to two, with twelve abstentions. Those voting in favour comprised developed and developing states, including the USA; these were states in all geographical areas of the globe and at all stages of economic development. An important reason for the support of several of the OECD states was the Resolution’s imposition of a standard of international law upon any act of nationalization.115 If energy resource contracts between states and foreign investors represented a temporary alienation of ‘inherent’ rights, any attempt to claw them back would require to be accompanied by proper compensation.

111 Para 5. 112 The rule of international law that a state has a duty to respect contracts freely entered into with a foreign party was given implied recognition some twenty years later in the Declaration of the Government of the Democratic and Popular Republic of Algeria concerning the Settlement of Claims by the Government of the United States of America and the Islamic Republic of Iran of 19 January 1981, reprinted in 20 ILM 230 (1981): Amoco International Finance Corporation and The Government of the Islamic Republic of Iran, Partial Award No 310-56-3 (14 July 1987), reprinted in 15 Iran–US Cl Trib Rep 189 at paras 176–179. Article V stated that ‘a State has the duty to respect contracts freely entered into with a foreign party’ (para 177), subject to the state’s lawful (that is, non-discriminatory) exercise of that sovereign power for a public purpose. The Iran-US Claims Tribunal emphasized however that the rule is not to be equated with the principle of pacta sunt servanda. It may be noted that Article VII, para 2 of the Declaration expanded the customary definition of a state to include entities controlled by the state as well as political sub-divisions. 113 GA Resolution 1803 (XVII), para (4). By ‘appropriate compensation’ is meant a flexible approach that would take into account all of the circumstances underlying the investment: see the discussion in Sornarajah, M. (2004) The International Law on Foreign Investment, Cambridge: CUP, 479–482. 114 Sornarajah (2004) AT 479–480. 115 This was examined in some detail by Arbitrator Dupuy in the TOPCO/Calasiatic Award on the Merits, at paras 83–84. It should be noted, however, that even when Dupuy discussed it, there was then and for many years no consensus behind the doctrine, given the diversity of UN Resolutions that claimed to have roots in it. Only by the early 1990s could it be claimed that ‘with the passage of time, and the refinement of the issues in the great oil arbitrations, the concept has ‘settled down’. It now stands for norms that command a significant common consensus, which I would summarize thus: states have a very special position in regard to their own resources’: Higgins, R. (1994), Problems & Process: International Law and How We Use It, Oxford: OUP, 141. Judge Higgins added: ‘The concept of permanent sovereignty over natural resources does not leave a state free to ignore contracts it has voluntarily entered into’: ibid at 142.

C. Governance 55 Many years later, concerns over the implications of foreign investment for sovereignty reappeared among a different group of states—this time post-communist ones—in the debates on the ECT.116 To meet their concerns, the final version of the ECT, Article 18(1), states that:

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[T]‌he Contracting Parties recognize state sovereignty and sovereign rights over energy resources. They reaffirm that these must be exercised in accordance with and subject to the rules of international law.

Further, Article 18 asserts that each state continues to hold the rights to determine in which areas of its territory exploration and development of energy resources can take place and by what method and at what rate. Each state may specify and benefit from any taxes, royalties, and other financial payments, and regulate environmental and safety aspects, as well as participate in its exploration and production through direct participation by the government or through state enterprises. Essentially, this text added nothing to what had already been secured in international law except perhaps the grant of a level of comfort to the then newly independent states that had emerged from the dissolved Soviet bloc. Support for the approach taken in Resolution 1803 can be found in subsequent Resolutions, but as the protection for investors’ rights became more qualified in these texts, so too did the level and range of support among states.117 A good example of this is Resolution 3281, the ‘Charter of Economic Rights and Duties of States’.118 It provides that:

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[E]‌very State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources, and economic activities.119

At the same time, each state has the right ‘to nationalize, expropriate or transfer ownership of foreign property in which case appropriate compensation shall be paid by the state adopting such measures’.120 Disputes over compensation were to be settled under the domestic law of the nationalizing state and its tribunals, unless ‘other peaceful means’ had been freely and mutually agreed upon.121 The paragraph on nationalization in Article 2 was subject to a separate vote and approved by 104 to 16 with six abstentions, but all of the major developed states voted against it or abstained, indicating an absence of consensus behind this wide notion of sovereignty. In the TOPCO arbitration, this background to the Resolutions was examined by the Sole Arbitrator to assess their legal significance, which Libya had argued was sufficient to remove its sovereign actions over natural resources from the standards of international law. He concluded that the import of each Resolution differed considerably, according to the type of resolution and the circumstances of its adoption, including the voting pattern, the status of the resolution as declaratory in character or not, and the statements made by states in the deliberations.122 In the case of Resolution 1803 of 1962 the declaration 116 Energy Charter Secretariat, The Energy Charter Treaty and Related Documents: A Legal Framework for International Energy Cooperation (2004) (see the discussion in c hapter 4 below). 117 GA Resolution 3171 (XXVIII) of 17 December 1973 asserted that the application of the principle of nationalization carried out by states was an expression of their sovereignty aimed at safeguarding their natural resources and implied that ‘each State is entitled to determine the amount of possible compensation and the mode of payment’ (para 3). This Resolution was, unsurprisingly, not passed with the support of the capital-exporting states nor all the developing states. It may be noted, however, that there is little in the way of a consensus about standards of compensation internationally (McLachlan, Shore, and Weiniger (2017) at 413–458). 118 GA Resolution 3281 (XXIX) of 12 December 1974. 119 GA Resolution 3281 (XXIX), Art 2(1). 120 GA Resolution 3281 (XXIX), Art 2(2)(c). 121 Ibid, Art 2(2)(c). 122 TOPCO Award on the Merits, at para 86.

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56 Chapter 2: States, Investors, and Energy Agreements appeared to reflect the state of customary international law in the field of natural resources; it expressed a customary rule on which a majority of states belonging to various representative groups had concurred.123 By contrast, the Charter was not adopted by consensus, and weakened considerably by the fact that the industrialized states of the time were among the states that had not voted for it. It was not, in his view, to be treated as legally binding. 2.80

Under the UN Convention on the Law of the Sea (UNCLOS), sovereign rights were conferred upon coastal states ‘for the purpose of exploring and exploiting, conserving and managing the natural resources’.124 These are both inherent and exclusive in the continental shelf regime. No one may undertake activities of exploration or exploitation without the express consent of the coastal state.125 The exclusive nature of these rights prevents them from being lost to another state in the absence of any express agreement to the contrary. Their exclusive character is reaffirmed by Article 81 of UNCLOS, which grants the coastal state the exclusive right to authorize and regulate drilling on the continental shelf for all purposes. They do not therefore depend upon occupation, either express or notional, or on any express proclamation by the coastal state. The rights cannot be lost through neglect. Given the advances in exploration and production technology for petroleum and minerals, these rights have acquired enormous significance for states. The natural resources in deep water offshore Brazil or in the Arctic have become a source of considerable commercial interest in recent years, making a removal of any doubts about sovereign rights a matter of some urgency. Another area of growing importance is deep-sea mining, since the advanced technology now available may be applied to mine in the oceans for minerals in demand for the energy transition. Although the element of technological complexity is less evident, there is a similar degree of urgency about the clarification of sovereign rights among littoral states around the inland lakes as in the Central African Great Lakes and the Caspian Sea.

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Even the European Union, in its attempt to pool sovereignty from its members, was obliged to find a balance on sharing competence over energy matters with them. In Title XXI, Article 194, the Treaty on the Functioning of the European Union (the ‘Energy Chapter’) allows the EU to adopt secondary legislation on ensuring the security of supply in the EU; promoting energy efficiency, energy savings, and new and renewable forms of energy, and promoting the interconnection of energy networks. However, they are immediately followed by the caveat that measures based on this provision ‘shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply . . .’.126 These might be described as the ‘energy rights’ of the EU Member States.127

123 Ibid, at para 87. 124 Art 56(1)(a). 125 For a discussion of this in relation to the development of offshore petroleum deposits, see Cameron, P. (2017) ‘The Design of Joint Development Zone Treaties and International Unitization Agreements’, in Daniel, P., Keen, M., Swistak, A. & Thuronyi, V. (eds) International Taxation and the Extractive Industries, Abingdon: Routledge, 242–263. 126 Consolidated Version of the Treaty on the Functioning of the European Union (2012), OJ C 326/47, 26.10.2012. This provision must not prejudice the need in special circumstances to take measures for environmental purposes in Article 192(2)(c). The common objectives are to ensure the functioning of the energy market; ensure security of energy supply; promote energy efficiency and energy saving and the development of new and renewable forms of energy; and promote the interconnection of energy networks. 127 The term is used by the authors of ‘The Beyond 2020 Project: Summary Report’ (2014) at 21. See also Johnston, A. & van der Marel, E. (2013) ‘Ad lucem? Interpreting the New EU Energy Provision, and In Particular the Meaning of Article 194(2) TFEU’, European Energy and Environmental Law Review 22(5), 181–199.

C. Governance 57 The notion of permanent sovereignty over natural resources has a problematic aspect in the early twenty-first century. It is one that pre-dates the unprecedented expansion of the global economy in recent decades and the intermeshing of national economies that has resulted from this globalization. Its robust defence of nation-state choice in energy matters appears on its face hostile to the major challenge to energy use patterns in this century: how to combat the long- term effects that carbon emissions have on the climate—effects that are global and therefore cut across national borders. It is not clear how its implications for investment (admittedly vague) could co-exist with the requirements of the Paris Agreement for international cooperation and collaboration as is implied by a programme of remedial action to mitigate these effects.128 Knowledge of such problems of sustainability was of course not present, at least not to any significant extent, at the time the notion of permanent sovereignty was originally developed, an important period of post-colonial assertiveness for many new states. In another respect, it has a dated character to it: many states now have a sense of sovereignty over their national infrastructure as much as over natural resources, and indeed this is probably evident among a broader group of states. The opening up of such infrastructure to foreign investment such as the gas and electricity infrastructure in Argentina in the 1990s has often been beneficial for the countries concerned but has also proved to be a source of tensions and disputes too. The UN Resolution has nothing to say about these issues. There are more fundamental problems with the notion. Indigenous peoples sometimes consider themselves to be nations and in several instances could argue that they enjoy ‘sovereign’ rights over the resources on their lands, including energy and mineral resources. These developments point to the limits and the apparent simplicity of the original notion, conceived in less complicated times.

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Despite the foregoing, the notion in the UN Resolution captures the continuing popular resonance of ‘sovereignty’ in the world of energy. It suggests that any transfer of certain inalienable rights by states has to be limited in duration and, as in the Resolution text, where changes are later required, the exercise of state power has to be fair to investors, with payment of compensation to follow. Sixty years later, the core message of sovereignty and responsibility has not lost its relevance.

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(3) Arbitration In the event of a dispute between the parties to a long-term contract in the international energy industry, the parties will usually design the contract so that they can avoid the public forum that litigation involves. Where one of the parties is the host state or a state entity, the investor is likely to take a critical view of recourse to the national courts in the event of a dispute, questioning the independence and accessibility of domestic courts in the host state, as well as having familiar concerns with the duration and cost of litigation, the public character of the process, and the adjudication of the dispute by persons who may have no familiarity with the specific characteristics of the energy business involved. For the foreign investor, the option of recourse to international arbitration means that it can counter one part of the political risk that ‘is within the control of the host state’.129 At the same time, the state party will 128 The Paris Agreement 2015 was made under the United Nations Framework Convention on Climate Change to enhance the implementation of the Convention: . 129 Waelde, T.W. (1996) ‘Investment Arbitration Under the Energy Charter Treaty: From Dispute Settlement to Treaty Implementation’, Arbitration International 12(4), 429–466 at 432. He adds rightly that ‘the prospect of

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58 Chapter 2: States, Investors, and Energy Agreements usually have little enthusiasm for submission of the dispute to the courts of another state. As later chapters will show, international arbitration has long been the favoured instrument for settling investment disputes between states and private parties in the international energy industry. It offers both a promise of finality as well as predictability. It offers the prospect of arbitrators with specific skills and experience relevant to the dispute, and the opportunity of introducing expert witnesses, which in energy investment disputes are common at both the merits and the quantum stages. Some comments on the arbitration process itself, why it is favoured and what its limitations are, seem therefore appropriate at this initial stage prior to the review and analysis of energy disputes in subsequent chapters.130 2.85

Arbitration and the global system Since arbitration is a private mode of dispute settlement in international commerce in which the rules are agreed by the parties themselves, it is often assumed that it exists independently of the national courts. In fact, there is a ‘global adjudication system’ in which international investment and other commercial disputes are ‘resolved by binding and final arbitration, as regulated, however, by national legislation and judiciaries’.131 It is crucial at all stages (design, proceedings, and settlement) to be aware of this fact of enforcement, and the role played by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in making awards enforceable through the local courts of its 168 Contracting Parties.132 The New York Convention sets out in its Article V a list of limited grounds on which recognition and enforcement of an award may be refused at the request of the party against whom it is invoked. That party must provide specific kinds of proof to the competent authority where the recognition and enforcement of the award is sought. Even so, local courts can be asked by an aggrieved party to stay the enforcement of an award, even in New York Convention countries, with The Netherlands, Sweden, the UK, and the USA being particularly popular for this kind of application. This has occurred in recent years in a growing number of energy cases (see Chapter 11). In the Russian Federation, for example, legislation appears to have limited the protection of the Convention for disputes arising in the natural resources sector.133 In Argentina too, there have been difficulties in the enforcement of ICSID awards which have arisen from actions by the host government and the domestic courts.134 Nonetheless,

international arbitration can often quite effectively discourage host states against using sovereign powers for abrogating legal and contractual rights granted to an investor’. 130 For a more comprehensive treatment of international dispute settlement than is attempted here, several textbooks are available: for example, McLachlan, Shore, and Weiniger (2017); Bantekas, I. (2015) An Introduction to International Arbitration, Cambridge: CUP. For international commercial arbitration, the standard works are Blackaby, N., Partasides, C., Redfern, A. & Hunter, M. (2015) Redfern and Hunter on International Arbitration (6th edn), Oxford: OUP, and Gary B Born’s two-volume work, Born, G.B. (2009) International Commercial Arbitration, Alphen aan den Rijn: Wolters Kluwer. At a theoretical level, two books of note are Gaillard, E. (2010) Legal Theory of International Arbitration, Leiden: Martinus Nijnhoff; and Paulsson, J. (2013) The Idea of Arbitration, Oxford: OUP. 131 Brower, C.N., Brower, C.H. & Sharpe, J.K. (2003) ‘The Coming Crisis in the Global Adjudication System’, Arbitration International 19, 415. 132 The aims of the New York Convention are: to oblige Contracting States to recognize foreign and non- domestic arbitral awards and ensure they are capable of being enforced in their jurisdictions in the same way as domestic awards; and to require courts to uphold valid arbitration agreements and stay court proceedings in matters that the parties have agreed should be resolved by arbitration. This prevents such awards from being discriminated against by courts asked to enforce them. 133 Article 17 of the Federal Law N 108-FZ amending the law ‘On Concession Agreements’ N 115-FZ (2 July 2008) appears to allow Russian courts to review awards made in disputes between the state and a concessionaire instead of being subject to the restricted review process of the New York Convention. 134 For example, CMS Gas Transmission v Republic of Argentina (Award), ICSID Case No ARB/01/8, IIC 65 (2005), 44 ILM 1205.

C. Governance 59 ratification of the New York Convention gives a signal to potential investors of reduced risk and the ability to recover debts if an investment subsequently goes awry.135 For the kind of high value, long-term projects typically found in the energy sector, this has a particularly strong resonance. Arbitration: key issues The arbitral process is based on the parties’ agreement and so the fundamental document for the jurisdiction of the tribunal is the arbitration agreement, usually the arbitration or dispute settlement clause in the broader commercial contract. This will set out a description of the disputes that will be subject to arbitration, the scope of the tribunal’s authority, applicable law, language and location of the arbitration, whether it will be administered by an institution such as ICSID or the ICC, and may include rules and procedures to be followed. The lex arbitri or law of the place where the arbitration is held will, if necessary, act to fill any gaps or supplement what is missing from the arbitration agreement, although the discretion of the tribunal also plays a role in addressing such matters. In addition, from a practical point of view, it is best to choose the governing law of a country in which there is a probability that the legal profession and judiciary have some knowledge of the relevant energy law.

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Institutional or ad hoc The parties may choose to have the arbitration conducted through an international arbitral institution or on an ad hoc basis. This is sometimes called administered and non-administered arbitration. An institutional form of arbitration lays down timetables and procedures to be followed when establishing the arbitral tribunal for the conduct of the arbitration. There are a growing number of options in institutional arbitration. The better-known ones are: the International Centre for Dispute Resolution of the American Arbitration Association (ICDR); ICSID; the International Court of Arbitration of the ICC; the London Court of International Arbitration (LCIA); the Singapore International Arbitration Centre (SIAC); and the Arbitration Centre of the Stockholm Chamber of Commerce (SCC). In energy-related disputes with a construction aspect, the Dubai Centre for International Arbitration is of growing importance. The advantages of an institutional approach are usually thought to include the following: it provides a wealth of arbitral experience, including that of the arbitrators themselves; it ensures that the arbitral tribunal is appointed and deals with any challenges to arbitrators; it has rules that are a known quantity; it sometimes has sufficient prestige to persuade a reluctant party to arbitrate and comply with the award; and it can be particularly useful when parties have different levels of sophistication or different languages and cultures. In an ad hoc arbitration, parties may designate the rules in their contract or they may adopt a pre-existing set of rules such as the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules.136 They are designed to provide a comprehensive set of procedural rules on which the parties may agree for the conduct of arbitrations arising out of their commercial relationships. This is particularly evident in comparison with ICSID, where the arbitral process is extremely sensitive to the fact that one of the parties is a state. However, the benefits of ICSID procedure are

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135 A study that considered the connection between signing the New York Convention and inward FDI concluded that the impact was ‘positive and significant’: Myburgh, A. & Paniagua, J. (2016) ‘Does International Commercial Arbitration promote Foreign Direct Investment?’, The Journal of Law and Economics 59(3), 597–627. Of course, this and other legal variables form part of a wider set of calculations by investors in which economic ones are probably more influential in the final decision. In that sense, the findings of this and similar studies on legal variables have to be placed in a wider context. 136 There are three versions of the UNCITRAL Arbitration Rules: from 1976, a revised version in 2010 and a further slightly revised version from 2013: (accessed 28 December 2019).

60 Chapter 2: States, Investors, and Energy Agreements attractive to claimants in relation to enforcement (see Chapter V), while arbitration under UNCITRAL involves enforcement by national courts. 2.88

In terms of procedure, investment arbitration is commonly divided into two stages: a jurisdictional stage, in which the jurisdiction of the relevant treaty is determined and when the tribunal’s competence may well be challenged, and a merits stage. The latter stage is commonly divided further into a liability stage, in which liability is declared by the tribunal, and a damages stage, in which the quantum of the compensation is assessed. In ICC arbitration the tribunal issues an Award, which may be preceded by an Interim Award. In contrast, a tribunal convened under ICSID will have to consider whether to join any jurisdictional objections (and respondent states commonly object to ICSID jurisdiction on the basis of the relevant treaty) to the merits or to establish a separate jurisdictional phase.

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The practical differences between arbitration and litigation may be debated, but for energy investments the use of arbitration is well established. The confidentiality aspect of arbitral proceedings has given it advantages over court proceedings, although these advantages may not be so evident as awards occasionally make their way into the public domain and amicus curiae applications multiply. A disadvantage of arbitration in relation to court proceedings is the lack of precedent, meaning that several distinct tribunals can address cases with almost identical facts and reach entirely different decisions. This becomes even more striking when there is an overlap in the composition of the tribunals. Here, there is a growing difference between the arbitration rooted in commercial practice and that arising from international treaties, where the treatment of confidentiality has to take into account the public interest element that the latter often contain (see chapter 5 below).

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Some of the oft-repeated advantages of arbitration require a cautious endorsement in energy cases. The finality of an award varies greatly according to whether it is a dispute between commercial parties or between an investor and a state. For the first group, finality offers ‘a swift path towards an ‘imposed consensus’ on the matter at hand, allowing them to quickly resume their usual business relationship, without losing valuable time in a never- ending cycle of appeals, of ordinary and extraordinary judicial challenges to the tribunal’s decision’.137 With the finality of an award there is a guarantee that further litigation will be unnecessary as will the potential costs and delays and unsought publicity in national courts. By contrast, with investor-State arbitrations the emphasis on finality will be accompanied by an emphasis on fairness. The investor will seek an efficient proceeding to clarify its position vis-à-vis the host state and allow it either to resume its economic activity in the country or to cease after payment of compensation. The state will have a different interest however: among other things, in avoiding reputational risk. As subsequent chapters show, states have been frequent users of review mechanisms, even if these are formal and limited to procedural issues, either in domestic courts or in the international system set out in the ICSID Convention and its Arbitration Rules.

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Alternatives to arbitration There are various ways of managing disputes without recourse to arbitration. They include mediation or conciliation where the parties will attempt to resolve their disputes informally through negotiations in good faith. The parties may also agree

137 EFILA (2016), Task Force Paper regarding the proposed International Court System (draft dated 1-2- 2016), 23.

C. Governance 61 to the use of stepped or multi-tiered dispute resolution clauses in the contract.138 This has value in the international energy industry where the long-term character of the contractual relationship is usually very important. The participants have often worked together in the past and may well do so again. These ‘escalation’ clauses require parties to submit disputes to an increasingly rigorous and formal series of dispute resolution methods. They allow the parties to create opportunities for an agreed settlement, either through mediation139 or (in the models of the Association of International Petroleum Negotiators [AIPN]) negotiation by senior executives. This means that the parties retain control over their own destinies in the initial stages, but also to ensure that if settlement efforts fail, a third party will render a binding decision. If this is adopted, it is important that the transition from one step to another is made clear (to avoid challenges or delaying tactics by one of the parties). Expert determination Another method of managing disputes found in the energy sector involves the use of an expert to find a solution. The parties agree to instruct a third party to determine a specific issue in dispute. This method normally applies only to a narrow range of issues; in the context of the energy industry these are usually complex technical or commercial matters such as equity determinations in unitization and the resolution of specific issues arising from a particular contract, often involving valuation. However, this general view of the expert’s role should not be interpreted too rigidly. In Venezuela, for example, the 1997 Model Operating Agreement for the Third Round listed a wider range of circumstances in which a dispute may be referred to an expert rather than arbitration: they covered the development plan and amendments to the plan; the annual work programme and budget; and exploration activity. There are important differences between determination by an expert and arbitration. Most importantly, there are usually no statutory provisions governing the former in contrast to the latter, which is normally covered by an arbitration statute such as, in England, the Arbitration Act 1996. The legal requirements of an arbitration may be absent in an expert proceeding with the parties not necessarily being required to present their case or to submit evidence. Whereas the courts may be used to assist in an arbitral process, by appointing arbitrators if necessary, by granting interim injunctions, and above all by enforcing awards of the tribunal, there is no comparable role for the courts in the process of expert determination. If intended by the parties to be binding, enforcement of the expert’s determination is by means of an action in contract for breach of the determination. On the international level, this is even more problematic; since it is not an arbitral award, it cannot be enforced under the New York Convention. Challenges to an expert’s role may be made only on limited grounds such as fraud or collusion, or that the expert had departed to a material extent from the instructions given.

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Challenges to expert determinations By way of illustration of how an expert process works, a dispute between two oil companies in the UK North Sea may be noted.140

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138 These issues are discussed in relation to energy disputes by Cameron, P.D. & Kolo, A.A. ‘Mediating International Energy Disputes (with A Kolo)’ in Titi, C. & Gomez, K.F. (eds) Mediation in International Commercial and Investment Disputes, Oxford: OUP, 239–258. 139 Mediation has acquired a much greater importance as a distinct approach with the entry into force of the United Nations Convention on International Settlement Agreements resulting from Mediation (the Singapore Convention on Mediation), 20 December 2018; entry into force on 12 September 2020: . 140 Other disputes have arisen in the North Sea context involving expert determination and disputes that had a state involvement, particularly those concerning cross-border unitization between British and Norwegian entities, especially the state-owned and controlled Statoil. The example of the Statfjord redetermination involving the engineering consultancy of DeGolyer & MacNaughton is discussed in Cameron (2006). For a review of these

62 Chapter 2: States, Investors, and Energy Agreements The ownership interests of Shell (UK) Limited and Enterprise Oil plc (Enterprise) were linked to their participation in the proceeds of exploration and production in given proportions. They were to be redetermined no more than three times during the life of the joint agreement, with matters contested between them being referred to an expert for determination. In the dispute that developed between them, Enterprise contended that during the second of these redeterminations, the expert’s determination was of no contractual effect and so the parties were not bound by it. In carrying out his work, the expert had been required to map contours of rock under the seabed and had used a computer package different from the one that had been agreed to in the contract. When the case was taken to the English Commercial Court,141 it was held that the law on this point was clear already from an earlier case: the conclusions of an expert who departed from his or her instructions in a material respect are not binding.142 The question of whether or not an expert had departed from the instructions in a material respect depended upon the materiality of the error, which had to be considered in relation to its potential effect on the result and/or the process. In this case, it was held that it would be unfair for Enterprise to be held subject to the findings of a computer programme that had not been agreed to in the contract. D. Energy Investment Agreements 2.94

Any investment proposal for a long-term project in the energy sector will draw upon contract designs typically used in the international energy industries, adapted to the needs of the planned investment, and its legal context. They will, for example, provide for an allocation of risks covering payments, potential insolvency, contingent default, price adjustments, such as indexation for commodity offtake contracts, frequent changes of law, force majeure and exchange rate risks. Although the energy sector uses many contract forms for commercial transactions that are or would be familiar to a commercial lawyer coming to the sector for the first time, there are a few that are unique to the sector, and others that, while less unusual, are an important feature of investing in an energy sub-sector, and therefore worth summarizing for the reader’s benefit.

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Most of the agreements relevant to making and managing an investment in the various energy sub-sectors are long-term in character and attempt to set parameters in law for a stable relationship that preserves the economic bargain for the duration of the agreement. Apart from the economic core, their design will typically include clauses that envisage consultation, review, and possibly renegotiation to allow the contract parties to jointly seek to

issues in the context of both developing and transitional states as well as market-states, see Polkinghorne, M. (2007) ‘Unitisation and Redetermination: Right or Obligation?’, J of Energy and Nat Res L 25, 303–323. 141 Shell (UK) Ltd v Enterprise Oil plc [1999] 2 Lloyd’s Rep 456; see also Veba Oil Supply and Trading GmbH v Petrotrade Inc. [2001] 2 Lloyd’s Rep 731, where Justice Lightman stated that the decision of an expert may be set aside by the Court if the expert ‘goes outside his remit e.g. by determining a different question from that remitted to him or if his determination fails to comply with any conditions which the agreement requires him to comply with in making his determination’. 142 Jones v Sherwood Computer Services plc [1992] 1 WLR 277.

D. Energy Investment Agreements 63 resolve any difficulties that may arise for one or the other or both during the contract’s performance. They will also include an ‘exit’ element if one or both parties decide not to continue. Usually, these agreements establish a founding relationship between the parties in a complex of contracts that covers distinct phases of the energy cycle and which must be designed so as to interlock smoothly with that complex. Often the state’s authorization is so fundamental that until its form is worked out, the final investment decision cannot be made, although in Europe and North America this role is more restricted. Similar concerns about duration, price volatility, and political risk are evident in the contractual and administrative arrangements for oil and gas, renewables, coal, unconventional energy and nuclear energy. Three kinds of energy investment agreement regarding the oil and gas sector have a claim to uniqueness: the instruments used by governments for granting rights to investors for hydrocarbons exploration and production, and particularly the production sharing contract; the joint operating agreement between the parties acting as investor which is commonly made after the grant of hydrocarbons rights by the state; and natural gas sale and purchase contracts that envisage readjustment over the term of the agreement.

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Moreover, the diversity of economic activity within and across the energy sub-sectors means that we can expect investment agreements to vary from one energy source to another, reflecting different approaches by investors and governments to the allocation of risk, stability guarantees, and the role of the state. Indeed, from a commercial point of view, each sub-sector contains clusters of different businesses with different risk and reward profiles.

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Investment law agreements can also be expected to respond to the fact of variation in the activities that comprise the cycle within each sub-sector. For example, in the economic activities concerning hydrocarbons there are important differences between the legal frameworks for oil and gas exploration and production on the one hand, and their transportation and distribution on the other. Within each of these sub-sectors there are important commercial segments in which the governing rules are those of business law. This reminder about differences in commerce and legal rules needs to be considered alongside another point of difference. Some energy sources are more strategic—in relation to the international economy at the present time, or in terms of potential harm, such as in nuclear energy law—than others, and the development of law will reflect this.

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The sections that follow are only an introduction to agreements that are often long and complex, containing for example, provisions for periodic review, quite sophisticated mechanisms for price determination and negotiation framed in ways that set procedural parameters and substantive limits, and characterized by features that are tailored to the specific needs of the individual project. The intention is to provide a summary of the main features of such agreements relevant to the subject matter of this book—the provision of legal stability in investor–state relations and its operation—and to facilitate understanding of the analysis of cases and disputes that occur in later chapters.

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As a caveat to readers unfamiliar with investment agreements in the energy sector, it is recommended that any individual agreements be assessed in relation to their content and not their title. Contract names sometimes reflect policy considerations in a particular jurisdiction or the outcome of negotiations and can prove an unreliable guide to the content of the agreement.

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64 Chapter 2: States, Investors, and Energy Agreements

(1) Hydrocarbons 2.101

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There are three main kinds of contractual instrument for petroleum exploration and production activities that allocate risk between foreign and/or domestic investors and host states: the production sharing contract, the licence (sometimes called the ‘modern concession’), and the risk service contract. Each one establishes a quite different regime of governance sanctioned by the host state’s law, and each has been in use by international investors in hydrocarbons for many decades.143 However, there are few examples of ‘pure’ types: hybrids are common, and combinations of agreement types can sometimes be found within a single country over time, reflecting policy shifts that have occurred over the years. Among the developing countries, the production sharing contract (PSC) has become the most popular, especially in Africa.144

(a) The PSC

As its name implies,145 this type of petroleum agreement requires a sharing of the fruits of the venture in predetermined proportions between the company and the host state, usually through its NOC. Title to the oil and gas remains vested in the host state or the NOC. The foreign oil company contracts with the host state or the NOC to provide the capital and the expertise required to explore for petroleum resources within a specified contract area, paying all the costs. It becomes a ‘contractor’ which fulfils work obligations at its sole risk and expense. In return, it obtains if commercial production is established a right to recovery of its eligible costs from the petroleum produced or from a proportionate part thereof, and for a share of the production or profit oil. In some of the Latin American contracts considered in chapter 7, the contractor is granted a ‘participation’ (that is, a share or equity) in the oil produced, and hence they are described as participation contracts. The sharing is usually done according to a sliding scale or formula set out in the PSC, granting a major share to the state from the balance of petroleum remaining after the recovery of costs, and with variations permitted according to whether the discovery is a marginal one or located in deep water. Usually, income tax is also levied on the contractor’s operations, and sometimes a royalty too. Its costs are recovered according to an agreed maximum percentage of the annual production until full recovery. Each PSC contains a section on accounting procedure, usually set out in a separate (and lengthy) annex. Although there tend to be many differences in the

143 However, some of their provisions have undergone changes over time. Provisions concerned with environmental issues, domestic market obligations (for gas) and local benefits, for example. 144 For discussions of production sharing agreements and other petroleum contracts between investors and host states, see Blinn, K., Duval, C., LeLeuch, H., Pertuzio, A., Weaver, J.L., Anderson, O.L., Bishop, R.D. & Bowman, J.P. (eds) (2009) International Petroleum Exploration and Exploitation Agreements: Legal, Economic and Policy Aspects (2nd edn), New York: Barrows; Cameron & Stanley (2017) at 75–81; LeLeuch, H. (2013) ‘Recent Trends in Upstream Petroleum Agreements: Policy, Contractual, Fiscal and Legal Issues’, in Goldthau A. (ed) The Handbook of Global Energy Policy, Chichester: Wiley & Sons, 127–145; Taverne, B. (1996) Co-operative Agreements in the Extractive Petroleum Industry 158–219, The Hague: Kluwer Law International; Johnston, D. (1994) International Petroleum Fiscal Systems and Production Sharing Contracts, Tulsa: PennWell Books. For a detailed analysis of petroleum contracts in the light of English law and practice, see Roberts, P. (2016) Petroleum Contracts: English Law and Practice (2nd edn), Oxford: OUP. 145 The terms ‘production sharing contract’ and ‘production sharing agreement’ (PSA) are used interchangeably in this book. In international usage, there is no substantive difference between them, although care should be taken to examine usage within a particular jurisdiction. In Nigeria, for example, both terms have been used by governments over time. In this study the term ‘PSC’ is preferred since a PSC or PSA is essentially a specific form of contract between the investor and the State or its agency or the NOC (or all). Countries using the PSC include Malaysia, India, Kenya, Bangladesh, Myanmar, and Nigeria. Those using the PSA form include Bahrain, Brunei, Qatar, Tanzania, and Uganda.

D. Energy Investment Agreements 65 degree of detail from one country to another and within a country over time, these contracts nearly always have a similar basic structure, covering economic, operational, accounting, regulatory, and legal matters. Although there is no recognized international model, many of the topic headings and some of the language used are now effectively common form. However, the differences can be crucial. For example, with respect to potential disputes, key elements such as cost recovery or profit oil split can vary, with between six and ten different main approaches identifiable. The PSC is the most common form of agreement between host states and oil companies in the international petroleum industry. It is in use in eighty-four countries around the world.146 It was developed in Indonesia in the 1960s from contracts used in the agricultural sector, as an alternative to the prevailing concession form of contract which was associated with economic and political colonialism. Under this regime, the NOC, Pertamina, became responsible to the state for the conduct of operations while the investor became a contractor responsible to Pertamina for the execution and funding of a work programme. The PSC became popular with countries in the developing world that had recently achieved independence, spreading to Egypt, Libya, the Philippines, Trinidad and Tobago, Malaysia, Peru, Qatar, and to other states that were members of OPEC. It has since been adopted in many countries that seek to attract investment in petroleum exploration and development.

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Given the large number of countries that use a PSC, it is not surprising that there are various methods used by governments to achieve the objective of attracting investment with respect to taxation. Three examples are given below: from Azerbaijan, a provision from the 1996 Shah Deniz contract; from the Kurdistan Regional Government of Iraq, a provision from their model PSC released in 2013; and a different approach adopted in a Mozambique PSC from 1999.

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(i) Azerbaijan The provision in Article 12 on Taxation states in 12.1(a) that:

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It is a condition to the Contractor Parties’ obligations under this Agreement that, except for the Profit Tax obligation described in this Article 12, the Contractor Parties shall not be subject to any Taxes of any nature whatsoever arising from or related, directly or indirectly, to Hydrocarbon Activities.

(ii) Kurdistan The provision on Tax in Article 31.1 states:147 Except as expressly provided in this Article 31, and without prejudice to the exemptions expressly provided for in Article 30 and in this Article 31, each CONTRACTOR Entity, its Affiliates and any Subcontractor shall, for the entire duration of this Contract, be exempt from all Taxes as a result of its income, assets and activities under this Contract. The GOVERNMENT shall indemnify each CONTRACTOR Entity upon demand against any 146 Wood Mackenzie’s Fiscal Service (2021): www.woodmac.com. The sample is 155 jurisdictions, so this amounts to 54 per cent. Several countries operate both PSC and concession systems. Usually, one has replaced another for current licences but older terms are still active on older licences. 147 Tax or Taxes are defined terms in the model PSC, and are extensively defined, listing many of the taxes that potentially might be levied. The PSC is available at the Ministry of Natural Resources website: . While the term ‘exempt’ is used, income tax is in fact payable under a ‘pay on behalf ’ scheme in Article 31.2.

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66 Chapter 2: States, Investors, and Energy Agreements liability to pay any Taxes assessed or imposed upon such entity which relate to any of the exemptions granted by the GOVERNMENT under this Article 31.1, and under Articles 31.4 to 31.11.

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(iii) Mozambique The PSC for the Sofala Bay block includes a provision on Fiscal Terms and other Charges in its Article 13. Its approach is different from the above. It begins by stating that the Contractor is subject to all the country’s applicable tax laws, unless exemptions are granted; these exemptions are then listed, and they are very comprehensive. Moreover, the government and the NOC give a warranty that any taxes that exist at the time the contract was signed but are not specifically mentioned in the contract are not relevant to the contract. If there is a breach of this warranty or if the law changes in a way that adversely affects the economic core of the PSC, a balancing form of stability clause is triggered, and the parties are required to negotiate a solution that provides the Contractor with: the same economic benefits as it would have derived if the change in the law had not been effected or if or in the case where there has been a breach of the warranty . . . the same economic benefits it would have derived if there had been on the Effective Date no taxes, duties, levies, charges, fees or contributions other than the listed imposts and the taxes in respect of which the Contractor and its Subcontractors are exempt.

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The role of the NOC in the last example above points to an important development in the allocation of responsibility for the making of tax payments. Contract stability has been affected by the growth of NOCs since the 1980s.148 This means that sometimes the contract for exploration and production is made between the foreign investor(s) and the NOC rather than the host state itself; on other occasions it is made between the investor on the one hand and the NOC and the host state on the other. A stabilization clause may therefore be introduced into an agreement by which the NOC is required to counter-balance any additional tax obligations imposed by the host state so that the original economic position of the parties is preserved. This is an example of a Type 4 stabilization clause discussed in chapter 3. It is in practice quite commonly used in petroleum agreements. This kind of provision is found in PSCs in Algeria and Qatar, for example. In effect, the host state is granting a specific tax exemption in the event of a change in the overall tax regime. There are variations on how the NOC (or even the state) can allocate the tax burden in the event of a unilateral change in the fiscal regime. Among the various possibilities, the NOC can bear the fiscal risk by paying all taxes and royalties (or some portion) out of its share. It can also pay all taxes and royalties regardless of its source of funds. It can agree to indemnify the IOC for the IOC’s payment of taxes and royalties. Moreover, it can agree to pay certain fiscal obligations for the IOC, subject to the government obtaining a higher share of production equivalent to such other charges and taxes, and to deliver the IOC’s share of production exempt from all other charges and taxes. In each case, the NOC acts to preserve the economic effects of the existing contractual relationship between the parties. However, for our purposes, the key point to note 148 For an authoritative overview of the main NOCs, see Victor, D.G. et al (2012) Oil and Governance: State- owned Enterprises and the World Energy Supply, New York: CUP. The literature on this subject is extensive but among the more notable contributions, apart from the collection by Victor, are Tordo, S. (2011) ‘National Oil Companies and Value Creation’, Working Paper 218, Washington DC: The World Bank/ESMAP,; and McPherson, C. (2013), ‘National Oil Companies: Ensuring Benefits and Avoiding Systemic Risks’, in Goldthau, A. (ed) The Handbook of Global Energy Policy, Chichester: Wiley & Sons.

D. Energy Investment Agreements 67 is that the practice of using an NOC as the vehicle for reallocation of a tax burden in the interest of stabilization of the original bargain is well established in the international petroleum industry.149 Advantages Although initially reluctant to use the PSC form, the IOCs have long since embraced it in most of the developing countries in which they operate. It offers several advantages to the parties. It can create its own legal regime, which has attractions in countries where the principal legal regime for foreign investment is of recent origin or is still unsettled. This applied in the 1990s to the countries that were in transition from communist to market- oriented economies in Eastern Europe and Central Asia. The state retains title to the petroleum which can quickly defuse an issue that arouses popular passions in some host states, allowing a relationship of cooperation, instead of confrontation, between the host government and the foreign investor. The foreign investor can ‘book’ in its published accounts a share of the petroleum reserves it finds (its production entitlement share), enhancing the value of its shares. However, this share will be only a fraction of the estimated future production, not the entirety. The PSC has in the past also been thought to demonstrate flexibility in the event of volatile oil prices. Further, the PSC (like the licence) will often require participation by the state or its agency as co-venturer in the operations of the activity though a body with representatives from both the investor and the state, the Joint Management Committee, offering learning opportunities and information flow to the State.

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Disadvantages It is a form of contract that has had its share of critics, however. Improperly supervised cost recovery provisions may result in ‘gold-plating’ or other forms of cost inflation (for example, claims made by the Russian authorities about the performance of the contract for the Sakhalin-II oilfield operated by Shell in the Siberian part of Russia, discussed in chapter 8). Even a well-calibrated volumetric sliding scale can fail to account for high-cost fields. Indeed, the cost recovery provision is likely to prove the most dispute-prone provision in the entire contract. The PSC is also less appropriate as a vehicle for involving foreign companies in areas that already have a very high level of prospectivity or where the existence of reserves is known to be probable, and the risk therefore low: in many parts of the Middle East, for example.150 Difficulties have also arisen in some cases with its capacity to provide for a sharing of the costs of decommissioning, although this can also arise when the issue is not properly addressed in the licence or applicable legislation. However, assessments of the PSC as a form are sometimes difficult since the PSC itself is often ‘impure’ in character: it is often found in a combination with elements of royalty, tax, lease, local market obligations, and/or a carry provision for a host state company (the investor ‘carries’ the NOC through the initial, high-risk activities until development or production when it assumes a full participating role in a pre-agreed share, on the basis of pre-agreed terms).

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149 As early as 1971 Art 15 of Law No 8 in Indonesia (the Pertamina Law) articulated the concept that the contribution paid to the state by Pertamina was designed to satisfy the corporate income tax obligation of both the NOC and the PSA contractors, codifying a practice already evident in the PSAs themselves: Mills, K. & Karim, M.A. (2010) ‘Disputes in the Oil and Gas Sector: Indonesia’ JWEL&B 3, 44–70; see also Art 36 of the Tunisian Petroleum Law: Decree-Law dated 14 September 1985 establishing Special Provision for Petroleum Exploration and Production. 150 There has been a considerable debate about its appropriateness to Iraq since 2003 for this reason, with some arguing for the use of service contracts. Even despite excellent prospectivity, however, there may be reasons for choosing a PSA over a service contract. For a defence of PSAs in such settings, see Jafar, M. (2008) ‘Production- Sharing Agreements for Iraq: Exploding the Myths’, LI Middle East Economic Survey, 10 November.

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(b) The licence or tax-royalty approach

By contrast with production sharing contracts, this approach turns on the grant of certain mineral rights to an entity to explore for and exploit petroleum resources.151 It has its roots in the legal form of a concession, even though it is often described—misleadingly—as a licence. The mixture of administrative permission and contract gives the licence in the petroleum sector the character of a hybrid form of legal instrument. The rights granted are exclusive in character and convey the licensee company (or consortium) property rights to all of the produced oil and the right to dispose of it,152 perhaps subject to an obligation to supply the local market. Duration will typically be for a similar period as for the production sharing agreement, say twenty-five to thirty years if extensions are included. The licensee bears all risks and funds the operations. The host state usually receives a royalty in cash or in kind and taxes on the profits derived from the licensee’s production operations, usually set out in a special tax regime (hence the name sometimes given to the licence by economists, a tax-royalty agreement). The equipment and installations used for petroleum operations are the property of the licensee company. In its economics, the calculations may be simple, and the royalty mechanism ensures an early and predictable cash-flow to the host state. However, additional profit tax mechanisms may apply under modern licences to introduce progressivity in profit sharing. State equity participation usually occurs, ‘carried’ through exploration and possibly development if exploration is successful (often it is not). It is typically implemented through a national company, as a way of correcting information asymmetries, increasing revenue and government control over production operations.

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Advantages The investor has security (for financing or other purposes) through its acquisition of rights to—but not in—the resource in the ground. The state retains its ownership of the resources in the ground or beneath the seabed. Countries as wide-ranging as Norway, Thailand, Morocco, Australia, and the UK use this kind of system. It is perfectly compatible with the existence of a strong NOC and with various forms of participation by domestic companies, as well as technology transfer and training programmes. However diverse the national forms of a licence, the contents tend to be similar even if the detail is not, and it has a familiar legal status to foreign investors. It has been used by many states and is almost universally favoured among developed states.

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Disadvantages The licence or tax-royalty form of agreement suffers from a nomenclature problem in two senses. Legally, it resembles the concession form of investor–state agreement associated with a period in the history of petroleum operations when the host government ‘conceded’ rights to its resources to a foreign oil company for long periods and under conditions that have long since been deemed unacceptable to the host state. However, in its modern variant it has a distinguished pedigree, being used for example by Norway alongside a highly independent petroleum policy with benefits to the state. In a different sense, the term ‘licence’ suggests an administrative permission rather than a contract, a weaker

151 Duval, C., LeLeuch, H., Pertuzio, A., & Weaver, J.L. (2009) International Petroleum Exploration and Exploitation Agreements: Legal, Economic & Policy Aspects (2nd edn), New York: Barrows, 57–68. Outside the USA, ownership of surface rights and mineral rights does not coincide. The state owns the latter irrespective of the ownership of the surface rights. Landowners will typically be compensated for disruption created by drilling rigs and a small rent paid for wellhead or pipeline rights. In parts of the USA (and Canada), the surface owner can negotiate directly with a driller about terms for prospecting for hydrocarbons under the surface. 152 This is a complex area: what the investor receives is an entitlement to reduce the petroleum into its possession, which is what happens at the wellhead or at another agreed point for the transfer of title.

D. Energy Investment Agreements 69 form of right entirely. When used in the international petroleum industry, the licence has a contractual character in practice, and conveys a right to extract or take petroleum, usually at the well-head (in contrast to the PSC). Its precise legal character has provoked debate among legal scholars but any uncertainty that may remain in law appears to have no practical significance.153 For a country sensitive about ownership of its natural resources, a disadvantage of the licence approach is that the foreign investor appears to acquire control of the national patrimony, even if only for a limited period of time and subject to many conditions. In some jurisdictions this might be taken as an affront to the sovereignty of the host state (as owner and custodian of the natural resources): if, for example, the state is a recently independent nation or for historical reasons has constitutional restrictions on ownership transfers, as in Iran. From a practical point of view, the disadvantages are fiscal and operational. For example, a royalty agreement can be as inflexible as a rent-sharing instrument, and the general income or profits tax may be too low or contains tax loopholes that erode government revenues. On the operational side, the foreign company may have greater control over the development of the resource than under a typical PSC arrangement, but the more recent the grant, the less this is likely.

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Comparing PSAs and concessions There is no built-in advantage in adopting one form of agreement over another. By adjusting shares of oil or rates of tax or royalty the state’s take under a PSC can be theoretically equated to its take under an agreement which is not in the production sharing form. In practice, even where a state granting authority favours production sharing, it will not usually be prevented from entering into other types of agreement, if it thinks it appropriate to do so: for example, it will often elect to do so for areas that have special characteristics such as deep water (requiring terms that incentivize investors to commit larger sums of capital and use more advanced technology), or which are deemed to have a ‘frontier’ (that is, higher than usual risk) character. In such circumstances, the IOC operating under an alternative to the tax-royalty or licensing kind of agreement (such as a PSC) would be entitled to take much (but never all) of the production from a producing field, subject usually to an obligation to meet or contribute to meeting the requirements of the local market. The host state would obtain its ‘take’ from the field by means of royalty and tax payments. Under these types of agreements, the host state’s ‘take’ from a producing field would consist of:

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(a) In the case of a PSC: (i) the host state or NOC’s share of ‘profit oil’; (ii) tax and, (iii) when applicable, royalty payments. (b) In the case of a petroleum agreement in the licence/concession form: (i) tax on the contractor’s profits, and when applicable a specific additional profit tax scheme; (ii) royalty; and (iii) the NOC’s percentage under the joint venture of the entire production from the field.

153 An early but still relevant contribution to the debate on this subject was the collection of papers assembled by Daintith, T. (ed) (1981) The Legal Character of Petroleum Licences, Dundee: University of Dundee.

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The core difference between the two forms of contract lies in ownership. Under the concession system, an IOC normally takes ownership of produced oil once it reaches the well-head. The IOC is then liable for tax and other levies on this produced oil. By contrast, a key feature of the PSC is the retention of ownership of produced oil by the host state or its NOC. Instead, the PSC separates the produced oil into several ‘parts’: (1) a share designed to permit recovery of costs by the contractor (the IOC); (2) a profit share, to be separated between the IOC and the host state or its NOC; and (3) a part that is normally taken by the government in the form of a tax and sometimes also a royalty. These parts are shared between the parties which are normally one or more IOCs and the state represented by a ministry or the NOC. The state is, and remains throughout, the owner of the petroleum resources and the recipient of the state’s share of the produced oil. Production is vested exclusively in the party that owns the mining rights, and the contractor’s rights are of a purely contractual nature. The contractor does not acquire title to its share of the petroleum until it reaches the export point or a mutually agreed delivery point. In this sense, it is possible to describe the PSC as a kind of ‘oil and gas sales agreement’, with the contractor receiving a share of production for the services it has performed.

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Another key feature of the PSC is the operation of the tax regime. Under the licence or concession system (which remains popular in many countries, especially in Europe and North America), tax is paid by the IOC on taxable income but allows depreciation. The PSC does not exempt the contractor from the operation of the wider tax regime unless specific tax clauses have been adopted in the tax law on PSCs on the hydrocarbons law. Moder good practice is for specific tax rules to be avoided in a PSC since it creates a risk of conflict with the general tax laws. In some cases, however, the PSC may specify that certain taxes will be paid for the IOC by the state or the NOC, with the IOC exempted by the state from paying other taxes or charges.

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(c) The risk service agreement

The general idea behind a risk service agreement is that the host state hires the services of the IOC as a ‘contractor’.154 The financial, exploration, and development risks are carried by the contractor. If commercial production becomes possible from the contract area, the contractor is reimbursed for its costs and investments and paid a fee for its services from the sale of the oil produced. The foreign investor is granted no mining or mineral rights and the production belongs in its entirety to the host state or the NOC. The investor resembles a ‘hired hand’ working for ‘wages’. A key feature is the method of payment. If it is specified in terms of a fixed fee denominated in dollars and valued at market prices at the time of the transaction, any problems arising from volatile oil prices will be avoided. Such a fee would normally be paid monthly or quarterly according to a formula that allocates reimbursement over several years of eligible investment and operating costs incurred, relative to maximum percentage of the annual production value, and providing a profit element such as a fee per barrel. The relationship between the investor and the state under these arrangements has been described as ‘like a creditor of a debt obligation’, in which the investor receives ‘income calculated to cover its expenses plus a fixed return on its debt investment’.155 Like any petroleum agreement the operation of a service contract can trigger disputes. A service contract awarded to 154 Smith, Ernest E., Dzienkowski, John, Anderson, Owen L., Conine, Gary B. & Lowe, John S. (2000), International Petroleum Transactions (2n edn), Boulder: Rocky Mountain Mineral Law Foundation at 480–493. 155 Occidental Exploration and Production Company v The Republic of Ecuador, Final Award, LCIA Case No UN3467 of 1 July 2004, IIC 202 (2004), 43 ILM 1248 (2004), at para 95.

D. Energy Investment Agreements 71 a consortium in the Philippines entitled the contractor to 40 per cent of the net proceeds of production, with 60 per cent to be remitted to the government through its energy department. In practice, the latter sourced the payment of the consortium’s income taxes from the government’s 60 per cent share. The country’s audit commission declared this practice an unlawful tax exemption and issued a demand for US$1 billion in back taxes on profits generated over a seven-year period.156 The attractions to a foreign investor of such agreements are limited to locations like parts of the Middle East or, for many years at least, Venezuela, where much is already known about prospectivity, significantly reducing the exploration risk. Other countries that have experimented with this form of agreement include Bolivia, Ecuador, and Mexico. Proven but undeveloped fields in developing countries are obvious candidates for such contracts, especially where the host state lacks the capital and technical expertise to develop the resources itself. The investor may, for example, have access to third party funds and loans under better terms than those that the host state could access, and may also have technical capacity to use more advanced technology than the host state or its national oil company.157 The arguments against such contracts are based on the incentive structure they offer: they may encourage the foreign investor to seek high-cost small fields, and to carry out high-cost operations based on poor development plans, and their operations may be more profitable to them if a lower resource recovery rate is achieved rather than a maximum one. The limited benefits of these contracts were evident in the producing countries of Latin America by the early 1990s and led to changes in oil and gas policy to attract foreign investment and boost levels of recovery (see c hapter 7).

(d) Stability and petroleum agreements

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At the heart of negotiations about any international petroleum contract is the fiscal regime which, in the event of commercial discovery, will determine how the profits and revenues are to be divided between the state (and usually the NOC) on the one hand and the IOC on the other. This will involve more than taxes and royalties. The determination of a modern fiscal regime—in a PSC at least—will involve agreement on the provisions for and the timing of cost recovery and the division of profit oil. If agreement is reached on all the essentials (and this is usually a lengthy process), it may nonetheless be undermined if the contract cannot be given some degree of long-term stability.

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Apart from concerns about the long-term stability of the fiscal regime, the other concerns of the investor when considering whether to make an investment in a particular case will be those provisions that have a likely impact upon investment recovery and profit such as security of contractual and proprietary rights and titles, the right to sell petroleum and the right to export. Further, the investor will usually seek stability beyond purely fiscal provisions in the investment agreement, seeking also the right to retain and repatriate foreign exchange earned, to retain the proceeds of export sales offshore without mandatory currency conversion, and to exercise operational freedoms consistent with international standards.

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156 157

GAR, 8 June 2018: ‘Shell and Chevron ask Philippine court to refer tax dispute to ICC’. Le Leuch (2013) at 134.

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(e) The Joint Operating Agreement

A different kind of agreement entirely, but one that is quite specific to the petroleum industry, is the Joint Operating Agreement (JOA).158 Given the role of joint ventures in the upstream oil and gas industry as mechanisms for the sharing of geological and political risk, raising finance, and sometimes bringing in necessary expertise, the JOA is the typical legal form to address issues raised by these joint ventures. In contrast to the vertical relationship between the State and investor established by the above three agreements (whereby the state as owner grants rights to an investor), the JOA establishes a horizontal relationship among the parties to a consortium acting as an investor, and presupposes a grant of rights by the state to the consortium/investor. The JOA is intended to last for the life of the project, and during that period, the parties will remain together unless termination, withdrawal, assignment, or default occur. The JOA provides the constitution or framework of rules on which the joint venture will operate throughout its lifetime and will be in constant use by the parties during the operations. It usually applies to a single government licence or contract and will allocate responsibilities among the parties to fulfil the obligations to drill and pay for exploration and appraisal wells required in the host government agreement, and thereafter for development, production and decommissioning activities in the event of any commercial discovery. The parties will appoint one of themselves as Operator to run the joint venture on their behalf. It will have three main tasks: to carry out the joint operations, dealing with the necessary sub-contractors; to represent the joint venture to the host government and third parties and to manage the group’s internal affairs, such as chairing meetings and providing accounts. The operator does this on a no-loss, no-gain basis, and follows a standard of reasonable and prudent conduct set out in the JOA. Control over the operator is exercised by means of an operating committee in which each of the parties is represented and which controls the direction of operations by means of passmark voting (the aggregate percentage interest required to agree to a proposal). Liabilities are joint and several in respect of the host government; in a legal sense, this is not a partnership. Given the importance of the JOA in day-to-day operations and the information the JOA committee has access to, the absence of a government representative means that the State will be at a disadvantage in terms of information flow from the field. Some PSCs or licences respond to this risk by establishing a Management Committee (MC) between the NOC and the investor/contractor. In Algeria, for example, a model PSC requires just such an MC to be set up, and empowers it to make all decisions relating to approval of annual and multi- annual work programmes and budgets submitted by the Operator (the contractor); approval of annual plans for production; review of accounts, and approval of them, and to do so by unanimous vote. In this case, during the exploration stage (where the risk is significant), the contractor is the Operator; during the exploitation stage (if there is one), this role is

158 The literature on this subject is extensive, usually oriented to the practice lawyer. A comprehensive overview of the JOA is provided in Roberts, P. (2015) Joint Operating Agreements: A Practical Guide (3rd edn), London: Globe Business. A guide to the influential model JOA produced by the Association of International Petroleum Negotiators: Fowler, R., Roberts, P. & Pereira, E. (2019) The AIPN Model Joint Operating Agreement: A Practical Guide, London: Globe Business. There are many chapter-length introductions to JOAs, such as in Duval et al (2009) chapter 16 at 285–303; Golvala, C. (2009) ‘Upstream Joint Ventures: Bidding and Operating Agreements’, 41–55 in Picton-Turbervill, G. (ed) Oil and Gas: A Practical Handbook. Various model JOAs exist, developed by industry-led associations such as the AIPN, Oil and Gas UK, the Canadian Association of Petroleum Landmen, the Australian Association of Petroleum Landmen (the term ‘landmen’ has its roots in early US on-land operations when operators entered into joint agreements as a way of raising, spreading risks over several projects and gaining access to pipeline transportation and distribution for their products: see Duval et al (2009) at 286.

D. Energy Investment Agreements 73 entrusted to a joint Operating Body with an equal division of responsibilities between the NOC and the contractor. The JOA relationship may end in one of three ways: by fault or default; by mutual consent or by a party’s decision to transfer its interest. Where a party fails to pay its percentage share of cash calls within the allotted time set, this can trigger a default. Disputes among parties are not unusual: although the parties come together in a joint venture to shift, share or reduce their exposure to certain risks, such as financial, technical, or market risks, their entry into a JOA introduces a new set of risks entirely: for example, reputational risk, the risk that a party will fail to fund future capital investments or to meet decommissioning obligations, the risk that intellectual property will leak or that corporate strategies will cease to be in alignment on key issues during the life of the project. The JOA will provide a process for the management and resolution of disputes: usually, this will be through final and binding arbitration, sometimes supplemented by pre-arbitration measures such as consultation and negotiation between senior executives and mediation. These processes may not involve the host state directly but, as custodian of the resources, the state has an interest in their efficient management, so may seek to limit the scope and frequency of disputes among JOA parties when at all possible.

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(2) Natural gas Most of the oil and gas exploration and production agreements discussed in (1) above will contain only limited provisions on natural gas, permitting, for example, a longer period for appraisal of a natural gas discovery, restrictions on gas flaring, and perhaps a priority allocation of gas to the domestic market.159 When natural gas deposits are found, and investments are proposed to develop them, these petroleum agreements become the first link in a series of long-term contracts that must be carefully negotiated and involve a new set of parties, not least for financing purposes: this is an instance of the commercial complexity mentioned in Chapter 1 as a defining feature of energy investment. The most important of these long- term contractual arrangements is the natural gas sale and purchase agreement (SPA), made between the producer or seller of the gas and the buyer, or a small number of buyers.160 It provides for the sale of certain quantities of gas by the producer at a base gas price on a given date and delivered at a given point of the gas supply chain. Typically, its duration will be between fifteen and twenty-five years, especially when the contract concerns the export of pipeline gas using a specially built pipeline or sale of Liquefied Natural Gas (LNG). The base price is subject to a specific revision formula that contains a list of agreed indices such as the quoted prices for a set of crude oils and/or competing fuels to gas as well as indices 159 Complex issues can arise about allocation: see Griffin, P. (1999) ‘Commingled Streams of Natural Gas: Allocation and Attribution’, in David, M. (ed) Oil and Gas Infrastructure and Midstream Agreements, London: Langham Legal. 160 The commercial details are diverse and are generally treated by the parties as sensitive and therefore confidential. However, most sales agreements will conform to a pattern and have many features in common, which have been described and analysed in a number of publications. The nomenclature can vary. Peter Roberts describes them as Gas Sales Agreements (GSAs) and then adds that in his analysis of the GSA, it ‘is examined equally from the perspective of the seller and the buyer’: Roberts, P. (2008) Gas Sales and Gas Transportation Agreements: Principles and Practice (2nd edn), London: Thomson/Sweet & Maxwell, vi. Roberts also considers in detail the other major agreement in the complex of contractual arrangements required to develop a gas discovery and bring it to market: the Gas Transportation Agreement. A third type of agreement that is commonly found is the gas balancing contract, which is used to allocate under-lifted gas among producers: LeLeuch (2012) at Appendix 8.

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74 Chapter 2: States, Investors, and Energy Agreements representative of costs, inflation and sometimes currency exchange rates. In all, there are likely to be around thirty provisions that cover legal, contractual, operational, economic, and fiscal matters. Typically, they will also include provisions on price determination and price review, contract quantities and gas quality, as well as a take-or-pay obligation for the buyer to accept the minimum quantities specified in the GSA according to a timeframe that may be daily, monthly, quarterly or annually.161 Where the buyer fails to do so, it must compensate the seller by paying for the gas not taken up to a certain amount, although such clauses are not usually absolute in character and may limit the relevant contract quantity by an agreed percentage. In this way, the volatility of pricing and demand as well as other market risks are mitigated by setting a ‘floor’.162

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(a) Contract adjustment

The highly capital intensive and front-end loaded character of investment in gas infrastructure dictates a reliance on debt financing.163 The long payback periods require financing to be tied to a revenue stream from the project. Long-term contracts are a means of guaranteeing debt service and a sharing of project risk between buyer and seller. Given the long duration, the parties have departed from a classical contract model and introduced a wide variety of sophisticated mechanisms that are aimed at adapting the contract price to unforeseeable changes in market conditions: use of price formulae linked to costs or to market indicators or both; continuing negotiation arrangements bounded by substantive limits or procedural rules; resort to third parties for price ascertainment or price fixing under a variety of substantive and procedural constraints; provisions for periodic review or ‘on demand’ review or renegotiation of price adjustment arrangements.164 In such situations of market instability, the parties will normally be overwhelmingly concerned with keeping the contract alive and will avail themselves of opportunities to renegotiate some of the fundamental clauses, in contrast with the more reluctant approach to renegotiation that is sometimes evident in the international oil industry (at least in public). An important caveat to this is that in normal circumstances a price review is designed to allow the contract price to vary according to certain defined indices and ensure that over the life of the contract the price remains in line with the aspirations of the parties when they entered into the contract. There is further discussion of this important point in (b) below. This commitment to preserving the terms of contracts has been tested repeatedly for more than a decade as the number of disputes about pricing of gas has grown significantly. It has followed a period of liberalization and volatility in the commodity markets, the development of gas hubs and the increase of alternative energy sources (to piped gas) such as LNG.165

161 For a recent examination of the take-or-pay aspect of these long-term agreements, see Talus, K., Looper, S. & Burns, L. (2020) ‘Long-term Take-or-Pay Agreements in the Natural Gas Industry: Past, Present and Future’ OGEL 18(3). 162 Ibid, at 1. 163 Of all the fossil fuels (petroleum products, and coal), natural gas has the lowest energy density when measured by the amount of energy stored in each unit of matter. This fact of life means that long distance transportation of natural gas from the place of production soon becomes uneconomical, since when pipelines are used the gas needs to be cooled and pressurized, and that requires significant amounts of energy. The alternative is to liquify the gas at origin and re-gasify it at the destination. Once made, a pipeline investment usually constitutes a ‘sunk’ investment and establishes an interdependency between the gas supplier and the market served by the pipeline. 164 Cameron, P.D. (2017), 82–84, 141–142; see also Daintith, T. (1987) ‘Contract Design and Practice in the Natural Resources Sector’, in Nicklisch, A. (ed), The Complex Long-Term Contract, Heidelberg: Müller, 151–170. 165 For commentary on these developments, see the chapters in Freeman, J. & Levy, M. (eds) (2020) Gas and LNG Price Arbitrations (2nd edn), London: Global.

D. Energy Investment Agreements 75 Arbitrations about gas pricing have become especially common in the pan-European area (see chapter 8). They raise the question about whether even complex pricing arrangements are sufficient to ensure performance or even the survival of a contract in the face of significant disparities between the prices paid under long-term contracts and spot prices and a decline in demand. Contracts may simply break down when there is no community of interest among the parties to support them; even a superior design quality with provision for contractual flexibility may prove insufficient to prevent this. At that point the threat of third- party enforcement of the formal stipulations of a contract will become a reality.

(b) Pricing and price review

The approach to stability of contract in the gas industry is strongly influenced by one important factor. In contrast to the international oil industry, where there is a generally recognized international trading price for oil, based on various international marker blends, such as Brent or West Texas Intermediate, this feature is largely absent in the markets for gas. Some local markets may have a trading price which can be used as a reference point, but otherwise the price of gas, whether in piped or LNG form, will be negotiated in the context of the individual agreement for gas sales and its economic circumstances. As market conditions develop throughout the lifetime of the contract, the price will normally be adjusted according to a formula. That formula is however often tied to the crude oil price or petroleum products where they are the principal competing alternative fuel supply to natural gas. It is therefore vulnerable to dramatic rises or falls in that price.166 The GSA may also be subject to the approval of the government, which will also have to approve the gas pricing clause.

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A renegotiation, adjustment or review of price and possibly some other contract terms after a few years is a common occurrence and is usually based upon review provisions already set out by the parties in the contract itself.167 Gas price reviews can be scheduled in the contract to take place at regular intervals (normal reviews), and in the light of unforeseen circumstances (special reviews).168 They are usually couched in fairly general terms, however. When, later, the parties meet to discuss such a review, there is not necessarily any sense that the contract has broken down or that a serious dispute has taken place between the parties. On the contrary, the contract may simply need an amicable review or revision due to changed circumstances. The host state where the gas is produced is usually a party to the contract, either directly or through the national gas company.

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Under a price break clause or price review mechanism, a review is open to either buyers or sellers who can demonstrate that the price is no longer appropriate in light of current market conditions. The effect is to allow the parties to ‘reset’ the contract price to one that preserves the sound economics for both parties and removes any undue hardship or loss of revenue caused by the operation of the original contract price. The key concept involved is defining the set of circumstances under which prices can be changed (known as the ‘triggering event’). If there is no agreement that an event has occurred, the dispute

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166 This applies to NE Asia and continental Europe, but in states that developed their gas industries based on domestic supplies (UK, the US, and Canada), pricing developed in a different way, following policies of liberalization and tolerance of contract abrogation. 167 For a recent review of this subject, taking into account the impact of COVID-19, see Polkinghorne, M. & Ramen, Y. (2021) ‘Gas Price Re-openers and Other Remedies’, Extractives Hub Research Insights, January 2021 Insight, Extractives Hub . 168 For a more detailed examination of price review clauses than is possible here, see the various contributions to Freeman and Levy (eds) (2020); see also Energy Charter Secretariat (2015) Putting a Price on Energy: International Coal Pricing, Brussels: ECS.

76 Chapter 2: States, Investors, and Energy Agreements will be referred to an expert or arbitrator who will determine the new price or formula. The other key elements are the methodology for establishing a price adjustment and the procedure to be followed when a price review takes place and a process for making an adjustment if one is required. 2.131

A hardship clause in the contract may permit a more radical alteration in the pricing mechanism, allowing either the buyer or seller to require the other party to re-negotiate the price to a more equitable level, if it can demonstrate that undue and unforeseen hardship is being experienced as a result of the existing price level. This is normally defined in the contract itself (for example, with reference to the failure of a party to make a defined economic return). The contrast with indexation and price adaptation clauses is considerable however. While they are concerned with questions of price, ‘hardship usually allows literally any part of the entire contract to be reviewed’.169 It also allows more flexibility in the outcome while the scope for adaptation permitted by the contract is usually narrower, objective and directed at a single outcome.

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A key provision in terms of relief rather than contract revision is the force majeure clause. These clauses have become more standardized over time, partly because the number of players in the international gas industry is small and because the external lawyers they hire from time to time come from a small group of specialist firms. The typical clause is in three parts: firstly, there will be a description of events which will operate to excuse a party from its performance. This will not usually be a catch-all definition; it is more likely to list circumstances, either on an exhaustive or on an inclusive basis, which constitute events of force majeure. These would normally include acts of God, war, strikes, or some forms of government intervention. Secondly, there is an obligation to mitigate: this is about how the parties must attempt to prevent the force majeure event from occurring and what they must do while it occurs as well as their duties to restore normal performance. This usually works to prevent a party from claiming force majeure when the event has been the result of the party’s negligence or failure to exercise a standard of reasonableness (the force majeure clause is aimed more at removing difficulties that are beyond the control of the parties). Thirdly, there will be a provision which addresses the process, such as a requirement that one party give notice to another that an ‘event’ has occurred which constitutes force majeure.

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Experience shows that force majeure clauses are not effective if contract renegotiation is sought. They are designed rather for suspension or termination of the relevant contractual obligations. An attempt to invoke force majeure following an increase in the market price for gas (making the contract price uneconomic), provoked the judicial response: the ‘fact that the contract has become expensive to perform, even dramatically more expensive’ is not a ground for force majeure.170 Nonetheless, buyers in Asia and some other places have invoked force majeure in the long-term gas sales contracts following the impacts of the COVID-19 pandemic.171

169 Polkinghorne and Ramen (2011) at 3. 170 Thames Valley Power Ltd v Total Gas & Power Ltd [2–6] 1 Lloyd’s Rep 441. 171 Ason, A. (July 2020) ‘Scenarios for Asian Long-term LNG Contracts Before and After COVID-19’, Oxford Institute for Energy Studies NG 160, 5. Declarations of force majeure were issued by CNOOC and Petrochina due to logistical constraints at receiving ports and to weak domestic demand: Ason, A. & Meidan, M. (March 2020) Force majeure Notices from Chinese LNG Buyers: Prelude to a Renegotiation? Oxford Institute for Energy Studies.

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(c) Disputes over gas supplies

The kind of disputes that typically arise are threefold: highly technical ones (involving measurement, for example); legally complex (force majeure issues, for example); or disputes involving elements of both (involving say a price review mechanism). Disputes about price have usually been resolved by means of negotiation but in recent years market volatility has led to an increase in disputes submitted for resolution by arbitration. The highly complex, technical character of such disputes means that only a few arbitrators have the appropriate level of experience to take part in such disputes. It is common for expert witness evidence to play a major role in assisting the tribunal; usually, these are economists by training. These circumstances also support a case for appointing persons as arbitrators who have industry backgrounds.

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There are different views about how to pattern the management of a dispute in a natural gas sales contract. The approach taken in the AIPN Model Gas Sales Agreement172 is similar to that of the AIPN models for the oil industry. The basic choice is whether a dispute, should it arise, will be managed in a ‘stepped’ manner, beginning with amicable discussions, perhaps with senior executives and progressing (in the absence of a settlement) to and ending with formal arbitration. Alternatively, the stepped options may be reduced or eliminated altogether, and the parties go straight into the commencement of arbitral proceedings. The AIPN model offers five sets of administered rules which are recommended (in no order of preference) and two sets of non-administered rules, the Conflict Prevention and Resolution (CPR) Institute for Dispute Resolution and UNCITRAL. If the host government is a party to the contract, ICSID is recommended as an option. However, an additional option (not present in the models mentioned above), is that disputes may be referred to the courts. This is an appropriate framework approach for international import contracts but would not necessarily apply in the absence of this dimension. In the UK, for example, the jurisdiction of the ordinary courts would normally be accepted for sales and purchases of gas from the UK continental shelf. For international transactions, neither party would normally wish to submit the dispute to the jurisdiction of a foreign court. If several arbitrations are triggered by a dispute, the AIPN International Model Dispute Resolution Agreement provides for the consolidation of such multiple arbitrations. However, it may be noted that a consolidation provision can lead to litigation over the right to and the method of consolidation, resulting in a delay in the settlement of the dispute.

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Another option in settling disputes is the selection of an expert. For matters that are deemed to be ones that require a determination of fact, an expert is the likely choice: they could include the accuracy of measurements, price calculation, reserve determinations, and compliance with specifications on quality. An expert is most likely to be useful for resolving disputes of a technical or quantitative character. The courts or an arbitral tribunal may be more appropriate for issues concerning the interpretation of contract. This differentiation might not prove clear-cut, however. The expert may be required to determine whether circumstances exist that make it impossible to calculate the contract price for gas; following which the parties may be required to meet and seek in good faith to agree on a means of removing the effect of such circumstances on the calculation of the contract price; failing agreement, the same expert may be asked to resolve the matter, or a new expert may be appointed. In a dispute concerning gas from a field in the UK sector of the North Sea, an expert was called upon

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172 AIPN Model Contract: Gas Sales Agreement (2006) Art 23.2. For the comparable provision in the AIPN Model Form Gas Transportation Agreement, see Art 28.

78 Chapter 2: States, Investors, and Energy Agreements because the buyer claimed that the contract price could not be properly calculated because of the inclusion by the sellers in one or more of the indicators of a tax imposed or changed for environmental or energy conservation purposes.173 2.137

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Growth in demand for natural gas, particularly in power generation, has led to a corresponding growth in the number and variety of long-term contracts for its supply and transportation. Indeed, this growth has led to a greater diversity in forms of transportation, including not only cross-border, long distance pipelines but also the use of large tankers to carry natural gas in liquefied form (LNG) across the seas. It has also led to a greater incidence of contractual disputes arising from disruptions to the supply of gas across transit states. The disruptions to supply of gas from the Russian Federation to customers in the EU in 2005– 2006 and 2009 are vivid illustrations of this, triggering arbitrations before the Stockholm Chambers of Commerce, a popular venue for European gas disputes, and involving state company sellers and transporters and EU buyers of the gas.

(d) LNG contract variations

Many of the provisions typically found in piped gas contracts have been adapted to LNG sales contracts, including price review mechanisms and take or pay clauses.174 Prior to the COVID-19 pandemic, LNG sales were growing so fast that they appeared likely to overtake those of piped gas. LNG has several clear advantages over the latter: it is cheaper over long distances and allows for flexibility in the destination of gas. The significant (and unprecedented) growth of LNG projects and cargo transportation around the world and indeed the growth of states engaged in LNG export means that investor–state disputes are likely to increase with respect to LNG and major offshore construction projects.175 Knowledge of these disputes is limited due to the confidential character of the proceedings. The first major (known) international dispute over LNG occurred in 1982 between Trunkline LNG Company (TLC), a US buyer, and Sonatrach, an Algerian seller and state-owned company. In July 1982, TLC filed for arbitration before the ICC because Sonatrach had failed to deliver LNG under a gas supply contract. The following month, TLC announced that it had reached agreement with Sonatrach about both a shipping schedule and an amendment to the price review mechanism in the agreement. The request for arbitration was withdrawn. This settlement became mired in further disputes as various US governmental agencies intervened in LNG pricing at a time of market deregulation and falling gas prices, with the result that most LNG agreements with Sonatrach for gas sales to US terminals were terminated or renegotiated.176 Another dispute arose in 1996 when ENEL, the Italian state-owned utility, attempted to cancel its Sale and Purchase Agreement to buy gas from the Nigerian LNG company, claiming force majeure. The breach of contract arbitration against ENEL involved a claim of US$13 billion, the largest claim ever brought under English law at that time. The 173 The case involved the UK gas field, Britannia. It was settled. 174 For further discussion of LNG contracts, see Sullivan, H.W. Jr (2017) ‘LNG Sale and Purchase Agreements’, in Griffin, P. (ed) Liquefied Natural Gas: The Law and Business of LNG (3rd edn), London: Globe Business, 185–212; also, in the same volume, Barra, S.P. ‘LNG Sale and Purchase Agreements’, 287–304; Energy Charter Secretariat (2008) Fostering LNG Trade: Role of the Energy Charter. 175 The AIPN Model Agreement for LNG Master Sales and Purchase Agreement (2012) contains provisions on dispute settlement but these follow closely those in the Model Contract: Gas Sales Agreement. 176 An account is given in Hodges, P. ‘LNG: A Minefield for Disputes?’, in Griffin, P. (ed) (2006) Liquefied Natural Gas: The Law and Business of LNG, London: Globe, 113–125 at 114. The US context of deregulation behind this dispute and its effects on the TLC agreement are explained in some detail in Castaneda, C.J. & Smith, C.M. (2006) Gas Pipelines and the Emergence of America’s Regulatory State: A History of Panhandle Eastern Corporation 1928–1993, Cambridge: CUP, 219–246.

D. Energy Investment Agreements 79 dispute was settled, and the force majeure argument never finally determined.177 More recently, commercial disputes have extended from price review ones to disputes between parties on how to share the benefits of arbitrage opportunities arising from differences between contract and short-term prices.178 Distinct trends in contract and pricing disputes have also been emerging in the region which is the largest destination for LNG, Asia Pacific,179 and contract adjustments have been subject to careful analysis due to the impact of the COVID- 19 pandemic.180

(e) The state role and public service

The service character of gas distribution means that this segment of the gas industry is usually subject to a degree of state control in the form of ‘public service obligations.’ Several rights and obligations are linked to this such as the following:

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Public service. The public has a legal right to demand and receive gas supply and distribution service. This must be provided on reasonable terms and the company cannot choose to connect only those users that are profitable to supply. An exclusive franchise area is also common in which there is no competition in the designated area. Price regulation. The price at which gas is supplied and conditions of service for customer protection are enforced by a regulatory commission. Right of way. Access to public roads, and other essential networks is usually obtained by means of assistance of the public authorities.

(3) Electricity and renewable energy International investment in conventional electricity generation, transmission and supply is relatively recent. For many years the standard approach to investment in this sector, at least outside of the United States, was to rely on state-owned and controlled utilities. The same approach was taken to network-bound utility sectors such as gas transmission and distribution (but not exploration and production), water, and much of the transport sector. Electricity was also the most nationally organized form of energy. A change began with the liberalization and privatization of public utilities in the 1990s, mostly in parts of Europe, Latin America, and some Asian countries, where real markets in electricity did not exist. This was accompanied by the introduction of regulatory frameworks to encourage competition. After many years of under-investment (except in Western Europe), these utilities required substantial front-end investment by the bidders for concession rights, which were often foreign investors, sometimes with local partners, and sometimes local firms that had sold a significant share of their capital to a foreign firm. For such investors, the host State regulatory framework is crucial to enable utilities to recover their fixed costs. However, in some cases, as in Argentina, unexpected changes in the regulatory framework led to losses and a 177 See the account in Cameron, P. (2007) Competition in Energy Markets: Law and Regulation in the European Union (2nd edn), Oxford: OUP, 315–16. 178 Agosti, L. & Mozelle, B. (2020) ‘LNG Disputes Beyond Price Reviews’, OGEL 18(3). 179 Finizio, S., Trenor, J.A. & Tan, J. (2020) ‘Trends in LNG Supply Contracts and Pricing Disputes in the Asia Pacific Region’, OGEL 18(3). 180 Christie, K., Han, M. & Shmatenko, L. (2020) ‘LNG Contract Adjustments in Difficult Times: The Interplay between Force Majeure, Change of Circumstances, Hardship, and Price Review Clauses’, OGEL 18(3).

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80 Chapter 2: States, Investors, and Energy Agreements proliferation of claims by investors (see c hapter 7). In other cases, such investment had more success. The typical contractual form of risk allocation for such investments is examined below in (a). International investment in renewable energy is more recent, and the risk profile of such investments is different. The legal response is reviewed in (b) below. In each case, the contractual arrangements typically include guarantees of stability of the legal and business environment against political risk.

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(a) Conventional electricity

The most frequent mode of entry for foreign investors has been through the grant of a concession by the host state or a municipality.181 These grant rights to the investor but also allow for tariff fixing and price formulae that have no counterpart in the hydrocarbons industries or in competitive ones. In the long term, government supervision or regulation of the concessionaire will continue, usually through a dedicated agency. For that reason, and because such projects are usually financed by debt, the inclusion of guarantees for the stability of the regulatory framework over a thirty-or even a fifty-year period is not unusual. These can influence the bankability of a project which will have to service the principal and interest on the debt through the revenue stream. A change in law after the loan has been made leading to a reduction in revenues available to service the loan will ‘significantly affect the likelihood of timely repayment of that loan’.182 A report by the International Energy Agency has stated that: Over 95% of power sector investment (in 2018) was made by companies operating under fully regulated revenues or long-term contractual mechanisms to manage the revenue risk associated with variable wholesale market pricing.183

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Regulatory risk can indeed be significant. The generation of electricity is the infrastructure segment most often targeted by states for the promotion of FDI, while the transmission and distribution of electricity are less likely segments for promotion.184 Yet all such investments are made in circumstances ‘saturated with risk’.185 In general, infrastructure investment has certain common characteristics that render it vulnerable to political risk, including sub-sovereign, regulatory, and contractual risk. It is typically capital-intensive, complex, requiring long-term investment, usually in transportation networks that have a natural monopoly aspect, and generation (although both are increasingly contested in this respect) and access to it often has a strategic character for the host states involved. In the case of electricity investments, they touch on the provision of fundamental social goods such as heating, cooking, and light. For developing countries, a priority is often the encouragement of independent power generation projects through the kind of structures described below.

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Legal arrangements have also been developed that offer the prospect of mitigating political risk in settings where bargaining leverage is likely to decline. They included long-term 181 Ibid: in 62 per cent of cases of entry into a national electricity sector. Another mode of entry was through full privatization. 182 Kantor, M. (2005) ‘Stabilisation Clauses in Infrastructure Investment’, TDM 2(1). The tariffs that can be charged for the output from a power plant are usually subject to regulatory or contractual ceilings. This feature makes such projects different from ordinary commercial projects, where a manufacturer can usually pass on to the customer increased costs imposed upon it. Since the increased costs from a future change in law cannot be passed on by raising tariffs, the stabilization clause will have a mitigating effect in the transaction. 183 IEA, World Energy Investment 2019, Paris: OECD. 184 UNCTAD (2008) ‘Promotion of Investment into Infrastructure: A Survey of Investment Promotion Agencies’, UNCTAD/WEB/DIAE/IA/2008/2, at 5. 185 Woodhouse (2006) at 126.

D. Energy Investment Agreements 81 power purchase agreements (PPAs) with utilities subject to purchase obligations. These are bilateral commercial contracts that set out quantities and prices for electricity to be sold by the generator over the life of the project to a counterparty (usually a utility company, the off taker). For a lender, it is necessary to have assurance that the volume and price agreed for a project’s output (in the PPA) will cover debt amortization since the off-take contract is usually the project’s sole source of revenue. These PPAs are the standard off-take contracts in the industry. They typically include a ‘take-or-pay’ obligation by which the power purchaser agrees to purchase the available capacity up to a certain level, and if it is not available, penalties may be imposed. The off taker agrees to pay a fixed minimum price for the duration of the loan (say, twenty to twenty-five years), irrespective of whether it takes all or part of the delivery, so long as that volume is available. The lender is therefore assured that the risk of variations in quantity is transferred to the power purchaser, that revenue will be received, and that debt will be amortized. PPAs have become increasingly complex as investors seek to protect themselves against changes in government policy, being supplemented by political risk insurance and including partners such as the international financial institutions as a deterrent.186 For some projects, the ‘build, own and operate’ (BOO) or ‘build, own, and transfer’ (BOT) variety were adopted.187 These arrangements allocated the principal benefits and risks to the investor but sometimes envisaged a transfer of the entire project to the host state (or a local authority) at the end of a specified period. Such arrangements applied to the establishment of infrastructure, especially in the transport, energy, telecommunications, and water sectors. There was also significant investment in the creation of new utilities, often involving the establishment of specific investment vehicles, in partnership with a local firm, in economic activities in which foreign investment had been non-existent previously. Such utilities were then subject to regulation by the state authorities, representing a new role for the state as regulator of activities carried out by private, often foreign companies. However, this new relationship established between the state and the investors contained within it the seeds of future disputes. The narrow focus on contract stability and the allocation of risks in a contract concluded with a single (usually but not always) state-owned off-taker could obscure difficulties in the economics of electricity supply in those markets that were in the process of reforming and which still exhibited a high degree of concentration (see c hapter 7).

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An example of the problems that could arise may be provided from Turkey. A large-scale energy project led to a dispute and a claim brought to ICSID by Alapli Elektrik, a Dutch company.188 Its claim under the ECT and the BIT between The Netherlands and Turkey, was that Turkey had breached its treaty obligations to the investment by a series of legislative measures which had the effect of adversely affecting the terms of a contract to construct and operate a new electricity power plant in Turkey. The contract was entered into in 1998, but had become impossible to perform, the financial guarantee provided by the government had been rendered worthless and important international financing of the project had been

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186 The important role of the banks as lenders in contract design is considered in Vinter, G.D., Price, G. & Lee, D. (2013) Project Finance (4th edn), London: Sweet & Maxwell. For a view of political risk insurance in relation to treaties, see Bekker, P.H.F. & Ogawa, A. (2013) ‘The Impact of Bilateral Investment Treaties (BIT) Proliferation on Demand for Investment Insurance’, ICSID Review-FILJ 28(3), 314–350. 187 For an interesting account of the legal arrangements in several specific cases, see Wells, L.T. & Ahmed, R. (2007) Making Foreign Investment Safe: property rights and national sovereignty, Oxford: OUP. 188 Alapli Elekrik BV v Republic of Turkey, Award 16 July 2012, ICSID Case No ARB/08/13. Annulment application rejected by an ad hoc committee in a Decision of 10 July 2014.

82 Chapter 2: States, Investors, and Energy Agreements withdrawn. Turkey argued however that its actions were taken in accordance with Turkish law on the rights of private enterprises. Such alleged indirect expropriations, resulting from regulatory actions by the host state, are a typical feature of the modern landscape of political risk (see c hapter 6). 2.146

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The risks are not only on the side of the investors, however. Where declining volumes and revenues affect investor returns in the electricity and water sectors, the risk can arise for states that some investors may default or seek to renegotiate the terms of concessions, which previously had offered the prospect of steady, reliable rates of return to them in highly regulated sectors.

(b) Renewable energy

International investment in the various forms of renewable forms of energy (from wind and geothermal energy to solar power, hydropower, and biofuels) has similarities with conventional electricity in its contractual arrangements but differs in some respects. Above all else, as a new form of supply its regulatory regime needs to offer investors with considerable incentives. Relative to conventional power systems, renewable energy requires a high front- end capital outlay, is more expensive in relation to each unit of energy generated (at least in the early years of a project), and has a degree of intermittency in supply that combine to create serious disincentives to investment. Projects vary in size from exceedingly small ones (around 5 MW) to large, utility-scale projects, although transaction and due diligence costs tend to be the same whatever the size. Aggregating smaller-scale assets can help to scale up investment volume and reduce due diligence costs per project.189 Government support policies have been essential if investment is to reach any significant scale, including feed-in tariffs, quotas, subsidies, contracts for difference to underpin nuclear and offshore wind investments and tax credits. Without explicit policy support, market prices would not have been sufficient to attract investment. This pattern has been universal, from Europe to the Americas, although it has begun to change, with less and less price support for onshore wind and solar projects, for example. Such government policies have also been popular, driven by commitments to develop nationally determined contributions to CO2 mitigation under international instruments, such as the United Nations Framework Convention on Climate Change 1992 and related Kyoto Protocol of 1997;190 its successor, the Paris Agreement 1997,191 and in the European context, the various Directives on the promotion of renewable energy from 2001 onwards, and the EU Emissions Trading System in disincentivizing investment in fossil fuel generation.192 At the sub-national level, regional and local public authorities have also taken initiatives in response to these commitments. Such state-backed incentives for private investment in the relatively new or higher-cost technologies have proved successful in their main goals, and have ensured that these long-term investments take root in markets where conventional fuels are already established. A common example of this kind of regulatory incentive for investment is the ‘feed-in tariff ’, a mechanism (not a subsidy) which guarantees payments for power generated for a defined 189 IRENA (2016) at 76. 190 United Nations Framework Convention on Climate Change, 9 May 1992; Kyoto Protocol to the United Nations Framework Convention on Climate Change, 11 December 1997. 191 United Nations FCCC, The Paris Agreement, 12 December 2015. 192 The original Renewable Energy Directive (2009/28/EC) was replaced in 2018 by a revised Directive (2018/ 2001/EU); Directive 2003/87/EC of 13 October 2003 establishing a system for greenhouse gas emission allowance trading within the Union and amending Council Directive 96/61/EC, OJ L 275, 25.10.2003, p. 32.

D. Energy Investment Agreements 83 period of time, usually fifteen to twenty years, providing investors with long-term security. Essentially, this is a fixed tariff set at a rate above the normal electricity market rates for the sale of each unit or kilowatt hour of electricity generated. At least sixty countries have introduced FITs. It has supported the promotion of renewable energy by requiring utilities to pay generators for their output and has usually allowed them to pass on those costs to consumers. However, it is not the only kind of incentive by any means. In North and South America, a different approach is preferred, relying upon tax credits. In Europe an unexpected very large take-up of the support schemes by investors led to an escalation in state costs and/or costs recovered from power consumers through socialized tariffs during the period 2008 to 2013, especially in Germany, Italy, Spain, the Czech Republic, and the UK. Some governments elected to withdraw or curtail them, sometimes retrospectively, with bankruptcies resulting in certain cases. Many international arbitrations have arisen from these events (see c hapter 6).

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These legal proceedings underscored the vulnerability of investors in this sector to the kind of policy realignments that have long been a source of concern to investors in the hydrocarbons and mining industries. Although much publicity has surrounded cases of regulatory change in Europe, it may be noted that similar changes in regulatory policy and legal framework with respect to renewable energy can also be found in many other parts of the world (see chapter 6).

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(4) Coal and energy-related mining The investment agreements found in the coal and hard minerals sector have similarities with oil and gas at their exploration and production stage, not least the similar role of the state as grantor of rights, as regulator and sometimes participant, the long-term character of contracts, the common inclusion of a stabilization mechanism, and the exposure to price volatility (leading to stockpiling or production cutbacks in periods of weak demand), potentially discouraging investment in new capacity. The legacy and development factors common to the investment context in energy generally are also evident in the coal sector. Many surface mines and some deep mined deposits have been known for exceptionally long periods, especially to the communities around them. The Ashanti Mine at Obusai in Ghana has been operational for more than a hundred years, and among modern mines a productive life of more than twenty-five years is common. For traditional minerals like coal, their abundance and low production cost has been a positive factor in fostering development for many countries despite their evident environmental costs. Growth in mining of certain minerals used in green energy applications is also benefiting from policies that encourage lower carbon usage, with much higher values placed on certain, often scarce, minerals than ever before. Further up the supply chain, trading in coal and hard minerals differs in the sense that transactions involve parties that are often neither states nor state owned or controlled companies, and which carry on their trade in a typical commercial manner. Sale is not necessarily international and may be directed at local consumption in countries like China and India; and in some regions, such as Europe, the contracts for coal are short term or spot contracts rather than long term. Some longer term contracts are ‘frame’ contracts where the tonnage is fixed but the price is regularly adjusted in line with an agreed quoted reference price. However, the same need to allocate risks by means of contract is evident as in other areas of energy investment. Moreover, future, and existing investments in this area are increasingly affected

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84 Chapter 2: States, Investors, and Energy Agreements by government actions to impose a framework with timings for the phasing out of coal use in electricity generation with claims being brought to international arbitration as a result.193

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(a) Extraction

Investment in mining for hard minerals begins with an application for a licence in some countries and in others with the negotiation of a mineral development agreement. In each case, the core idea is the same. What the investor seeks is a legal instrument that allocates various rights and obligations to be taken on by the investor and host state that are additional to (and underpinned by) the legislation relevant to mining activities. The mineral right is transferred by the government authority in exchange for a commitment to carry out mineral exploration, development, or production. The content may be in a standard form (as in South Africa) or it may be individually negotiated; sometimes it is partly standardized and partly negotiated. Where licences are used, it is common to have two or three applicable to prospecting, exploration, and exploitation. Sometimes the preferred word used is ‘permit’, sometimes ‘lease’ or ‘concession’. Given the high-risk aspect of many kinds of mining, investors will seek security and continuity of tenure for the term of the licence, and if not offered, are unlikely to apply for the licences.194 Duration is also of key importance and tends to be long, often with provision for extensions or renewals. In a study carried out by the Centre for Sustainability in Mining and Industry, the sample of countries using mining licences showed that duration varied between twenty-five and forty years, with an option to renew.195 This will typically provide exclusivity and a prohibition on unlicensed activity in the area, and a right to assign interests to third parties subject to government consent. Increasingly, ‘use it or lose it’ provisions are used to ensure that these arrangements do not persist for very long periods without activity. A mining development agreement is commonly used to attract investment and develop mining projects.196 These investment agreements can supplement or implement the rules set out in a mining law or code, and so are negotiated within the parameters set by such a law. In some cases, however, they can be a substitute for it, although that tends not to be considered good practice since it can lead to wide discretionary power and abuse. A model agreement can also be provided by the government to facilitate and guide negotiations on the content. Indeed, an international research project led to the publication of a model agreement by the International Bar Association, the Model Mine Development Agreement.197 It is in these investment agreements that stability mechanisms can readily be found to safeguard certain defined parameters for the duration of a mining project, especially with respect to taxation arrangements. These assurances may supplement or be additional to any set out in 193 Recent examples are the NAFTA claim against Canada, following the decision by the Province of Alberta to phase-out coal in power generation by 2030: Westmoreland Mining Holdings, LLC v Canada, ICSID Case No UNCT/20/3. Similarly, The Netherlands was reported to be facing an ECT claim from Uniper, its second-largest power plant in response to the Government’s decision to prohibit coal-based power generation by 2030. The plant was constructed after discussions with the then Government with a view to diversifying the country’s energy mix at a cost of €1.6 billion with an expected life of forty years: GAR, 7 September 2019: ‘Netherlands poised to face its investment treaty claim, over closure of coal plants.’ 194 Even after the award, disputes can arise over the revocation of a licence or concession or otherwise the loss of a producing mine: in recent cases before ICSID, there have been disputes about such matters involving Colombia, the Czech Republic, Poland, and Turkey. 195 CSMI (2010): cited in Cameron and Stanley (2017) at 87. 196 This analysis is expanded in Cameron and Stanley (2017) at 87–90. 197 International Bar Association (2011) MMDA 1.0: Model Mine Development Agreement, London: IBA. It contains a generic tax stabilization clause at 13.2, with four examples. The Working Group were unable to reach a consensus on this topic, so these have illustrative status only.

D. Energy Investment Agreements 85 the mining law. They are particularly suited to large-scale projects where the mining company may have to set up appropriate infrastructure that might attend not only to the needs of the mining project itself but also those of the local community or other economic sectors. Mining is probably the activity best able to illustrate the legacy feature of energy investment, discussed in Chapter 1. In most areas there has been some previous activity to prospect and extract minerals, and often overlapping uses by communities. Its footprint, environmentally and socially, is usually highly visible, leading to issues about its ‘social licence to operate’, and not infrequently to legal disputes with communities and local authorities.

(b) Sale and trade

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As in the international oil and gas sector, the coal sector uses long-term contracts for various operations in the coal cycle.198 In some countries (India, for example) there are public sector bodies that dominate the industry, but a large amount of the coal produced is consumed domestically. China and the US are examples of domestic producers and consumers of coal on an exceptionally large scale. Moreover, many of the contracts used are neither long-term nor complex, but mostly confidential.

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In terms of physical characteristics, coal differs from oil and gas in not being in a fluid state before exploitation. Multiple shipments are usually the response to the large capital investments required and a need arises for guarantees to secure financing. The duration of coal sale contracts can vary from just over a year to twenty years. Exploration risk for coal is generally much lower than in the oil and gas sector or for some other minerals, but the development costs of a mine can be formidable. Other contracts are used for spot purchases, usually for a single shipment. In international contracts, an issue for coal as in natural gas is how prices are to be calculated over the long term.199 These are likely to be subject to frequent renegotiations. Further, coal quality is a driver to the conclusion of long-term contracts. For steel mills, for example, the quality of coking coal is very important; similarly, steam coal for power plants. By ‘quality’ is meant the capacity of the coking coal to coke, and for steam coal, the calorific rating and its ash content.

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(c) Uranium mining

There are only a very few suppliers of uranium, the raw material essential for nuclear power generation, used only after a number of stages of processing, such as concentration (invariably done at the mine), conversion, enrichment, and fabrication into fuel rods.200 Typically, the legal basis for exploration or prospecting and exploitation is essentially the same as for other hard minerals and hydrocarbons. Disputes have emerged from time to time, leading to investment treaty claims.201 In Europe, a recent example is the claim made by an Australian 198 For a recent overview of coal contracts, see Baruya, P. (2015) Coal Contracts and Long- Term Supplies: Technical Report (CCC/258), Paris: International Energy Agency Clean Coal Centre. 199 For an overview see Energy Charter Secretariat, ‘Putting a Price on Energy’ (2015). 200 The principal countries involved are Canada, China, Kazakhstan, and Namibia. Between four and six mines produce about two-thirds of the world’s supply of uranium. 201 Uranium figured in a very different kind of dispute in Kazakhstan, where a Canadian uranium mining company brought a claim against Kazakhstan on the basis of its foreign investment law and a contractual arbitration clause: that it had breached its obligation to provide fair and equitable treatment under the Canada–USSR BIT by failing to grant the claimant a uranium export licence in line with Kazakhstan’s established procedures and had substituted an arbitrary and ad hoc process that let two state-owned companies defeat its application for a licence, frustrating the object and purpose of the contracts, leading to the suspension of operations, bankruptcy, confiscation, and forced sale of the claimant’s assets by the state. For Kazakhstan, the claimant was in breach of a trust management agreement reached in 1997. The case has interest in two respects: the tribunal held that Kazakhstan was still bound by a BIT concluded between Canada and the USSR in 1987, the first time that a state other than

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86 Chapter 2: States, Investors, and Energy Agreements company under the Energy Charter Treaty against the Kingdom of Sweden. In August 2018 Sweden removed uranium from the list of minerals that are eligible for concessions.202 This was part of an effective ban on uranium mining in the country, as well as the processing of uranium unearthed in conjunction with other minerals. No new permits are to be issued for uranium prospecting, exploration, or exploitation. The claimant, Aura, operates a mine in central Sweden, with polymetallic deposits and potential for development of uranium. It sought compensation for the financial loss resulting from the decision to ban uranium mining, although it had already indicated its change of focus from uranium to vanadium and battery metals due to a sharp rise in the price of the former, increasingly used in industrial battery storage.

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(d) Seabed mining

With advances in technology the potential for energy and mining development grows. The prospects for mining of minerals from the deep-sea bed are, from a technical and economic viewpoint, very favourable. However, the economics are as yet unproven and the environmental issues are potentially unproblematic. Few licences have yet been granted, mostly for exploration and often to state-backed organizations. Licences or concessions to explore for minerals in international waters beyond the continental shelf, known as ‘the Area’, are granted by the International Seabed Authority (ISA), based in Jamaica, which has authority for regulating and administering the economic exploitation of the deep sea under Articles 151 and 153 of the UN Law of the Sea Convention (UNCLOS). Commercial interest has grown in the potential for mining ‘green metals’ (minerals required to facilitate the energy transition such as copper, cobalt and nickel) from the seabed. By 2019 there were twenty-nine active mineral exploration projects on the deep seabed.203 Disputes arising may be settled by the Seabed Disputes Chamber of the International Tribunal for the Law of the Sea, but under Article 188 (2)(a) certain disputes, concerning the interpretation or application of a contract or work plan under Article 187(c)(i), are to be submitted at the request of any party to the dispute to binding commercial arbitration (unless it concerns the interpretation of UNCLOS). A draft mining code for exploitation has been issued.204 However, mining in shallower waters has already triggered disputes. In 2019 a US company filed a notice of intent to initiate a NAFTA arbitration with Mexico over its refusal to grant environmental permits for the exploitation of a large phosphate deposit in its offshore waters.205 The claimant has a fifty-year mining concession over 2,680 km2 of seabed, further extended in 2014. Environmental permission to proceed with the project was rejected for political reasons, it was alleged, while approval was granted to similar Mexican owned ventures, breaching Mexico’s National Treatment obligation. Substantial compensation was claimed, amounting to US$3.5 billion. the Russian Federation had been held to be the legal successor to the investment treaty obligations of the USSR. Secondly, the damages awarded to the claimant amounted to US$13.7 million plus interest of around US$31 million, and US$8 million to claimant’s costs, but the claim was initially for US$1.9 billion plus interest; the outcome represented less than 1 per cent of the sum claimed: GAR, 1 November 2019: ‘Kazakhstan held liable under Soviet treaty.’ 202 . 203 (accessed 21 July 2021). Eighteen of these were granted by the ISA for polymetallic nodules to countries such as China, India, Japan, Russia, and the UK. 204 (accessed 21 July 2021). 205 GAR, 25 March 2019: ‘US investor threatens NAFTA arbitration against Mexico over failure to provide environmental permit for mineral exploitation project.’ Phosphate is used in the production of fertilizer.

D. Energy Investment Agreements 87

(5) Unconventional energy The relationship between international investment law and unconventional sources of energy,206 a term that is commonly used for hydrocarbons produced from shale rock but also from oilsands, is of only marginal importance to international energy investment due to the limited geographical spread of this sector.207 To date, it has been developed almost entirely within the United States and parts of Canada, and only to an extremely limited extent in a few other countries, such as the UK, Colombia, and Argentina. In the latter case, international investors have been evident, and to some extent also in the US itself, alongside many domestic investors.

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In the US context, the growth of the industry is usually thought to have benefited from its access to privately owned lands through leasing arrangements, a feature of granting rights to investors that is absent in almost every other country in the world. Some foreign investment into the US unconventional sector has occurred, but the threat of politically inspired intervention which is such a common feature of international energy investment is absent. Elsewhere (and in parts of the US too), these underground resources are held to be in public ownership and are subject to similar laws as those that prevail over conventional subsoil energy resources. In these contexts, governments have—or will have, if an industry emerges—a pervasive role in the licensing and regulation of inward investment on private lands, as well as on public lands. It is notable too that these operations occur on land and therefore are vulnerable to disruption through actions of local community activists, citizen science litigation, and local municipalities in a manner that bears comparison with the experience of mining for hard minerals in many countries.208

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A feature of activity in this energy sub-sector is that, without reliable seismic data, it requires the drilling of continuous exploration and appraisal pilot wells across a large area to assess the potential size and viability of a shale project. A conventional oil and gas project requires a relatively small number of exploration and appraisal wells to determine the size of a reservoir or field, with most of the capital invested at the front end of the project if one is deemed to be viable, generating cash flow from production and becoming positive in a fairly short time frame, with a life of twenty to twenty-five years for the field. With unconventional hydrocarbons, capital investment commences slowly and continues for most of the project life, with positive cash flow being realized only after a relatively long period such as fifteen years into a potentially forty to fifty-year project. There is a risk of ‘late fail’, a precipitous drop in production so that development potential cannot be assured until years after the first production.

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206 The meaning of this term can vary according to changing patterns of energy usage. In this study it is taken to mean liquid hydrocarbons with commercial potential that have the same chemical characteristics as conventional oil and gas but differ in terms of the techniques required to exploit them, the nature of the geological reservoir, as well as the potential impact on the environment, costs, production profiles, and economics. The resources tend to be located deeper underground, in more compact rocks and dispersed over larger areas than is the case with conventional petroleum. They may also have differences in density or viscosity and require well stimulation or additional extraction. An expression sometimes used is ‘tight oil’ or ‘tight gas’, referring to the compactness and depth of the reservoirs in which it is located, requiring hydraulic fracturing of the rock. It can include production from oilsands and coal-to-liquid technologies. 207 Attempts to build a shale sector outside of the USA are discussed in the comparative study: Cameron, P. & Castro, J.N. with Lanardonne, T. & Wood, G. (2018) ‘Across the Universe of Shale Resources: A Comparative Assessment of the Emerging Legal Foundations for Unconventional Energy’, JWEL&B 11, 283–321. 208 Large-scale protests by residents played a part in Chevron’s cancellation of three shale gas concessions in Romania, which led to an ICC arbitration: GAR, 5 February 2018: ‘Romania wins against Chevron.’

88 Chapter 2: States, Investors, and Energy Agreements This means that the investor requires a longer production term than is typically expected in conventional oil and gas projects.209 It also means that the resource is harder to value. 2.162

If we were to translate the above considerations into contract terms, it would be necessary to ensure that recovery of costs is continuous to match the high and ongoing character of capital investment in the project by the contractor. Contract stability over a long period would be critical for the contractor; failure to offer it would probably make investment risk too high. It is still too early to generalize about the contractual implications since initial legal arrangements outside of the US are heavily reliant on conventional forms, such as licences and concessions (discussed in D(1) above). This feature is likely to change if experience of unconventional hydrocarbons activity develops. Within the US, the lease form of contractual arrangement is dominant, a form not used in many other countries around the world.

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In terms of political risk to investments, the policy risk has a four-fold character. First, like hard minerals, there is a risk of negative regulatory action at the sub-national level. In Alberta, Canada, for example, regulatory approval of an oilsands project was delayed following an election in 2015 that brought to power a state government keen to promote interests of environmental groups and indigenous communities and a phasing out of coal-fired power generation. This led to a treaty claim from a Czech investor.210 Second, there is a risk of a change toward a low carbon policy from any government level due to a rejection of the alleged public benefits of unconventional forms of energy development, especially ones that involve production of liquid hydrocarbons (see Chapter 6). Third, we may note that where laws and public opinion on fracking differ across regions within a country, as in the US, a patchwork of legal outcomes is the consequence. In the US, Federal policy on land use is controlled by the President but somewhat limited by statutes that mandate leasing for public use. Private land is regulated by states, but each state has varying laws on fracking. Finally, policy implementation may have adverse effects when a key public body exercises its discretion, particularly if it is an environmental agency. In 2020, for example, the Slovenian Environmental Agency took a decision to impose an environmental impact assessment on the use of ‘low-volume hydraulic stimulation’ techniques at an oil and gas field, a decision upheld by the country’s administrative court. The investors then issued a notice of dispute to the government under the UK–Slovenia BIT and the ECT.211

(6) Nuclear energy 2.164

An international approach to investment in nuclear power plant construction and operation has been common for many years, driven by the exceptionally large costs and duration of construction (a decade or more) and the differential spread of the highly specialized technologies required.212 A challenge is to ensure that this construction cost can be paid back, 209 I am grateful to Dr William Onorato for noting these points in his unpublished paper at the Dundee Energy Forum, June 2017: ‘Petroleum Regime Issues for Shale Development Present New Challenges for Energy Sector Arbitrators.’ 210 GAR, 8 April 2019: ‘Frustrated by delays in licensing process Czech oil sands investor puts Canada on notice of a claim under bilateral investment treaty.’ 211 GAR, 24 July 2020: ‘Slovenia is put on notice of treaty-based claims in hydraulic fracturing dispute.’ 212 There are 442 nuclear reactors around the world, supplying about 11 per cent of the world’s electricity. Global demand is usually met through long-term supply contracts between producers and utilities: Foro Nuclear (https://www.foronuclear.org/en/nuclear-power/nuclear-power-in-the-world/) (accessed 21 July 2021). An important caveat is that some countries have domestic vendor capability: China and Russia are examples.

D. Energy Investment Agreements 89 and a return generated during the period of operation. To meet this risk, new nuclear power plants are usually built by companies in consortia with some form of host government support, such as legally binding guarantees over the price for electricity generated once the plants are operational. The companies themselves are often state or part-state owned. This heavy involvement of the state has implications for the balance of risks between the private sector, electricity consumers and the state, and gives investment in this sector a political character. The legal instruments for investment are a mixture of licences and contracts, with a granting licence or concession given to an electricity utility or consortium to carry out the project on certain terms and conditions. The regulatory role of states in commercial nuclear energy has been extensive from the very outset, unsurprising given the safety issues surrounding the civil use of nuclear power. There is also extensive international regulation through the International Atomic Energy Agency (IAEA), although it does not provide guidance on the types of licences that may be granted at the national level or the methodology for classifying different activities into categories or classes of licence.213 Project structures and much of the proposed investment tend to be organized around the licensing process.214 In this highly regulated environment, even after the investor has obtained the necessary licences, it is ‘unrealistic for the parties to anticipate no changes or unforeseen regulatory requirements’.215 Together with the high costs of construction and risks of delay, this regulatory uncertainty has constrained investment in the sector. To go some way towards allaying investor concerns, forms of government support are often given to investors. This has implications for the risk balance between the private sector, electricity consumers and the taxpayer. An instrument that may be used to address this is a long-term contractual arrangement that effectively guarantees a price for the electricity over the long term.216

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An example is the UK Contract for Difference (CfD) for the EDF Energy/Hinkley Point C nuclear plant awarded in 2013.217 This sets the price for electricity at £92.50 per Megawatt hour (MWh) in 2012 prices, indexed for thirty-five years (worth more than £105 by late 2018).218 The construction risk of building the power plant to budget is borne by the investors, and is substantial: the CfD pays out only once generation commences. The CfD was granted by the Secretary of State acting in accordance with the powers and discretions

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213 Cook, H. (2018) The Law of Nuclear Energy (2nd edn), London: Sweet & Maxwell. 214 For nuclear new build and operation, around six kinds of licence and certification are likely to be required: a site selection licence; a preliminary works licence; a manufacturing licence; reactor design certification; a construction licence; an operating licence; and a decommissioning licence (see Cook (2018) at 116–125, 179–196; for a detailed review of the contractual arrangements for new build see 285–362). 215 Davies Evans, J. (2018) ‘Construction Arbitrations in the Nuclear Sector’, in Brekoulakis, S. & Brynmor Thomas, D. (eds) The Guide to Construction Arbitration, London: Law Business Research, 209. 216 The contractual framework includes several kinds of contract. In addition to the construction contract, the main contracts are fuel supply and services agreements; a power purchase agreement; an operation and maintenance contract; a project management agreement; multiple financing agreements a spent fuel management contract. 217 The new build project at Hinkley Point C in the UK uses a mechanism called ‘Contracts for Difference’ (CfDs), which allows for payments to generators to provide increased certainty around revenue levels, to bring forward investment, while retaining the need for the generator to sell its electricity in the commercial market. In this case, the CfD provides a Strike Price for the developer of £92.50/MWh (2012 prices), reducing to £89.50/MWh (2012 prices) if the project developer, EDF, takes a Final Investment Decision on their proposed Sizewell C project, for a thirty-five-year term from the date of commissioning. For each MWh of electricity generated at Hinkley, the developer receives the difference between the Strike Price and the market reference price (a composite of wholesale price indices) for electricity sold into the market for the duration of the contract. The generator agrees to pay back the difference should the market reference price rise above the strike price. 218 ‘EDF seeks to charge customers upfront for UK nuclear plants’, Financial Times, 22 November 2018.

90 Chapter 2: States, Investors, and Energy Agreements delegated to him under the Energy Act 2013. This Act is an Act of Parliament (primary legislation) which was adopted in the same way as ordinary legislation: that is, the bill or legislative proposals were laid before Parliament and obtained approval through a vote of both Houses of Parliament before it became law. So, the provisions that ultimately allowed the Secretary of State discretion to grant the CfD have been subject to Parliamentary scrutiny and approval. The CfD had to be made available to Parliament under the Energy Act 2013, and so it was made publicly available after signature.219 2.167

Most construction contracts that are used in the nuclear sector are similar to conventional ones with the caveat that many nuclear regulations limit the ability of suppliers to work ‘at risk’, and restrict the application of conventional project management techniques to mitigate delays and cost overruns.220 The result is that if a nuclear project encounters difficulty, the result can be substantial delay and significant cost increases. There are notable examples of this in long-running disputes such as that around the Olkiluoto 3 nuclear plant in Finland. This is perhaps the most notorious arbitration in the nuclear industry in recent times. It arose from a dispute between a consortium of the French electricity utility, Areva, and the German company, Siemens (in this case, the principal supplier who contracts directly with the owner), and Teollisuuden Voima (TVO), a Finnish power company (the plant owner). It concerned delays in the construction of a nuclear power plant (Olkiluoto 3) in SW Finland, and its increased cost. Work had begun on its construction in 2004 and was scheduled to be completed and the plant operational by 2009. Areva-Siemens filed its claim in 2009, seeking an extension of the deadline for completion and €2 billion in compensation. The arbitration at the ICC took almost a decade and led to a series of four partial awards, concluding in 2018 with a comprehensive settlement agreement among the parties. Under the settlement, Areva agreed to pay €450 million to TVO for the delays and all other claims relating to the project were ended.221 However, electricity from the plant was not scheduled to be delivered for another three years, until 2021. At around €8.5 billion cost, it has been described as the second most expensive building in human history, behind a hotel complex at Mecca.222

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Changes in government policy on the national energy mix or in response to a nuclear accident can be swift and unexpected. After the Fukushima disaster in Japan in 2011 several arbitrations were initiated because of responses taken by governments worldwide: cancellation of orders;223 failure to make payments owed on nuclear reactors subsequently 219 Department for Business, Energy and Industrial Strategy, Hinkley Point C: Contractual Documents (accessed 21 July 2021); the Secretary of State Investor Agreement is also available: UK Government Publishing Service, Secretary of State Investor Agreement (accessed 21 July 2021). This agreement protects the investors from ‘qualifying changes in law which permanently prevent the construction or operation of the facility or a reactor where there is a political shut down of Hinkley Point C by a UK, EU, or international Competent Authority’. This guarantee holds for the duration of the CfD. Interestingly, there is also a provision whereby a higher-than-expected performance or sale of equity that leads to returns to investors above the base case would result in a sharing of the benefits with the consumer. A Report from the UK National Audit Office in June 2017 evaluated the government support and found it did not achieve value for money given its high cost and the level of risk it accepted in a changing market: Department for Business, Energy and Industrial Strategy (2017), Hinkley Point C, HC 40 (2017–18) National Audit Office, London. Given falling renewable energy prices, this is a model that is unlikely to be replicated. Indeed, a decades-long contract such as this is highly vulnerable to falling prices for renewables and batteries. The dynamics of carbon taxation also play a role. 220 Davies Evans (2018) at 210. 221 GAR, 12 March 2018. 222 Uutiset, 20 December 2019. 223 GAR, 16 July 2019: ‘Fukushima plant operator liable but escapes bulk of damages’ (Japanese state-owned utility held liable by ICC tribunal for terminating uranium supply contract after the disaster).

E. Conclusions 91 closed;224 realignment of domestic energy policy away from nuclear power,225 and imposition of nuclear taxes.226 In a different vein, international pressure on the government in Bulgaria over its energy dependence on Russia led it to cancel an agreement with a subsidiary of Russian state nuclear energy company, Rosatom, to construct two nuclear power plants in northern Bulgaria. Faced with a possible treaty claim, the national electricity company paid €602 million to the Russian company to honour an ICC award, and thereby end the dispute.227 E. Conclusions The structuring of energy investments has long been among the most innovative in the international economy. The six characteristics of energy investment identified in Chapter 1 provide a continually evolving—and disruptive—character to the energy economy, accentuated by the context of an energy transition that raises questions about any kind of long-term planning. The review of legal responses to this in section D shows not only the very considerable diversity in legal forms used by energy investors but also the highly specific business contexts in which energy investment is made: from hydrocarbons production to nuclear plant construction or from natural gas transportation to renewable energy generation. For the most part, the role of the state is a very extensive one, reaching well beyond the role implied by the doctrine of permanent sovereignty over natural resources.

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The review of contractual practice and treaty debates on the meaning of ‘investor’ and ‘investment’ reveals the creativity of investors in adapting to the changing dynamics of markets, as well as the evolving expectations and requirements of host States. A common theme is how these arrangements can be made to endure over exceedingly long periods of time, a goal made necessary by the commercial dynamics that drive many of these investments. This is not a new theme but may have become more challenging to reflect in appropriate legal arrangements. It requires greater appreciation of the cooperative character of much energy investment and the relationships of mutual dependence that allow investments to bear fruit.

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Despite the foregoing, a spirit of realism is also required. Cooperation is not an end in itself; partnerships can and do wind down. New kinds of investor with shorter time horizons have already emerged on the energy scene. Government officials, no matter what country they are in, face a wider range of investors than ever before, from familiar large internationally operating companies to private equity vehicles operating through a network of complex corporate structures. The UK North Sea in its current phase is a good illustration of a setting in which this corporate complexity has become normal over the past decade. This has not proved threatening or unmanageable for the state in a mature energy sector. However, it underlines the effort required to understand the approach of modern energy investors to inward investment. It shows the existence of a diverse set of business models and expectations about the duration of an energy investment, and invites reflection on the assumptions about what a ‘long-term’ cooperative relationship with the host state means in practice.

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224 GAR, 7 March 2019: ‘GE wins award in Taiwan nuclear dispute.’ 225 Vattenfall AB and others v Federal Republic of Germany (II), ICSID Case No ARB/12/12 (claims arising out of Germany’s decision to phase out nuclear power by 2022). 226 GAR, 3 January 2018: ‘Nuclear tax row leads to ICC award.’ 227 GAR, 9 December 2016: ‘Bulgaria pays Russia to end nuclear dispute.’

3

Stability Based on Contract

A. Introduction B. Contract, Legislation, and Treaty

3.01 3.06 (1) Legislative support for contract stability 3.07 (2) Interplay with international law 3.15 (3) Choice of law 3.20 C. Stabilization Clauses 3.22 (1) Freezing 3.26 (2) Prohibition on unilateral changes 3.36 (3) Rebalancing of benefits 3.40 (4) Allocation of burden 3.52 (5) The four methods 3.56 (6) Asymmetry 3.58 D. Renegotiation: The Rules of Engagement 3.69 (1) Clarity about aims 3.70

(2) Triggering event (3) Precise obligations of the parties (4) Coercion (5) Contrasts with hardship

E. Enforcement

3.74 3.76 3.80 3.82 3.84

(1) Can a state bind itself by an investment contract?3.85 (2) Arbitration: the powers of the tribunal 3.89 (3) Remedies 3.93 F. International Pipeline Projects 3.96 (1) The West African Gas Pipeline project 3.103 (2) The BTC pipeline project 3.110 G. Conclusions 3.118

Stability of contract terms is . . . the lurking presence at all exploration and production negotiations and must be recognized and confronted by the parties before their deal is concluded. Roland Brown1

A. Introduction 3.01

Energy investors’ early experiences with host states played an important role in shaping the approaches to long-term contract stability that are evident today. The failure of early stabilization clauses in petroleum contracts to act as a deterrent to nationalizations in the Middle East and North Africa led to the emergence of more pragmatically designed stability mechanisms in energy contracts. In the literature this is sometimes referred to as a shift from ‘freezing’ clauses to clauses that favoured some form of adaptation in the light of changed circumstances.2 A popular choice among investors was a clause that provided for adjustments 1 Brown, R. (1990) ‘Contract Stability in International Petroleum Negotiations’, The CTC Reporter (United Nations), no 29, 56–60 at 56. 2 For example, Blackaby, N. & Partasides C. with Redfern, A. & Hunter, A. (2015) Redfern and Hunter on International Arbitration (6th edn), Oxford: OUP, 194; Dolzer, R. & Schreuer, C. (2012) Principles of International Investment Law (2nd edn), Oxford: OUP, 85–86; Al Faruque, A. (2007) ‘Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal’, TDM 4(5), 1 at 30–32; Amoco International Finance Corporation v The Islamic Republic of Iran, 15 Iran–US Cl Trib Rep 189, partial award (14 July, 1987)(Brower J, concurring), para 13: ‘[T]‌he protection of some alien investors formerly sought in a stabilization clause is nowadays sometimes

A. Introduction 93 or permitted renegotiation in the event of future unilateral action by the host state, variously described as a balancing, equilibrium, or adaptation clause. While not entirely new, it became a focus of drafting attention and its use has become widespread in energy investment agreements. While this contractual trend evolved, the jurisprudence and scholarly writing on this subject largely developed on a different track, taking its inspiration from the generation of awards that followed the expropriations of the 1970s and 1980s (see c hapter 4): that is, a series of awards issued before such innovations in contract design became widely used. The reason for this historical focus in scholarship is not hard to discern: until very recently, the only awards that tested contractual stabilization clauses were the ones that followed the wave of unilateral state actions of that period. The more flexible, ‘modern’ clauses are only now becoming the subject of review by arbitral tribunals, even though they constitute one of the principal ways in which energy investors have sought to protect themselves from unilateral state actions for several decades already. Some of the awards that have since emerged are discussed in Part II of this book. For investors, the principal lesson from the wave of host state actions during this earlier period was that a determined government cannot be prevented from an act of expropriation if it is set on taking that course. For a variety of reasons (examined in chapter 4), the stabilization clauses of the time achieved little in the face of unilateral state action even though they did enable international oil companies (IOCs) to obtain compensation and some awards favoured investors by resulting in settlements. Subsequently, the key challenge that has faced investors when designing enforceable stability arrangements has become one of responding to the reality that the host state has the right in customary international law to expropriate an investment made in its sovereign space at some future date (subject of course to the requirement that compensation be paid). No amount of care in contract design, innovation in or use of available stability mechanisms by the prudent investor can entirely foreclose this possibility. This proposition came to attain the status of a conventional wisdom in the international energy industry. The focus therefore shifted to limiting this risk as much as possible, and if the risk became unstoppable to improving the bargaining position of the investor in such a situation, and ensuring that compensation was appropriate, and that any award would be enforced. The practice that has built up through the actions of prudent investors for such an eventuality—with respect to contract design—is the subject of this chapter. Other important ways of enhancing the stability of an investment, such as the different options raised by the thousands of bilateral and multilateral investment treaties (including tax treaties), or the role of stability provisions in domestic law (including tax codes), and indeed the interaction of these, are reviewed and assessed in detail in c hapter 5.

3.02

The principal means by which political risk is sought to be mitigated in an energy investment contract is through the use of stabilization clauses, and they form the main focus of this chapter.3 This is a contractual assurance of negotiated terms against future legal or regulatory changes, providing legal and fiscal stability. The risks these clauses target are ones that

3.03

provided in a quire different way by a broad renegotiation clause.’ For a critique of this ‘transition’ thesis, see Cameron, P.D. (2013) ‘Reflections on Sovereignty over Natural Resources and the Enforcement of Stabilization Clauses’, in Sauvant, K.P. (ed) Yearbook of International Investment Law & Policy, 2011–2012, Oxford: OUP, 311– 344. From a methodological point of view, there are challenges in basing general arguments such as these upon contract data that is usually limited in scope and which may or may not be representative. 3 Although the term ‘energy’ is used, the investment contracts considered in this chapter are mostly those found in the international oil and gas industry. Similar clauses are common in the international minerals industry. The chapter draws on material included in a study which the author carried out for the Association of International

94 Chapter 3: Stability based on Contract threaten the investor’s objective of securing what it regards as an appropriate return on the capital invested on exploration and development and repatriating its capital. For the most part, the risks that threaten this objective are: direct expropriation; a gradual loss of investment value by a series of measures over time, sometimes called ‘creeping expropriation’; or the loss of anticipated future opportunities. Even where such clauses fail to mitigate the political risks, they may at least be able to limit the scale of the economic loss that results. That is one reason for paying attention to the way in which they are designed, in both form and content. It has stimulated investors to learn from the shortcomings of past efforts at the design of such clauses. A second reason is that their existence can serve as an important chip in the bargaining between investor and host state both when a dispute is still at a very early, incipient stage and, if it moves forward, when formal proceedings have commenced by the parties. The presence of a stabilization clause (and the threat of its use in arbitral proceedings) may encourage the host state to reach a settlement with the investor and to do so on terms that are more favourable to the investor than would be the case if no stabilization clause were present in the contract. As several arbitral awards have shown, the presence or absence of a stabilization clause (whatever its form) in an investment contract can have an important effect on the outcome of an arbitral proceeding.4 3.04

Other mechanisms exist in an energy investment contract that may contribute to the overall stability of a long-term investment and can serve to mitigate political risk.5 In Latin America there are even cases of special contracts being offered in some countries that are designed solely for the purpose of providing stabilization of foreign investments (legal stabilization agreements or contratos de estabilidad). These are discussed in c hapter 7 and are therefore not examined in extenso here. To a large extent, they are stability clauses writ large, and much of what is said about stabilization in this chapter is applicable to these special agreements and their contents. They are also applicable to economic sectors and investments that are not energy related. Other states provide legislative support for the stability provisions of a contract, either of a procedural kind (by legislative approval of the contract itself) or a substantive kind (by incorporating specific stabilization guarantees for investment contracts in domestic law). However, there are also states that do not offer stabilization guarantees at all: the UK is one example; others are Brazil, Colombia, Norway, and Saudi Arabia. This may reflect the presence of effective legal remedies for changes in the contract under a domestic legal system that is independent from the executive branch of goals,6 or legal tradition (Parliament cannot Petroleum Negotiators (AIPN): Cameron, P. (2006) Stabilization in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil and Gas Investors (Research Papers). 4 Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award, 11 September 2007; Bogdanov v Moldova, SCC Arbitration No V 091/2012, Final Award 16 April 2013, paras 205–207 (the stabilization clause was too limited in scope to be applicable). 5 Choice of law and arbitration clauses are examples: the former by invoking rules and principles of public international law including general principles of law, in order to internationalize the contract and so protect the investor from unilateral and abrupt modification of the legislation in the host state; the latter by providing a neutral forum for the settlement of investment disputes, thereby avoiding reliance upon the domestic courts of the host state. The investor may also attempt to limit by contract the discretion of government in several project-sensitive areas, such as the declaration of commerciality or the approval of a development plan, or termination rights of the host state. There are also ‘commercial’ approaches to stabilization of a fiscal regime which include the use of so-called R Factors and rate-of-return triggers that function like an Additional Profits Tax; these are usually applied to profits rather than to revenue and are aimed at improving adaptability and progressivity, especially in a context of price volatility, so that the probability of contract stability is increased. 6 Consider the US Fifth Circuit’s award to Anadarko over the interpretation of Deep-Water Relief leases (see chapter 2.08, n 7). With respect to stability in the US, it may also be noted that under the G.W. Bush Administration, existing oil shale leases were amended to provide for legal stability.

B. Contract, Legislation, and Treaty 95 bind itself) or bargaining power (rooted in a state’s character as a capital-exporting country or its extensive control over the domestic energy industry and large domestic resources of fossil fuels). It should not therefore be concluded that the kind of stabilization by contractual means that forms the basis for discussion in this chapter is one which all host states will offer to investors, in one form or another. The next section of this chapter (section B) deals with the interplay between investment stability guaranteed by contract and other legal instruments: specifically, host state (or municipal) legislation; international treaties, and international law as the governing law of the contract. The following section (section C) examines the four principal kinds of stabilization clauses available to investors, including both the freezing kind of clause and the more flexible variety, variously called a balancing, equilibrium, or adaptation clause. Section D examines the issues surrounding renegotiation pursuant to the latter variety of stabilization clauses, partly because some of them expressly envisage a renegotiation at a later date in the event of changed circumstances, partly because some envisage a renegotiation but do not provide any ground rules for its conduct, creating a need to lay down ‘rules of engagement’, and partly because renegotiations sometimes have a coercive character for an investor. Section E considers the perennial topic of enforceability of a stabilization clause, noting the powers and practice of international tribunals in this respect. Finally, the advent of international oil and gas pipeline projects has raised some new questions about the stability of the arrangements concerned and the design of appropriate contracts to promote such infrastructure. Section F considers the legal foundations of two international pipeline projects and the ways in which they provide for long-term stabilization.

3.05

B. Contract, Legislation, and Treaty The legal techniques which international investors can use in their investment contracts to mitigate the political risks or at least to limit the resulting economic loss fall into three broad categories: contractual, legislative, and treaty based. There are few examples of investors placing all of their trust in the stabilizing influence of contractual mechanisms alone.7 These are usually adopted together with the others in a hybrid combination appropriate to the particular investment. The unique character of each investment will ensure that the relative weight attaching to each provision will differ. Inevitably, the significance of a stabilization clause, for example, will be influenced not only by the drafting of the contract itself but by this wider legal framework.

3.06

(1) Legislative support for contract stability Legislative support can be provided in two principal ways. Firstly, there may be substantive provisions in certain legislative acts that set out more or less specific guarantees for the 7 There are also limited advantages in taking out political risk insurance, which usually offers book value for expropriation and not Fair Market Value (substantially higher for a successful venture); is very expensive, and does not cover breaches of Fair and Equitable Treatment or MFN or NT. Its advantage is that it offers a payment guarantee by a creditworthy party: for a discussion of this, see Kantor, M. (2014) ‘Comparing Political Risk Insurance and Investment Treaty Arbitration’, in Sabahi, B., Birch, N.J., Laird, I. & Rivas, J.A. (eds) Essays in International Economic Law, Development and Arbitration in Honor of Don Wallace Jr, New York: Juris.

3.07

96 Chapter 3: Stability based on Contract stabilization of a category of investments. Such provisions would normally be found in the general legislation applicable to energy and to foreign investment, but given the very high value of certain energy and natural resource projects, their long-term character and their sensitivity to the host state’s economic development, a special legislative instrument may be used. For the same reason, the substantive provisions containing stabilization guarantees may be spread across several forms of legislation: energy, investment, commercial, and others. For example, in Chile, a petroleum law provided that the legislative regime, including the advantages, exemptions, and taxation benefits which are applicable, has to be recorded in the operating agreement and will not vary throughout the duration of the contract.8 In the Cote d’Ivoire, the Petroleum Code provides that any petroleum contract must include conditions on applicable law, stability of contract conditions, cases of force majeure, and the regulation of disagreements.9 Secondly, conventional legislative procedures may be used to provide additional legal support for contractual instruments that have been negotiated by an investor and the appropriate department of government. The investment agreement may be submitted to the legislature for approval, which if granted would give the agreement the force of a law adopted by the legislature of the host state, a lex specialis with supremacy over other legislative acts. This may be useful if there is an element of doubt about the consistency of the contract terms with some or any provisions of already enacted legislation. In the 1990s there were such risks in post-communist states, such as Azerbaijan and Kazakhstan, and as a result, petroleum agreements with foreign investors were in some cases approved by Parliament with the intention of giving them the status of a law and thereby granting stability to them (see chapter 8).10 This practice of enacting contracts into laws is also evident in Chad, Egypt, Liberia, and Sierra Leone, as well as other countries. It should also be noted that the stability clause must be validly entered into to be enforceable and that legislation may be necessary to authorize such a clause. 3.08

It is debatable whether the effects of legislative support through parliamentary approvals offer a greater degree of security than do mechanisms provided for in the applicable law of the contract. Future changes in law can negatively impact upon the foreign investment protection laws or laws approving the contract in the same way as they can negatively impact on other enacted laws. Moreover, most arbitral awards suggest (see chapter 4) that the IOC will be entitled to damages if the host state breaches the agreed arrangements (whether formalized in law or contract) as long as the IOC has reasonably relied upon them to conduct its business. Of course, the size of the damages is another issue entirely and one that has attracted some controversy (see c hapter 11).

3.09

The basic risk to investors is: ‘what parliaments enact, parliaments may undo’.11 These attempts to grant additional stability by legislative means may ultimately act as little more than a comfort factor to the foreign investor. However, if they are available, they have an evident use in bolstering an investor’s claim to having legitimate expectations about the host state’s intent. In addition, in states with independent executive and legislative branches, a

8 Decree-Law No 1089 (1975) Art 12. For a survey, see Maniruzzaman, M. (2007) ‘National Laws providing for Stability of International Investment Contracts: A Comparative Perspective’, JWIT 8, 234–241. 9 Petroleum Code, Ordinance 96-733, 19 September 1996, Art 18(m). 10 The degree of supposed stability is nonetheless open to doubt: Bati, A. (2003) ‘The Legal Status of Production Sharing Agreements in Azerbaijan’, J En Res L 21, 153–167. 11 Daniel, P. & Sunley, E.M. (2010), ‘Contractual Assurances of Fiscal Stability’, in Daniel, P., Keen, M., & McPherson, C., (eds) The Taxation of Petroleum and Other Minerals: Principles, Problems and Practice, Abingdon: Routledge, 405–424.

B. Contract, Legislation, and Treaty 97 parliamentary enactment may provide a serious procedural hurdle to an executive seeking to modify a contract.12 It would be an unusual investor that did not ask for this additional support and, if offered by the host state, did not accept it.

(a) Nigeria

An interesting and controversial example of using legislation to provide stability for an investment project is provided by the Nigeria LNG (liquefied natural gas) Act of 1990.13 The Act included extensive stabilization provisions for Nigeria’s first LNG project (see Appendix IV) to commercialize gas for export. The investors in the project were parties to an unincorporated joint venture owned by the Nigerian National Petroleum Corporation (NNPC), Shell Gas BV, Total, and ENI. The Act was amended in 1993 and in 2004 became the Nigeria LNG (Fiscal Incentives Guarantees and Assurances) Act. The clauses included a prohibition on unilateral change, freezing of the fiscal regime, and effective grant of legal enclave status to the project. The provision of international project finance was crucial to its viability, and the degree of assurance required by lending institutions was very high, extending beyond a contractual form of stabilization.14 At that time Nigeria was still under military rule, had a history of state intervention in the economy, and was considered a high-risk country for foreign investment (see c hapter 9). As a result, the investors sought to have guarantees against expropriation and a neutral forum outside of Nigeria for the settlement of disputes. The content of the law has proved less controversial than the manner in which the assurances were given. Section 3 of the Act states that: ‘neither the company nor its shareholders in their capacity as shareholders in the company shall in any way be subject to new laws, regulations, taxes, duties, imposts, or charges of whatever nature.’ After providing that the government would take appropriate measures to ensure that the assurances in the Act were fulfilled, it continued:

3.10

the Government further agrees to ensure that the said guarantees, assurances and undertakings shall not be suspended, modified or revoked during the life of the venture except with the mutual agreement of the Government and the shareholders of the company.

Yet, the absence of any time limit on the grant of stabilization could be viewed as an unwise concession by the host state; the only reference to duration appears to be in section 14 in which the government agrees to ‘facilitate the acquisition by the Company of legally sound title to, and vacant possession (for a period of not less than eighty years) of land required by the Company for the venture’. In principle, the enclave status of the project could persist for a further twenty years. The Act was challenged in Niger Delta Development Commission v NLNG in 2007 and held to be unconstitutional to the extent that it fetters the legislative power of the state to make new laws.15 This was overturned on appeal and upheld by the Supreme Court. Apart from

12 See c hapter 2.08, n 7. 13 Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act of 1990 [1990 No 39, chapter N87] amended in 1993: the stabilization sections are set out in Appendix V of this book. Another example of a special law being adopted for a large-scale investment to enshrine contractual stability is the Western Australian state government’s adoption of the North West Gas Development (Woodside) Agreement Act in 1979. The kind of measure adopted in Nigeria was not the first nor was it peculiar to a low-income country. 14 For an authoritative account of the Act and its early history see Adaralegbe, B. (2008) ‘Stabilizing Fiscal Regimes in Long-term Contracts’, JWEL&B 2, 239–246. 15 A Federal High Court pronounced the Act unconstitutional: Niger Delta Development Commission v Nigeria Liquefied Natural Gas Company Ltd, 11 July 2007; judgment of Justice RO Nwodo in FHC/PH/CS/313/2005, 19.

3.11

98 Chapter 3: Stability based on Contract the economic case for the project guarantees (one estimate has the investment amount at US$9.348 billion),16 there has also been a cost to investors in the security threats to the project leading to physical blockades of LNG shipments and delays in constructing additional capacity for liquefaction.

3.12

3.13

3.14

(b) Israel

Another example of using legislation to provide stability only to find it challenged in the local courts comes from Israel. An exceptionally large gas project was proposed to develop two gas fields offshore Israel in the East Mediterranean Sea. The project developers, Noble Energy and an Israeli company, Delek, designed a legal and regulatory framework with the Israeli Government and sought approval from the Parliament (Knesset) in 2015. This Gas Framework contained a stabilization clause which included an undertaking by the Government to refrain from changing, for a period of ten years, its policy and regulation in relation to the gas market with respect to taxation, exports, and antitrust.17 The Government also undertook to oppose any private bill tabled in the parliament that has the aim of changing anything in the above areas. The Framework became part of a petition by several NGOs to the Supreme Court in its capacity as High Court of Justice. The effect of the clause, argued the petitioners, was to fetter the Government’s discretion, and that of future governments by committing not to change the regulatory framework. The Supreme Court agreed. In a 4–1 decision on 27 March 2016, it declared the stabilization clause undemocratic and unconstitutional. The government, it held ‘does not have the power to decide not to decide and not to act’, and especially when it sought to limit the discretion of the next government ‘whose composition and ideology will be different than this one’s’.18 An amended version of the Gas Framework was developed in a matter of weeks. Under this revised version, the Government undertook to maintain and not change the regulatory regime that applies to the gas sector, but did not set a fixed duration for its commitment, not fettering the discretion of future governments, and did not commit itself to oppose private legislative initiatives in the Parliament. The title of the stability clause was amended to ‘maintaining a regulatory environment which encourages investments’.19 The new regulatory framework was approved in May 2016.

(c) Legislature–executive interaction

The interplay between the departments of the executive arm of the state and the legislature can be a matter of great sensitivity, underlining the vulnerability of the foreign investor to actions that have their roots in what are essentially matters internal to the host state. The risk is not only one of Parliamentary approvals and any other legislative protections being changed at a later date, but also one of disagreement regarding mandatory procedures or being denied

16 Oyewunni, T. (2017) ‘Securing Regulatory Stability for International Gas Commercialisation and LNG Projects: The Nigerian Experience’, paper delivered at 35th USAEE/IAEE North American Energy Conference, Houston, TX, 13 November 2017. 17 A detailed examination of this episode can be found in Reich, A. (2017) ‘Israel’s Foreign Investment Protection Regime in View of Developments in Its Energy Sector’, European University Institute Working Papers, 2017/02. For an analysis of the legal issues, see Goldberg, S.M. (2017) ‘The Israeli Gas Framework in Regional Context: Stabilisation Clauses in Natural Gas Contracts around the Levant Basin’, OGEL 15(3): www.ogel.org. 18 Cited in Reich (2017) at 14. The Deputy Supreme Court President reached his decision following a review of the international literature on stabilization clauses which included the work of this author. 19 Goldberg (2017) at 8.

B. Contract, Legislation, and Treaty 99 an approval in spite of a positive recommendation from the department of government responsible for negotiating the agreement. There is no shortage of instances of this behaviour, such as that which resulted in the Hunt Oil v Yemen case (see c hapter 6 at paras 6.14–6.15). The threat of its escalation into arbitral proceedings is never far away. Three disputes illustrate the different circumstances that can be involved.

(i) In Egypt, a dispute arose about an agreement to supply gas from Egypt to Israel. The dispute turned on the differing perceptions of contract authorization procedures in Egypt. The agreement was concluded in 2005 by East Mediterranean Gas (EMG), a joint Egyptian–Israeli venture, to supply 1.7bcm of gas to the Israel Electric Corporation over a fifteen-year period. The gas was to be transported from northern Sinai to the port of Ashkelon in Israel, which was built and operated by EMG. When gas exports began in 2008, the original supply contract was criticized since it was not approved by the Egyptian parliament. In judicial proceedings the government argued that the transaction is an economic (that is, private business) matter and therefore was not subject to parliamentary approval.20 (ii) In Iraq an agreement to commercially develop gas currently being flared off in the Basra region and signed by the Oil Ministry and Royal Dutch Shell in 2008 was held to be illegal by a Parliamentary committee on oil and gas in 2009.21 The reason given was that the agreement had not been approved by the Parliament which was a requirement of Iraqi law. A service contract with the China National Petroleum Corporation (CNPC) for the development of the Al-Ahdab oil field in the south-e ast of Iraq was also held to be illegal for the same reason. The government argued that the approval of the Parliament was not required. In the absence of agreement on a new oil law, the issue about competences was hard to settle. (iii) In Mauritania, amendments to four offshore Production Sharing Contracts (PSCs) were negotiated by Woodside Petroleum, an Australian company, with the Ministry of Energy and approved by the government and Parliament, becoming law in 2005. These reduced the state share in profit oil, reduced taxation in certain zones, and eased environmental constraints. However, these measures were accompanied by a commitment by the investor to make a very substantial investment in the development of the Chinguetti oil field. Following a military coup, they had to be renegotiated at the new government’s insistence, leading to a compensation payment of around US$100 million to be paid to the government, cancellation of the amendments, and the introduction of revised fiscal terms and special environmental provisions into the PSCs.22 However, in this case, the interplay between government and legislature took on a rather different character since, following an unexpected regime change, all agreements with foreign investors were potentially up for re-examination. 20 ‘See chapter 9, paras 9.85–9.98. 21 ‘Iraq MPs Seek to Revoke Gas Deal’, Khaleej Times, 18 April 2009): https://www.khaleejtimes.com/business/ iraq-mps-seek-to-revoke-shell-gas-deal (accessed 21 July 2021). 22 Premier Oil, Mauritania Offshore Update—Notice of Dispute, 3 February 2006: (accessed 28 January 2021); Upstream, 30 March 2006: ‘Mauritania delivers $100m blow’; arbitral proceedings before the ICC were considered but an agreement reached involving an outside arbitrator before they commenced: US Department of State, 2014 Investment Climate Statement, June 2014, p. 6, available at (accessed 28 January 2021).

100 Chapter 3: Stability based on Contract

(2) Interplay with international law 3.15

There are mechanisms for stabilization of an investment that are to be found in international investment instruments such as bilateral investment treaties (BITs). Both treaty and contract have become an essential source of the protection which investors can expect to receive in international law (see chapter 5). When designing a legal regime for the protection of investors it is not possible to avoid a consideration of both and how they interact. In two areas in particular, the protections offered to investors by Fair and Equitable Treatment (FET) and the umbrella clause, issues about the interplay between contractual and treaty protection are and have been raised in ways that are relevant to stabilization clauses (see c hapter 5).

3.16

FET standard The FET standard of protection is found in virtually all BITs (and multilateral investment treaties, or MITs). It includes the protection of legitimate expectations, and therefore has the potential to provide support for an alleged breach of the stability of a long-term investment. If a stabilization clause is included in a contract, it may be argued that this grant by the state alone creates the expectation that the law will not be changed or that if changed, a renegotiation will follow which would restore the investor’s original position (depending upon the kind of stabilization clause in the contract). This would allow an FET claim to be made if the contract is breached. The tribunal in the Parkerings case (discussed in chapter 6) took a restrictive view of this, holding that without the evidence of a stabilization clause it would not be able to conclude that the investor had any legitimate expectations. This decision—and the El Paso award discussed below—have emphasized the importance of having a stabilization clause in the agreement if certain tribunals are to be persuaded that the investor did indeed have legitimate expectations. This view about the required evidence is a restrictive one and demonstrates that other tribunals may not view other forms of guarantee granted by the host state as adequate proof of the investor’s legitimate expectations that the law would remain unchanged, or at least its effects would.

3.17

Umbrella clause The wording of an umbrella clause in a BIT will typically be broad. In the US–Ecuador BIT the wording is as follows: ‘Each party shall observe any obligation it may have entered into with regard to investments.’23 This is not atypical of the wide formulations that are found in many BITs. Inevitably, it can be interpreted as elevating every single contractual obligation entered into by a state to the status of a treaty obligation. On another view, it may be restricted to mean any treaty obligation but that involves inferring a word that is not normally present in the text of a BIT umbrella clause. A middle ground involves distinguishing certain acts of a state as commercial or merchant categories on the one hand, and sovereign acts on the other. The tribunal in El Paso Energy International Co v The Argentine Republic made this distinction with respect to the umbrella clause and concluded that an investment dispute arising under the US–Argentine BIT was therefore limited to one ‘resulting from a violation of a commitment given by the state as a sovereign state either through an agreement, an authorization or a BIT’.24 This interpretation means that the umbrella clause does not provide treaty protection to ‘breaches of an ordinary commercial contract entered into by the state or a state-owned entity, but will cover additional investment protections contractually agreed by the state as a sovereign—such as a stabilization 23 Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment: Article II, 3(c). 24 El Paso Energy International Company v Argentine Republic, Decision on Jurisdiction, 27 April 2006, IIC 83 (2006), para 81.

B. Contract, Legislation, and Treaty 101 clause—inserted in an investment agreement’.25 On this view, a BIT provides an additional level of protection to investors if there is a prior agreement in the form of a stabilization clause. If that agreement is present, the investor is not restricted to the contractual enforcement methods provided by the stabilization clause but would also be able to proceed through the BIT. There are of course other respects in which BITs can provide for stabilization, but these two are the ones that are directly relevant to the creation of stability by contract and its interplay with treaties. One example must suffice: stability for the investment could take the form of guarantees in relation to freely convertible currencies for transfers linked to investments. The exact language providing for stabilization is important, however, with the host state guaranteeing a right, or providing for a particular regime (or portion thereof) to be ‘frozen’, or providing for the result of the host state imposing additional obligations, or diminishing the investor’s rights.

3.18

Good faith The contract may also require the parties to perform it consistently in ‘good faith’. The duty of good faith is itself a general principle of law as well as a basis for a prohibition of unjust enrichment and of the rule that a state entity cannot rely upon a change of law to excuse a breach of contract. It can act as a way of bringing international law principles into the contract and thereby defend the interests of the foreign investor. In the Award in Sapphire International Petroleum Limited v National Iranian Oil Company, the tribunal stated that this duty of good faith ‘more often calls for the application of general principles of law, based upon reason and upon the practice of civilized countries’.26 The incorporation of a good faith requirement can be made so as to apply to various uses of discretionary power. An example of the kind of text that may be expected in an investment agreement, whereby the host state accepts a requirement that when exercising its discretion or giving its approval, consent, authorization, ‘or the like’:

3.19

it shall act reasonably and in good faith in doing so, in a prompt and timely manner, on the basis of the efficient and economic conduct of the Petroleum Operations and in accordance with good international oil industry practice.27

(3) Choice of law The applicable law that the investor will be seeking to stabilize will normally be the law of the host state. Yet, in the event of a dispute, many international energy investors remain doubtful about the degree of protection they will receive under the domestic law of the host state.28 Where the investor does not enjoy a right to apply international law as the governing law of the contract by means of an applicable treaty, the investor may instead make an effort in negotiations on the investment contract to stipulate international law or the domestic law 25 Ibid. 26 35 ILR 136 (1967) 173. 27 Author’s copy (unpublished). The differences between model and negotiated texts in this respect is illustrated by the examples in Appendix IV of this book. 28 See Erkan, M. (2009) ‘Mitigating Political Risks for Transnational Energy Projects through Contractual Mechanisms’ (PhD diss., University of Exeter) at 238; the results of his extensive survey of opinion among oil company investors revealed that the doubts could be divided into technical (understanding of the industry) and political (independence) categories; for an earlier discussion, see Brown, R. (1976) ‘Choice of Law Provisions in Concession and Related Contracts’, Modern Law Review 39, 625–643.

3.20

102 Chapter 3: Stability based on Contract of another state as the governing law of the contract in lieu of or in addition to the domestic law of the host state. Essentially, by making a choice other than the domestic law of the host state, the contract can be ‘internationalized’. What such ‘internationalization’ means was explained in the Texaco case (discussed in c hapter 4) in the following manner: . . . a contract between a State and an alien private person could be ‘internationalised’ in the sense of being subjected to the only other legal order known to us, namely public international law. This does not mean or was ever intended to mean that the State contract should be considered to be a treaty or should be governed by public international law in the same way as transactions between States. It simply means that by exercising their right to choose the applicable legal system the parties may make public international law the object of their choice.29 3.21

The inclusion of a clause that invokes the rules and principles of international law and general principles of law or a clause that establishes a choice of law other than the domestic law of the host state, can serve to ‘internationalize’ the contract. If the contract contains a stabilization clause, an arbitral tribunal will usually interpret it in the context of international law. However, whether a stabilization clause alone will serve to ‘internationalize’ a contract is an area of some controversy;30 the pattern of awards on this issue is not entirely clear (see chapter 4). To ensure that the validity of the stabilization clause is recognized in the face of any subsequent changes in the local law, ideally the contract could be ‘internationalized’ by using a combination of international law or another state’s domestic law as well as host state law as the governing law. C. Stabilization Clauses

3.22

The inclusion of a clause or clauses on stability is a common practice in contracts between investors and host states in the international energy industry, originating from as far back as the early 1930s. Although there are a variety of ways in which contract stabilization may be achieved, the essential idea is the same: the parties to the agreement seek to provide contractual assurance that the investment terms at its core on the date of signature will remain the same over the life of the agreement unless they have agreed otherwise. Essentially, the parties are seeking to ensure both the economic terms and the ability to implement the project. Sometimes the scope of the investment terms may be defined narrowly to comprise only fiscal matters but for many investors a wider formulation will be preferred, including the right to monetize (which may include the right to export products, and sell interests in the investment), the right (in the case of the petroleum industry) to develop a petroleum discovery deemed to be commercial, an exchange regime (to keep payments in hard currency repatriate funds outside the host state and make payments), and the governance of the project itself. One of the reasons for this wider approach to the scope of stabilization is that a host state has many levers within as well as outside the contract to ‘persuade’ the investor that a change in fiscal terms should be accepted. If, for example, the host state’s authority to approve an investor’s development plan for a petroleum discovery is unfettered, it can easily 29 17 ILM 14; see also Sapphire International Petroleum Ltd v National Iranian Oil Co, Arbitral Award of 15 March 1963 (chapter 3). 30 See eg the discussion by Sornarajah, M. (2004) The International Law on Foreign Investment, Cambridge: CUP, 410–429; Manciaux, S. (2005) ‘Changement de legislation fiscale et arbitrage international’, TDM 2, 17–20.

C. Stabilization Clauses 103 be used to tie a grant of approval to increased fiscal obligations and other conditions such as state participation. Limitations on the scope may also arise from a ‘carve-out’ of environmental, health and safety matters, where the host state may seek to avoid restrictions on its capacity to introduce innovations over the life of the project as standards change and improve. Conversely, the scope of the clause may be defined in a dynamic way so as to capture future benefits from changes in the legal and fiscal regime to the advantage of the investor (see below under ‘Asymmetry’). Protection may be sought both against unilateral modifications to the contract and against taking the rights of the investor (with the distinction between the two concepts not always being a clear one). If rights under an agreement made with a foreign investor are viewed as a form of property, then the legal issue in a particular case will be whether interference by a state with these rights amounts to expropriation, for which the state may incur responsibility if appropriate compensation is not paid. In this context, there is a distinction to be drawn in international law between lawful and unlawful expropriation.31 However, the principal difference in practice concerns the quantum of damages, especially book value or net book value versus discounted cash flow or lost profits (see chapter 11).32 Moreover, if a host government does not pay ‘appropriate compensation’ it may have the responsibility to pay a higher quantum of damages. The principal aim of the investor in providing for an expropriation provision (in addition to a stabilization mechanism addressing the risk of ‘creeping expropriation’) is to stipulate a quantum of damages applicable in the event of any kind of expropriation, whether lawful or unlawful. This provision would be drafted in line with normal BIT language on this subject: market value prior to the news of the expropriation reaching the marketplace, along with normal commercial interest.

3.23

If a definition of stabilization is required, it could take the following form:

3.24

in the context of an international energy contract, the term stabilization applies to all of the mechanisms, contractual or otherwise, which aim to preserve over the life of the contract the benefit of specific economic and legal conditions which the parties considered to be appropriate at the time they entered into the contract.33

In many agreements, references to the parties’ aim of maintaining the relationship which prevailed at the time of signature of the contract are explicitly provided. However, quite often, the term ‘stabilization’ is applied less to the exclusion of future legislative acts that may impact on that relationship than to the provision of mechanisms which can manage the impacts of any new legislation on the contract.

31 There are several arbitration cases that have discussed this, including BP v Libya (1979); LIAMCO v Libya (1981); AGIP v Congo (1982), and Amoco International Finance v Iran (1987). Essentially, expropriation is unlawful if it is discriminatory, if it is not motivated by the public interest of the expropriating country, if it breaches stabilization clauses of the parties’ contract, or if inadequate compensation is paid, offered or other provision is made for it, or not paid promptly. 32 Bishop, R.D. (2002) ‘International Arbitration of Petroleum Disputes: the Development of a Lex Petrolea’, Rocky Mountain Mineral Law Foundation International Energy and Minerals Arbitration Mineral Law Series: Westminister, Colorado, 2–25. 33 The purpose is not necessarily to subject an investor to all relevant legal conditions that prevail at the time the agreement is concluded since the parties may wish to provide that the host government shall exempt or protect the investor from the application of certain laws that are in fact applicable as of the date at which the agreement was concluded. Further, the ‘specific economic and legal conditions’ may include an adaptation condition: the investor and/or state may benefit from changes that occur in the wider fiscal environment during the life of the contract (see section on ‘Asymmetry’, below).

104 Chapter 3: Stability based on Contract 3.25

If a host state decides to offer stabilization in an energy investment agreement, there are a variety of ways in which it can do so. Many commentators have sought to classify the various kinds of clause typically found. International practice is highly diverse and is not standardized. One study has identified eleven.34 In the following section four principal types of contract stabilization commonly used by investors in the international energy industry are examined, abstracted primarily from usage in the international hydrocarbons industry. These are contract terms designed to last for periods of up to forty years, so most of the contracts currently in use for hydrocarbons production were concluded more than two decades ago. Terms offered and stabilization design may have altered slightly in the past decade in the light of experience gained in hydrocarbons activity, but those are not the contracts on which current production is based. An important caveat to this grouping of types of clause is that a proper understanding of a stabilization clause in a particular contract can be gained not only through consideration of the clause itself but the interrelationships between the various contract provisions or ‘stabilization architecture’:35 how did the parties structure the contract so that the final form of stabilization agreed upon was one that fitted into and interacted with the other contract provisions, such as choice of law and international arbitration, bearing in mind that agreement was probably reached only after lengthy and complex negotiations between the parties? There may, for example, be several forms of stabilization in the same contract, an outcome the parties may have intended as a result of their negotiations.

(1) Freezing 3.26

The most familiar (and possibly notorious) kind of stabilization clause is usually known by its legal effect as a ‘freezing’ clause. In its strictest form, such a clause prohibits the host state from changing its laws, and in a sense ‘handcuffs’ the host state so that it cannot exercise its sovereign rights to change its laws. In this way the investor creates an enclave arrangement for itself. Alternatively, it may seek to prevent the host state from applying changes in the host state’s law made after the effective date of the contract to the specific investment contract. Such an approach would aim to limit the legislative competence of the host state with regard to the contractual relationship between the parties in order to secure the investment under discussion. The state may not act to amend or abrogate the contract in question. Alternatively, the contract may be granted an enclave status by making it exempt from any legal changes occurring in the wider legal regime of the host state. In effect, the parties ‘freeze’ the law governing the parties’ contract, by limiting it to the legislation of the host state on the effective date of the petroleum contract. One commentator concludes that this ‘cannot be considered as lex contractus’ and is better viewed as a ‘system of reference chosen by the parties to be incorporated into their contract’.36 With this form of freezing clause, the parties do not purport to restrict the host state’s ability to change its laws, but instead agree as a matter of private contract that this ‘lex specialis’ will govern their respective rights and obligations towards each other, irrespective of the host state’s exercise of its sovereign powers.37 34 Bowman, J.P. (2016) ‘Contractual Stabilization Systems: Three Case Studies’, AIPN/ICDR Seminar: Dispute Resolution in the International Oil & Gas Business, Houston, TX, 27–28 October 2016. 35 See ibid. 36 Montembault, B. (2003) ‘The Stabilisation of State Contracts using the Example of Oil Contracts: A Return of the Gods of Olympia?’, RDAL/IBLJ, (6), 593–643 at 608. 37 An example is cited by Algerian scholar, Nour Eddine Terki, from a Sonatrach LNG Sales Contract (1975): ‘The law applicable shall be Algerian law as in force at the date when this contract is signed’: see Terki, N.E. (1991) ‘The Freezing of Law Applicable to Long-Term International Contracts’, J of Int’l Banking L 6(1), 43–47 at 44.

C. Stabilization Clauses 105 Such ‘freezing’ of the host state’s legal regime is not necessarily one that all states will find acceptable. Clearly, it is designed to benefit the investor and act as an inducement to make the investment. However, by not spelling out how damages are to be calculated in the event of a breach, the investor may also not be entirely comfortable with an exclusive reliance upon this approach. Further, it would seem to close off an opportunity for the investor to benefit from new legislative or regulatory provisions which are more favourable than those which have been subject to this form of stabilization.38 In such circumstances, freezing the law in force could work to the detriment of the investor and ‘tend to protect the interests of the host country’.39 By way of an alternative, a host state may prefer to offer a more limited version of legal freezing instead of one that applies to the terms and conditions of the entire contract. Indeed, a common approach is to offer only ‘partial’ stability of the applicable law, with express wording on what is included in its scope or what is excluded from its scope. For example, the wording of the clause may exclude from its scope matters such as those concerning health, safety, and the environment. Similarly, it may expressly limit the grant of stability to those laws applicable to a key fiscal element or elements of a contract such as royalty or income tax. As another alternative, a freezing clause may define the damages in the event of the state’s breach.

3.27

A recent example of a freezing clause limited to fiscal matters only (but extensive nevertheless) is that found in an amended minerals development agreement concluded in Liberia. First, it defines the body of tax law that applies to the contract. This is notable because of its scope, including both interpretations, written and oral, and methods of interpretation of the law:

3.28

. . . the CONCESSIONAIRE and its Associates shall be subject to taxation under the provisions of the Minerals and Mining Law and the Code and all regulations, orders and decrees promulgated thereunder, all interpretations (written or oral) thereof and all methods of implementation and administration thereof by any agency or instrumentality of the GOVERNMENT (the Code and all such regulations, interpretations and methods of implementation collectively, the ‘Tax Corpus’), in each case as in effect as of the date of this Agreement . . .40

After this comprehensive definition of the tax regime, it adds the stabilization provision: For the avoidance of doubt, any amendments, additions, revisions, modifications or other changes to the Tax Corpus made after the Amendment Effective Date shall not be applicable to the CONCESSIONAIRE. Furthermore, any future amendment, additions, revisions, modifications or other changes to any Law (other than the Tax Corpus) applicable to the CONCESSIONAIRE or the Operations that would have the effect of imposing an additional or higher tax, duty, custom, royalty or similar charge on the CONCESSIONAIRE will not apply to the CONCESSIONAIRE to the extent it would require the CONCESSIONAIRE to pay such additional tax, duty, royalty or charge.

38 Terki states that ‘the investor could by definition not claim’ the implementation of such post-contract signature legal measures ‘which would be more favourable than those which have been subject to stabilisation’: Terki (1991) at 43. 39 Ibid, at 43. 40 The Mineral Development Agreement between the Government of the Republic of Liberia and Mittal Steel Holdings NV dated 17 August 2005, and the Amendment thereto dated 28 December 2006.

106 Chapter 3: Stability based on Contract 3.29

This awareness of the importance of interpretation as well as of secondary legislation is not new, as this provision in a 1989 agreement from Tunisia indicates: The Contractor shall be subject to the provisions of this Contract as well as to all laws and regulations duly enacted by the Granting Authority and which are not incompatible or conflicting with the Convention and/or this Agreement. It is also agreed that no new regulations, modifications or interpretation which could be conflicting or incompatible with the provisions of this Agreement and/or the Convention shall be applicable.41

3.30

Bearing in mind that sometimes contractual provisions reproduce or ‘contractualize’ the provisions on stability found in legislation, two further examples of fiscal stability from hydrocarbons legislation in Latin America may be noted. They illustrate forms of stability that are more limited in scope, perhaps reflecting the investment climate at the time they were drafted. In the Bolivian Model PSC stability is provided only for royalty and permits: In Article 52 of the Hydrocarbons Law, the system of royalties and permits to apply to this Contract shall remain fixed throughout its term.42

This example from Chile limits the grant of stability only to taxes: The tax regime, benefits, privileges and exemptions provided in any of the articles hereof, which shall be recorded in the special operation contract, shall remain invariable for the duration thereof.43 3.31

The stricter forms of freezing were typically found in petroleum agreements concluded many decades ago and appear now to be less common. However, the partial forms of freezing are still found in contracts awarded by host states such as in Angola, Cambodia, Guyana, Iraq, Kazakhstan (in a highly qualified way, with some exceptions), Malta, Poland, and Tunisia.44 Freezing may also be found in a hybrid combination with other forms of stabilization.

3.32

The party to a contract with a freezing stabilization clause may be the NOC, and this can make a difference to the investor’s position. Obviously, it cannot offer not to change the domestic law as the state may do. But it may agree that the law governing the contract will not change as between the parties themselves. In principle, it may also be easier for an investor to collect a monetary award from the NOC than the host state.45 Given the international ambitions of some NOCs, particularly in energy infrastructure projects, there is leverage for investors when seeking payment for an award.

3.33

Apart from the macro-issues concerning this form of stabilization, such as whether a state can bind itself in this way, whether in part or whole, there is an important practical issue about what exactly has been frozen. Does this extend to the interpretation of a law or legal

41 Model Production Sharing Contract (1989), Art 24.1. 42 Model Production Sharing Contract (1997), Art 12. As events have shown, however, even this limited kind of stability is no protection in the face of a government determined to remove it: see chapter 7 below. 43 Decree-Law 1089 of 1975, Art 12 and 12.1. 44 However, it should not be assumed that such an approach is a matter of petroleum policy that always influences the design of all such petroleum contracts awarded . 45 In practice, however, it may prove difficult, as the long drawn out case of Karaha Bodas Company v Pertamina demonstrated. Karaha Bodas was a specially created venture controlled by US companies, Florida Power & Light and Caithness Energy, which won US$261 million in an arbitration award in 2000 after a geothermal electricity generating project in Java was cancelled during the 1997 financial crisis. The respondent, Pertamina, appealed to the US Supreme Court and courts in New York, Hong Kong and the Cayman Islands (among others), and only accepted defeat in 2007, paying the award and US$58 million in interest.

C. Stabilization Clauses 107 instrument such as a tax measure if that aspect is not expressly mentioned? From the Duke Energy v Peru case (see chapter 7.48–7.69), it appears that it does, provided that the investor can demonstrate that a stable interpretation existed at the time the stabilization clause was granted or, in the absence of any stable interpretation,46 that the application of the law by the state was ‘patently unreasonable or arbitrary’ (this was an important qualification to the tribunal’s view). However, how can an investor produce evidence of a practice of interpretation which has been stabilized in this way? It may be possible to do so but the effect is to place a burden of proof on the investor that is not likely to be a small one, not least since the practice in question may not necessarily include documentation in written form. A dispute between the investor and a host state entity is more likely to emerge many years after the contract has been signed, after many changes have taken place in the wider tax regime, and after many other contracts have been signed under more or less different fiscal rules. It is in that context that the investor will have to provide ‘compelling’ evidence of a stable interpretation, as the tribunal in Duke Energy v Peru deemed essential. Reflections on freezing Some writers have taken the ‘freezing’ variety of stabilization as the definitive form,47 contrasting it with provisions that envisage a renegotiation or adaptation of the contract terms at some undefined future date. For example, Professor Bernardini defines a stabilization clause as synonymous with a freezing clause that ‘records the State’s undertaking not to apply new laws and regulations to the private party’s detriment’.48 It is ‘more and more rarely to be found in these (investment) agreements’, while instead the approach which envisages a possible, future adaptation is an ‘alternative to a stabilization clause’, and is more in the nature of a private law arrangement between the parties. This ‘alternative’ is discussed in (3) below. Similarly, Professor Brownlie defines a stabilization clause as: a clause contained in an agreement between a government and a foreign legal entity by which the government party undertakes not to annul the agreement or to modify its terms, either by legislation or by administrative measures, either at all or for a defined period.49

This limitation of the notion of stabilization in the freezing or prohibition variety has also appeared in recent work by the UN concerned with the human rights implications of stabilization clauses.50 It is an approach which tends to function as an anchor for discussions at a fairly high level of abstraction about the limitations imposed by such clauses on state sovereignty, their (doubtful) value in the face of an expropriatory act by the host state and their contrast with the ‘modern’ kind of contract stability; that is, the renegotiation or adaptation provision.

46 An absence of ‘stable interpretation’ is especially likely in the context of a new or recently established state: Timor-Leste or South Sudan are examples; during the 1990s most of the states created from the former USSR generated similar uncertainties for some years. 47 Bernardini, P. (1998) ‘The Renegotiation of the Investment Contract’, ICSID Review-FILJ 13, 411–425; and (2008) ‘Stabilisation and Adaptation in Oil and Gas Investments’, JWEL&B 1, 98–112 at 100–101; Brownlie, I. and James Crawford (2019) Brownlie’s Principles of Public International Law (9th edn), Cambridge: CUP, 606–607; Dolzer, R. & Schreuer, C. (2012) Principles of International Investment Law (2nd edn), Oxford: OUP, 82; Sornarajah (2017) The International Law on Foreign Investment (4th edn) 330–334; Paasivirta, E. (1989) ‘Internationalisation and Stabilisation of Contracts versus State Sovereignty’, BYIL 60, 315 at 323; Amoco Int’l Fin Corp v Government of the Islamic Republic of Iran, 15 Iran–US Cl Trib Rep (1987) 189, 239: see discussion in chapter 4. 48 Bernardini (2008) at 102; (1998) at 418. 49 Brownlie (2019) at 606. 50 United Nations and International Finance Corporation, Stabilization Clauses and Human Rights (a research project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights (27 May 2009)) (see c hapter 10, paras 10.97–10.110).

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108 Chapter 3: Stability based on Contract 3.35

There are several shortcomings with this approach. Firstly, investors tend to prefer a multiplicity of approaches to stability whenever they can persuade a host state to accept them. A review of a sample of agreements from recent contractual practice suggests that freezing or intangibility versions of stabilization are still to be found in international petroleum agreements,51 but that investors may also include the renegotiation version as well. In Duke Energy v Peru it was evident that this combination was present in the Legal Stability Agreement (LSA), which was the key stabilization document in the case (see chapter 7). The outcome in a particular contract appears to depend upon what the host state is prepared to accept. Secondly, if there is a trend towards an increasing use of balancing (and there is evidence that this is indeed so), it is not because such clauses are any more effective than the freezing variety in preventing expropriation. Indeed, by focusing upon the effects of host state actions, it would appear that they are implicitly recognizing the futility of any express prohibition on expropriation or any similar acts that could be said to fall within a state’s sovereign capacity. Instead, they commit the host state to participating in a process in which the parties have stipulated, in more or less detail, that other adjustments must be made to restore the status quo or that a renegotiation has to take place with the aim of restoring the status quo. However, this aim is usually stated in fairly clear terms, sometimes with provisions on how damages might be calculated. The goal remains one of keeping the original bargain stable, not one of re-opening it.

(2) Prohibition on unilateral changes 3.36

This is often described as an ‘intangibility clause’,52 and might be viewed as a sub-category of the freezing variety above, with which it has similarities. It ‘freezes’ the contract rather than the law. Usually short and simple in its construction, it prohibits unilateral changes to the investment agreement and requires the consent of both parties before any changes may be made. Instead of indirectly restraining the state’s legislative capacity to intervene at a later date by freezing the law applicable at the time of the contract signature, this form of stabilization tries to limit the state’s capacity directly by requiring mutual consent to contract changes. By requiring mutual consent (in contrast to the freezing approach to stabilization), this approach has the advantage that it establishes a procedural mechanism for discussion (and probably negotiation) between the parties about the future of the agreement.

3.37

An example of such a clause is found in Article 34 of a PSC concluded in 1995 between the government of India, the state-owned entity, the Oil and Natural Gas Company (ONGC) and a leading IOC. It reads: This Contract shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the Parties, which shall state the date upon which the amendment or modification shall become effective.53

51 United Nations/International Finance Corporation, Stabilisation Clauses and Human Rights (2008) (revised version published April 2009)(authors: John Ruggie and Andrea Shemberg). 52 Montembault (2003) at 615 calls it an inviolability clause; see also in this context, Weil, P. (1974) ‘Les Clauses de stabilisation ou d’intangibilité insérées dans les accords de développement économique’, in Mélanges Rousseau, Paris: Pédone, 301–329. 53 Author’s copy of agreement.

C. Stabilization Clauses 109 Another example is to be found in an agreement between the government of Yemen and a foreign investor in 1992, which reads:

3.38

Contractor shall be solely governed by the provisions of this Agreement and [the contract] may be altered or amended only by the mutual agreement of the Parties.54

In slightly stronger terms and in more detail than is usual, the 2001 Mozambique model PSC states that:

3.39

The government will not without the agreement of the contractor exercise its legislative authority to amend or modify the provisions of this Agreement and will not take or permit any of its political subdivisions, agencies and instrumentalities to take any administrative or other action to prevent or hinder the Contractor from enjoying the rights accorded to it hereunder.55

(3) Rebalancing of benefits There are contract clauses that address stability in a different manner, envisaging automatic adjustments or renegotiation of contract terms in the event of specified circumstances occurring. These stabilization provisions are described within this study as balancing clauses. Essentially, they stipulate that if the host state adopts a measure subsequent to the conclusion of the contract (a triggering event) that is likely to have damaging consequences to the economic benefits of the original bargain for one or both of the parties, a re-balancing has to take place. Petroleum contracts differ in their treatment of how that balancing will be effected. On one view, the adjustment may be automatic or achieved in a manner stipulated in the contract so that the economic balance struck between the parties on the effective date of the contract is re-established. On another view, however, neither the manner of such adjustment nor a requirement that it should be the result of mutual agreement between the parties should be specified: what might be called the open-ended approach. This approach might result from the host state’s refusal to agree to a more detailed clause. A third approach is to make express provision for the parties to enter into a negotiating process to identify which amendments should be made to the contract to permit a balancing of the economic core of the contract.56 This element of renegotiation can create difficulties as is demonstrated in D below. Inevitably, the large number of petroleum contracts in existence around the world allows for considerable diversity of approaches including hybrids of the ones outlined above.

3.40

All of these versions of balancing have one important feature in common: they do not seek to prevent a change in the law by the host state but rather seek to address the economic impact of such a change on the bargain originally struck and to establish a framework in more or less detail for its preservation. If there is an NOC, it may (on an optimistic view) be expected

3.41

54 Article 18.2: Mayfair Production Sharing Agreement between the Ministry of Oil and Natural Resources and Yemen Mayfair Petroleum Corporation (Al Zaydiah, Block 22, Tihama Area), dated 29 July 1992. 55 Mozambique Model Production Sharing Contract (2001), Art 30.7(d) and (e). Italics added. Since that time, Mozambique has evolved a hybrid contract, the model for which does not contain this Article and instead combines a balancing provision with tax exemptions. 56 FC Alexander Jr refers to these three approaches as, respectively, ‘Stipulated Economic Balancing’; ‘Non- Specified Economic Balancing’, and ‘Negotiated Economic Balancing’: see ‘The Three Pillars of Security of Investment Under PSCs and Other Host Government Contracts’, chapter 7 of Institute for Energy Law of the Centre for American and International Law’s Fifty-Fourth Annual Institute on Oil and Gas Law (Publication 640, Release 54), LexisNexis Matthew Bender (2003).

110 Chapter 3: Stability based on Contract to take an active role in promoting a solution on behalf of the foreign company in its discussions with the state party. An example of a balancing provision can be found in the Model PSA of the Kurdistan Regional Government (KRG)57 which reads: 43.2 The obligations of the CONTRACTOR resulting from this Contract shall not be aggravated by the GOVERNMENT and the general and overall equilibrium between the Parties under this Contract shall not be affected in a substantial and lasting manner. 43.3 The GOVERNMENT guarantees to the CONTRACTOR, for the entire duration of this Contract, that it will maintain the stability of the fiscal and economic conditions of this Contract, as they result from this Contract and as they result from the laws and regulations in force on the date of signature of this Contract. The CONTRACTOR has entered into this Contract on the basis of the legal, fiscal and economic framework prevailing at the Effective Date. If, at any time after the Effective Date, there is any change in the legal, fiscal and/or economic framework under the Kurdistan Region Law or other Law applicable in the Kurdistan Region which detrimentally affects the CONTRACTOR, the terms and conditions of the Contract shall be altered so as to restore the CONTRACTOR to the same overall economic position as that which CONTACTOR would have been in, had no such change in the legal, fiscal and/or economic framework occurred. 43.4 If the CONTRACTOR believes that its economic position has been detrimentally affected as provided in Article 43.3, upon the CONTRACTOR’s written request, the Parties shall meet to agree on any necessary measures or making any appropriate amendments to the terms of this Contract with a view to re-establishing the economic equilibrium between the Parties and restoring the CONTRACTOR to the position it was in prior to the occurrence of the change having such a detrimental effect. Should the Parties be unable to agree on the merit of amending this Contract and/or any amendments to be made to this Contract within ninety (90) days of CONTRACTOR’s request (or such other period as may be agreed by the Parties), the CONTRACTOR may refer the matter in dispute to arbitration as provided in Article 42.1. 43.5 Without prejudice to the generality of the foregoing, the CONTRACTOR shall be entitled to request the benefit of any future changes to the petroleum legislation or any other legislation complementing, amending or replacing it. 3.42

The above sections contain some important elements that are common to many balancing clauses: • a triggering event broadly defined (‘any change in the legal, fiscal and/or economic framework under the Kurdistan Region Law or other Law applicable in the Kurdistan Region which detrimentally affects the CONTRACTOR’); • aim of the balancing exercise stated (‘to restore the CONTRACTOR to the same overall economic position as that which CONTACTOR would have been in, had no such change in the legal, fiscal and/or economic framework occurred’); • procedure for renegotiation set down (written request by party invoking benefit of the clause; meeting of the parties; outcome stipulated); • procedure in the event of a failure to agree provided (time-limit for negotiation set; arbitration option may be exercised under contract). 57 See Kurdistan Regional Government, Ministry of Natural Resources, Model Production Sharing Contract (accessed 16 December 2009).

C. Stabilization Clauses 111 Another example of balancing comes from a Nigerian production sharing contract:

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Should the income of the state or the Contractor be materially altered as a result of new laws, orders or regulations then, in such an event, the Parties shall agree to make the necessary adjustments to the relevant provisions of this Contract, observing the principle that the affected Party shall be restored to substantially the same economic condition as it would have been in had such change in laws or regulations not occurred. The cost of such restoration to the other Party may not exceed the benefit received by such other Party as a result of such change.58

The scope of application is slightly different from the KRG model contract, focusing only on the laws, orders, and regulations rather than both those and the remainder of the legal, fiscal, and economic framework (eg interpretation or application of laws). There are also possible differences between the scope of ‘income’ and ‘economic equilibrium’. The clause has also a more explicit concern to ensure the balancing process is one in which the cost to one party is not greater than the benefit received by the other party. As a slight corrective to this, however, it adds that the provisions ‘shall not be construed to deny to Contractor the benefit of any new law or regulation intended by the State to benefit Contractor’. An example of balancing with a strong element of negotiation (the third approach above) is contained in a Concession Agreement awarded in Egypt in 2002. This provides a role for the NOC in the renegotiations. Article XIX reads:

3.44

In case of changes in existing legislation or regulations applicable to the conduct of Exploration, Development and production of Petroleum, which take place after the Effective Date, and which significantly affect the economic interest of this Agreement to the detriment of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the ARE (Arab Republic of Egypt) the proceeds from sales of CONTRACTOR’s Petroleum, CONTRACTOR shall notify EGPC (the NOC) of the subject legislative or regulatory measure. In such case, the Parties shall negotiate possible modifications to this Agreement designed to restore the economic balance thereof which existed on the Effective Date. The Parties shall use their best efforts to agree on amendments to this Agreement within ninety (90) days from aforesaid notice. These amendments to this Agreement shall not in any event diminish or increase the rights or obligations of CONTRACTOR as these were agreed on the Effective Date. Failing agreement between the Parties during the period referred to above in this Article XIX, the dispute may be submitted to arbitration, as provided in Article XXIV of this Agreement.59

If the level of comfort provided by wording such as ‘best efforts’ is of limited effect on an investor, more reassurance may be found in the arbitration provision. In the second paragraph, the beneficiaries of the renegotiation—namely, the government, the NOC, and the investor—commit themselves to a ‘best efforts’ approach to negotiating their economic

58 Unpublished, dated 1994; author’s copy. It provides a definition of ‘state income’. 59 Concession Agreement for Petroleum Exploration & Exploitation between Egypt & The Egyptian General Petroleum Corporation & Dover Investments Ltd (East Wadi Araba Area Gulf of Suez) (2002). Source: Barrows Company Inc. Italics added. The contract is between Egypt and the EGPC on the one hand and the IOC on the other.

3.45

112 Chapter 3: Stability based on Contract balancing. A time limit to the negotiations is however stipulated and the third paragraph appears to suggest that the amendments sought through negotiation are intended to restore the disrupted equilibrium: no more and no less (although the wording is not free from ambiguity). 3.46

A similar approach to rebalancing the contract with negotiations included is found in Vietnam. For many years, all Vietnam PSCs used stabilization clauses in one or another of the above forms. The relevant clause in the model contract issued by the state60 lists a wide scope to the state-imposed changes that may adversely affect a contractor’s interests or revenue: if any change in existing law or regulation but also an application of changes of regulations of a law, cancellation of a licence or the conditions for a licence, are revised in a way that adversely affects the rights and obligations on tax, changes are to be made as are necessary to achieve the outcomes stated below: both to maintain the CONTRACTOR’s rights, benefits and interests hereunder, including CONTRACTOR’s share of Profit Oil or Profit Gas, as at the Effective Date and to ensure that any revenues or incomes or profits, including any one or more of the foregoing, derived or to be derived to the CONTRACTOR under this Contract, will not in any way be diminished in comparison to that which was originally contemplated as a result of such changes of law or annulment thereof or as a result of such changes, cancellation of approvals or licences.

3.47

The Russian law on production sharing61 contains a use of balancing, but expressly applies certain exclusions to the scope of its application. Article 17.2 provides that in the event of a national or local regulation affecting the commercial results of the investor’s operations, the agreement is to be varied in order to ensure that the investor obtains the same commercial results as would have flowed had the regulation in existence at the time of the contract conclusion continued to apply. However, the stabilization provision is qualified since in certain broadly defined circumstances, this rule does not apply: in cases such as those where the variations apply to the security of the works, conservation of mineral resources, and protection of the environment or public health.62 This approach needs to be assessed in the context of the host state’s practice: where measures have been introduced that set environmental standards (for example) at a very high level, making non-compliance a strong possibility, this limitation—while on the face of it entirely reasonable—might be thought to seriously undermine the negotiated balancing provision. The appearance of environmental problems at the time of the Sakhalin-II renegotiation is an example of the risks here (see c hapter 8).

3.48

Russia is far from being an exception in electing to include such qualifications to a balancing form of stabilization. Mozambique, for example, has opted for a balancing mechanism that contains a strong element of negotiation in it but also includes a provision for exemptions.63 Alongside the stabilization requirement for the fiscal package, it includes another provision that asserts the state’s continuing capacity to take measures in certain areas such as environmental protection. However, it has countered perceptions of possible abuse by including a 60 Model PSC, 22 November 2013 (as contained in Decree No 33/2013/ND-CP), clause 18.1.3 (NRGI Resource Governance Index). 61 Federal Law No. 225-FZ of December 30, 1995 ‘on Production Sharing’, as amended in 1999 and 2001. 62 The value of the example is undermined however by the fact that only one PSC has been awarded under this—essentially defunct—law (which also grandfathered in three other PSCs) (see c hapter 8, paras 8.14–8.17). 63 Mozambique Model Exploration and Production Concession Contract, March 2006, Articles 11.2 and 11.3 (exemptions): .

C. Stabilization Clauses 113 provision that such measures must not be unreasonable and must be ones that are in accordance with the standards generally accepted from time to time in the international petroleum industry. The words ‘from time to time’ imply that such standards will develop during the petroleum project and that the expectations of the investor must be adapted to reflect such development. The clause also provides an illustration of what we might view as an emerging dual focus of modern stabilization concerns: firstly, the economic issues that lie at the heart of an energy investment agreement and secondly, the various, non-economic matters that are occupying a role of growing importance in negotiations on energy and natural resources projects, whether upstream or downstream. On the latter, the relevant Article reads as follows:64 Nothing in the provisions set out in this Article 11 shall be read or construed as imposing any limitation or constraint on the scope, or due and proper enforcement, of Mozambican law of general application which does not discriminate, or have the effect of discriminating, against the Concessionaire, and provides in the interest of safety, health, welfare or the protection of the environment for the regulation of any category of property or activity carried on in Mozambique; provided, however, that the Government will at all times during the life of the Petroleum Operations ensure in accordance with Article 28, that measures taken in the interest of safety, health, welfare or the protection of the environment: (a) are in accordance with standards generally accepted from time to time in the international petroleum industry; and (b) are not unreasonable.

The former reads:65 In the event that after the Effective Date, any other tax introduced in the Republic of Mozambique which is not of the type set out in Article 11 and, as a result, there is an adverse effect of a material nature on the economic value derived from the Petroleum Operations by the Concessionaire, the Parties will, as soon as possible thereafter, meet to agree on changes to this EPC which will ensure that the Concessionaire obtains from the Petroleum Operations, following such changes, the same economic benefits as it would have derived if the change in the law had not been effected.

A notable feature of this Article is the use of the words ‘to agree on changes to this EPC’: if the parties fail to agree upon the changes, what recourse might the investor have? Would a duty of good faith effectively constitute an obligation on the part of the host state to agree upon any changes proposed by the investor? The familiar doubts about the appropriate steps that might follow a failure to agree are underlined by such wording.

3.49

A final example can serve to illustrate how a stabilization clause may attempt to combine freezing with economic balancing by negotiation—very common around the world. It is contained in a Kazakh PSA.66 It begins with a simple statement that the contract terms must

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64 Ibid, Art 11.8. 65 Ibid, Art 11.9. A change in laws or breach of the warranty about tax exemptions means the arrangements for sharing profit petroleum are adjusted so that the net revenues to be received by the concessionaire from petroleum operations are the same as they would have been if no change in the law had taken place: Article 9.12. 66 Contract for additional exploration for and production and production sharing of crude hydrocarbons in the Chinarevskoye Oil and Gas-Condensate Field in West Kazakhstan Oblast pursuant to licence series MG no 253D (Petroleum) between the Republic of Kazakhstan State Committee for Investments (the Competent Body) and Production sharing agreement between The Republic of Kazakhstan State Committee for Investments (the

114 Chapter 3: Stability based on Contract remain inviolable during the entire life of the contract. It then adds that any changes made in the country’s general laws shall not worsen the contractor’s position: 21.1 The Tax Regime set forth in the Contract shall be permanently in effect until the expiration of the Term of the Contract. 21.2 If changes are made in the law after the Contract signing data that make further observance of the original terms and conditions of the Contract impossible or that lead to a significant change in its general economic terms and conditions, the Contractor and representatives of the Competent Body and Tax Agencies may make changes in or correction to the Contract that are needed to restore the economic interests of the Parties as of the Contract signing date. These changes in or correction to Contract terms and conditions shall be made within sixty days of the time of written notification of a Tax Agency or the Contractor. 3.51

The above references to possible changes in the general laws make it quite clear that what they envisage are economic and not only fiscal changes. This could include, for example, abrogation of the investor’s right to export or abrogation of the investor’s right to develop and/ or produce a petroleum discovery. The requirement that changes are to be made within sixty days raises a familiar question: what are the investor’s available remedies if there is no agreement during this period?67

(4) Allocation of burden 3.52

Another common form of stabilization involves the use of clauses that seek to allocate the burden created by an attempted unilateral change in the law. These clauses can take different forms but usually require the NOC to play the key role in burden sharing. Essentially, in the event of any changes in the legal framework that are applicable to the investment contract, such as an additional tax, the clause shifts the burden of change in the fiscal regime (payment) to the NOC (but in some versions the burden may be shifted simply to ‘the state’). This can happen at any stage in the potentially long life of a petroleum agreement.

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At first sight this may appear to resemble a balancing clause that specifies the means of offset. However, no balancing is implied; instead, it involves a transfer of any additional burden on the IOC if there are changes to the laws. Moreover, in contrast to an equilibrium form of balancing which may be automatic or negotiated, no actual amendment of the contract is required. Instead, the NOC will be required to take specific remedial action. This may involve payment of any additional tax or royalty in kind from its own share of oil on behalf of the foreign investor. With this mechanism, there is a risk that the NOC share of production may prove insufficient or that it may be pre-sold. Alternatively, it may be required to pay any additional tax or royalty irrespective of its source of funds. In another variant, the clause will state that the foreign investor has to pay any additional amount required by the new measure but will then be indemnified by the government or the NOC. An example of this is in the KRG PSA: Competent Body) and the Zhaikmunai Limited Liability Partnership (the Contractor), Kazakhstan, 1997, Article 21 (stability of the tax regime). 67 See para 2.75 for a discussion of the question whether an arbitral tribunal would try to make an agreement for the parties where they fail to reach one themselves, and where resolution of the issue by arbitration is not specifically mentioned.

C. Stabilization Clauses 115 The GOVERNMENT shall indemnify each CONTRACTOR entity upon demand against any liability to pay any taxes, duties, levies, charges, impositions or withholdings assessed or imposed upon such entity which relate to any of the exemptions granted by the GOVERNMENT under this Article 31.1.

Article 31.1 (above) specifically exempts the investor from all the taxes listed, other than the income tax which the government pays on its behalf. Another example of such an express exemption is to be found in the Egyptian model concession agreement, which exempts the NOC and the foreign investor from all taxes and duties (Art XVIII (c)), except for income tax, which the NOC pays on behalf of the foreign investor (Art III (g)). A slightly different approach to this is found in an Algerian contract, where the NOC was charged to negotiate a restoration of the contractual status quo if the legislature adopted measures with adverse effects:

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In the event of changes in the Algerian laws made after this Contract is signed, which result in a substantial reduction of the rights or increase in the obligations of one or the other Party, Sonatrach (the NOC) and Partner (the investor) will negotiate amendments to re-establish the same rights as those agreed on the date the Contract was signed.68

An allocation clause from an Azerbaijan contract illustrates how pivotal the role of the NOC can be during the operation of fiscal stabilization. The PSA covered several fields in Azerbaijan and was concluded in 1994.69 It stated that if the rights or interests of the Contractor have been adversely affected by unilateral action by the host state with negative consequences for the Contractor’s rights or interests, the NOC (SOCAR, in this case) ‘shall indemnify the Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom’. The NOC is also charged to ‘use its reasonable lawful endeavours’ to take appropriate measures ‘to resolve promptly in accordance with the foregoing principles any conflict or anomaly between such treaty, intergovernmental agreement, law, decree or administrative order and this Contract’.

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(5) The four methods The four methods of stabilization are not mutually exclusive and may be combined. An example of a combination of several methods is the economic stabilization clause in Azerbaijan’s Shah Deniz contract. The specific stabilization elements are described in parentheses in the text below: The rights and interests accruing to Contractor (or its assignees) under this agreement . . . shall not be amended, modified or reduced without the prior consent of Contractor [intangibility]. In the event that any Governmental Authority invokes any present or future law, treaty, inter-governmental agreement, decree or ministerial order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of Contractor hereunder, including, but not limited to, any changes in 68 Contract between Sonatrach and Oryx Algeria (1998) Art 36. 69 Agreement on the Joint Development and Production Sharing for the Azeri and Chirug Fields and the Deep- Water Portion of the Gurashli Field in the Azerbaijan Sector of the Caspian Sea, 20 September 1994, Art XXIII.2. The wording is almost identical to that in the Shah Deniz contract below. Other examples of this form of stabilization are found in Qatar, Egypt, Syria, Tunisia, and South East Asia.

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116 Chapter 3: Stability based on Contract tax legislation, regulations or administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this Agreement shall be adjusted to re-establish the economic equilibrium of the Parties [balancing], and if the rights or interests of Contractor have been adversely affected, then SOCAR (the NOC) shall indemnify Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom [allocation]. SOCAR shall within the full limits of its authority use its reasonable lawful endeavours to ensure that the appropriate Governmental Authorities will take appropriate measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly between any such treaty, intergovernmental agreement, law, decree or administrative order and this Agreement [allocation of NOC support]. 3.57

Another example of a combined approach is to be found in the recently replaced participation or production sharing agreements used in Ecuador for many years. These included a freezing clause, which freezes the applicable law at the time the agreement was made; an intangibility clause, which prevented any change being made without the consent of the parties and, in the event of modification to the tax system, application of a ‘correction factor’ to production sharing percentages.

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A curious feature of some stabilization clauses—of whatever variety—is that they are expressly asymmetrical in character. They work to ensure that the contractor is protected from negative changes arising from state action and at the same time give the contractor a right to benefit from any positive changes after contract signature such as a reduction in tax rates or a more liberal approach to the recovery of costs in a PSC.70 The effect of this contractual anticipation of both negative and positive changes in law is to create a ‘one-way street’ that works in the investor’s favour if, at a later date, the government decides to reduce tax rates and broaden the tax base.71

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An example of this asymmetry is Article 43 of the Kurdistan Region (Iraq) Model PSC, which provides a balancing form of clause to address negative changes at some future date, before adding the following wording: ‘the Contractor shall be entitled to request the benefit of any future changes to the petroleum legislation or any other legislation complementing, amending or replacing it.’72 In addition to a right to negotiate an offsetting change if a package of government-initiated changes leaves the investor in an adverse economic position, this provision would allow the contractor to ‘cherry pick a balanced tax reform package combining, say, lower tax rates with less favourable capital recovery rules’.73 In other words, this kind of fiscal stability clause can provide both a positive and a negative form of protection 70 Daniel, P. & Sunley, E.M. (2010), 405–424. The authors are among the very few to have written on this feature of contract practice. At the time of writing this, they were employed at the Fiscal Affairs Department of the International Monetary Fund (IMF), and as a result of its many missions made to member state governments had access to multiple unpublished contracts. 71 The company protected by the stabilization clause ‘will be entitled to the reduced rates but may not be subject to the provisions that broaden the tax base. This can make future tax reform very difficult, especially if large contractors are protected by stability agreements that entitle them to all beneficial tax changes’: Daniel & Sunley (2010) at 417. 72 Model Production Sharing Contract, Article 43.5 (2007). 73 Daniel & Sunley (2010) at 422–423.

C. Stabilization Clauses 117 with respect to future state actions, with the positive element working to ensure that any available benefits occurring after the original agreement is signed are brought into that contract to benefit the investor. This contrasts with the kind of fiscal stability offered by Tanzania in the 2001 PSA referred to earlier. Article 28.17 reads: If after the date of this Agreement there occurs . . . [a]‌Change of Law that either adversely affects or enhances PanAfrican Tanzanian’s economic benefits under this Agreement, the Parties shall promptly meet for the purpose of making all necessary adjustments to the relevant provisions of this Agreement so as to maintain the economic benefits to PanAfrican Tanzania specified under this Agreement.74

This is an example of a ‘two-way street’, since it ‘fixes tax parameters in both directions—the contractor does not benefit from tax reductions’.75 From a public policy perspective, it would be more equitable for a government to seek to make the fiscal stability a two-way street, but the course of individual negotiations may persuade it differently, with outcomes reflecting the unique balance of benefits and trade-offs influencing a particular deal.

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Asymmetry of benefits based on contract appears to be a common feature of stabilization in hydrocarbons and mining contracts. The confidentiality surrounding final agreements means that a systematic empirical testing of this proposition is not possible. However, the two IMF economists, basing themselves on access to contracts gained from several dozen missions to member country governments, and their natural resource regimes, claimed to have encountered this asymmetrical form of stabilization ‘in many mining and petroleum agreements’.76 It is an outcome of individual contract negotiations between the parties rather than a legislated provision, supplementing the kinds of stabilization clause discussed earlier in this Chapter. Curiously, it is also a phenomenon that is largely ignored in the voluminous literature on stabilization clauses.

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Why, we may ask, might a government make this concession to an investor? The effect might after all be to offer the investor the prospect of a windfall.77 Another risk to the government is that unintended benefits might arise if the domestic tax regime is poorly developed or defective: among other things, there may be no capital gains tax in place and the investor, following a successful hydrocarbons or mining discovery elects to sell its interest, making a substantial gain if commodity prices are high (see chapter 9). Several sources give us an idea why a government might take this approach. First, in his report on human rights and stabilization clauses, Professor John Ruggie states: ‘Investors and lawyers (including those representing states and investors) observe that states sometimes accept sweeping stabilization clauses, along with other terms that appear to tilt the project in favor of the investor, as a way of securing a large investment project and enticing further investment in the country.’78 Second, the late Professor Thomas Waelde, writing at a time when the newly independent states of Central Asia and East Europe were seeking investment, observed: ‘[p]‌romises not to alter given legislative regimes [for investment] have therefore reemerged, in the most

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74 Songo Production Sharing Agreement, Article 28.17, at 87. 75 Daniel & Sunley (2010) at 417–418. 76 Ibid., at 417. 77 Ibid: ‘Conferring future beneficial tax benefits on these contractors would provide them with a windfall’, but that does not mean that many Governments do not in fact conclude agreements with such incentives in them; a practice more likely in jurisdictions where final contracts are not in the public domain. 78 United Nations and International Finance Corporation, ‘Stabilization Clauses and Human Rights’ 27 May 2009, p. 5.

118 Chapter 3: Stability based on Contract extensive form ever seen, as an important tool of foreign investment promotion policy.’79 Thus, States will offer generous terms to potential investors for several reasons: in a context of capital drought or decline, they seek to attract foreign investors into the energy economy as ‘first movers’ in the hope of opening or reviving a key sector for the country’s development, and encouraging a second group of larger companies to invest; to match neighbours’ offers of stabilization; to gain access to specialist expertise and technology; and, in periods of low commodity prices, or the presence of other disincentives, to overcome foreign investors’ reluctance to invest capital that is in short supply. A measure of the investor’s response can be gained from a study on contract terms sponsored by a leading industry association, based on extensive contract analysis. The author cautions his readers that the investor ‘should, of course, beware of excluding new laws or regulations which might be favourable to it’. This, he finds, is a sentiment that is hardly surprising, since in countries with developing legal frameworks, there is the prospect of positive changes in the law for the investor at some point after the contract has been entered into80. He adds: While most fiscal stabilization provisions are triggered only if the IOC’s fiscal position is damaged as a result of the unilateral host government revision of the stabilized element(s) of the fiscal relationship . . . others are triggered if the IOC’s fiscal position is either damaged or improved as a result of the unilateral host government revision of the stabilized element of the fiscal relationship . . .81

Therefore, depending upon how it is drafted, a stabilization clause can lock in the economic balance to both parties or either party and so be symmetrical or asymmetrical in character. 3.63

This asymmetry is not the same as another pro-investor clause that is reasonably common, although superficially there is a resemblance. That is sometimes called the ‘most favoured company’ clause. It provides that the contractor will be eligible for any benefits granted to other investors by law or by more favourable contract terms given to other investors. The impetus to change in such cases has nothing to do with a unilateral action by the state or change in law in the sense relevant to a balancing clause. It lies in a need for equality of treatment among investors. The French jurist, Georges Delaume, noted that this provision protected the competitiveness of an investor with others in the same sector, allowing it ‘to claim the benefit of subsequent legislation making the conditions offered to other investors more favourable than those originally granted to him’.82 As a result, the investor receives the benefit of any favourable changes to the law irrespective of the inclusion of stabilization clauses.

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How asymmetry works The practical operation of an asymmetrical stabilization clause raises a question about the appropriate date to use in the event that a change in law occurs with adverse impact during the life of the contract. Where this act triggers a rebalancing of benefits form of stabilization, the conventional assumption (and sometimes the contract language) is that the restoration of benefits should be calculated as of the date of contract signature by the parties, with the bundle of rights and obligations agreed to then as the relevant starting point for a calculation of adjustments. Yet the wording of many ‘change in law’ provisions implies that restoration of the balance is to be linked not to the contractual baseline 79 Waelde, T. & Ndi, G. (1996) ‘Stabilising International Investment Commitments: International Law Versus Contract Interpretation’, Tex Intl LJ 31, 215 at 218. 80 AIPN, Host Government Contract Handbook Section 13: Contract Stabilisation and Hardship. 81 Ibid, at section 7.03 [1]‌, para 7-18. 82 Delaume, G. (1988) Law and Practice of Transnational Contracts: Transnational Contracts, Applicable Law and Settlement of Disputes, New York: Oceana Publications, at 47.

C. Stabilization Clauses 119 (the effective date) as the economic comparator for the purposes of assessing the effect of the adverse change but to the period immediately before that change occurs.83 If a positive benefit has been absorbed by the contractor in the period since the contract was signed, will that then be reflected in this negotiation as a new baseline or will the negotiation revert back to the terms at the date of contract signature? The question can be expressed differently by taking three points on a spectrum: A, B, and C. The law at the point of contracting is A. It improves from the perspective of the beneficiary at B (a benefit is conferred) and then deteriorates from its perspective at C (a tax is introduced, for example). Can the beneficiary use the stabilization clause to return itself to the position between B and C, immediately prior to the relevant adverse change, or must it revert to A? The conventional assumption about the starting point of the ‘change in law’ element in a balancing clause is potentially challenged by the operation of an asymmetrical stabilization clause. The investor will surely argue that if the contractor is expressly permitted to receive the benefit from any changes in law that are ‘not detrimental to the Contractor’ after the effective date of the contract, such future benefits may be kept by the contractor unless there is wording to the contrary. In other words, beneficial changes of this kind can, on this view, establish a new baseline (or ratchet point) for calculating the benefits to be restored in the event of a negative change in law. An un- repealed positive benefit to the Contractor would be permanently retained since, to continue the metaphor, it is not possible to reverse down a one-way street. The above analysis is not without its challenges. For example, it could be argued that since the parties can only know what the economic balance between them is at point A, they cannot guess what it may be at B, and therefore they cannot be assumed to have agreed to be returned to a position which they cannot predict. Further, there may be ambiguities with the law at point A. It is possible to hypothesise that a transaction might have been taxable at A under the law in force at the time or might not have been, not least if there was doubt about how the tax authorities might interpret the law and whether there was any practice of interpretation or assessment. If the ambiguity is removed entirely at point B, can it be said that there has been a change which has materially reduced the beneficiary’s economic benefits to the extent that the chance of avoiding tax at point A has been lost?

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In both symmetrical and asymmetrical forms, all of the rights and obligations of the parties are those that they have signed up to on the effective date. Each form is aimed at protecting a bargain that has emerged from usually very lengthy negotiations between the parties. In negotiating these long-term, complex agreements with particular investors for a specific investment proposal, government negotiators may consider an incentive such as this as justified to conclude a deal with the prospective investor.84 Asymmetry of the kind outlined above clearly has greater potential benefit to the investor than a clause that is limited to ensuring that economic benefits bargained for at the time of contracting are not reduced by subsequent changes in law. It is therefore useful to distinguish it from symmetric stabilization clauses which are generally limited to achieving the latter outcome.

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83 Examples of clauses using the contractual baseline as the economic comparator are the Tanzanian Model Contract, Art 30, and the Vietnam Model Contract, Art 18.1.3. Examples of clauses using the position immediately prior to the adverse change as the economic comparator are the Kurdistan Model PSA, Arts 43.3 and 43.4 and the Mozambique Mining Agreement, Art 11.9. 84 There is also a possibility that if other investors, whether existing or future ones, become aware of this benefit, they will seek to incorporate a similar benefit into their contracts on a case-by-case basis. The result may be a pattern of exceptions rather than a standardization of asymmetric provisions of this kind.

120 Chapter 3: Stability based on Contract 3.67

Kazakhstan contrast A very different kind of asymmetry was evident in Kazakhstan some years ago. A typical stabilization clause will not protect the investor against changes that result from actions that result from the actions of a neighbouring state or a multilateral body such as OPEC of which the host state is a member. In the former situation, for example, a host state might insist upon adherence to a stabilization clause in spite of difficulties that have arisen for the investor through actions by a neighbouring state, and not by any action of its own. The Karachaganak field PSC contained a stabilization clause which led to exactly this effect in 2002.85 The Kazakh tax regime which was applicable at the date when the contract was stabilized implied that VAT for sales of hydrocarbons into the Russian Federation was to be charged in Kazakhstan. Russian buyers could reclaim (offset or obtain a refund from the Russian budget) input VAT charged in Kazakhstan against their output VAT in Russia. However, with effect from 1 July 2002, Russia changed its tax code so that foreign VAT could not be included in the calculation of VAT to be paid in Russia. The economic effect on the buyers of Karachaganak condensate was that their purchasing costs increased by the amount of VAT charged on the Karachaganak consortium in Kazakhstan (20 per cent). Hence, the Russian buyers requested that the sales price of Karachaganak condensate should be reduced by the amount of the now non-recoverable VAT. The consortium could not agree to this proposal, the sales contracts were not signed, and the field was shut-in for more than two months from September 2002. Production restarted from the field in November 2002 when the consortium realized that the losses from suspended production exceeded the negative effect from the reduced sales price. So, what was the position of the Kazakh tax authorities on the applicability of the stabilization clause to this case? The clause in the PSA was as follows: Stability of Tax Regime. The tax regime provided by Article XIX is stable for the entire effective period of this Agreement pursuant to the provisions of Article 94-3 of the Tax Code existing at the date hereof. Taking into account that the Tax Regime was established by Tax Legislation of the Republic existing as of October 1, 1997, the authorized bodies of the Republic are liable to inform Contractor in writing concerning any amendments and additions of the Tax Legislation or other legal acts regulating payments of taxes and fees prior to the date hereof. In the case of absence of such notifications, provisions of those amendments and additions from October 1, 1997, till the date hereof shall not apply to Contractor and each Contracting Company.

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The Kazakh authorities took the view that the tax stabilization clause was entirely applicable to this case and that Kazakh VAT should continue to be charged at the rate of 20 per cent in Kazakhstan irrespective of any changes in the tax legislation in the Russian Federation. The consortium elected to accept this decision and to live with a reduced sales price that appeared to be legally unchallengeable. One risk to the investor of attempting to change the above clause to meet this situation was that the Kazakh state authorities might have seen this as an opportunity to renegotiate the entire PSA or other parts of it that the authorities deemed unsatisfactory. Annual losses of revenue to the consortium from this development were probably in the region of US$50 million.

85 Karachaganak PSA, 1997. The project was operated by a consortium of ENI-BG-Chevron-Lukoil. The account below is based on an interview conducted with a negotiator for the consortium in 2005.

D. Renegotiation: The Rules of Engagement 121 D. Renegotiation: The Rules of Engagement The balancing form of stabilization may require an automatic restoration of the parties’ situation to that pertaining before the new measure introduced by the state. However, in cases where an automatic adaptation is absent, the contract may require some form of revision or adaptation that involves a process like a renegotiation, even if that term is not expressly used. It is worth examining some of the parameters of this process since the openness and flexibility that are likely to characterize most stabilization provisions using this process may, when activated, prove to be a source of uncertainty and create obstacles to an agreement. The process involved may be characterized in Norbert Horn’s words as ‘a common effort by the parties to adapt a contract to a new situation through a material change of its terms’.86 Renegotiation itself ‘points more clearly to the procedure—the common effort of the parties—than to the result, the adaptation or restructuring of the contract’.87 Recent multilateral work on the durability of contracts in this field has emphasized the partnership aspect and, in the event of changes in law that have negative effects on the economic viability of a project, the importance of good faith discussions before any renegotiations on the contract take place.88

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(1) Clarity about aims There may be a lack of clarity about the aim or aims of a contract renegotiation. To some extent, this follows from the wide range of approaches taken by drafters of balancing clauses to the design of the objective of the clause. Much will depend on whether the stabilization provision is one that seeks to achieve balancing through an equilibrium clause or through an economic benefits clause. In the former category, the clause calls for the re-establishment of equilibrium between the parties; in the latter category, the aim is to return the investor to the same benefit that it had at the beginning. In the first case, there is a sharing of the burden based on the relative take at the start. In the second case, in the event of change the terms of the contract would be renegotiated to reach a level of economic benefit based on what was expected at the start. Two further varieties are evident: the parties may renegotiate to return to the same rights and obligations as before, not necessarily casting this in terms of economic benefit; where the economic benefit is qualified in some way in the contract, the parties seek to establish a reasonable benefit.

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Despite the wording of some clauses, in practice the negotiations are unlikely to take into account the interests of only one party. The goal of restoring a balance may seem to imply that the parties intended that full compensation should be paid to the aggrieved party but it is highly probable that the state will insist that consideration be given to its interest, and to the justification it provides for the legislative measure (or interpretation) that is at issue. However, although this may be true as a matter of practice in negotiations, it may not apply in the context of an arbitration of an objective clause. Probably many if not most arbitrators would incline to enforce the literal language and adjust to compensate the investor only, if

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86 Horn, N. (1985) ‘The Concept of Adaptation and Renegotiation in the Law of Transnational Commercial Contracts’, in Horn, N. (ed) Adaptation and Renegotiation of Contracts in International Trade and Finance, The Hague: Kluwer Law and Taxation, 9. 87 Ibid. 88 OECD (2019) Guiding Principles for Durable Extractive Contracts, Principle VII.

122 Chapter 3: Stability based on Contract they found the clause to be applicable. The state’s position would then come into play in determining the actual loss that the investor had suffered. 3.72

The parties do not always stipulate that the goal of the process is an agreement, although from the investor’s standpoint such a goal is likely to be very necessary. A number of Nigerian PSC contracts signed in the 1990s contain wording such as: ‘the Parties shall use their best efforts to agree to such modifications to this contract as will compensate for the effect’ of changes defined in the contract (see chapter 9). In this case, a failure to agree is not a breach of contract for which either of the parties may be held responsible. By contrast, the provision in the West African contract quoted above (at C(3)), requiring in an unequivocal manner that the parties agree on a revised set of terms, is a reminder that the parties are free to stipulate this requirement if they so choose. Usually the investor would want such an agreement, provided that the clause addressed stabilization for the investor and did not require a general re-opening of the contract. It may not however always be advantageous to one or both of the parties to require that an agreement on contractual modifications be reached as an outcome of the renegotiations.89

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A key feature of these clauses and a reason for caution about the use of the term ‘renegotiation’ is that what is not being considered by the parties, at least in any typical application of such a negotiated form of balancing clause, is ‘a restructuring of the entire contract unless this is clearly expressed in the clause’.90 What is involved is an adaptation of the contract to changed circumstances. The existence of a stabilization clause in the investment agreement will almost certainly improve the investor’s capacity to bargain with the host state (one of the investor’s goals in including such a provision ab initio) and increase the probability that it may achieve a higher level of compensation from a tribunal’s award than would be possible without one.

(2) Triggering event 3.74

A variety of legal measures taken by a host state or changes of circumstance could trigger an adaptation clause in an investment agreement. There are obvious changes of circumstance, such as a change in the tax rate or the adoption of a new tax by the host government, such as a ‘windfall’ profits tax, with adverse economic effects on the investment. However, there could be other, less obvious forms of action taken by the host state that impact upon the economic bargain it has struck with the investor in the contract. These may include the following: • A legal measure that requires the investor to reserve funds for environmental catastrophes such as a non-tax fund that would have an impact upon the value of the contract; • A requirement that the investor meet 80 percent of its goods and service purchases from local sources or that it does so by using a state-owned company (local content); • A requirement that the company spend money on building schools and hospitals (social spending); • Where a PSC is involved, the production shares could be changed in a manner that increases the state share. In Indonesia this was done by unilaterally imposing a change 89 Bishop, R.D. (1997) ‘The Duty to Negotiate in Good Faith and the Enforceability of Short-Term Natural Gas Clauses in Production Sharing Agreements’ University of Dundee, CEPMLP Discussion Paper No DP 13. 90 Berger, K.P. (2003) ‘Renegotiation and Adaptation of International Investment Contracts: the Role of Contract Drafters and Arbitrators’, Vanderbildt J Transnat’l L 36, 1347 at 1365.

D. Renegotiation: The Rules of Engagement 123 through the law. This would not be the imposition of a fiscal obligation but would be highly negative for foreign investment; and • ‘The Unknown’: the investor’s negotiators cannot know in advance all of the ways in which a host government may try to claw back value, and in such circumstances a general renegotiation clause may well be deemed a useful fallback measure. Once the conditions are present for a provision on renegotiation to be activated, the parties may take a decision to commence renegotiations according to the framework provided by the balancing clause (if one is provided). However, this first element may be a source of uncertainty. The contract may expressly refer to an event (often the case in gas sales contracts) as the trigger for renegotiations. However, the contract will be drafted in such a way as to frame widely the circumstances in which a change may occur so as to ensure flexibility, taking care that it is worded at a high level of generality. It will normally try to capture circumstances that are internal and also external to the contract.91 At a later stage, one of the parties may dispute the existence of an event or change of circumstances within the terms of the agreement and whether the conditions for a renegotiation are in fact present. Have the contractor’s rights or interests really been detrimentally affected by the legislative measure? Is the detrimental effect ‘significant’? To the extent that there is no definition of the effects in the contract, there is a risk of these questions arising and proving troublesome. If there is a disagreement on these matters, the parties would normally meet once the dispute has arisen and seek in good faith to reach agreement on whether an event has occurred, and if so, on a means by which the effect of such an event can be removed. Failing agreement on the former, the parties may decide to activate the dispute resolution procedures in the contract, by referring the matter to arbitration or expert determination. The arbitrator or expert may then proceed to determine whether an event exists and then invite the parties to seek a solution by negotiation or determine that the parties themselves in failing to reach an agreement have brought it to an end. Less likely is that an arbitrator or expert will proceed to determine the way a revised agreement should be modified and issue an award to that effect.92

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(3) Precise obligations of the parties The difficulty or inability to use precise wording in the definition of the duties of the parties in the renegotiations may have damaging results. Wording such as the use of ‘best efforts’ language or which exhorts the parties to do their utmost to reach an agreement leaves a great deal of unanswered questions about how the process is to be conducted by the parties and does not require them to reach an agreement on revised terms.

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Authoritative guidance on how the parties ought to behave is available, nonetheless. In the Aminoil award, the tribunal cited the International Court of Justice’s (ICJ’s) views on the content of an obligation to negotiate in the North Sea Continental Shelf Cases,93 and added that

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91 The ‘external’ events would normally be state-controlled events such as an adoption of a legislative act, but this may be an act that is itself a response to a different kind of external event such as an increase in the international oil price (eg a windfall profits tax). 92 Bernardini (1998) at 420–421. See para 2.77 which considers the question of whether an arbitral panel would try to make an agreement for the parties where they fail to reach one themselves, where resolution of the issue by arbitration is not specifically mentioned. In disputes over natural gas contracts this may be more likely however. 93 North Sea Continental Shelf (Federal Republic of Germany/Denmark), ICJ Rep 1969, 4, 47 et seq. The ICJ noted that the Permanent Court of International Justice in its Advisory Opinion in the Railway Traffic between Lithuania and Poland case (PCIJ Series A/B at 116) had held that the obligation to negotiate was not only one of having to

124 Chapter 3: Stability based on Contract the general principles that ‘ought to be observed in carrying out an obligation to negotiate’ were, in no particular order:94

• • • •

good faith; a sustained upkeep of the negotiations over a period appropriate to the circumstances; an awareness of the interests of the other party; and a persevering quest for an acceptable compromise.95

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With respect to the first principle, the parties will be required to conduct the negotiations in good faith irrespective of whether a good faith requirement is expressly included in the stabilization provision. If they fail to do so, this will be taken into account in arbitral proceedings that may follow from any failure of the renegotiation process. The other three principles express the Aminoil tribunal’s view that while an obligation to negotiate is not an obligation to agree, the obligation to negotiate exists within a ‘well-defined juridical framework’ which can involve ‘fairly precise requirements’.96 Nonetheless, a failure to reach an agreement does not mean that the parties have failed in their duty to negotiate.

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With respect to the fourth principle, it may be noted that if the parties have an obligation to renegotiate under the contract, provided that the triggering event has occurred, they must proceed to commence renegotiations rather than simply refer the matter to the courts (instead of commencing renegotiations).97 In a dispute of a long-term gas supply contract between EDF and a group of oil companies, the parties referred the dispute to the French Court of Appeal. A price revision clause had a formula index which came under strain when the oil price rose sharply after war in the Middle East, leaving EDF with a substantial loss if it performed the contract. The contract contained a clause stipulating that the parties would meet ‘to study possible modifications to be made in the contract in case the fuel price increased by more than six francs a ton’. Before deciding on the merits, the Court sent the parties away ‘to conclude an agreement on this part, as they had undertaken, under the aegis of an observer’, appointed by the Court. It held: that it is only in the case of failure of these negotiations, and bearing in mind the proposed solution, that the Court will say if the formula which might possibly be suitable from the financial point of view modifies the elements of the current contracts and consequently prohibits the judge from imposing it, or whether, as the parties intended, it restricts itself to adjusting the price to the fluctuations of the market (without altering the economy of the contract) and may therefore be substituted automatically.98 enter into negotiations but also one of pursuing them as far as possible with a view to concluding an agreement, ‘even if an obligation did not imply an obligation to reach agreement’. 94 Aminoil, at 1014. 95 Berger (2003) at 1365 lists nineteen obligations that should govern the parties during a contract renegotiation. 96 Aminoil at 1004, para 24. Compare the tribunal’s remarks in Wintershall AG et al v The Government of Qatar: ‘such a duty does not include an obligation on the part of the respondent to reach agreement with respect to the proposals made by the claimants’: 28 ILM (1989) 795, 814; but see also the discussions of good faith obligations in F-W Oil Interests Inc v The Republic of Trinidad and Tobago, ICSID Case No ARB/01/14, 71–74 and United Group Rail Services Limited v Rail Corporation New South Wales (2009) NSWCA 177 (includes a summary of the common law authorities on this subject). 97 EDF v Société Shell Française, Cour d’Appel, Paris, Opinion of 28 September 1978, JCP II No 18810. 98 Cited in Puelinckx, A.H. (1986) Frustration, Hardship, Force Majeure, Imprévision, Wegfall der Geschaeftsgrundlage, Unmoelichkeit, Changed Circumstances: A Comparative Study in English, French, German and Japanese Law, 3 J Int’l Arb (3), 47–66 at 58 (accessed 21 July 2021).

D. Renegotiation: The Rules of Engagement 125 A step was missing in the procedure that the parties had agreed upon in the original gas supply contract and the Court strongly recommended that the step be taken by the parties before it would proceed further. In the event, the parties reached a settlement.

(4) Coercion A survey of energy investor opinions on contract modifications found that there was a clear willingness of investors to consider renegotiation of the original contract in certain circumstances if the host state were to request it on the ground that there had been a shift in investment conditions.99 In a large number of cases, such renegotiations led to amicable solutions, rather than to arbitration or litigation.100 However, there have been a number of renegotiations initiated by host states that appear to have been accompanied by instances of coercion or duress used against the other party. This may be more common than is evident from published reports. In the past, this has been alleged to figure in Latin American disputes involving Bolivia, Ecuador, and Venezuela, and in the Russian Federation.101 Coercion in renegotiations is documented as long ago as in the events leading to the Aminoil case, where the claimant was led to argue that duress vitiated its consent to a revised agreement. The tribunal rejected this defence, holding that circumstances of strong economic pressure do not nullify consents. There has to be either an absence of any other possible course of action for the investor or the nature of the goal or the means employed must be illegal. In that case, international circumstances—a coordinated action by Middle Eastern States in introducing the so-called Abu Dhabi formula (see chapter 4)—had effectively transformed the concession contracts the investor held into less valuable service contracts.

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This is an important aspect of the renegotiation process.102 It has been the subject of concern to a number of tribunals in both energy and non-energy investment cases.103 However, it is addressed in detail in the case studies in later chapters of this book (chapters 7, 8, and 9) and is not therefore dealt with further here.

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(5) Contrasts with hardship Some may view a hardship clause (or clause d’imprévision) or indeed a force majeure clause as agents for contract stabilization and for contract renegotiation.104 However, it would be more appropriate to view them as providing justifications for non-performance, allowing 99 Erkan (2009) at 221–223. 100 Ibid, at 218. 101 Another example taken from the developed world is the threats by the US Congress to try to force oil companies to renegotiate Deep Water Royalty Relief leases. 102 The subject was discussed extensively in a seminal article by Vagts, D. (1978) ‘Coercion and Foreign Investment Rearrangements’, AJIL 72, 17 et seq. 103 For example, among the non-energy cases in recent years are CME v Czech Republic, Partial Award, IIC 61 (2001), 13 September 2001; Técnicas Medioambientales Tecmed SA v Mexico, Award, ARB(AF)/00/2; IIC 247 (2003), 29 May 2003. 104 Montembault (2003). The distinction between these concepts is not as clear as it once was; UNIDROIT essentially merges the concepts of force majeure and hardship, stipulating the percentage by which the cost of performance has to go up before such a cost increase would constitute an excuse for non-performance. An example of a hardship clause is Art 17.1 of the Russian PSA (1995) which provides that ‘amendments to the agreement shall be allowed only by consent between the parties, as well as upon request of one of the parties in case of a significant change of circumstances as defined by the Civil Code of the Russian Federation’.

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126 Chapter 3: Stability based on Contract the investor a justification for loosening its position in the contract. Hardship is a concept that envisages a possible renegotiation by the parties if the economic balance in the contract changes due to an extraordinary and unforeseeable external event which seriously damages the interest of one of the parties to the contract (as in the EDF case discussed above).105 It can be distinguished from force majeure in the following manner: force majeure is an external and unforeseeable event, such as war, a strike, a terrorist attack, a coup, an epidemic or a natural or environmental disaster, which has the effect of making performance of the contract in whole or in part virtually impossible. It would not extend to an oil price collapse, however. Usually, the clause excuses a party from liability due to the impossibility of performing it in certain agreed circumstances. The contract will anticipate this by permitting an extension of the period of performance, negotiation for a solution, or ultimately the termination of the contract.106 Force majeure clauses generally do not provide for modifications to the underlying contract terms. Hardship, by contrast, is external and unforeseeable but does not make performance of the contract impossible.107 It does not arise merely because the terms of the contract have become unprofitable for one of the parties due to changes in the wider economic setting.108 As Berger notes, ‘what is required is a breach of the commercial limit of sacrifice because of a fundamental change in the commercial balance of the contract’.109 When this occurs, the remedy is aimed at maintaining the commercial equilibrium of the contract; readjustment in line with the unexpected event follows as a legal consequence, although termination is possible in most jurisdictions. Essentially, the idea is to introduce some flexibility into the contractual obligations due to the intervention of unforeseen changes in the commercial equilibrium. In practice, it is not often used in long-term commercial contracts. This is not the starting point for the kind of renegotiation of a contract which is envisaged in the operation of a balancing clause such as has been discussed in section C(3) above. Nor 105 Either the cost of performance of the contract by the disadvantaged party has increased substantially or else the value of the performance a party receives has diminished to a significant extent: see the discussion of hardship by Alfaruque, A. (2008) ‘Renegotiation and Adaptation of Petroleum Contracts: The Quest for Equilibrium and Stability’, JWIT 9, 1–33 at 14–16. The concept has its roots in French law with application in respect of administrative contracts. In common law systems the preferred term is frustration of contract. 106 See the discussion of force majeure in Alfaruque (2008) at 23–26 and Duval, C. et al (2009) International Petroleum Exploration and Exploitation Agreements, 322–336. 107 ‘Contract Stabilisation and Hardship’ (section 13), AIPN Host Government Contract Handbook 22. Where no hardship provisions have been included in the contract, different national systems have provided diverse ways of addressing this problem. 108 See eg section 13-9 of the North Sea Ekofisk Natural Gas Sales Contract: ‘When entering into this agreement the parties contemplate that the effects and/or consequences of this Agreement will not result in economic conditions which are substantial hardship to any of them, provided that they will act in accordance with sound marketing and efficient operating practices. They therefore agree on the following: ‘Substantial hardship shall mean if at any time or from time to time during the term of this Agreement without default of the party concerned there is the occurrence of an intervening event or change of circumstances beyond the said party’s control when acting as a reasonable and prudent operator such that the consequences and effects of which are fundamentally different from what was contemplated by the parties at the time of entering into this Agreement (such as without limitation the economic consequences and effects of a novel economically available source of energy), which consequences and effects place said party in the situation that then and for the foreseeable future all annual cost (including, without limitation, depreciation and interest) associated with or related to the processed gas which is the subject of this Agreement exceed the annual proceeds derived from the sale of said gas. Notwithstanding the effect of other relieving or adjusting provisions of this Agreement the party claiming that it is placed in such position as afore-said may by notice request the other for a meeting to determine if said occurrence has happened and if so to agree upon what, if any, adjustment in the price then in force under this Agreement and/or other terms and conditions hereof is justified in the circumstances in fairness to the parties to alleviate said consequences and effects of said occurrence. Price control by the government of the state of the relevant Buyer(s) affecting the price of natural gas in the market shall not be considered to constitute substantial hardship.’ See Oppetit, B. (1974) ‘L’Adaptation des contrats internationaux aux changements de circonstances: la clause de hardship’, J de Droit International 4, 784–814 at 812. 109 Berger (2003) at 1347.

E. Enforcement 127 would it provide the same degree of protection against an unfavourable change in the economic balance, offering less likelihood that an arbitral tribunal would intervene with respect to the content of the contract. In practice, if the host state or the investor were to attempt to bring about a renegotiation by virtue of the hardship clause, it would probably not succeed. An aspect of hardship that is important to note is that the significant changes in energy markets associated with ‘energy transition’ policies are almost certain to lead to an increase in hardship claims: for example, the phasing out of coal use in power generation, exit from financing of fossil fuel investments by institutional and other investors, and continued strong policy support for expansion of renewable energy sources.110

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E. Enforcement Perhaps the most raised questions in connection with stability by contract are those concerning the enforceability of measures designed to cushion the investor against the adverse effects of possible future changes by the host state.

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(1) Can a state bind itself by an investment contract? A question that has commonly been asked is whether a state can indeed fetter itself by the inclusion of a clause to this effect in a long-term agreement. Based on a review of the ‘expropriation awards’ from the 1970s and 1980s, and of the classic arbitral awards (see chapter 4), it appears that a host state can indeed fetter itself to a stabilization provision.111 Nor is this challenged by any subsequent awards considered in this book. Although the state has the sovereign power to revise its relationship with the foreign investor unilaterally, the result of a stabilization mechanism which applies to such unilateral action is that the host state would then be liable for the payment of lump sum damages.

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At its boldest, the aim of a stabilization clause is to ensure that the terms and conditions of a contract (and their effects) are ‘frozen’ from the time of signature over the life of the contract. However, a distinction may be drawn between the following two circumstances: the operation of such a clause in circumstances in which the state announced, for example, that it no longer planned to honour the fiscal terms of the contract: a measure that would not be protected by international law; and the circumstances in which a state may take necessary regulatory measures which are not arbitrary or discriminatory even where these diminish

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110 Linklaters (2020) Hardship: A Comparative Review of the Concept of Hardship and its Application in 18 Jurisdictions: https://w ww.linklaters.com/en/insights/publications/2020/february/hardship-a-comparativereview-2020. 111 This is not contradicted by certain much cited decisions: in England there is the well-known Amphitrite case but note the application of English law in the ICC case discussed in the following paragraphs; in the US there is the case of US v Winstar Corporation 518 US 839 (1996). where the US Supreme Court held that the US Government had breached its contractual obligations by failing to honour promises made to several failing savings and loans institutions to encourage takeovers. The Court rejected the defence that a waiver of sovereign authority (such as a promise to refrain from regulatory chances) has to appear in unmistakeable terms in a contract if it is to be enforceable. The Court held that the doctrine does not apply to government agreements that have as their object the insurance of a business against the risk of future changes in law or regulations (it was in fact an act of Congress that forced the government’s regulatory act).

128 Chapter 3: Stability based on Contract the value of petroleum agreements. This is a principle established in international law.112 In the latter circumstances most stabilization clauses would be unable to achieve their goal of ‘freezing’ the contract terms in practice. They also raise an issue about how such an exercise of police power may be distinguished from a breach of contract. In the Winstar case,113 the US Supreme Court held that the US government had breached its contractual obligations by failing to honour promises made to several failing savings and loans institutions to encourage takeovers. The Court rejected the defence that a waiver of sovereign authority (such as a promise to refrain from regulatory changes) has to appear in unmistakeable terms in a contract if it is to be enforceable. The Court held that the doctrine does not apply to government agreements that have as their object the insurance of a business against the risk of future changes in law or regulations (it was in fact an act of Congress that forced the government’s regulatory act). 3.87

However, the real issue is not so much whether the host state can unilaterally take legislative or regulatory actions that modify the foreign investor’s rights but rather one of calculating the result of such legislative action in terms of lump sum damages or possible specific performance of stabilization mechanisms. The legislative or regulatory action may trigger a form of indemnification or compensation in a stabilization clause.

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There are certain procedural requirements that must also be met for the stabilization clause to be valid: • it must be properly entered into by the state; • it must be both legal under the law of the state at the time executed and • it must be executed by an individual with proper authority to bind the state in such matter. In terms of form, the stabilization mechanism may be provided for in a law (say, a foreign investment law) or ‘contractualized’ by way of a law referencing the investment agreement (as in certain Central Asian countries) or it may be in the contract itself. Once enforceable, the clause applies to the result of the unilateral change imposed by the host state. While other considerations would have to be taken into account in designing a fully effective stabilization mechanism, the essential point here is that it can have value as a response to unilateral action by the host state occurring at a later date.

(2) Arbitration: the powers of the tribunal 3.89

Apart from the classic arbitration cases, there are still relatively few known examples of arbitral awards on stabilization clauses in international investment agreements. For that reason it is common for scholars and tribunals to proceed by analogy. This book has assembled a number of arbitral awards in which stabilization clauses have played a role, even if not a central one. The publicity that surrounds many treaty-based cases is usually absent from such cases since they will tend to be brought under contract and heard privately. In an ICC case, for example, the details of the parties and the dispute will not usually be released. Yet, in 2007, at least one case concerning stabilization clauses did result in an award by an ICC 112 For example, Brownlie (2008) at 538; Mann, F.A. (1973) ‘State Contracts and State Responsibility’ in Studies in International Law, Oxford: OUP, 302–26. 113 US v Winstar Corporation 518 US 839 (1996).

E. Enforcement 129 tribunal. It showed evidence of a tribunal seeking to follow the line of cases decided in the 1970s and 1980s but also taking an innovative approach in doing so. The case arose from a dispute between a foreign investor and an African state.114 The government had entered into a concession agreement and given an undertaking that Parliament— to facilitate the concession—would create a specific legislative framework for the investment that would last for a period of ten years. The concession was not governed by local law or subject to the local courts; the governing law was English law and disputes were subject to ICC arbitration in London. The investment was not a success and the investor claimed that this was because of actions of the government. In the resulting arbitration, the state argued that the concession agreement was not lawful, and that the tribunal should not therefore uphold it. They relied upon three principal arguments, the first being that the government which had authorized the concession (and which had changed by the time of the arbitration) could indeed enter into such an agreement but could not in a parliamentary democracy provide undertakings that bound the legislature over a ten-year period in this way. The grant of such undertakings was a matter for Parliament, not the executive branch, which was acting ultra vires. Secondly, according to the government the contract was unenforceable since it was illegal. The third argument was more unusual. Noting that the concession was governed by English law, rather than the law of the host state, it argued that under accepted principles of English administrative law, the Crown was not able to fetter its future discretion. There is a line of cases, such as the famous Amphitrite case,115 that supports the view that undertakings given by governments to fetter the discretion of their successors are ultra vires or invalid. Since the contract was governed by English law, the respondent was entitled to rely upon these cases. The stabilization clause in the agreement was, the respondent argued, therefore invalid.

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The tribunal rejected the government’s arguments and upheld the contract, including the stabilization provision. The tribunal did this after carrying out a historical review of stabilization clauses, and concluded that it was common in international practice for governments to make broad commitments to a foreign investor including the grant of a stabilization clause; it was also clear that there is a fixed rule in international law that the state may not rely upon its own municipal law to avoid an international obligation. In this case, however, it was not an international obligation that was involved but a contract governed by English law. The tribunal therefore had to consider what effect to give to the parties’ express choice of English law to govern the contract. Their approach to this issue was a creative one, beginning with the statement that customary international law has always formed a part of the English common law. The only question is therefore one of the circumstances in which the English common law turns itself away from English law and looks to international law. The tribunal found that the obligations undertaken by a state in a concession contract do satisfy the test for the application of international law as part of the English common law. The tribunal saw ‘very good reasons of policy’ for holding that the host state, ‘having made certain commitments in the Agreement, should not be allowed to invoke in foreign proceedings its own internal legislative or constitutional constraints as a reason for saying that its promise

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114 The case was discussed at an AIPN event under the Chatham House Rule. 115 Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500 at 503–504: ‘It is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises. It cannot by contract hamper its freedom of action in matters which concern the welfare of the State.’

130 Chapter 3: Stability based on Contract was empty of content’.116 The tribunal found that it could and should apply to the agreement the principle of international law that a state cannot excuse its non-performance of a concession contract on the basis of its own law. In reaching its decision, the tribunal cited two cases, Revere Copper and Brass Inc v OPIC and Sandline International Inc v Independent State of Papua New Guinea,117 as authorities on the circumstances when municipal law contracts with foreign states can be internationalized. 3.92

The use of a balancing variety of stabilization clause, with the probability of negotiations between the parties about the restoration of the economic equilibrium, suggests that enforcement would benefit from the inclusion of a provision that calls upon the arbitral tribunal to decide on the way in which the restoration should take place, if negotiations fail. Without clear amiable compositeur authority being granted, the tribunal would instead probably award the investor only lump sum damages. Authorities seem to agree that unless the parties have expressly granted powers to the arbitrator in the arbitration clause, the arbitrator would not have a power to reshape the contractual relationship on behalf of the parties.118 If granted, it would have to specify the manner in which such power was to be exercised and the limits of the authority enjoyed by the arbitrator(s). Essentially, the connection between the balancing aspect of the stabilization clause and the competence of the tribunal created by the arbitral agreement should be made as clear as possible by the parties (that is, more than a simple reference to arbitration in the event of a failure to reach an outcome in renegotiations is required). There is however a certain lack of reality in this orientation of thinking about the contract and the stabilization clause. If the parties have a working relationship and wish to retain it, they are unlikely to abandon the consensual character of a balancing process in favour of having a decision imposed on them by a tribunal, particularly if the host state is unhappy with such an approach and even more if it is unhappy with the outcome of the proceedings or indeed the fact of the arbitration itself.

(3) Remedies 3.93

Some remedies for takings of energy investments by host states have proved to be at best disappointing. If one considers the freezing variety of stabilization clause, for example, which prohibits any change in the applicable law, it is clear that a tribunal is not going to award specific performance or restitutio in integrum with respect to such a clause in a dispute with a host state. To do so would involve a direct challenge to the sovereignty of the host state. Even with a different kind of stabilization clause, which focused on the effects of the state measure, it is unlikely that a tribunal will order specific performance in the way that the sole arbitrator did in TOPCO v Libya (see chapter 4). Arbitrator P.-J. Dupuy ordered Libya to reinstate the contract with the investor but the order was ignored, and the parties later 116 The unpublished award (2007). 117 Revere Copper and Brass Inc v Overseas Private Investment Corp (award) (1980) 56 ILR 258; Sandline International Inc v Independent State of Papua New Guinea (interim award) (1998) 117 ILR 552. 118 Berger (2003) at 1379: ‘The presence of a normal arbitration agreement in the contract will not suffice . . . Instead, an express allocation to the arbitral tribunal of the competence to adapt the contract is required’; Bernardini (2008) at 107: ‘the trend evidenced by arbitral awards is rather in favour of a restrictive view of the arbitrator’s powers to adapt a contract, even a long-term one, in case of a change of circumstances’; in the words of the Aminoil tribunal (at para 1016): ‘there can be no doubt that . . . a tribunal cannot substitute itself for the parties in order to . . . modify a contract unless that right is conferred upon it by law, or by the express consent of the parties . . . arbitral tribunals cannot allow themselves to forget that their powers are restricted’; there are specific challenges facing ICSID arbitrators arising from Art 25(1) ICSID, requiring a dispute to be ‘legal’ in nature.

E. Enforcement 131 reached a settlement. This step was unusual in the context of known awards in the energy and natural resources industry and proved impossible to enforce. Similarly, a stabilization clause may contain a prohibition on expropriation or expressly permit expropriation but at the same time provide for an applicable amount of damages in such an event. In the former case, such efforts to immunize the contract are not likely to prove enforceable or otherwise reliable as a way of providing the investor with the amount of damages that it would be seeking in the event of unilateral changes. International law confirms a right of a government to expropriate, subject to the payment of appropriate compensation, regardless of contractual prohibitions.119 However, an unlawful or wrongful action such as expropriation in the face of an undertaking not to do so will tend to increase the measure of damages available (since an argument could be made based on lost profits based on legitimate expectations): all the more so if the stabilization clause has spelled out how the damages are to be calculated.

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Arbitrators have usually seen the award of damages as the appropriate remedy for the breach of a stabilization clause. However, the published arbitral awards show considerable variation in their determination of actual losses incurred, including lost profits and prospective gains (lucrum cessans) (see chapters 4 and 11).120 In the Aminoil case, the tribunal rejected the investor’s claim for restitutio in integrum but also rejected the host state’s argument for compensation based on net book value121 (which it had argued was based on compensation solutions adopted in other nationalizations at the time and which it contended had generated a new customary rule valid for the international oil industry). Given developments in the years before the case, the tribunal argued, the parties’ expectations had changed over time and became based on a concept of a reasonable rate of return. Aminoil had a legitimate expectation based partly on the stabilization clause in the contract with the host state.122 The legal effect of the clause as far as compensation is concerned depended on the legality or otherwise of the state’s measure. If the measure was lawful but the clause was breached, the appropriate standard was fair market value. If it was unlawful, the appropriate standard for the calculation of compensation for a breach of the clause should include both actual loss and future profits. In this case, the principle of a moderate estimate of profits constituted Aminoil’s legitimate expectation and was a reasonable rate of return. In another case, Phillips Petroleum Co Iran v Iran and the NIOC (see chapter 3), the tribunal determined that a taking had occurred of the investor’s contract rights under a joint venture agreement, that the rights were part of a going concern and that fair market value should apply in calculating the compensation from the date of the taking. A discounted cash flow method was applied to

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119 GA Resolution 1803 (XVII) of 14 December 1962 (chapter 2, paras 2.71–2.79). Recent cases have held that full market value compensation is required in the event of a nationalization (Funnekotter et al v Republic of Zimbabwe, ICSID Case No ARB/05/6, 22 April 2006) and expropriation is not lawful if no compensation is offered (WEG Siag & C Vecchi v Egypt, ICSID Case No ARB/05/15, 1 June 2009). 120 Among the commentators to note and examine this, see Maniruzzaman, M. (2007) ‘Damages for Breach of Stabilization Clauses in International Law: Where do we Stand Today?’, IELTR 11/12, 246–251; Alfaruque, A. (2006) ‘Validity and Efficacy of Stabilisation Clauses: Legal Protection vs Functional Value’, J of Int Arbitration 23, 317–336. 121 The actual amount invested in the project minus the amounts deducted as current expenses and depreciation and amortization of the assets. It could mean as little as the net amount listed in the investor’s account books on the day of the nationalization, omitting the value of say, petroleum fields discovered but not developed. For a host state this is an attractive starting point for the calculation of compensation, but it will usually seek to treat it as a maximum, deducting amounts required to meet the costs of environmental damage, negligence, payments owed to the state, and so on. 122 Aminoil case, at para 159.

132 Chapter 3: Stability based on Contract determine the fair market value.123 However, this calculation had to reflect the risk that not all recoverable oil would as a practical matter be produced, that world oil prices would prove lower than in the range foreseen and that coerced revisions of the joint agreement would take place; all of which would have reduced very significantly the value of the rights which a willing buyer would have paid to a willing seller in a freely negotiated transaction. In this context of diverse opinions about the mode of calculation of compensation, investors have sought to define more specifically in the contract what constitutes an expropriation and how damages are to be calculated in the event of expropriation. A final comment is that any damages can be hard to collect from a host state if relations have by that time been placed under considerable strain as a result of the arbitral proceedings and may even have broken down irretrievably (see c hapter 11). F. International Pipeline Projects 3.96

Questions about the role of stability in energy investment contracts also arise when a plurality of host states commit to legal regimes for large, trans-boundary oil and gas pipeline projects.124 A variety of players are potentially involved, including international lending institutions, operating companies, and nationally and privately owned corporations, as well as producing, consuming, and host states. Innovation in the design of stabilization clauses has been marked, and merits examination with respect to some of the more established projects.

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Model agreements In this context, we may note the development of a model Inter- governmental Agreement (IGA) and a Host Government Agreement (HGA) for hydrocarbons pipelines, developed by the Energy Charter Treaty (ECT) Secretariat.125 The former represents a ‘treaty model’ between the states involved and is governed by public international law, dealing mainly with horizontal issues that concern the pipeline infrastructure as a whole. The latter is a model for an agreement between the states and project investor(s) involved, dealing mainly with vertical issues that concern the project activity within the territory of each state involved in the pipeline project. The models provide a template of prescriptive clauses for possible use in negotiations on a pipeline project by an investor or a host state, and as guidance as to good international practice; they are not legally binding. The HGA provides a template for an agreement between each of the states and the project investor. It contains inter alia two options for a model clause on economic stabilization. Option 2 reads: The Host Government shall take all actions available to it to restore the economic Equilibrium established under this Agreement and any other Project Agreements if and to the extent the Economic Equilibrium is disrupted or negatively affected, directly or indirectly, as a result of any change (whether the change is specific to the Project or of general

123 The project cash flow is projected for its remaining life and the projection is discounted by an interest rate to reflect the present value of these amounts. 124 For an overview of diverse legal and regulatory regimes, see the Energy Charter study, ‘Intergovernmental Agreements and Host Governmetn Agreements on Oil and Gas Pipelines: A Comparison (2015): (accessed 10 August 2020). 125 Energy Charter Treaty website: (accessed 4 January 2020).

F. International Pipeline Projects 133 application) in [name of country] law (including any laws regarding taxes, health, safety and the environment) occurring after the Effective Date, as applicable, including changes resulting from the amendment, repeal, withdrawal, termination, expiration of [] law, the enactment, promulgation or issuance of [] law, the interpretation or application of [] law (whether by the courts, the executive or legislative authorities, or administrative or regulatory bodies), the decisions, policies or other similar actions of judicial bodies, tribunals and courts, the Local Authorities, jurisdictional alterations, and the failure or refusal of judicial, bodies, tribunals and courts, and/or the Local Authorities to take action, exercise authority or enforce [] law (a Change in Law).126

In analysing this clause, it is important to note that ‘Project Agreements’ include the IGA, and therefore the clause obligates each government with respect to changes in the overall international framework. However, the language of this balancing provision is likely to be too open-ended to appeal to many investors, not least because there is no guidance provided about how the economic equilibrium between the parties is to be restored. The concept of a Change in Law is defined very widely as:127

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any domestic or international agreement, any legislation, promulgation, enactment, decree or regulation; or any other form of commitment, policy or pronouncement or permission [that] has the effect of impairing, conflicting or interfering with the implementation of the Project, or limiting, abridging or adversely affecting the value of the Project or any of the rights, indemnifications or protections granted or arising under this Agreement or any other Project Agreement.

One of the options available to the host government includes a provision applicable to cases where a Change in Law has worked to bring benefits rather than costs to the project investor. Article 37(5) of Option 1 states that the investor may be required by the host government to compensate it for one half of any savings it makes from the project following a Change in Law, to be paid for in convertible currency.

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It is also relevant to note that there is a ‘carve-out provision’ in Article 37(6) which states that the host government is to have no liability to the investor in relation to a Change of Law that is specifically authorized in relation to environmental and safety standards, labour standards, social impact standards and technical standards, that are applicable to the cross-border pipeline project.

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The above models for hydrocarbons projects were adapted for cross-border electricity projects in 2008 and published in 2011.128 Their content is very similar. However, the former group of agreements are concerned largely with issues relevant to the development and operation of the physical infrastructure and contain few provisions on the energy carried through the infrastructure. By contrast, the electricity model agreements also deal with the way that the physical infrastructure fits into the electricity systems of the jurisdictions

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126 HG Agreement, Article 37.2 (Option 2) (2nd edn). Individual project investors have the option of achieving Economic Equilibrium by a reduction in the amounts of Tax otherwise payable under Art 26.9 (Art 37.3, Option 2). Evidence of use of the Models by ECT Member States is recorded on the ECT website: in 2004 the Model Agreements ‘helped to provide a basis for negotiations between Kazakhstan and Azerbaijan on the Trans-Caspian Aktau-Baku transport system, which would provide an additional export route for Kazakh energy resources’ through the BTC pipeline. 127 Ibid, Art 37.1 (Option 2). 128 Energy Charter Secretariat (2011), Model Intergovernmental and Host Government Agreements for Cross- Border Electricity Projects: .

134 Chapter 3: Stability based on Contract involved. A cross-border electricity project differs from an oil and gas one in that it rarely passes through the territory of a state without interconnecting with that state’s local electricity system. Transit can produce incremental or decremental costs in the host country or countries.129 3.102

In practice, there have been several attempts to tackle the specificities of a cross-border pipeline project, including the design of stability mechanisms. The roots of this lie inter alia in the emergence of new regional energy markets and a growing concern among governments in the larger consuming states for additional security of energy supply. The challenge has faced investors in many regional settings, such as the West African Gas Pipeline project (WAGP) and the Baku-Tbilisi-Ceyhan (BTC) Main Export Oil Pipeline. The legal arrangements that resulted contain interesting new approaches to stabilization in cross-border pipeline projects, and the subsections below analyse them with respect to each of these projects.

(1) The West African Gas Pipeline project 3.103

The WAGP transports gas from Nigeria to three African nations, Ghana, Benin, and Togo. It commenced work in 2003 and became officially operational in 2011, on the basis of legal arrangements that comprise, among others, an IPA130 and a treaty131 to which all of the participating nations are party. In addressing the allocation of risks between the four states and the private contractor, the IPA contains some significant stabilization commitments. These are a little unusual, not least because the four states (Benin, Ghana, Nigeria, Togo) each had to implement an entirely new, harmonized regime for this cross-border project, and the obligation of the project developer was contingent on that regime being implemented in each state. Moreover, the stabilization commitments extend well beyond the fiscal regime. Essentially, the agreement sets out in some detail the new regime to be implemented (the ‘Agreed Regime’),132 which includes an ‘Agreed Fiscal Regime’133 (an entirely new fiscal regime applying to the project as a whole, without regard to the international boundaries), but it also includes other investment regime features including exchange controls, foreign investment rules and regulatory control over the pipeline.

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Once the Agreed Regime was implemented, and the developer committed to construction, the states thereafter are contractually liable to the developer to pay damages for ‘Regime Failure’: that is, any deviation away from that Agreed Regime. Clause 36.1 gives an extensive definition of Regime Failure, resulting in a limitation on the potential for disputes regarding interpretation of regime failure. This includes the following eventualities: • a decision of a court or tribunal that the Agreed Regime or part of it is not in force or is not valid; 129 ECT Model Electricity Agreement, 6. 130 West African Gas Pipeline Project: International Project Agreement, 22 May 2003: (accessed 31 January 2021). The Operator is a consortium company comprising Chevron (36.9 per cent), Nigerian National Petroleum Corporation (NNPC: 24.9 per cent); Shell Overseas Holdings Limited (17.9 per cent); Takoradi Power Company Limited (16.3 per cent); Société Togolaise de Gaz (2 per cent), and Société BénGaz S.A. (2 per cent). The overall aim of the WAGP is to bring clean, reliable, and cheap natural gas from Nigeria to Togo, Benin, Ghana, and the Cote d’Ivoire. 131 Treaty on the West African Gas Pipeline Project between the Republic of Benin, the Republic of Ghana, the Federal Republic of Nigeria and the Republic of Togo: . 132 Ibid., Clause 7. 133 Ibid., Clause 29, and schedule 8.

F. International Pipeline Projects 135 • the coming into force in a state of a law, as a consequence of which the Agreed Regime or part of it ceases to be in force or maintained; • the entering by a state into any international agreement or similar or other commitment that conflicts with, impairs or interferes with, or adversely affects such state’s performance of or ability to perform its obligations under the Treaty or agreement or implementation of the project. In the event of a Regime Failure, which results in a material adverse effect on the Company, certain remedies are provided. In the case of a decision by a court or tribunal, the state or states concerned are required (under clause 36.2 (b)) to make their ‘best endeavours’ to appeal the decision to reinstate the agreed regime. Otherwise, the states are required to meet with the Company at its request and ‘endeavour in good faith to negotiate a solution which restores the Company and/or its shareholders to the same or an economically equivalent position it was or they were in prior to such change’ (36.2 (a)). This is equivalent to a balancing form of stabilization clause with a strong negotiating element, as discussed in C(3) above. A failure to comply by the state triggers a compensation requirement in clause 36.4. International arbitration is also provided.134

3.105

The fiscal stabilization is a part of this, but it is not quite the same as the other parts. In the case of the fiscal regime, the states undertake not to take any executive, regulatory, or legislative action that amounts to a violation of the treaty regime. However, it is agreed that the states are free to change some aspects of it (including the most important components like the tax rate) after twenty years, and therefore a change after that time is not an instance of Regime Failure. However, the states do commit that they will maintain the operation of harmonization measures between them, so if one of the states unilaterally changes an element without the others also changing, that would amount to Regime Failure.

3.106

The linkage of the IPA to the Treaty is notable since the latter is governed by principles of international treaty law and in particular, by the Vienna Convention on the Law of Treaties of 1969. The stability measures under the Treaty might therefore be expected to enjoy a higher legal status than those under the investor-host state agreements alone, since a treaty is usually ‘insulated’ from unilateral actions of a host state that may amount to a breach of contract. Therefore, any claim under the agreement can be espoused at the international level by virtue of the treaty protection. However, this implication of a ‘freezing’ form of stability may be more apparent than real. The same result—enforceability—may also be attainable in the absence of a treaty under the petroleum regime of one of the host governments if international law applies to the agreement, and other provisions were included in it (waiver of sovereign immunity from execution and an appropriate arbitration clause, for example).

3.107

In addition to the above, the states undertake not to expropriate or nationalize the assets of the company.135 However, this is in practice not enforceable, since a state may expropriate under international law, and indeed there may be provisions in the states’ separate Constitutions that would facilitate such action within each state’s own borders (see IPA, para 3 ). In that event, the issue would be the calculation of an applicable quantum of damages. This legal undertaking is not a convincing step towards enhancing the stability of the pipeline agreement by protecting the company from unilateral actions of the states parties, although it may have a certain moral authority. The same clause provides in the next

3.108

134 135

Art 42. Clause 35.

136 Chapter 3: Stability based on Contract paragraph—more realistically—that in the event of an ‘expropriation event’ occurring, the state or states taking such action shall make ‘prompt, adequate and effective compensation’ under public international law to the company or companies affected by the expropriation or nationalization.136 The result of a breach of the first paragraph (an expropriation event) may therefore be an enforceable claim by the investor. 3.109

With respect to future amendment, the Agreement requires consultation with the operating company prior to any amendment and makes provision for periodic review and amendment with the parties’ consent. This appears to imply some special expectation of future changes and recognizes the likely need for adjustment of the contractual relationship.

(2) The BTC pipeline project 3.110

The BTC pipeline project is a highly complex example of a cross-border energy project involving an integrated approach to stabilization between the pipeline project and the upstream petroleum developments in Azerbaijan’s Caspian Sea area (ACG). No fewer than seventy-eight parties were involved in BTC, with 208 finance documents and 17,000 signatures on them.137

3.111

HGAs were signed by the project consortium and the respective host governments (Azerbaijan, Georgia, and Turkey). They contain similar but not identical provisions on stabilization. The HGA binds the parties but also binds state authorities generally. Several themes already discussed appear in the context of the HGAs: stabilization in the form of economic balancing; expropriation; and compensation. However, they are dealt with in a more elaborate manner than in the WAGP legal construction.

3.112

With respect to stabilization, the Azeri HGA adopts the ‘modern’ balancing variety, requiring the state authorities to: take all actions available to them to restore the Economic Equilibrium established under the Project Agreements if and to the extent that Economic Equilibrium is disrupted or negatively affected, directly or indirectly, as a result of any change . . .138

This requirement includes the obligation to take all appropriate measures to resolve promptly by whatever means may be necessary ‘any conflict or anomaly between any Project Agreement and such Azerbaijan Law’. No negotiation between the parties is envisaged as to what is the most appropriate action required or indeed what aspect of the equilibrium has been disturbed in a particular instance. The notion of ‘Economic Equilibrium’ is defined as ‘the economic value to the Project Participants of the relative balance established under the Project Agreements at the applicable date between the rights, interests, exemptions,

136 Clause 35.2. 137 See the documents at (accessed 10 August 2020). For a very different experience of energy pipeline regime design which also included the provision of a stability regime, see the account by Forsyth, S.G. & Boiteau, V. (2004) ‘Chad–Cameroon Development and Pipeline Project Legal Issues’, IELTR 8/9, 112–123. 138 Host Government Agreement between and among the Government of the Azerbaijan Republic and the State Oil Company of the Azerbaijan Republic, BP Exploration (Caspian Sea) Ltd, Statoil BTC Caspian AS, Ramco Hazar Energy Ltd, Turkiye Petrolleri AO, Unocal BTC Pipeline Ltd, Itochu Oil Exploration (Azerbaijan) Inc, Delta Hess (BTC) Ltd, 17 October 2000, Art 7.2(x). The other HGAs appear to be identical in wording.

F. International Pipeline Projects 137 privileges, protections and other similar benefits provided or granted to such Person and the concomitant burdens, costs obligations, restrictions’.139 International arbitration is expressly provided for as is a waiver of sovereign immunity by the host state from jurisdiction and from enforcement.140 The stabilization provision is much more complex than this however. The key lies in its lack of any distinction between specific legislative measures that may be taken by the host state at a future date and the entire corpus of host state law (except the Constitution). Important too is the manner of adoption of the HGA. By annexing it to the IGA and expressly stating that the text of each HGA forms ‘an integral part hereof ’, the combined text that was ratified in each host state as a treaty is one that includes the entire text of the HGA. As a result, the HGA provisions become law in each state as well as creating a commercial contract between the relevant host state and the BTC Company. This is a more elaborate version of the kind of legislative support for investment agreements that was discussed in B (1) above. It has been used in Azerbaijan and Kazakhstan as a way of granting overriding legal status to a PSC, insulating it from the effect of any conflicting provisions in domestic law. However, in this case the IGA is a treaty so the HGA provisions that are integral to it (and which have a duration of forty to sixty years) take precedence not only over inconsistent domestic law but also over all subsequently adopted domestic law.141 It is—and will remain—the only applicable legal regime. The legal effect of this has yet to be tested. At the national level there are doubts about whether the practice delivers the degree of long-term stability it is assumed to do. For the investor the assumption is that the enforcement capacity of such a regime is more ‘robust’.142 The perceived disadvantage of a purely contract-based form of stability is that a breach by the host state of its commitments will result in damages only and even then, it would need to be pursued through international arbitration, with time and cost implications, as well as an inevitable deterioration in relations with the host state. Practically, if a host state obstructed BTC Company from shipping oil, the Company’s remedy would be to seek damages for its loss, rather than to compel the host state to cease the obstruction. By contrast, under the project-specific legal regime, an obstruction by the host state of BTC Company from shipping oil (for example) would be met with legal action to compel the state to desist from such action.

3.113

The provision on compensation in Article 9 is quite specific and focuses upon the result of a breach. A failure to maintain Economic Equilibrium is expressly provided for as a trigger for an obligation to pay monetary compensation. It adds that the obligation of the government extends to loss or damage caused by or arising from any person which was a state entity at the time the applicable project agreement was executed by it. It also spells out in detail the kind of monetary remedies appropriate to compensation: money damages, restitution, reimbursement, and indemnification.

3.114

Moreover, the possibility of expropriation is expressly anticipated. Instead of striking a prescriptive note that it should never happen, it sets out parameters for any such acts:

3.115

139 Contained in Annex 1 to the HGAs. 140 Art 17 of the Azerbaijan HGA (Art 18 of the Turkish HGA and Art 17 of the Georgian HGA). 141 Presumably, the treaty would not take precedence under domestic law over a constitutional amendment, even though that might involve a breach of the treaty. 142 See the discussion of the investors’ views on the legal framework by Boyd-Carpenter, H. & Labadi, W. ‘Striking a Balance: Intergovernmental and Host Government Agreements in the Context of the Baku-Ceyhan- Tbilisi Pipeline Project: EBRD’ LiT Online (accessed 16 December 2009).

138 Chapter 3: Stability based on Contract In the event that the State Authorities should ever carry out any act of Expropriation with respect to the Project, the State Authorities shall do so only where such Expropriation is (i) for a purpose which is an overriding public purpose, (ii) not discriminatory, (iii) carried out under due process of law and (iv) accompanied by the payment of compensation as provided.143 3.116

‘Due process’ in respect of a claim is to include the parties’ right to resort to arbitration under the Agreement to (1) establish that an expropriation has taken place; and (2) to assess the amount owed by the State Authorities as adequate compensation for loss or damage arising from the expropriation.

3.117

It may be noted that ‘state authorities’ are defined broadly in Article 15 (Binding Effect) to include the government, all state entities and all local authorities. Moreover, this applies: notwithstanding any change in the constitution, control, nature or effect of all or any of them and notwithstanding the insolvency, liquidation, reorganization, merger or other change in the viability, ownership or legal existence of the state authorities (including the partial or total privatization of any state entity).

This is strengthened by a further provision in Article 20.2, in which the parties acknowledge that it is their mutual intention that no law (this is described as variously, Azeri, Georgian, or Turkish in the respective HGA) now or in future, or the interpretation or application procedures of such law, if that should be contrary to the terms of the HGA or any project agreement, ‘shall limit, abridge or affect adversely the rights granted to the MEP participants or any other project participants in this or any other project agreement’. Such a law is also precluded from amending, repealing or taking precedence over the whole or any part of this or any other project agreement. It is hard to see how this obligation would be enforceable, however. G. Conclusions 3.118

Experience suggests that none of the main forms of stabilization mechanism in international energy agreements will prevent a determined government from an act of expropriation if it has a mind to do so. It is well established that a host state has the right in international law to expropriate, subject to conditions including the payment of compensation. However, for the majority of host states, the various contract mechanisms that provide for stability are a way of framing subsequent negotiations between the investor and the host state about matters that reflect in one form or another a set of circumstances during the life of what may be a long contract. In this respect, they have a practical significance that far outweighs their occasional appearance before international arbitral tribunals.

3.119

Too much should not be made of the relative decline in popularity of the freezing variety of stabilization clause in favour of the balancing variety. A number of states continue to provide for stability in the form of freezing obligations in the contract. However, given the high risk of unilateral action at some future date this is in itself a highly unreliable mechanism. Perhaps in recognition of this, the long-term trend has unmistakeably been one in which economic balancing and allocation have been favoured, with the former often involving a

143

Art 9.4 of the Azerbaijan HGA.

G. Conclusions 139 requirement for negotiations between the parties about a defined outcome. If one were to take a historical view of stabilization clauses, it could be said, without great risk of oversimplification, that the freezing variety is an older, more conservative approach, aimed at preventing acts of expropriation by a host state, while the balancing variety has been increasingly used and accepted by host states.144 The latter does not challenge the state’s right to make changes unilaterally that affect an investment agreement at some future date. It accepts that international law is clear on this point: the host state can in fact change its laws, and it is not effective to stipulate otherwise in the agreement. The balancing and allocation approaches seek to ensure that if the state does exercise its legitimate sovereign power in a way that changes the contract’s effect, it must do so in a way that respects the economic bargain agreed by the parties to the contract and must compensate the investor accordingly. The probability of securing an award of damages for breach of contract from an arbitral tribunal in the event of a dispute is thought to be significantly higher as a result of these approaches. For that reason, the investor who makes thorough preparations to secure its investment will seek to include this mechanism as well as any other mechanisms of stability that appear to be appropriate. However, this does not mean that the trend has all but eliminated the use of freezing. On the contrary, it is still deemed to be useful by investors in the energy and mining sectors and sought by them. One form of stabilization clause that is often overlooked is the ‘allocation of burden’ variety discussed in this chapter. This is a very common form of stabilization, as is evident from a review of published contracts in the hydrocarbons industry. Curiously, it has attracted little attention from scholars or commentators, perhaps implying that for them it is subsumed under the category of balancing which it resembles. Nonetheless, its frequency of use among the many states that have a NOC in their petroleum operations as well as its distinct character merits recognition as a separate form of stabilization.

3.120

Similarly, little attention has been given to the asymmetric approach to stabilization clauses, despite its apparent frequency of use. Their design to grant the investor access to as yet undefined future benefits can give rise to questions about enforcement and also about fairness, even if the host state has offered this incentive in full knowledge of its ‘comfort’ effect on the investor. Some government negotiators have responded to this sought-after feature by secured a more balanced, symmetrical approach to future benefits.

3.121

Ultimately, the form of stabilization in an energy investment contract is less important than the content in relation to practice. The presence of a stabilization clause of any kind may act as a threat, not least if it offers the prospect of combining a contract claim with a claim based on an international treaty; it may also encourage more accommodating behaviour on the part of the host state. The real issue in designing an appropriate stabilization mechanism is this: what can it contribute to ensuring that the result of an adverse legislative measure on the investment is an appropriate one in terms of lump sum damages or possible specific performance of stabilization mechanisms? In securing this objective, an open-ended approach to negotiated balancing is also a high-risk strategy. The investor has a strong incentive to

3.122

144 Any general statements about trends in investment contract design are inevitably handicapped by the confidential and unpublished character of such agreements. However, lawyers involved in the design, operation, and enforcement of international petroleum agreements have, in many conference presentations, given a clear signal that in the light of their experience this is indeed a trend. A number of them contributed to the empirical study carried out by Dr Erkan (2009) ‘Mitigating Political Risks for Transnational Energy Projects through Contractual Mechanisms’.

140 Chapter 3: Stability based on Contract ensure that any stabilization provision is complemented by detail and by penalties for non- compliance, such as the imposition of time limits on negotiations; the recognition that compensation must follow loss or damage; the basis for calculating that compensation; and recourse to arbitration must follow if the negotiations fail. 3.123

The growing interest in cross-border pipeline projects is generating new applications of familiar stabilization mechanisms to more complex sets of legal arrangements. It is too early to pronounce on their efficacy, but the arrangements considered here are innovative in their approaches to fiscal stability involving several states as parties. They underline the importance for all parties to such high-cost, long-term projects, especially lenders, to ensure that legal stability is provided for.

4

The Classic Tests of Contract-Based Stability

A. B. C. D. E. F.

Introduction The Key Role of Arbitration Lena Goldfields Aramco Sapphire The Libyan Cases (1) (2) (3) (4) (5) (6) (7)

4.01 4.06 4.11

4.16 4.19 4.25 The concession terms 4.27 Unilateral actions 4.32 Procedure 4.33 Internationalization 4.36 States can bind themselves by contract 4.41 Compensation 4.45 Assessment 4.48

G. Aminoil

(1) (2) (3) (4) (5)

The concession terms The arguments Renegotiations: content and conduct The award Compensation

H. The Iran–US Claims Tribunal Cases

(1) (2) (3) (4)

Amoco International Finance The Consortium Cases Phillips Petroleum Compensation

I. AGIP v Congo J. Conclusions

4.51 4.54 4.59 4.61 4.65 4.74 4.78 4.82 4.87 4.90 4.94 4.99 4.106

Changing economic contexts and changing political perceptions condition legal answers. Rosalyn Higgins1

A. Introduction Throughout the history of international energy investment there have been particularly robust conflicts between host governments in countries with energy resources or energy networks and foreign companies invited in to develop those resources or networks under long-term contracts. Often, this has followed a north–south geographical pattern, with the host countries making a link between the disputed investment and their overall economic and social development. In recent years, conflicts have also emerged between investors and states with respect to the generation, transmission, and sale of electricity and gas—Argentina is a notable example—and with respect to investments in various forms of renewable energy, mostly in Europe.

4.01

In the development of oil and gas resources, such conflicts were evident in Latin America and the Middle East as early as the 1930s and emerged on a much larger scale during the oil

4.02

1 Higgins, R. (1999). ‘Natural Resources in the Case Law of the International Court’, in Boyle, A. & Freestone, D. (eds) International Law and Sustainable Development, Oxford: OUP, 87.

142 Chapter 4: The Classic Tests of Contract-based Stability price hikes of the 1970s, particularly in the Middle East. In several cases, this led to expropriations of investments by the host states. Investors’ concerns about the unilateral actions of several petroleum-producing states during the 1930s—Mexico for example—appear to have been responsible for the design and introduction of dedicated ‘stabilization’ clauses into petroleum contracts in the Middle East.2 The aim of such clauses was to provide additional legally binding assurances to investors that their investments would be secure over the long term. In the event of a breach, the dispute would be resolved by international arbitration. Several decades later, their value as a risk-mitigation tool was put to the test. In the 1970s the unilateral actions by states in the Gulf Region and Libya triggered arbitrations, which led to a number of awards concerning the legal significance of these stabilization clauses in petroleum contracts, and on the appropriate method of compensation for expropriated oil and gas assets. Although there is a great deal about these disputes that is rooted in the social, economic, and political climate of the time, the awards have much more than historical relevance: the arbitrators wrestled with a number of issues which, like those in the Chorzów Factory case, continue to figure in investor–state relations several decades later. They also provoked a large body of commentary and analysis from distinguished writers, which, like the awards themselves, continues to influence scholars, counsel, and arbitrators when analysing international energy disputes arising in the twenty-first century.3 In practice, few arbitrators in contemporary disputes will be unaware of these awards and even fewer will ignore the findings of these tribunals in their deliberations. 4.03

This chapter will examine the arbitral awards made in the 1970s and early 1980s that followed the wave of unilateral state actions at the time. They can be described as the ‘classic tests’ of the validity, scope, and function of contractual stabilization in international energy arrangements. They still have relevance in an era dominated by treaty-based protections. For the first time, a number of states acted more or less in concert to change the terms of existing long-term energy contracts and indeed to expropriate assets of investors. These actions tested the contract-based stability mechanisms developed by investors in the international petroleum industry in preceding years. For the most part, the results were, from an investor perspective, unsatisfactory. Indeed, they encouraged a search by investors (and their advisers) for new legal mechanisms that offered the prospect of more effective long- term stability.4 Typically, these disputes involved a taking of investor assets by the state or its agent; following a period in which the investors concerned had been more or less forced into negotiations over the transfer to the state of existing investments, all of which challenged the value of stabilization clauses. The disputes arose or intensified at a time when the price of oil increased dramatically, generating substantial profits for the oil companies concerned. They resulted in a number of key arbitral awards concerning Libya, Kuwait, and Iran. The 2 For a brief account of the origin of stabilization clauses, see Sir Gerald Fitzmaurice’s Separate Opinion in the Aminoil case, footnote 7: Government of the State of Kuwait v American Independent Oil Co (Aminoil), award of 24 March (1982), reprinted in 21 ILM 976 (1982). 3 For example, in the work of scholars and practitioners such as Partasides, C. & Martinez, L. (2018) ‘Of Taxes and Stabilization’, in Bishop, D. & Kaiser, G. (eds) The Guide to Energy Arbitrations (3rd edn), London: GAR, 68–84; Alvik, I. (2011) Contracting with Sovereignty: State Contracts and International Arbitration, Oxford: Hart Publishing; Lamb, S.J. & Lee, A.-J. (2015) ‘The Relevance of Stabilization Clauses in Oil & Gas Investment Treaty Arbitrations’, in Gaitis, J.M. (ed) The Leading Practitioners’ Guide to International Oil & Gas Arbitrations, New York: Juris, 115–150; and Burnett, H.G. & Bret, L.-A. (2017) Arbitration of International Mining Disputes: Law and Practice, Oxford: OUP. 4 In this context note the comments of the tribunal in CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No ARB/01/8, Decision of the tribunal on Objections to Jurisdiction, IIC 64 (2003), 17 July 2003, para 28.

A. Introduction 143 first and second of these are considered in sections F and G below, while the more complex arrangements that resulted from the Iranian Revolution of 1979 are considered in section H. Finally, a case is examined which arose during the same period and concerned a stabilization clause but in a region—Africa—which at that time was only just beginning to attract significant energy-related investments. AGIP v Congo is the only one of the awards considered in this chapter that was made by a tribunal convened under the institutional umbrella of the International Centre for the Settlement of Investment Disputes (ICSID). These ‘classic’ awards, however, were not made in a legal vacuum. On several occasions, disputes about the terms of oil, gas, mining, and electricity concessions are known to have been the subject of arbitral awards in earlier years, touching on issues of contract stability and applicable law, among other matters.5 These early awards provided a frame of reference for the arbitrators in the classic disputes. The earliest example is likely the Lena Goldfields case, concerning mining interests in the former Soviet Union, but there are also two cases that arose in the 1960s, the Aramco and Sapphire cases, involving Saudi Arabia and Iran respectively as the respondents. In sections C, D, and E, these early cases will be reviewed, and their contribution assessed to the jurisprudence on stability of contract in energy-related investments.

4.04

The contribution of this generation of awards to international energy investment law has been an important one. It is beyond doubt that the awards, twelve in number and handed down almost four decades ago or more, made significant contributions to legal thinking on a number of issues, not least in establishing the limits of investor protection under the then legal arrangements. Dissatisfaction with the outcomes may also be seen as a major contributory factor in laying the foundations for a new approach, involving a different kind of contract stability based on ‘equilibrium’ and allocation clauses or legal stability agreements, and recourse to treaty-based forms of stability and other investor protections. Their approach to the provision of stability was both limited and simple by modern standards of investment protection in the energy sector. Deservedly then, they can be described as the ‘classic tests’ of key legal issues in this area. They were made at a time when the host states concerned were exploring, deliberately or not, the scope of the relatively new doctrine of permanent sovereignty over natural resources for the first time in the post-colonial era, especially in the Middle East. Investors too were assessing the implications of this shift in the security available to them for large, long-term investments in the developing countries. Such investments were made at a time when the contracting states in several cases did not yet possess a system of law that was sufficiently developed to govern the concession contracts made with foreign investors.6 The awards were also made at a time when other, treaty-based protections available

4.05

5 Some of the early cases involving investor–state disputes over concessions for the supply of electricity in Greece are examined in an article by Wetter, J.G. & Schwebel, S.M. (1964) ‘Some Little-Known Cases on Concessions’, Brit Y B Int’l L 40, 208; the Electricity Companies case concerned a contract concluded between the government of Greece and a number of power companies in 1925. The tribunal held that while no choice of law clause had been included by the parties in the concession, the intention had been to internationalize the contract. It was therefore governed by general principles and Greek law. The case is also discussed by Weil in Recueil des cours (1969–III) 128 at 169. 6 For example, the comments made by the arbitrator in Petroleum Development Ltd v Sheikh of Abu Dhabi (1951) 18 ILR 144 at 149; ‘The Sheikh administers a purely discretionary justice with the assistance of the Koran; and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments’ (my emphasis). Compare remarks made by the Referee, Sir Alfred Bucknill, in Ruler of Qatar v International Marine Oil Company Ltd (1953) 20 ILR 534 at 545: he declared himself satisfied that Islamic law ‘does not contain any principles which would be sufficient to interpret this particular contract’ (my emphasis) and ‘such law does not contain a body of legal principles applicable to a modern commercial contract of this kind’. Both sets of remarks display the arrogance of the late colonial era but more importantly show an ignorance of principles of Islamic law that had been in use for centuries. For

144 Chapter 4: The Classic Tests of Contract-based Stability to investors were by current standards extremely modest, and pre-dated the modern investment treaty system with its investor-state dispute mechanism. In terms of their content, they concerned oil, not gas, and occurred at a time when the level of international investment in other energy sectors, particularly electricity, but also gas transmission and distribution, was significantly lower than now. There were almost no reported cases involving contract stability in the electricity sector. Nonetheless, while the modern legal and policy context of current disputes over energy resources contains important new elements, there remain features of these classic disputes and the issues they raised that are relevant to investor–state disputes over energy resources today. B. The Key Role of Arbitration 4.06

Prior to considering the classical arbitral awards, it is worth asking why they should have provided the only authoritative source of guidance for so many years about issues of breach of contract caused by unilateral state action in the energy industries. For the most part, they were ad hoc arbitrations and only one of them was held before an international arbitral institution (ICSID). Was there no scope for intervention by the International Court of Justice (ICJ), for example?

4.07

The answer to this question lies in the determination by the ICJ in the Anglo-Iranian Oil Company (Anglo-Iranian) case that it lacked jurisdiction to decide on a claim from the United Kingdom (UK) that Iran had unlawfully terminated petroleum concessions held by the Anglo-Iranian Oil Company.7 The UK asked the ICJ to declare, inter alia, that the Iranian Oil Nationalisation Act of 1 May 1951 in so far as it purports to effect a unilateral annulment, or alteration of the terms of the Convention concluded on 29 April 1933, between the Imperial Government of Persia and the Anglo-Persian Oil Company Limited, contrary to Articles 21 and 26 thereof, would be an act contrary to international law for which the Imperial Government of Iran would be internationally responsible.8

In addition, the UK also asked the ICJ to declare that the concession: cannot lawfully be annulled, or its terms altered, by the Imperial Government of Iran, otherwise than as the result of agreement with the Anglo-Iranian Oil Company Limited, or under the conditions provided in Article 26 of the Convention.9 4.08

In its arguments to the ICJ, the British government was careful to note that a state is entitled to nationalize and to expropriate concessions that have been awarded to foreign investors. However, it emphasized that the exercise of the right is subject to limitations that are clearly established in international practice and rest on ‘well-recognized principles of international

a discussion of Islamic law in this context see Majeed, N. (2004) ‘Good Faith and Due Process: Lessons from the Shari’ah’, Arbitration International 20, 97, esp. at 102–104.

7 8

Anglo-Iranian Oil Company Case, (1952), ICJ Reports 93. Ibid, at 95.

9 Ibid.

C. Lena Goldfields 145 law’.10 Such limitations include the principle that a state is not entitled to nationalize a concession if it has accepted a provision in the contract of concession that it ‘has expressly divested itself of the right to do so . . .’.11 This important issue was to recur in subsequent cases between states and foreign investors. The ICJ found that it lacked jurisdiction to hear the case for a number of reasons. One of the arguments advanced by the UK concerned the settlement of a dispute about the so-called D’Arcy Concession between Iran and the UK in 1933. The settlement followed mediation by the Council of the League of Nations and constituted a treaty in force between the two states. The UK claimed that it fell within the terms of Iran’s declaration of acceptance of the jurisdiction of the ICJ. This involved the notion that a concession may possess a double character of being at the same time a contract between the Iranian government and Anglo-Iranian and a treaty between the two governments. This argument was firmly rejected by the ICJ.

4.09

The questions which the ICJ was asked to address were familiar ones in the context of this book. Did a breach of the terms of a concession constitute a violation of international law? Is unilateral alteration or termination permissible, and if so, to what extent and in what circumstances? Yet, the ICJ found it had no jurisdiction to answer these questions. In the words of a former President of the ICJ, ‘the answers in international law have thus come not from the Court but from a series of arbitral awards’.12

4.10

C. Lena Goldfields The earliest known case13 in which a stabilization clause was discussed in the natural resource industry was the Lena Goldfields case, involving an English investor and the government of the then Soviet Union.14 Lena Goldfields (Lena), a British corporation, had been granted a concession in 1925 with the exclusive right to mine gold and other metals in the

10 Anglo-Iranian Oil Company (United Kingdom v Iran), Memorial submitted by the United Kingdom of Great Britain and Northern Ireland, 10 October 1951, 85, para 10; (accessed 16 December 2009). 11 The Iranian government had agreed that the Concession ‘shall not be annulled by the Government and the terms therein contained shall not be altered either by general or specific legislation in the future, or by administrative measures or any other acts whatever of the executive authorities’. The British government argued that this provision was inserted with the express aim of making it legally impossible for the government to terminate the concession by ‘some measure of nationalization’. 12 Higgins, n1, 95. See also Schwebel, S. (1994) Justice in International Law, Cambridge: CUP, 425–435. This is not to say that the ICJ has not taken up cases between states involving an energy investment: the Barcelona Traction case is an example of this: Barcelona Traction, Light and Power Co Ltd (Belgium v Spain), Judgment, 5 February 1970, ICJ Reports 1970, 3. The Belgian government sought reparation for damage claimed to have been caused to Belgian nationals (who were shareholders in a Canadian company—Barcelona Traction), by the conduct of various organs of the Spanish state. 13 The award was made in German at the Royal Courts of Justice in London by Dr Otto Stutzer, a professor at the Freiburg School of Mines, and Sir Leslie Scott. The former was the arbitrator appointed by the parties and chairman; the latter was the British arbitrator appointed by Lena. The original transcript of the case has been lost and the principal source is an article by Professor Nussbaum published in 1950 (see below). A detailed account of the case, using inter alia archive material available only since the collapse of the Soviet Union, is provided by the late Veeder, V.V. (1998) ‘The Lena Goldfields Arbitration: The Historical Roots of Three Ideas’, ICLQ 47, 747. 14 Lena Goldfields Ltd v Soviet Government (1930) Cornell Law Quarterly (1950-I), 36, 31; the wider legal context of mining concessions in Soviet Russia is examined by Veeder, V.V. (2005) ‘International Arbitration: A Lesson Learnt from Anglo–US Mining Concessions in Soviet Russia (1920–1925)’, in Bastida, E., Wälde, T. & Warden- Fernandez, J. (eds) International and Comparative Mineral Law and Policy, The Hague: Kluwer Law International; see also Veeder, V. V. (2002) ‘The 1921–23 North Sakhalin Concession Agreement’, Arbitration International 18, 185.

4.11

146 Chapter 4: The Classic Tests of Contract-based Stability Urals and parts of Siberia. The duration of the concession was between thirty and fifty years. By 1929, an increasingly adverse economic environment precluded Lena from meeting the production requirement in the concession. Its assets were seized by the Soviet government and its senior personnel arrested and imprisoned. After the failure of attempts to negotiate a settlement, Lena referred the matter to arbitration on 12 February 1930 under the terms of an ad hoc arbitration clause contained in the concession. 4.12

Under Article 75 of the concession, Lena was subject to the whole present and future legislation of the Soviet Union but with an important reservation: ‘in so far as special provisions are not contained in the present agreement.’ Under Article 76, the then Soviet government undertook to make no alteration in the concession agreement by order, decree, or other unilateral act, or at all, except with Lena’s consent. This stabilization clause was linked to a choice of law clause. Under Article 89, the choice of law clause,15 it was stated that the ‘parties base[d]‌their relations with regard to this agreement on the principle of good will and good faith, as well as on reasonable interpretation of the terms of the Agreement’. The arbitral tribunal decided (in the absence of the government’s arbitrator since it refused to take part in the proceedings) that the interaction between the two clauses meant that the contract between the private investor and the state could be ‘internationalized’. The concession was held to be subject to the general principles of law in so far as the contractual provisions safeguarding the company’s position were concerned. Nonetheless, in most other respects the performance of the contract by both parties inside the Soviet Union was governed by Soviet Russian law: ‘[o]n all domestic matters in the USSR, the laws of Soviet Russia applied except in so far as they were excluded by the contract.’ There was no further elaboration of the relevance of the stabilization clause.

4.13

Enforcement of the award proved to be a source of many difficulties and attempts to satisfy the award lasted for many years. This process ended when the government of the UK linked its negotiations for payment of the award to discussions on a trade agreement between the two countries and a settlement was reached soon afterwards.16

4.14

The case is often cited as an early example, if not the first, of a private arbitration panel applying ‘a general principle of law recognized by civilized nations’ by reference to Article 38(1) of the Statute of the Permanent Court of International Justice, concerning compensation for unjust enrichment.17 What was certainly a ‘first’ was the arbitral tribunal’s decision to hold that international law and not only domestic law could govern the contractual relationship between a state and a private party. The parties themselves had not agreed to the application of public international law or the general principles of law and there was not even an express provision on applicable law in their concession agreement.

4.15

In at least four important subsequent cases, the Lena Goldfields award was influential. Firstly, it led to the drafting of Articles 21 and 22 of the 1933 Concession Convention granted by the Iranian government to the Anglo-Persian Oil Company, which have proved influential 15 In designing a choice of law clause, the parties may stipulate (1) one or more national laws such as the law of one of the parties or of a third party or a combination of national laws; (2) public international law; (3) a legal system that is sui generis and established by the contract itself (impractical); (4) transnational law such as UNIDROIT Principles; or (5) a combination of these. They may elect not to make a choice however, agreeing to perform their contract in good faith or to empower the tribunal to determine the dispute ex aequo et bono or as amiable compositeurs. 16 Nussbaum, A. (1950) ‘The Arbitration between the Lena Goldfields, Ltd and the Soviet Government’, Cornell L Rev 36, 31. 17 Veeder (1998) at n 11: sources cited in footnote 5 of his text.

D. Aramco 147 on the drafting of petroleum agreements ever since.18 Secondly, it provided a precedent for the tribunal in the Aramco case (discussed below), where the tribunal relied on the Lena Goldfields case by analogy. Thirdly, it influenced the Preliminary Award by Professor Dupuy in the Texaco v Libya Arab Republic arbitration in 1979 (discussed below in section F). Finally, the case was cited in the Iran–US Claims Tribunal’s discussion on the discounted cash flow method of assessing compensation for expropriation (see section H below). In Lena’s case, it did not own the mining assets, having only the rights of a concessionaire to them; and as such could not measure its losses using an asset-based valuation. D. Aramco The Aramco case19 was another early case involving a stabilization clause. In 1954, an agreement was concluded between the government of Saudi Arabia and Saudi Arabian Maritime Tankers Ltd, and its owner, Aristotle Onassis, which gave the Onassis company a thirty-year ‘right of priority’ for the transport of Saudi Arabian oil. This agreement was in direct conflict with a concession held by the Arabian American Oil Company (Aramco). Under the oil concession agreement granted to Aramco by the government of Saudi Arabia in 1933, Aramco had the exclusive right to transport oil it extracted from its concession area within the country. This led to an arbitration in Geneva under an ad hoc arbitration agreement concluded in 1955. It may be noted that although the dispute involved a concession for petroleum production and various other related activities, the dispute did not concern the production itself. The validity of the concession was not at issue. The dispute was ‘strictly confined to the right of transportation by sea’,20 and was much less evidently a confrontation between a foreign investor and a host government over matters of national interest.

4.16

The arbitral tribunal noted that there was a stabilization clause in the 1933 Concession, and concluded that:

4.17

[b]‌y reason of its very sovereignty within its territorial domain, the state possesses the legal power to grant rights which it forbids itself to withdraw before the end of the Concession, with the reservation of the clauses of the Concession Agreement relating to its revocation21 . . . [n]othing can prevent a state, in the exercise of its sovereignty, from binding itself irrevocably by the provisions of a concession and from granting to the concessionaire irretractable rights. Such rights have the character of acquired rights.22 18 Mann, F.A. (1959) ‘The Proper Law of Contracts Concluded by International Persons’, BYIL 35, 34 at 51: the concession directed arbitrators to base their award ‘on the juridical principles contained in Article 38 of the Statutes of the Permanent Court of International Justice’: Art 22(F) and also Art 21. In this context, the approach of the tribunal in Petroleum Development Ltd v Sheikh of Abu Dhabi may be noted. In a dispute over a concession of seventy-five years’ duration, concerning the exclusive character of a right to explore for and exploit oil in the offshore waters of Abu Dhabi, there was doubt about the proper law applicable to the contract. The Umpire, Lord Asquith, declared the municipal law to be prima facie applicable but inappropriate since the Sheikh ‘administers a purely discretionary justice with the assistance of the Koran’ and in ‘this very primitive region’ there was ‘no settled body of legal principles applicable to the construction of modern commercial instruments’. Given this lacuna, he concluded that the Agreement prescribed ‘the application of principles rooted in the good sense and common practice of the generality of civilized nations—a sort of “modern law of nature” ’: 18 ILR 144 (1951) at 149. This was a view that anticipated the condescension in Sir Alfred Bucknill’s (1953) remarks on the applicable law in Ruler of Qatar v International Marine Oil Company Ltd, 20 ILR 534 at 545 (see n 5). 19 Government of Saudi Arabia v Arabian American Oil Company (Aramco) (1958) 27 ILR 117. 20 Ibid, at 144–145, 177. 21 Ibid, at 168. 22 Ibid.

148 Chapter 4: The Classic Tests of Contract-based Stability The tribunal held that the government was bound by its agreement with Aramco, and that the subsequent agreement with Onassis’s company had violated that agreement. It also recognized the validity of stabilization clauses in international law. 4.18

The Aramco concession did not specify the applicable law. The agreement instructed the tribunal to decide the matter in accordance with Saudi Arabian law ‘insofar as matters within the jurisdiction of Saudi Arabia are concerned’23 but the tribunal had discretion to declare the applicable law for matters beyond the jurisdiction of Saudi Arabian law. The tribunal argued that Islamic law was in an ‘embryonic state’ and therefore Saudi Arabian law needed to be interpreted or complemented by ‘the general principles of law, by the custom and practice in the oil business, and by notions of pure jurisprudence’.24 The tribunal reached its conclusion after applying what it described as objective criteria and also finding that the concession had an international character ‘because of its Parties and its ramifications’.25 There are similarities between this conception of an international contract and the approach taken several years later by the sole arbitrator in the Libyan case with Texaco (see section F below). It is not one that has attracted widespread acceptance. E. Sapphire

4.19

A review of stabilization clauses also figured in the case of Sapphire International Petroleums Co v National Iranian Oil Company.26 This involved a petroleum agreement entered into by a government agency, the National Iranian Oil Company (NIOC) and a Canadian company called Sapphire Petroleums (Sapphire) in June 1958. Under the Iranian petroleum regime, the negotiation of such agreements and the supervision of their performance were delegated to the NIOC, which was also charged with establishing ‘joint structures’. Article 2 of the agreement stated that the parties would become partners in a joint structure relationship, and the Iranian Canada Oil Company (IRCAN) was set up to this end. This was a joint stock company and non-profit corporation, which was to act only as Sapphire’s agent. During the first (exploration) stage of the agreement, Sapphire was to act through the IRCAN, while for any second stage (the ‘working, extraction and sale of oil’), the IRCAN was to act as the agent for both Sapphire and the NIOC. In this second stage, each company would be responsible for an equal share of the expenses necessary for carrying out the operations laid down in the agreement. It would provide the risk capital for exploration and would earn the right to share the product with the NIOC once commercial production was established, and to claim reimbursement for part of its risk investment. The work commitment involved a minimum investment of US$18 million over a period of twelve years from the effective date of the agreement, with US$8 million of this amount to be invested in the first four years, at the end of which period Sapphire could elect to discontinue the search for oil and give up the concession.

4.20

The agreement lacked a choice of law clause but it did provide that the parties would carry out the contract ‘in accordance with the principles of good faith and good will and to respect

23

Ibid, at 153. Ibid, at 169. 25 Ibid, at 166. 26 Award of 15 March 1963, 35 ILR 136 (1963). 24

E. Sapphire 149 the spirit as well as the letter of the agreement’.27 It also contained a stabilization clause in Article 38, Paragraph 3, which read as follows: no general or statutory enactment, no administrative measure or decree of any kind, made either by the government or by any governmental authority in Iran (central or local), including NIOC, can cancel the agreement or affect or change its provisions, or prevent or hinder its performance. No cancellation, amendment or modification can take place except with the agreement of the two parties.28

The dispute concerned the level of the NIOC’s involvement in the IRCAN’s plan of operations during the exploration stage rather than the production and sale of crude oil. At an early stage the NIOC contended that its approval was required for every operation, instead of mere consultation, as Sapphire interpreted the contract requirements. Without such consent, the NIOC would be entitled to refuse to take into consideration the expenses incurred in the prospecting work. In the event, the NIOC refused to accept Sapphire’s claim for expenses, and Sapphire ceased prospecting operations; the NIOC repudiated the contract, calling on a US$350,000 Letter of Guarantee, on the ground that Sapphire had failed to carry out its obligations.29 Three months before the contract was repudiated, Sapphire notified the NIOC of its request for arbitration. The respondent, the NIOC, refused to nominate an arbitrator and, following the appointment of a sole arbitrator by the President of the Swiss Federal Court, according to Article 41 of the Agreement, the NIOC did not participate in the arbitration.

4.21

The sole arbitrator held that since the agreement did not contain any express choice of law provision, the substantive law applicable to the interpretation and performance of the concession agreement was the principles of law generally recognized by civilized nations. He also held that it seemed ‘natural’ that Sapphire should be protected against any legislative changes which might alter the character of the contract, and that they should be assured of some legal security for their investments, responsibilities and considerable risks. Since the legal security of Sapphire’s interests ‘could not be guaranteed . . . by the outright application of Iranian law, which it is within the power of the Iranian state to change’,30 general principles of law and not Iranian law alone, should be applied to the agreement (even though the contract was concluded in Tehran and the work was carried out in Iran). He ignored the stabilization clause however, refusing to find that Iran was in breach of the clause. The reason may be located in the fact that the alleged violations of the agreement did not involve the specific obligations that were listed in the stabilization clause.

4.22

The sole arbitrator found that the NIOC had deliberately failed to carry out certain obligations under the contract, and that this failure amounted to a breach of contract. Sapphire

4.23

27 Article 36, para 1.The Agreement was similar to three others that had been concluded concurrently under the Petroleum Law of 1957 with a view to encouraging private investment in the oil industry following a period of stagnation after the enactment of a Nationalization Law in 1951. The other three were concluded with a consortium led by BP and Shell, AGIP and the Pan-American International Oil Company: for a discussion of the choice of law issue, see Ramazani, R.K. (1962) ‘Choice-of-Law Problems and International Oil Contracts: A Case Study’, ICLQ 11, 503–518. He quotes Article 38(3) of the contract with the Pan-American International Oil Company, which contains a stabilization clause almost identical in wording to Article 38(3) of the Sapphire Agreement: 515, note 40. 28 35 ILR (1963) at 140. This did not preclude unilateral action by the NIOC under the termination and penalty provisions of Articles 16 and 43. 29 This was a letter of credit in favour of the NIOC that assured the NIOC that the amount to be paid as a penalty would be available if Sapphire failed to meet its work obligations. 30 35 ILR (1963), at 171.

150 Chapter 4: The Classic Tests of Contract-based Stability was entitled to consider that the NIOC’s attitude meant that it would continue to refuse to perform and was therefore released from the obligation of further performance, including the obligation to drill. The termination of the contract as a result of breaches by the NIOC entitled Sapphire to damages, and to a refund of the indemnity claimed by NIOC as penalty in the event that the drilling obligation was not met (the amount of US$350,000). The sole arbitrator applied general principles of law to the determination of damages. However, he also used the principle of ex aequo et bono (that is, equity) to find that Sapphire was entitled to compensation for loss of the profits it expected to earn when performing the contract. Sapphire was also entitled to its costs and expenses incurred in the arbitration, but not for expenses incurred before the termination of the contract. 4.24

The approach taken to the claim for loss of profits that Sapphire expected to earn in performing the contract has proved influential and merits some comment. Can a loss of opportunity, the sole arbitrator considered, give a legal right to compensation? In an influential comment, he held that: It is not necessary to prove the exact damage in order to award damages. On the contrary, when such proof is impossible, particularly as a result of the behavior of the author of the damage, it is enough for the judge to be able to admit with sufficient probability the existence and extent of the damage.31

Since no oil had actually been discovered, the sole arbitrator had to consider what its existence and extent would be ‘with sufficient probability’. In determining the market value of the opportunity lost, the arbitrator found a ‘particularly rich source of information’ in American case law, which contained several decisions on the determination of compensation for loss of land or unprospected mining or oil concessions. Such cases showed that there was no need to prove the success of the search. It was sufficient to demonstrate a reasonable probability of success, which gives the land or the concession a market value. The task of the courts is then to take three factors into account: (1) transactions relating to neighbouring territories; (2) the appraisal of experts (especially geologists) on the probability of profit; and (3) a comparison with neighbouring areas. In this case, the geological expert had stated that there was ‘a very strong chance, but not a certainty, that deposits of commercially workable oil exist in the concession area’.32 Moreover, the NIOC would not, he supposed, have offered a concession over such an area if they did not think there was sufficient likelihood of discovering oil (given the geological data they already had), and hence they required a minimum investment of US$8 million from the company. His conclusion was that Sapphire had demonstrated ‘sufficient probability’ of the venture’s success had it been able to complete the prospection phase and so was able to claim loss of profits.33 Once that principle was established, the next step was to determine the amount of compensation as a matter of fact. In taking this step, the sole arbitrator drew on the principle of ex aequo et bono and held that compensation of US$2 million was reasonable and equitable. This rationale for computing lost profits has been followed in a number of subsequent cases.34 31 Ibid, at 187–188. 32 Ibid, at 159–161, 188–190. Willis G. Meyer, a geologist from Dallas, Texas, stated in his expert report that ‘there is a very high probability’ that the four characteristics, considered essential for the accumulation of oil and gas reserves, existed in the areas where Sapphire had prospected in (at 160). 33 Mr Meyer estimated that the profits from the venture accruing to Sapphire could have reached US$46 million: ibid, at 189. 34 For example, Liberian Eastern Timber Corporation (LETCO) v Republic of Liberia, ICSID Case No ARB/83/ 2, Award, 31 March 1986 at V.1; Libyan American Oil Company v The Libyan Arab Republic, Award, 12 April 1977,

F. The Libyan Cases 151 F. The Libyan Cases On 7 December 1971, the government of Libya (acting as the Revolutionary Command Council) promulgated a Decree which nationalized all the interests and properties in Libya of the BP Exploration Company (Libya) Limited (BP), a subsidiary of the British Petroleum Company Limited.35 Almost two years later, the government adopted legislation which nationalized a majority share of nine of the International Oil Companies’ (IOCs’) interests and properties in the country. These interests were in the form of long-term concessions granted by the previous government between 1955 and 1968. All the concessions contained stabilization clauses and still had many years to run. Three sets of arbitral proceedings were commenced against the government of Libya as a result of these oil nationalizations: the first involved BP;36 the second involved the Texaco Overseas Petroleum Company (TOPCO) and the California Asiatic Oil Company (Calasiatic)37 (hereinafter TOPCO); and the third involved the Libyan American Oil Company (LIAMCO).38 The fact pattern in each of the three cases was very similar and the issues of law were, as some authorities have noted, ‘virtually identical’.39 The awards were important in developing legal standards for nationalizations, and were influential in the light of their discussion on the relationship between national law and international law in petroleum agreements.

4.25

Although each case was submitted to a different ad hoc arbitration body, each of the sole arbitrators reached the same conclusion: Libya had violated its obligations under the concessions, a nationalization had taken place and compensation was payable. To this extent, each case ‘confirms the basic tenet that states cannot disregard duties to foreign private persons’.40

4.26

(1) The concession terms The terms of the three concessions were identical since each was based on a standard form of deed of concession set out in a schedule to the Libyan Petroleum Law of 1955. Article 9 of that Law required that the standard form be used for the grant of all concessions. The standard form included three clauses designed to safeguard the long-term interests of the foreign investor: clause 16 provided that future Libyan legislation would not affect the concession without the prior consent of all of the parties (a stabilization clause); clause 28 included a choice of law that was designed to ensure that the concessions were not governed

YCA 1981 at 89 et seq; AMCO Asia Corp v Republic of Indonesia, ICSID Case No ARB/81/1, Award (resubmission) 31 May 1990, para 183, citing Sapphire 35 ILR 183 (1963). 35 The BP Concession was originally granted to Nelson Bunker Hunt, a US citizen, in 1957, who assigned to BP an undivided one-half share of this interest in the Concession, after which BP acted as operator on behalf of both parties. Subsequently, the parties litigated against each other: BP v Hunt (No 2) [1982] 2 WLR 253. 36 BP Exploration Co (Libya) Ltd v The Government of the Libyan Arab Republic; the Award on jurisdiction and the merits was dated 10 October 1973 and published in 53 ILR 297 (1979). 37 Texaco Overseas Petroleum Co/California Asiatic Oil Co v The Government of the Libyan Arab Republic; the award on the merits, dated 19 January 1977, translated from the French, was published in 53 ILR 389 (1979). 38 Libyan American Oil Co v The Government of the Libyan Arab Republic; the Award on jurisdiction, the merits and damages, was dated 12 April 1977 and published in 20 ILM (1981) 1 and 62 ILR 140. 39 von Mehren, R.B. & Kourides, P.N. (1981) ‘International Arbitrations between States and Foreign Private Parties: The Libyan Nationalisation Cases’, AJIL 75, 476–552. The authors were counsel to TOPCO in the Texaco Overseas Petroleum Co/California Asiatic Oil Co v The Government of the Libyan Arab Republic arbitration. 40 von Mehren & Kourides (1981) at 513.

4.27

152 Chapter 4: The Classic Tests of Contract-based Stability exclusively by Libyan law; and the same clause also provided for the reference of all disputes to arbitration if the parties failed to reach an amicable solution. In spite of the close similarity between the agreements and the circumstances of their premature termination, the arbitrators reached different conclusions on important points in each case. To understand why, the relevant concession terms require some further explanation. 4.28

The terms of clause 16 on contract stability were as follows: 1. The government of Libya will take all the steps necessary to ensure that the Company enjoys all the rights conferred by this Concession. The contractual rights expressly created by this concession shall not be altered except by mutual consent of the parties. 2. This Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and the Regulations in force on the date of execution of the agreement of amendment by which this paragraph 2 was incorporated into this concession agreement. Any amendment to or repeal of such Regulations shall not affect the contractual rights of the Company without its consent.41

4.29

The choice of law provision in clause 28(7) was as follows: [t]‌his Concession shall be governed by and interpreted in accordance with the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.

4.30

Finally, the arbitration provision in clause 28 allowed either party the right to commence arbitration proceedings unless the parties arrived at a friendly settlement. Under clause 28(3) a refusal to appoint an arbitrator by one of the parties would lead to the appointment of a sole arbitrator by the President of the ICJ.

4.31

Soon after oil production commenced in the early 1960s, the government attempted to revise the terms of the concessions already awarded. Several Royal Decrees were issued to amend the Petroleum Law. Subsequently, the deeds of concession were renegotiated with the consent of the parties.

(2) Unilateral actions 4.32

The motive for the unilateral action by the Libyan government was not clearly articulated in each one of the actions. Nor did it take place as a single legislative event in each case. In BP’s case, its entire concession interest was nationalized through the BP Nationalisation Law in retaliation for the UK government’s perceived failure to prevent the occupation by Iran of three islands in the Persian Gulf, which were claimed by the Rulers of Sharjah and Ras-al-Khaimah. The nationalization was deemed to be an appropriate reaction to the UK’s failure to fulfil its treaty obligations of protection, or so the Libyan argument ran. No compensation was offered, although provisions for compensation were included in the Law.42

41 53 ILR 297 at 322. 42 The legislation envisaged that compensation would be assessed by a committee, although this was never implemented. Similar committees were envisaged in the Kuwaiti and Iranian nationalizations in the 1970s: see sections G and H in this chapter. The problem with such mechanisms is their limited credibility as vehicles for the determination and payment of compensation in accordance with the requirements of international law.

F. The Libyan Cases 153 Subsequently, negotiations took place between TOPCO, Calasiatic, and LIAMCO with respect to the government’s demands for an equity interest in all concessions ranging from 51 to 100 per cent. In September 1973, the government terminated the negotiations and promulgated a decree which nationalized 51 per cent of the interests and property of TOPCO, Calasiatic, and LIAMCO, covering fourteen and three concessions respectively.43 While no motive for the action was expressly stated, it appears to have been the result of a refusal by the oil companies to accept the government’s demands for state participation, and the pro-Israeli stance of the US government in the Arab–Israeli War. When these three companies indicated that they intended to take the nationalization to arbitration, the government proceeded to nationalize by two decrees the remaining 49 per cent of their interests and property. In spite of the foregoing, the argument made by the claimants in the Texaco/California Asiatic Oil Co v Libya (TOPCO) and the Libyan American Oil Co v Libya (LIAMCO) cases—that the nationalizations were discriminatory and politically motivated—proved unsuccessful. The sole arbitrator decided in both cases that the nationalization decrees were adopted for economic reasons as part of an overall policy of nationalizing the oil industry.

(3) Procedure In each case the parties made requests to the government of Libya that the dispute be referred to arbitration, and nominated an arbitrator in accordance with clause 28 of the concessions.44 Since Libya did not respond or nominate an arbitrator, each company sought the appointment of a sole arbitrator by the President of the ICJ. The BP arbitration was conducted in Copenhagen with Judge Lagergren as sole arbitrator, and the award was rendered on 10 October 1973. In the TOPCO case, the ICJ appointed Professor Dupuy as sole arbitrator and the arbitration was conducted in Geneva. A Preliminary Award was made in November 1975, and an award on the merits in January 1977. The LIAMCO arbitration was also held in Geneva, with Dr Sobhi Mahmassani as sole arbitrator. The award was given on 12 April 1977. Libya did not take part in any of the above proceedings, save in the TOPCO case, where it filed a memorandum with the President of the ICJ contending that no arbitral tribunal had jurisdiction to hear the case since the nationalizations were acts of sovereignty, and asking that the President not appoint a sole arbitrator. The various arguments made by Libya to justify its actions were examined in detail by the sole arbitrator, taking up more than one third of the TOPCO award on the merits.

4.33

One of the arguments made by Libya in the memorandum submitted in the TOPCO case was that the companies had not attempted to negotiate a friendly settlement before proceeding to arbitration, and hence the arbitrator lacked jurisdiction. Although there had in fact been negotiations, the adoption of the first nationalization decree demonstrated the failure of these negotiations. The arbitrator held that a party was not under an obligation to engage in

4.34

43 LIAMCO held an undivided 25.5 per cent interest in three concessions. Six other companies were subject to this decree: Esso Standard of Libya; Grace Petroleum Corp; Esso Sirte Co; Shell Exploratie en Productie Maatschappij; Mobil Oil of Libya and Gelsenberg AG (Libya). Concession holders that were not subject to the decree included French and Spanish companies. A few weeks earlier, the government had nationalized 51 per cent of the interests and properties in Libya of Occidental of Libya. The company reached a settlement for the transfer of its assets to the Libyan National Oil Company. 44 There were other procedural issues involved in the three cases, which are discussed in von Mehren & Kourides (1981) at 504–509.

154 Chapter 4: The Classic Tests of Contract-based Stability attempts to negotiate if events indicated that there was no substantial prospect of reaching a friendly settlement.45 4.35

In the absence of any agreement between the parties on the arbitration procedure, clause 28(5) of the concession conferred on the sole arbitrator the power to draw up the rules of procedure. Each of the three arbitrators had therefore to decide which legal system governed the proceedings before him. In the cases considered already in this chapter, two approaches were evident. In the Aramco case (section D above), held in Geneva, the tribunal held that the governing law was public international law. In the Sapphire case (section E above), the arbitrator had held that the proceedings were subject to the law of the seat of the arbitration. In the event, the arbitrators in the Libyan cases each took the view that the proceedings were not necessarily subject to the procedural law of the state in which they were held.46

(4) Internationalization 4.36

With respect to the law governing the concessions, there was an express choice of law in clause 28(7). Clearly, the aim of this clause was to remove the concessions from the control of Libyan law and subject them to a non-municipal legal system. The arbitrators had to examine whether the parties could actually do this, and noted the various authorities that supported internationalization, such as the Lena Goldfields, Aramco, and Sapphire cases.47 Although there were differences of opinion about the meaning of the clause, all three arbitrators agreed that it had the effect of removing the concessions from the automatic application of the law of Libya. The latter played a role, particularly with respect to day-to-day matters that affected the concessions. Indeed, the arbitrators were required to decide any dispute by first applying those principles common to Libyan law and public international law and only then, if no common principles existed, were required to apply the general principles of law.48 However, all three arbitrators made it clear in their awards that the core provisions of the concessions, the guarantees to the companies, had been removed from the ambit of the law of Libya. In this respect, Libya was not able to abrogate these safeguards by legislation unless it was permitted to do so by public international law or by the general principles of law.

4.37

In the TOPCO case, the sole arbitrator held that clause 28(7) was primarily a matter of choice of public international law, while the BP arbitrator held the same clause was a choice of the general principles of law. In TOPCO, the concept of internationalizing the contract was clearly stated. A private party has an international capacity and contracts between states and private parties can be internationalized by making them subject to public international law or international arbitration. However, the character of the contract itself could also be, and

45 This view was later supported by a decision of the ICJ: Case concerning the United States Diplomatic and Consular Staff in Teheran [1980] ICJ Rep 3 at 26–27. 46 See the discussion of this in Greenwood, C. (1982) ‘State Contracts in International Law: The Libyan Oil Arbitrations’, BYIL 53, 2 at 34–39. 47 At the time the general principles of law had been applied to state contracts in five other arbitral awards: the Electricity Companies case (1925) (see note 5 above); Société Rialet v Government of Ethiopia (1928–29) Recueil des décisions des tribunaux arbitraux mixtes 8 742; Petroleum Development Ltd v Sheikh of Abu Dhabi (1951) 18 ILR 144; Petroleum Development Ltd v Ruler of Qatar (1951) 18 ILR 161, and Ruler of Qatar v International Marine Oil Co Ltd (1953) 20 ILR 534. However, even at the time this authority was ‘far from conclusive’: Greenwood (1982) at 42 et seq. It was ‘open to argument that the strength of opposition to the internationalization of contracts was such that a new norm of international law was emerging which precluded that possibility’ (at 43). 48 53 ILR 297 at 329; 389 at 441–442; 62 ILR 140 at 173.

F. The Libyan Cases 155 in this case was, international in both economic and legal senses: in the former, because it involved the interests of international trade and in the latter sense, because it included factors connecting them to different states. This was, in fact, ‘the first arbitral or judicial decision expressly to adopt the theory that public international law may be chosen as the proper law of a state contract’.49 This is probably the clearest statement of the idea that state contracts may be internationalized, and remains a controversial view.50 It should not be forgotten however that the parties have agreed to the introduction of clauses providing for the settlement by arbitration of disputes such as these with a view to removing the disputes from the jurisdiction of domestic courts, whether in the host state or that of the investor’s state, and indeed courts in other states in which action may be brought as a result of forum shopping. The purpose of the parties was not to settle applicable law issues. The sole arbitrator in LIAMCO took what most would now consider a reasonable interpretation and held that the governing law of the contract was the law of Libya but the clause excluded any part of that law which was in conflict with the principles of international law.51 The latter concept was to be applied in accordance with Article 38 of the Statute of the ICJ. Such principles include the sanctity of property and contracts, respect for acquired or vested rights, a prohibition of unjust enrichment, and the obligation to pay compensation for expropriation. This was not the first time that an arbitral tribunal had considered the possibility that a concession might be internationalized. In the Lena Goldfields case, considered above, the tribunal held that the concession was subject to the general principles of law as far as the contract provisions safeguarding Lena’s interests were concerned. In Aramco, the tribunal followed this decision. The concession was held to be subject to both Saudi Arabian law and the general principles of law. In the Sapphire case, the arbitrator held that the general principles of law applied to a prospecting agreement between the NIOC and the Canadian investor, and not Iranian law alone. Much earlier, in 1925, there was also the Electricity Companies case, in which the tribunal considered a contract between the government of Greece and several electricity companies. It lacked a choice of law clause but there was clearly an intention by the parties to internationalize the contract. It held that the contract was governed by general principles and Greek law, and its reasoning relied heavily upon the contractual provisions themselves.52

4.38

The TOPCO approach to internationalization of contracts proved influential in another arbitral award in which a stabilization clause was involved. In Revere Copper Inc v OPIC (Revere), the tribunal had to determine the proper law of an agreement between the Jamaican government and an American company, Revere Copper and Brass Inc (Revere Copper).53 The agreement did not contain a choice of law clause or an arbitration provision, but it did contain

4.39

49 Greenwood (1982) 48: he adds at 50: ‘The most significant feature of the award is the decision that a state contract may be removed from the automatic application of the local law by means of a reference to a non-municipal legal system.’ This is supported in the Lena Goldfields, ARAMCO, Sapphire, and the BP and LIAMCO cases, but also by state practice and the recognition given to it by UN Resolution 1803: GA Resolution 1803 (XVII) of 14 December 1962. However, this need not lead to an acceptance of the position that a state contract might be internationalized without such an express choice of law in the contract. 50 For example, the comments by Higgins in Higgins, R. (1983) ‘The Taking of Property by the State: Recent Developments in International Law’, Collected Courses of the Hague Academy of International Law: Recueil des Cours 176, 313, Leiden: Brill . 51 Compare the pragmatic approach of ICSID Art 42(1) which provides that in the absence of an agreement by the parties ‘the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable’. 52 The case has not been reported but see the account in Weil, P. (1969-III) Recueil des Cours 128, 169. 53 17 ILM (1978) 1321; 56 ILR 258. However, the claim was not based on whether the host state action violated international law and so merited damages for breach or repudiation of the agreement; the tribunal had to address the issue of whether the host state actions which repudiated the agreement had the effect of directly preventing

156 Chapter 4: The Classic Tests of Contract-based Stability a stabilization clause, which guaranteed that the taxes paid on the company’s bauxite/alumina plant in Jamaica would be unchanged over a fixed period.54 Subsequently, under the Bauxite (Production Levy) Act 1974, the government of Jamaica imposed a tax on bauxite at a rate to be decided from time to time, commencing at 7.5 per cent, but amounting to about 20 per cent between 1974 and 1975. This was part of a series of governmental acts that was alleged to have effectively abrogated the agreement between the host state and the investor, putting an end to the contractual security provided by the agreement. However, the agreement was not terminated. The tribunal, in examining whether the Levy constituted a breach of the agreement, noted that all of the elements found in the TOPCO award to characterize an economic development agreement were found to be present in the Revere agreement. A majority of the tribunal held that the principles of international law were applicable and especially to the guarantee provisions of the agreement in clause 12 (tax stabilization) and clause 20 (security of investment). The characterization of the agreement as an ‘economic development agreement’ was deemed to be sufficient to infer that the parties had intended that the agreement should not be subject to the municipal law of the contracting state. 4.40

This interpretation relied on the suggestion of Professor Dupuy, the sole arbitrator in TOPCO, that the characterization of an agreement as an economic development agreement was sufficient to infer that internationalization was intended.55 This view is difficult to accept. If the parties did not provide a clear indication in the agreement that they intended to restrict the state’s exercise of its sovereignty, it involves taking a large step to conclude that the restrictions which an internationalized contract entails on a state can nonetheless be inferred. In the Revere case, the majority noted that the fact that the investment made under the agreement had been insured under the Overseas Private Investment Corporation (OPIC)56 was a factor indicating internationalization.57 However, more explicit evidence surely needs to be found in the agreement to support the proposition that the intention of the parties was to restrict the state’s capacity to amend or terminate it. A stabilization clause (such as existed in the Revere Agreement) would fulfil that function since its inclusion implies that the state has undertaken not to use some of its sovereign rights. Such a clause, as both the TOPCO and the claimant from exercising effective control over the use or disposition of a substantial portion of its property or from operating that property: 17 ILM (1978) at 1348. 54 17 ILM 1321 at 1332: clauses 12 and 13 stated respectively that ‘No further taxes . . . burdens, levies . . . will be imposed on bauxite, bauxite reserves, or bauxite operations . . .’ and ‘[f]‌or the purposes of taxation and royalties the provisions of this Agreement shall remain in force until the expiry of twenty five years . . .’. Stabilization clauses were also at issue in three Jamaican bauxite cases before ICSID but subsequently settled: (1976) John T. Schmidt, ‘Arbitration under the Auspices of the International Centre for Settlement of Investment Disputes (ICSID): implications of the decision on jurisdiction in Alcoa Minerals of Jamaica Inc. v Government of Jamaica’, Harvard Intl LJ 17, 90–109; see also c hapter 6, para 6.137. 55 53 ILR 389 at 455–457: Professor Dupuy held that characteristics of these agreements included the size of the investment involved; their importance for economic development in the host state and the need for stability of contract to protect the private party and incentivize it. 56 OPIC was established under the US Foreign Assistance Act 1961. The OPIC insurance scheme allows US nationals who have invested in a state from a defined category of developing states with the approval of the government of the host state to insure their investment against expropriatory action and other actions. If an insurance claim against OPIC is successful, the US succeeds to all of the claimants’ rights and claims against the host state. A precondition of such insurance coverage is that the host state must first conclude a treaty with the US in which it undertakes to recognize this transfer of rights to the US government. 57 The majority of the tribunal held that if Revere Copper had succeeded in obtaining compensation from OPIC, the US government would be subrogated to Revere’s rights under the agreement. Greenwood notes: ‘it seems strange to say that the contract was internationalized because the US government would be subrogated to Revere’s rights, when the basis of the tribunal’s decision was that Revere Copper did not possess any rights unless the contract was first held to have been internationalised’: 17 ILM (1978), at 53.

F. The Libyan Cases 157 Revere awards noted, is one of the characteristics of an economic development agreement. However, as one authority has observed, it is this clause more than any other characteristic of an economic development agreement which is ‘the most significant factor from which one may infer that the contract had been internationalized’.58 Without the presence of a stabilization clause in the agreement, it would have been much harder to make the case in Revere for inferring that the contract had indeed been internationalized.

(5) States can bind themselves by contract All three arbitrators held that Libya had undertaken binding obligations in the concessions, and had violated them.59 The concessions had a contractual character which was underscored by the stabilization clauses. Such clauses were to be interpreted according to the laws and regulations in force at the time of the concession award, and no amendments were to be made without the company’s consent. In the LIAMCO case, Dr Sobhi Mahmassani concluded that the form and style of the concessions, and especially their stabilization provisions, demonstrated that the parties had intended to enter into a largely contractual arrangement. Indeed, the stabilization clause strengthened its contractual character as a precaution against the fact that one of the parties was a state. The principle of pacta sunt servanda was common to both Libyan and international law and applicable to the LIAMCO concessions.

4.41

It was not left in doubt that the arbitrators considered that the state had the power to bind itself by contract. In the TOPCO case, the arbitrator decided that a state may contract not to exercise its power of nationalization at all in respect of a particular enterprise for a limited period of time. Professor Dupuy, the sole arbitrator, held that ‘the undoubted right of a state to nationalize’ could not prevail over a stabilization clause in the contract between the state and the foreign private investor, and was therefore illegal per se, regardless of the issue of compensation. In the LIAMCO case, the arbitrator held that an internationalized contract imposed a restriction on the right of the contracting state to nationalize; compensation was therefore due and had to be assessed in a way that took into account the fact that the nationalization had frustrated the intentions of the contracting parties. The presence of a stabilization clause in a concession may therefore impose a financial limit upon the contracting state’s power of nationalization. However, in contrast to the TOPCO case, the arbitrator did not find that nationalization was contrary to the stabilization guarantee and unlawful per se, but that Libya’s failure to pay compensation was unlawful.

4.42

The TOPCO award has received much attention in this respect, by imposing a major restriction upon a state’s freedom of action. Essentially, Professor Dupuy argued that a state may accept an undertaking, limited in scope and time, not to exercise certain sovereign

4.43

58 Greenwood (1982) at 53. 59 An interesting issue was whether the concessions had survived the breach by Libya. In the BP case, the sole arbitrator took the view that this question was of purely academic interest since it could not be enforced by specific performance. However, if the concession had remained in force BP would have continued to have the exclusive right to extract oil from the concession area and if such oil were extracted by any other party it would become the property of BP. It could claim ownership of individual shipments of oil from the concession area in ‘pursuit’ actions in municipal courts. If the concession had been terminated by the Nationalization Law, such claims to oil extracted after the date of nationalization would be void: Greenwood (1982) at 71–76. By contrast, the sole arbitrator in TOPCO took the view that a repudiatory breach of an internationalized contract gave the innocent party the option of treating the contract as being terminated. If the innocent party chooses to construe the contract as terminated, then that choice continues to bind both parties to the contract.

158 Chapter 4: The Classic Tests of Contract-based Stability rights without abandoning the doctrine of permanent sovereignty over natural resources. He held that: the recognition by international law of the right to nationalize is not sufficient to empower a state to disregard its commitments, because the same law also recognizes the power of a state to commit itself internationally, especially by accepting the inclusion of stabilization clauses in a contract entered into with a foreign private party.60 4.44

The notion that an attribute of state sovereignty is the capacity to enter into binding obligations, rather than a limit on it is one which was present in both the Aramco and Sapphire cases. However, the TOPCO case illustrates this position in relation to the challenge of attracting foreign investment by offering guarantees to the investor. The very purpose of the stabilization and choice of law clauses was an inducement offered to the companies in return for the making of significant economic investments by the companies.61 Without such inducements, the bargaining position of Libya would have been significantly weaker. This had a parallel in the Revere case, where it was argued that the stabilization guarantee provided by the government of Jamaica had proved essential in persuading Revere Copper to obtain bauxite/alumina from Jamaica and to agree to refine it there.62

(6) Compensation 4.45

The only one of the three cases that resulted in an award of damages was the LIAMCO case. The claimant had sought damages as alternative relief to restitutio in integrum (restoration of the conditions applying before the host state intervention). This should cover the lost profits or other economic benefits which the concession would have yielded to LIAMCO over the remaining term of the concession or the producing life of the petroleum deposits lying within the concession. The sole arbitrator ruled out the award of restitution, stating among his reasons that ‘it is impossible to compel a State to make restitution; this would constitute in fact an intolerable interference in the internal sovereignty of States’.63 However, he concluded that Libya had an obligation to compensate LIAMCO for the loss caused by the nationalization, and that such compensation should include ‘as a minimum the damnum emergens, eg the value of the nationalized corporeal property, including all assets, installations, and various expenses incurred’. He awarded the company the full amount of its claim, almost US$14 million, as compensation for physical assets such as plant and equipment. However, with respect to the two concessions, the outcomes were very different and less favourable to the claimant. In the arbitrator’s view, to award lost profits for all future concession reserves from Concession 20 (covering the Raguba field) would be to adopt an extreme evaluation of its prospects. Instead, the test of equitable compensation would be applied to LIAMCO’s expropriated share in the potentially very profitable Raguba field as the appropriate measure of damages. This led to an award of a lump sum of US$66 million as ‘a reasonable equitable indemnification for the nationalization of the concession rights of LIAMCO’s interest in Concession 20’.64 By contrast, the second concession in the LIAMCO claim, Concession 60 17 ILM 1, 24–25 (1978). 61 53 ILR 389 at 450–452. 62 Revere Copper, 56 ILR 258 at 276. 63 LIAMCO, Award, para 268. He is in fact quoting the work of V.S. Friedman, an international law scholar:Friedman, V.S. (1953) Expropriation in International Law, London: Stevens & Sons, 214. 64 LIAMCO, Award, para 354.

F. The Libyan Cases 159 17,65 had not yet produced any oil from the Mabruk field. Arguing that ‘the loss of profits to be taken into consideration must be certain and direct’, factors not present in this part of the claim, and also not realized by the NOC or its concessionaires, the claimed loss ‘seems thus doubtful and not probably realizable’.66 The arbitrator declined to award any indemnification on this part of the claim. The interest rate claimed was at 12 per cent but the arbitrator chose a 5 per cent rate allowed by Libyan law for commercial cases, with an unusual approach to interest, granting it only from the time of the final assessment of damages at the date of the award.67 The award was not paid until 1981, four years later, following attempts by LIAMCO to have the award enforced in various countries (Sweden, France, the US, and Switzerland). LIAMCO had been successful in obtaining orders to make the award enforceable in the courts of the aforementioned European states, but had not been successful in its efforts to have the assets of the Libyan government seized as payment of the award in France and Switzerland.68

4.46

In the BP and TOPCO cases, the parties reached settlements with Libya before the question of damages was considered by the arbitrators. In BP’s case, the settlement in November 1974 awarded BP a sum of £62.4 million in compensation, of which £17.4 million would be paid in cash on conclusion of the agreement, and the remainder was to be set off against outstanding claims by Libya for taxes and royalties due from BP. In TOPCO’s case, the Libyan government committed itself to pay US$76 million to each of the two companies, Texaco and Calasiatic, in the form of crude oil over a period of fifteen months. In return, the companies discontinued both the arbitration proceedings and the actions they had commenced in municipal courts against the purchasers of oil from the concession areas they had lost.

4.47

(7) Assessment The three awards were broadly in favour of the companies, but the approach taken to the stabilization clauses in each case was different. The BP award had little to say about the clause, while the TOPCO award treated this as an expression of the state’s capacity to bind itself, concluding that the expropriation was null and void and that the concession continued in existence. In LIAMCO, the arbitrator found that the expropriation was not contrary to the stabilization clause and so not unlawful, but the refusal to pay compensation was unlawful. All the arbitrators agreed that the concessions were contractual in character, and not unilateral acts of state or administrative contracts.

4.48

There are grounds for viewing the LIAMCO approach as the more in tune with modern notions of state sovereignty. The emphasis on pacta sunt servanda and the state’s capacity to

4.49

65 There was a third concession, Concession 16, but it had not yielded any oil and so no indemnification was claimed on its account by LIAMCO. 66 LIAMCO, Award, at 359. 67 Ibid, at 365–366. 68 von Mehren & Kourides (1981) at n 284 and n 285. The Swiss proceedings are discussed by Delaume, G.R. (1981) 20 ILM 151–60: Switzerland: Decision of the Federal Supreme Court in Libya v Libyan American Oil Company (LIAMCO), which also includes the Decision. The Court rejected the application for attachment on the ground that the Swiss doctrine of immunity from execution (no immunity from suit, no immunity from execution) is qualified by the need for sufficient contact between the underlying transaction and Switzerland. Even if the seat of the arbitration was in Geneva, it was too tenuous a link to meet the territorial test. The Swiss courts declined jurisdiction and refused to permit execution against the assets of Libya.

160 Chapter 4: The Classic Tests of Contract-based Stability bind itself in TOPCO involved giving little or no weight to the context in which the concession operated. The undertakings in the concessions, while limited in both scope and duration, were proving hard to sustain. There were already extensive efforts made by the parties at a renegotiation of terms, sometimes under pressure from the government. For example, in 1965 the government had issued a Royal Decree to the effect that any company that refused to agree to amendments sought in the financial terms of the concessions would not be eligible for future concessions. Increases in posted prices coordinated through the Organization of Petroleum Exporting Countries (OPEC) and in the profits tax had already been made, and at the time of the nationalizations TOPCO and Calasiatic were negotiating further changes in the economic provisions of their concessions to take these into account.69 The overwhelmingly dominant role of oil in the national economy of Libya meant that the element of public interest in the management of this finite resource was very considerable. Although many of the sovereign rights in respect of these concessions had been retained by the state, key ones were not, and the duration of fifty years was already appearing excessively generous by international standards.70 Nonetheless, the Libyan government’s decision to suspend negotiations and nationalize the concessions was held to be a breach of contract. Its refusal to pay compensation was a strong factor in weakening its position even further. 4.50

The three cases underscored the vulnerability of the companies in relying upon contractual undertakings by the host state, in contrast to treaty-based obligations. In such dealings with host states, the investors were in a sense disadvantaged by the economic context from which they came. The companies were based in market or mixed economies in which overseas investment was (and remains) largely a private matter, in contrast to countries with a substantial state sector including internationally operating national oil companies (NOCs). At the time of the Libyan nationalizations, such companies would have been at a disadvantage if they could not rely on contractual guarantees such as stabilization clauses for their investments, requiring instead that they rely upon a treaty made between states. In this respect, the presence of many bilateral investment treaties in the current international investment scene constitutes a major difference with the legal context of these three cases, and in terms of investor protection an enhancement. G. Aminoil

4.51

This dispute concerned a Concession of sixty years’ duration granted by the government of Kuwait71 to the American Independent Oil Company (Aminoil), a company incorporated in the state of Delaware, USA. The case is complex in its facts and in the analysis presented by the tribunal in the award.72 It also had a separate, concurring opinion which raised important concerns about the award. 69 62 ILR 140 at 154 (LIAMCO v Libya); 53 ILR 297 at 320–321 (BP v Libya). 70 These events were behind the criticism of Sole Arbitrator Dupuy’s decision in an editorial comment by Fatouros A.A. (1980) ‘International Law and the Internationalised Contract’, AJIL 74, 134. In his view, Dupuy had not taken into account recent trends in international economic development and confirmed traditional positions of the developed world (ibid, at 139–141). 71 Specifically, it was granted by His Highness Sheikh Ahmed Al Jabir al Sabah, who was the Ruler of Kuwait from 1921 to 1950. 72 The Government of the State of Kuwait v American Independent Oil Co (Aminoil), award of 24 March (1982), reprinted in 21 ILM 976 (1982). A detailed account of the various issues in the case is provided by Redfern, A. (1985) ‘The Arbitration between the Government of Kuwait and Aminoil’, Br Yearbook of International L 55, 65– 110; Hunter, M. & Sinclair, A.C. (2005) ‘Aminoil Revisited: Reflections on a Story of Changing Circumstances’, in

G. Aminoil 161 The Concession was originally granted in 1948 but was amended by the parties in 1961 in a Supplemental Agreement. This modified the financial terms to increase payments to the Ruler of Kuwait, and provided, among other things, that the concession could not be terminated before the end of its term except by surrender or by default. However, in 1977, the concession was terminated by a legislative act of nationalization accompanied by an offer of ‘fair compensation’. Decree Law No 124 of 1977 terminated the contract and at the same time it nationalized the assets and property of Aminoil.

4.52

Initially, there were contradictory approaches to arbitration. Aminoil commenced arbitration under Article 18 of the 1948 Concession, but Kuwait refused to participate, arguing that this had been superseded by the 1961 and 1973 Concessions. Aminoil refused to invoke the arbitration agreement in the 1973 Concession on the ground that it had no legal force. In 1979, the parties agreed to submit their dispute to an ad hoc tribunal in Paris with a view to settling their differences on compensation and damages, and the amounts payable to the government by Aminoil or by the government to Aminoil for outstanding royalties, taxes, or other obligations. The parties recognized that neither the restoration to their previous positions nor the resumption of operations was practicable, and therefore agreed to limit the claims against each other to claims for monetary compensation and/or monetary damages.73 A notable difference between this case and the three Libyan cases discussed in the previous section is that the host government took part.

4.53

(1) The concession terms The tribunal recognized that the stabilization clauses in the Concession were ‘intimately connected with the question of the validity and effect of Kuwait Decree Law [N]‌o 124’, and was of ‘primary importance’.74 There were two stabilization clauses in the Concession, as amended.

4.54

Article 17 of the 1948 Concession contained a stabilization clause as follows:

4.55

The Sheikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in Article 11 [failure to perform obligations, make payments or be in default under the arbitration provisions of the Agreement]. No alteration shall be made in the terms of this Agreement by either the Sheikh or the Company except in the event of the Sheikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement.

The Supplemental Agreement of 1961 contained a clause (Article 11) which stated that this agreement was to be ‘construed as an amendment and supplement to the Principal Agreement’ and ‘all the provisions of the Principal Agreement shall continue in full force and effect except in so far as they are inconsistent with or modified by this [Supplemental] Agreement’. A new Article 11 represented a modification of the existing one and gave the Weiler, T. (ed) International Investment Law and Arbitration, 347, New York: Juris; see also Blackaby, N., Partasides, C., Redfern, A. & Hunter, M. (2009) Redfern & Hunter on International Arbitration (5th edn), Oxford: OUP, 202, para 3.118.

73 74

Art III, para 1. Paras 13 and 11 respectively.

4.56

162 Chapter 4: The Classic Tests of Contract-based Stability Ruler the right to terminate the Concession in the event of a default of Aminoil over its payments, but added: (B) Save as aforesaid this Agreement shall not be terminated before the expiration of the period specified in Article 1 hereof except by surrender as provided in Article 12 or if the Company shall be in default under the arbitration provisions of Article 18. 4.57

Relevant to these clauses was another, rebalancing or ‘adaptation’ clause, included in Article 9 of the Supplemental Agreement. It stated: If, as a result of changes in the terms of concessions now in existence or as a result of the terms of concessions granted hereafter, an increase in benefits to governments in the Middle East should come generally to be received by them, the Company shall consult with the Ruler whether in the light of all relevant circumstances, including the conditions in which operations are carried out and taking into account all payments made, any alterations in the terms of the agreements between the Ruler and the Company would be equitable to the Parties.

4.58

Another issue which arose in the dispute concerned the arbitration agreement. It provided that the law governing the substantive issues between the parties was to be determined by the tribunal, ‘having regard to the quality of the parties, the transnational character of their relations and the principles of law and practice prevailing in the modern world’.75 Kuwait argued for the applicability of the law of Kuwait of which public international law formed a part. The tribunal concluded that the contract could be internationalized but the different sources of law to be applied were not in contradiction with each other. The law of Kuwait was the law ‘most directly involved’ but since public international law constituted an integral part of the law of Kuwait, its general principles were applicable. In practice, the determination of what law was applicable played a far less controversial role in this case than in the Libyan cases discussed in the previous section.

(2) The arguments 4.59

Aminoil argued that the Decree Law of 1977 was first of all a breach of the government’s contractual obligations; it was an illegal act since it was not made for a bona fide public purpose; it constituted discrimination and, further, it offended the general principles of law which constituted ‘transnational law’. The existence of the stabilization clause and the termination of the concession meant that there had been a violation of international law. The concession was governed by transnational law, which it equated with the general principles of law of which respect for acquired rights and pacta sunt servanda formed a part.

4.60

The government of Kuwait argued that the stabilization clause was a ‘colonial-type’ of stabilization clause. It had been superseded by events since it had been agreed to, including the declared independence of the state of Kuwait and the promulgation of a new constitution for the country. In addition, the tribunal should also take note of the current trend in modern international law, reflected particularly in the United Nations General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources (UN Resolution 1803). Moreover, it argued, this concession fell into a category of ‘administrative contract’ which allowed special

75

Aminoil, at para 8, citing Article III.2 of the Arbitration Agreement.

G. Aminoil 163 powers to be reserved to the state, and account of these ought to be taken in interpreting the stabilization clauses.76 In a further line of argument, Kuwait claimed that it was unreasonable to assume that a state could restrict its future legislative freedom for the entire life of the concession. Finally, and most significantly, it noted that there had been major revisions to the concession itself with the agreement of both parties.

(3) Renegotiations: content and conduct There had been several attempts to renegotiate the original and the amended terms, which resulted in various undertakings of a less formal character, particularly an agreement reached in 1973 (which never entered into force). From the government side, there had been pressure to modify the concession with a view to increasing the payments it received from Aminoil. Indeed, Aminoil appeared to be quite prepared to give up its interest altogether if the appropriate amount of compensation could be agreed upon (but it did not prove possible to reach such an agreement).77 This willingness to compromise is easier to understand when it is noted that the operation was carried on under some difficulty caused, by the ‘nature of the ground’ and the chemical composition of the oil. It was described in the award as a ‘high cost, low yield’ enterprise.78 In its submission, Kuwait presented its proposed revision of the concession as not a matter of a supervening fundamental change of circumstances (rebus sic stantibus) within the meaning of Article 62 of the Vienna Convention on the Law of Treaties. The proposed revision was, in its view, not a departure from a contract but reflective of a process of change that could be (and to a limited extent was) brought about by mutual agreement or acquiescence.79 The vehicle for this was Article 9 of the 1961 Supplemental Agreement which acted as an adaptation clause.

4.61

This renegotiation paralleled a wider set of changes in the oil concessions of the Middle East at the time. This concession was a classic example of the traditional concession agreement in which the host government surrendered significant elements of sovereign control to the foreign investor for a very long duration and over a large size of area that appeared anachronistic in the climate of the 1970s. In particular, actions were taken by several Gulf states and a number of large IOCs through the Tehran Agreement of 1971 and the Geneva Agreements in 1972–1973. These applied various OPEC resolutions and provided for significant increases in posted prices and tax payments, while giving the companies certain guarantees as to stabilization, especially with respect to state participation in their operations. In effect, by transforming the existing concession contracts into service contracts they brought a phase of foreign investment in that part of the world to an end. In Kuwait too, over 90 per cent of the petroleum production had already been nationalized by the state by the time the Decree was adopted, and Aminoil was the last wholly private operator in the country. These agreements led to further negotiations between Kuwait and Aminoil, ending in 1973 in a projected revision of the original concession and its 1961 amendment. Prior to ratification,

4.62

76 Other arguments were made (a failure to observe ‘good oilfield practice’ for example) by the parties but they are not relevant here. 77 In June 1977, Aminoil made a proposal under which it would have been taken over by the government and the Council of Ministers in Kuwait endorsed the principle of such a takeover. The factual part of the award notes this and also that the sticking point was the amount of compensation that was to be paid to Aminoil. 78 Paras (xxvi) and (xxxv). 79 This argument was accepted by the majority of the tribunal: para 101.

164 Chapter 4: The Classic Tests of Contract-based Stability further changes were mandated by the government, following increases in posted prices by OPEC in October and November 1973. 4.63

In at least one respect the tribunal’s comments have a contemporary resonance about them. Aminoil argued that the renegotiation of its contract terms had been carried out under duress, which provoked an extensive review by the tribunal of the lengthy negotiations between the parties. In particular, it examined the negotiations between the parties pertaining to the implementation of the so-called ‘Abu Dhabi formula’. A resolution had been adopted by three Gulf states in November 1974 (and subsequently by OPEC in December 1974) to increase royalties to 20 per cent and income tax to 85 per cent of posted prices with immediate effect. The Abu Dhabi formula was an attempt to recover a greater share of the profits accruing to oil companies as a result of the large price increases. Revenues left to the companies were to be predetermined on a fixed basis of 22 cents per barrel, with the effect that the concessions were transformed into service contracts.80 If the formula were to be applied strictly, Aminoil (as a marginal producer of heavy crude oil) might be forced out of business, and hence it sought to negotiate with the government on the return it should receive on its operations.

4.64

The argument about duress failed to convince the tribunal but its extensive review of the conduct of the negotiations by the parties did provoke interesting general comments on how negotiations ought to be carried out.81 Where there is an obligation to negotiate, the tribunal held that there are four general principles that should be observed:82 • the negotiations are to be carried out in good faith as properly understood; • there is to be a sustained upkeep of the negotiations over a period appropriate to the circumstances; • there is to be awareness of the interests of the other party; and • there should be a persevering quest for an acceptable compromise. The tribunal also emphasized that an obligation to negotiate is not the same as an obligation to agree.83 In conducting these negotiations, each of the parties acted within the parameters set by Article 9 of the 1961 Supplemental Agreement and observed the general principles of law. Changes were introduced into the Concession through Article 9 with Aminoil’s consent or acquiescence, reflecting ‘a profound and general transformation in the terms of oil concessions that occurred in the Middle East, and later throughout the world’.84 However, the tempo of such changes accelerated from 1973 onwards, and the nationalization Decree appeared to be an attempt to resolve differences of view between the parties which were proving irreconcilable within the framework of a contractual setting by the methods prescribed by that contract.

(4) The award 4.65

The tribunal drew a distinction between lawful and unlawful nationalization and held that the nationalization act of the Kuwait government was lawful despite the existence of the

80

Aminoil, at 573, para 50. Ibid, at paras 40–70. 82 Ibid, at para 70. 83 Ibid, at para 24. 84 Ibid, at para 97. 81

G. Aminoil 165 stabilization clauses. It was carried out for a legitimate public purpose that was consistent with Kuwait’s overall policy of petroleum resource development, which had as its ultimate goal the complete nationalization of the sector. As a result of negotiations and changes in the concession over the years, the stabilization clauses ‘no longer possessed their former absolute character’. The contract had changed its character over time due to the acquiescence or the conduct of the parties themselves.85 However, the stabilization clauses, while not absolutely forbidding nationalization, did by implication require that nationalization should not have a confiscatory character. In the state’s Decree, a confiscatory element was present and therefore damages were due to Aminoil. Specifically, in relation to the five main arguments made by Kuwait, the tribunal concluded that the ‘colonial’ argument—that the stabilization clauses did not remain binding after Kuwait had ceased to have protected colonial status—did not withstand scrutiny. The provisions of the 1948 Concession had been confirmed in two separate amendments since Kuwait had terminated its special relationship with the UK and the 1961 Constitution contained nothing that precluded the state from entering into such commitments.86

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Nor was there any merit in the claim that permanent sovereignty over natural resources had become an imperative rule of jus cogens that prohibited states from affording guarantees of any kind against the exercise of public authority. The UN Resolution 1803 might well reflect customary international law, but subsequent UN Resolutions did not have the same authority and so the notion of a trend was not sustainable.87 Even if the subsequent UN Resolutions did contain provisions that might be seen as codifying rules that reflected international practice, ‘it would not be possible from this to deduce the existence of a rule of international law prohibiting a state from undertaking not to proceed to a nationalization during a limited period of time’ (emphasis added).88

4.67

The argument based on analogy with the French administrative contract concept was also rejected. International law or general principles of law did not contain a theory of administrative contracts, the tribunal declared.89

4.68

With respect to the argument that a state could not restrict its legislative freedom, the tribunal’s response was mixed. If a state seeks to attract foreign investors by pledging itself not to nationalize their particular investments over a given period of time, in the Tribunal’s view it is free to do so and no rule of public international law prevents it from doing so. Nevertheless, the majority of the arbitrators introduced a qualification to this view by indicating that such a pledge would have to be of limited duration to be valid. In this respect, the concession had already been operational for thirty years and a further thirty-year term, in line with the original agreed period, would not meet this test. In a second qualification, the tribunal held that an undertaking by the state not to exercise its power of nationalization could not be inferred from general language that prohibited unilateral alterations of the

4.69

85 The character of Aminoil as a company had also changed. It had ceased to be owned by a consortium of oil companies, but had become by acquisition the wholly owned subsidiary of an international tobacco company, RJ Reynolds Industries Inc. Its interest in Kuwait was more as a short-term investor ‘than as a long-term partner of the State sharing the same ultimate objectives’: Hunter and Sinclair (2005) at 380. In 1984 it sold Aminoil for US$1.7 billion, indicating a price influenced by ‘a substantial pile of cash and cash-related investments accumulated overseas during its control of the oilfields in Kuwait’s sector of the Divided Zone’ (ibid, at 379). 86 Aminoil, para 90(1). 87 Ibid, at para 90(2). 88 Ibid, at para 90. 89 Ibid, at paras 90, 92. In this the tribunal followed the earlier awards of the Aramco and TOPCO cases.

166 Chapter 4: The Classic Tests of Contract-based Stability terms of the concession or the termination of the concession by either party. To achieve that goal, the language of such a stabilization clause would have to be expressly and specifically directed to that effect. This was not the case with the wording of Aminoil’s stabilization provisions, which were couched in just such general terms. 4.70

Finally, the argument by Kuwait that the context in which the concession was operational had changed in fundamental ways had some success with the tribunal. There had been a shift in the balance of the concession in recent years in favour of Kuwait as a result of negotiations required by Kuwait under the ‘change of circumstances’ clause. These features, according to the tribunal, did not preclude Kuwait from nationalizing Aminoil’s interests.

4.71

The argument made by Aminoil that the taking was discriminatory was dismissed by the tribunal since the Concession held by another company operating nearby, and not affected by the Decree, was quite different in character. The concession was held jointly with the government of Saudi Arabia and the operator had special expertise required by the offshore operation that was not present in Kuwait at the time.

4.72

In short, the stabilization clauses could be read as a prohibition against nationalization but it was not an interpretation which the tribunal chose to accept. It gave three reasons why stabilization clauses were not to be regarded as prohibitions on nationalization. Firstly, a limitation on a state’s right to nationalize ‘would be a particularly serious undertaking which would have to be expressly stipulated for’. It was not. Secondly, the majority noted that it would be expected to ‘cover only a limited period’. Finally, there had been a ‘metamorphosis in the whole character of the concession’ following changes brought about ‘through the play of Article 9, or else as a result of at least tacit acceptances by the Company, which entered neither objections nor reservations in respect of them’.90 As a result, the tribunal held that the purpose of the stabilization clauses was not to prohibit nationalization but rather to prohibit any measures of a confiscatory character which might cause serious financial prejudice to the interests of the company: the stabilization clauses in the concession were interpreted ‘as being no longer possessed of their former absolute character’.91 However, that change was due to the operation of an adaptation clause or Aminoil’s agreement with or acquiescence in unilateral actions of the Government. These were the changes that had brought about a ‘metamorphosis’ in the concession. In spite of that, the existence of stabilization provisions was held to create legitimate expectation of damages and those expectations had to be taken into account by the tribunal.

4.73

In a Separate Opinion one of the arbitrators, Sir Gerald Fitzmaurice, made a number of interesting comments on the tribunal’s award. In his view, changes could only be made within the framework of the continuing concession agreement. There was a clear contractual undertaking not to nationalize but the government had gone ahead and done so. The stabilization clauses aimed to prohibit any measure which terminated the contract before the end of the term and were not limited to confiscatory measures. The test cannot be one of deciding whether the nationalization is confiscatory or not, since every nationalization is exactly that, by definition. In his opinion, the nationalization of Aminoil’s assets was unlawful because it could not be reconciled with the stabilization clauses of a Concession that was still in force at the time of the nationalization itself.

90 91

Award, paras 95 and 97. 21 ILM at 1024.

G. Aminoil 167

(5) Compensation The Aminoil final award provoked much comment on the way it addressed the assessment of compensation when such compensation is due following a lawful expropriation.92 It contains a notable review of the various methods by which expropriated assets may be valued. Indeed, the justification for this lies in large part in the fact that the amounts claimed by the parties were not small. Aminoil had sought to recover US$423 million in overpaid royalties and taxes under the disputed 1973 Agreement, as well as compensation and damages for the termination of its concession amounting to US$2,587 million. While the government claimed a smaller amount, it sought nonetheless a sum of US$32 million unpaid under the financial provisions of the 1973 Agreement; US$90 million under the Abu Dhabi formula, and US$18 million arising from Aminoil’s liabilities to third parties that the government had paid after the nationalization.

4.74

The tribunal distinguished between lawful and unlawful nationalization. A lawful nationalization measure is one that is accompanied by a means for assessing fair compensation to the party whose assets have been taken. Since the Decree contained a provision which charged a Compensation Committee with the task of assessing the amount of compensation that was fair, this test was met, and the measure was lawful. However, this mechanism was superseded by the arbitration agreement concluded by the parties and it was therefore left to the tribunal to decide on the method to be used to assess the level of compensation that was fair. In seeking to identify the rules applicable to a lawful nationalization, the tribunal drew on the terminology used in Article 4 of UN Resolution 1803 and sought to interpret the practical import of ‘appropriate compensation’. This provided only a general standard but it was one that allowed it a measure of flexibility and an equitable response to the parties’ legitimate expectations, and also to take into account the stabilization clauses and the way in which the concession agreement had developed over time. Rather than proceeding in a theoretical manner, it chose to examine all the circumstances of the particular case.

4.75

Rejecting the measure of net book value of the assets, the tribunal opted instead for the monetary equivalent of restituto in integrum for the replacement value of the assets and Aminoil’s business as a going concern. This would include an element for lost profits. The stabilization clauses gave rise to a legitimate expectation for the investor which had to be considered. They ‘dissipate all doubts as to the strength of the respect due to the contractual equilibrium’.93 The notion of a contractual equilibrium was important to the tribunal: it involves economic calculations, a weighing of rights and obligations and chances and risks. It gives rise to legitimate expectations. However, the parties’ expectations changed over time and became based on the concept of a reasonable rate of return. The principle of a moderate estimate of profits or a reasonable rate of return constituted its legitimate expectation. The tribunal factored in a reasonable rate of return as a consequence to its assessment of appropriate compensation, but this had to take into account the parties’ new financial commitments entered into in 1973 as well as the impact of the Abu Dhabi formula. Aminoil had, in the view of the tribunal,

4.76

92 See notes above in n 72 but also: Mann, F.A. (1983) ‘The Aminoil Arbitration’, BYIL 52, 213; Teson, F.R. (1984) ‘State Contracts and Oil Expropriations: The Aminoil Kuwait Arbitration’, Va J Intl L 24, 323; and Norton, P.M. (1991) ‘A Law of the Future or a Law of the Past? Modern Tribunals and the International Law of Expropriation’, AJIL 85, 474. 93 Aminoil, at para 159.

168 Chapter 4: The Classic Tests of Contract-based Stability come to accept the principle of a moderate estimate of profits and set the reasonable rate of return at US$10 million a year. 4.77

The tribunal put a value of US$206 million on Aminoil’s investment. Its liabilities to the government were US$123 million, so that the tribunal’s award in favour of Aminoil was US$83 million. However, additional sums were awarded that doubled the amount awarded to Aminoil. The interest payable on the US$83 million was set at 7.5 per cent annually and was compounded. An additional allowance of 10 per cent was made for inflation. As a result, the total amount received by Aminoil was US$179 million, paid within two weeks of the Kuwait government’s receipt of the award. H. The Iran–US Claims Tribunal Cases

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Much has been written about the operations of the Iran–US Claims Tribunal (‘the tribunal’) and its contribution to international law.94 It is a remarkably successful example of a mass claims tribunal, which had issued awards, decisions or orders resolving 3,936 cases as of September 2008.95 Of these claims, 1,052 concerned amounts over US$250,000 and 2,884 claims concerned amounts less than US$250,000. It is also an example (like ICSID) of a tribunal handling mixed arbitrations, that is, arbitrations between states on the one hand and non-state entities, usually corporations, on the other. In contrast to the ad hoc character of the tribunals that figure in all of the cases considered in the sections above, the tribunal is a hybrid or ‘mixed’ body established by the Claims Settlement Declaration,96 with its seat at The Hague, the Netherlands. The tribunal conducts its business according to the Rules of UNCITRAL, as promulgated in 1976,97 subject to modifications by the governments and the tribunal. It was expressly set up to deal with an expected large volume of cases arising from the Iranian Revolution in 1979. Once the bulk of those claims was settled, the tribunal went into a ‘long twilight’; only a few inter-governmental claims were pending by September 2008 (fewer than one hundred).

4.79

It is all the more ironic then that in spite of such an impressive track record and the importance of the international petroleum industry in pre-revolutionary Iran, the tribunal has reached so few decisions on the nationalization of the country’s oil and gas industry. Indeed, there have been only four awards issued by the tribunal that directly concerned this industry: two were partial awards, involving Amoco International Finance Corporation and

94 Book-length contributions include Gibson, C.S. & Drahozal, C.R. (2007) The Iran–United States Claims Tribunal, Oxford: OUP. ; Brower, C.N. & Brueschke, J.D. (1998) The Iran–United States Claims Tribunal, Leiden: Martinus Nijhoff; Aldrich, G.H. (1996) The Jurisprudence of the Iran–United States Claims Tribunal: An Analysis of the Decisions of the Tribunal, Oxford: OUP. A critical assessment of the Tribunal’s influence on the international law on expropriation is provided by Rajput, A. (2015) ‘Problems with the Jurisprudence of the Iran–US Claims Tribunal on Indirect Expropriation’, ICSID Review-FILJ 30, 589–615. The Tribunal website contains the basic documents: . 95 Private claims had to be filed with the Tribunal by 19 January 1982, so their number is finite. There were however also claims made by the respective governments against the other, mostly by Iran. Approximately 800 claims were dismissed. 96 (1981) 20 ILM 230. The Tribunal consists of nine members. Three are appointed by each Government and a further three are appointed by the six Government-appointed members. 97 The Rules had only recently been adopted when the tribunal’s work began, so its awards included significant interpretations and applications of those Rules: see the influence in the comprehensive text on UNCITRAL by Caron, D.D. & Caplan, L.M. (2013) The UNCITRAL Arbitration Rules: A Commentary (2nd edn), Oxford: OUP.

H. The Iran–US Claims Tribunal Cases 169 a group of IOCs including Mobil Oil and Exxon (usually known as the ‘Consortium cases’);98 another was a final award, involving Phillips Petroleum; a fourth award concerned SEDCO, a US company with a controlling interest in a drilling rig company.99 In their study of the work of the tribunal, Charles Brower and Jason Brueschke explain this by reference to the highly political character of the industry in the Middle East and by noting ‘the apparent desire of large international oil companies to settle their differences with Iran to facilitate their re-entry into the Iranian market’.100 The other claims arising out of the Iranian nationalization were resolved by awards on agreed terms following settlement agreements reached between the parties. There were more than eighteen such settlements, involving such familiar names as Exxon, Mobil, Amoco, Texaco, Arco, and Chevron.101 By far the largest amount involved in these settlements was that concerning the claims of the Amoco Iran Oil Company, amounting to US$540 million.102 The central role of the petroleum industry in the overall strategy of the new government in 1979 was beyond doubt. One of its key objectives was to wrest control of the domestic oil industry from the IOCs. The legal instrument used for doing so was the Single Article Act Concerning the Nationalisation of the Oil Industry of Iran on 8 January 1980. Under this Act: [a]‌ll oil agreements considered by a special commission appointed by the Minister of Oil to be contrary to the Nationalisation of the Iranian Oil Industry Act shall be annulled and claims arising from conclusion and execution of such agreements shall be settled by the decision of said commission.103

Foreign investors in the oil and gas industry were already well entrenched before the revolution and had expectations of high returns on their investments, so large sums were involved.

98 The awards were both issued on the same day by Chamber Three of the tribunal, and concerned Amoco International Finance Corporation and The Government of the Islamic Republic of Iran, Partial Award No 310-56- 3 (14 July 1987), reprinted in 15 Iran–US Cl Trib Rep 189, and the ‘Consortium Members’: Mobil Oil Iran Inc; San Jacinto Eastern Corporation, Arco Iran Inc and Exxon Corporation: Mobil Oil Iran Inc and Government of the Islamic Republic of Iran, Partial Award No 311-74/76/81/150-3 (14 July 1987), reprinted in 16 Iran–US Cl Trib Rep 3. 99 Phillips Petroleum Company Iran and The Islamic Republic of Iran, Award No 425-39-2 (29 June 1989), 21 Iran–US Cl Trib Rep 79. This case was subsequently settled by an award on agreed terms: Phillips Petroleum Company Iran and Government of the Islamic Republic of Iran, Award on Agreed Terms No 461-39-2 (10 Jan 1990), reprinted in 21 Iran–US Cl Trib Rep 285; Sedco Inc v NIOC, Award No ITL 55-129-3 (28 October 1985) (see chapter 6, para 6.95 fn 146). The latter case concerned compensation for alleged expropriation of SEDCO’s shareholder interest in a local drilling company, and had no stabilization element in it. Two further awards resulted: Award No ITL 59-129-3, 27 March 1986, and Award No 309-129-3. 100 Brower & Brueschke (1998) at 420. 101 At the same time, it should be noted that the tribunal presented US companies with a significant advantage over their non-US counterparts in pressing claims against Iran. The Security Account mechanism established under Point 7 of the General Declaration (1981) ensured that claims made against Iran under the Claims Settlement Agreement were met promptly. If the amounts in that Account fell below US$500 million, Iran had to promptly make new deposits. This was an important incentive for the principal US oil company investors to engage with the tribunal, even though they were often able to reach a settlement before a final award. 102 Amoco Iran Oil Company and The Government of the Islamic Republic of Iran, Award on Agreed Terms No 480-55-2 (15 June 1990), reprinted in 25 Iran-US Cl Trib Rep 301. Brower and Brueschke list 17 other Awards on Agreed Terms with IOCs, ranging from US$130,450,000 awarded to Sun Company Inc to US$1,501,862 awarded to Chevron Research Company; in one case, involving Exxon, the amount of the settlement was undisclosed: Brower & Brueschke (1998) at 420, n 1978. 103 In an interesting historical resonance here, the words ‘Iranian Oil Industry Act’ referred to a law dated 5 May 1951 which allowed the then Prime Minister Dr Mosaddegh to nationalize the Iranian oil industry, a measure subsequently reversed after a Western-sponsored coup d’état.

4.80

170 Chapter 4: The Classic Tests of Contract-based Stability From the Iranian side, the claims were sensitive since they impacted upon the new regime’s approach to sovereignty over the country’s natural resources. 4.81

In the sections below, the three cases that were the subject of awards are considered to the extent that the claims are of relevance to the subject matter of this book. In each case, the existence or otherwise of stabilization clauses in the respective contracts was considered by the tribunal; the issue had implications for the lawfulness of the act of nationalization. In the first two cases, the tribunal considered whether the claimant’s contractual rights to participate in oil and gas ventures had been taken by Iran. In Amoco International Finance Corporation v the Islamic Republic of Iran (hereinafter Amoco International Finance), the tribunal held that a taking had indeed occurred. In the second case, Mobil Oil Iran Inc and Iran,104 the tribunal held that the parties had by mutual agreement agreed to substitute a new agreement for the contract at issue: there was therefore no taking involved. The third case, Phillips Petroleum Company Iran v the Islamic Republic of Iran, involved an alleged taking of the claimant’s interest in a joint venture agreement. The tribunal held that a de facto taking had occurred.

(1) Amoco International Finance 4.82

In Amoco International Finance, the question arose of whether contract rights constitute property for the purposes of compensation for an expropriation. The tribunal was obliged to consider the presence of stabilization clauses in the contract, which had been concluded in 1966 under the laws of Iran. It concerned a 50–50 joint venture between Amoco International Finance Corporation (Amoco IFC) and the National Petrochemical Company (NPC) called Khemco. The Khemco Agreement called for the construction and operation of a plant for the production and marketing of sulphur, natural gas liquids, and liquefied petroleum gas derived from natural gas. Khemco was to be jointly operated and managed by the joint venture parties. The agreement was implemented, and the gas processing plant was completed in 1970. However, on 24 September 1980, the Minister of Petroleum served notice on Amoco IFC that the Khemco Agreement had been declared null and void by the Special Commission established under the Single Act. As Brower and Brueschke note, the tribunal ‘did not preclude the possibility that a state may bind itself contractually in a particular case not to exercise its generally recognized right under customary international law to nationalize property’.105 However, a contractually binding waiver of the right to nationalize required ‘a particularly serious undertaking which would have to be expressly stipulated for and be within the regulations governing the conclusion of state contracts; and it is to be expected that it should cover only a relatively limited period’.106 It would be ‘particularly adventurous’ to construe a contractual provision to which a state is not a party as one that precludes nationalization. In this contract, the Iranian party was the NPC. Expropriation could not be ‘characterized as unlawful as a breach of contract, since Iran, the expropriating state, was not a party to the Khemco Agreement and, therefore, not bound by any stabilisation clause allegedly contained [therein]’.107

104 Award No 425-39-2 (29 June 1989), 21 Iran–US Cl Trib Rep 79. 105 Brower & Brueschke (1998) at 501. 106 Amoco International, at para 243 (quoting Aminoil at 1023). Amoco’s contract was of thirty-five years’ duration, but the tribunal did not state whether this would qualify as a ‘limited period’. 107 Amoco International, at paras 243–244.

H. The Iran–US Claims Tribunal Cases 171 The tribunal had already rejected Amoco IFC’s argument that the Khemco Agreement contained two stabilization clauses (and that the conduct of Iran in terminating the agreement had violated these clauses).108 The first of these was set out in Article 30.2 and applied to current laws and regulations in force at the time the contract was signed. The tribunal held that this provided no guarantee for the future and simply affirmed the validity of contractual clauses inconsistent with Iranian laws and regulations. It was not a stabilization clause ‘in the usual meaning of the term’. A stabilization clause

4.83

normally refers to contract language which freezes the provisions of a national system of law chosen as the law of the contract as of the date of the contract, in order to prevent the application to the contract of any future alterations of this system.109

This clause applied only to the provisions of any current laws and regulations and referred only to those in force at the time the agreement was signed. It provided no guarantee for the future. Indeed, it had to be read in conjunction with Article 2, which referred to the grant of facilities and privileges conferred by specific government acts and included the condition that any future amendments to those acts would also apply. The intention appeared therefore to be quite the opposite of that of a stabilization clause. The second clause, contained in Article 21.2, provided that no measures could be taken to annul, amend or modify the contract unless by mutual consent.110 The tribunal held that this created a principle of interpretation and implementation of the contract in a cooperative manner but did not bind the government of Iran because the government was not a signatory to the contract. It was not a stabilization clause. In the tribunal’s view, any contractual limitation on a state’s right to nationalize must be expressly stipulated, must be within the state’s regulatory powers and should cover only a relatively limited period. Since there were no stabilization clauses as such, the contract could not prevent nationalization, and any nationalization would not therefore be unlawful. Even if there had been a stabilization clause in the agreement, Iran as the expropriating state was not a party to the agreement and therefore not bound by it.

4.84

The tribunal’s analysis of the two clauses appears puzzling in relation to the clauses treated as stabilization clauses by the tribunals in the TOPCO and Aminoil cases. In the three Libyan cases, the government was a party to the agreements while Iran was not a party to the Khemco Agreement. As the analysis below suggests, this has no material consequences. In Aminoil, the tribunal declined to support the stabilization clauses, partly due to the length of the contract (sixty years, while the Khemco Agreement had a minimum term of thirty-five years). It contained a renegotiation clause while the Khemco Agreement did not, implying that stabilization over the full term was envisaged through Articles 21(2) and 30(2).

4.85

The tribunal’s decision involved the recognition that NPC and not the state per se was a party to the contract. Yet, it had also found that NPC, like NIOC, had acted as an instrument of the Iranian government when it took the claimant’s interest. In the case of Phillips Petroleum Co v The Islamic Republic of Iran (Phillips Petroleum, discussed below), it had also held that acts of

4.86

108 Amoco International, at paras 239–241. See Concurring Opinion of Judge Brower, which argued that the agreement did contain a stabilization clause and so ‘the expropriation here was contrary to an undertaking by Iran to stabilize the Khemco Agreement’ and was therefore an unlawful act. 109 Amoco International, at para 239. 110 ‘Measures of any nature to annul, amend or modify the provisions of this Agreement shall only be made possible by the mutual consent of NPC and AMOCO.’

172 Chapter 4: The Classic Tests of Contract-based Stability NIOC should be attributed to the government of Iran for the purposes of deciding whether an expropriatory taking had occurred. NIOC was vested under Iranian law with ‘the exercise and ownership rights of the Iranian nation and the Iranian Petroleum Resources’.111 NIOC was therefore acting in its capacity as a state agent when it interfered with the claimant’s property interests. The tribunal also noted that international law recognizes that a state may act through entities that are not part of its formal structure. Article VII, Paragraph 2 of the Claims Settlement Declaration expanded the customary definition of a state to include entities controlled by the state, as well as political sub-divisions. In this context, it would be reasonable to conclude that Iran had legal obligations to the claimant in relation to the agreement. This is evident in Article 2(2) which states that once the agreement is ratified by the relevant committees of the Iranian Parliament, ‘such ratification shall be considered acceptance by the Government of all obligations of the Government’. As Judge Brower noted in his Concurring Opinion, this grant is general and without any specific reference. So, while Iran is not mentioned in Article 30 of the agreement, its second paragraph below binds the government: The provisions of any current laws and regulations which may be wholly or partly inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency, be of no effect in respect of the provisions of this Agreement.

Iran would therefore have been in violation of its obligations if it had not permitted the agreement’s provisions to prevail over inconsistent provisions of Iranian law prevailing at the time. Similarly, the lack of an express mention of Iran in Article 21(2) does not mean it is not equally bound; in this case, bound not to expropriate or annul the Khemco Agreement. Only the government had the power to apply measures that could annul the Agreement, and ‘measures’ typically imply sovereign acts, as in the Claims Settlement Declaration’s reference to the jurisdiction of the tribunal as covering ‘expropriations or other measures affecting property rights’. The two Articles formed part of a scheme in which Iran bound itself to ensure that the agreement was fully valid and that it would remain so. The award only avoids this conclusion, in Brower’s view, by ‘an overly literal, crabbed reading of the Articles in question’.112 It is a very persuasive argument that leads to the conclusion that the expropriation was contrary to an undertaking by Iran to stabilize the Agreement, and was therefore an unlawful act.

(2) The Consortium Cases 4.87

The Consortium Cases113 also involved an oil nationalization where a stabilization clause was present in the agreement. The Consortium of IOCs had reached an agreement in 1953 to purchase Iranian oil at favourable prices until 1979 and retained an option to extend the agreement for a further fifteen years at its discretion. The Consortium was required to operate the oil industry in Iran on behalf of NIOC. It was by far the largest Iranian oil producer. Following the changes initiated by OPEC in price setting and the advent of participation agreements in the Persian Gulf states, Iran negotiated a new twenty-year agreement with 111 Phillips Petroleum (see note 99 above) at 89 n 22. 112 Amoco International, Concurring Opinion at para 12. 113 Mobil Oil Iran Inc and Government of the Islamic Republic of Iran, Partial Award No 311-74/76/81/150-3 (14 July 1987), reprinted in 16 Iran–US Cl Trib Rep 3.

H. The Iran–US Claims Tribunal Cases 173 the Consortium in 1973: the Sale and Purchase Agreement (SPA), which terminated and replaced the original agreement. In 1979, NIOC and the Consortium began negotiations on an agreement to terminate the SPA but these failed to produce an agreement and in January 1980 the Single Article Act was adopted, authorizing the nullification of contracts in the oil industry. The Special Commission established under this Act nullified the SPA and informed the Consortium in 1981. Eleven claims were filed with the tribunal based on alleged breaches, repudiation, and expropriation of the SPA on the part of NIOC and Iran. However, in the course of the proceedings seven of these were settled. The claimants argued that the alleged expropriation was unlawful because, inter alia, it breached a contractual provision (the stabilization clause) in apparent violation of Iranian law. Article 29 of the SPA read: ‘The termination before expiry date or any alteration of this Agreement shall be subject to the mutual agreement of the Parties.’ This was followed in Article 30A which stated that ‘[t]‌he term of this Agreement shall be twenty years from the Effective Date’. The legal responsibility of Iran for the SPA and NIOC’s role was also clear. The recitals stated that the SPA was ‘made by and between IRAN (acting through the Imperial Government of Iran)’ as well as NIOC and the claimants. Article 26B stated that ‘Iran hereby guarantees the due performance by NIOC of its obligations under the Agreement and related arrangements’. On their view, an unlawful expropriation of property interests had taken place. However, the tribunal found that no expropriation had occurred and so did not need to pronounce on the issue of whether or not the stabilization clause had been violated.114

4.88

In his concurring opinion, Judge Brower took a different view of Article 29, noting its significance for the relationship between stabilization and compensation.115 In his view, a comparison between the relevant parts of the SPA and the stabilization provisions considered by other tribunals at the time revealed similarities. They concluded that contractual provisions such as these ‘preclude a sovereign during the stated period from exercising the rights it otherwise possesses under international law to take an alien’s property for a public purpose, and without discrimination and for a just compensation’.116 Indeed, the wording in the SPA was similar to that in the TOPCO case where the tribunal found it sufficient to render unlawful Libya’s nationalization of a concession during its term. The only two awards at that time that failed to find nationalization incompatible with stabilization clauses nevertheless granted compensation which included some element of lost profits (the Aminoil and LIAMCO cases). Since the duration of the SPA was modest (twenty years in contrast to Aminoil’s sixty-year term) and concluded at a time (1973) when nationalization was entirely likely in the near future, it was reasonable to conclude that the parties had envisaged it should foreclose nationalization as a lawful course until 1993. His conclusion was that Iran and the NIOC were in material breach of the SPA and that the claimants’ property was unlawfully expropriated in 1979 in spite of its agreement to stabilize the SPA for the prescribed period. This did not affect the amount due the claimants, since the same was sought whether Iran’s actions were lawful or unlawful. However, if the claimants had sought a higher amount of compensation than the amount they claimed, this argument would have supported it.

4.89

114 115 116

Ibid, at paras 128–131. Concurring Opinion of Judge Brower, paras 8–16. Ibid, at para 10.

174 Chapter 4: The Classic Tests of Contract-based Stability

(3) Phillips Petroleum 4.90

On 17 January 1965, Phillips Petroleum, a US corporation (with AGIP of Italy and ONGC of India) (hereinafter Phillips Petroleum), signed a Joint Structure Agreement (JSA) with the NIOC to explore and exploit four blocks on the Persian Gulf. As required by the 1957 Petroleum Act, the JSA was approved by the Council of Ministers in the government and then by the Iranian Legislature, which enacted a law approving the JSA in February 1965, along with four other contracts between the NIOC and various other companies. The JSA entered into force on 13 February 1965.

4.91

As of 1 November 1974, the royalty stood at 20 per cent and tax at 85 per cent. Under Article 37(3), measures of any nature to annul, amend or modify the provisions of the JSA were only possible with the consent of the parties. However, the fiscal terms were amended several times. The Iranian Revolution occurred in 1978–1979, and on 29 September 1979, the claimant was informed that the JSA had been terminated, and Phillips Petroleum was no longer able to take delivery of oil. The claimant argued that its rights had been expropriated under the JSA and filed for damages for breach and repudiation of the JSA. The respondent’s defence was that force majeure had taken place.

4.92

The respondent’s force majeure defence was ultimately rejected, and the tribunal held that Iran had violated its obligations under the Treaty of Amity.117 While a stabilization clause was present in the JSA, the tribunal declined to address its significance. As such, the tribunal elected not to decide ‘whether the taking was unlawful, for instance, as violative of stabilization clauses or for any other reason’, on the ground that ‘whatever the relevance of that question as a matter of customary international law, it is irrelevant under the Treaty of Amity’.118

4.93

However, the stabilization clause had implications for the amount of compensation that could be calculated. Indeed, in his concurring opinion, Judge Aldrich noted that since the stabilization provision ‘would not be thought to have lost all effectiveness’, this factor combined with others, led him to conclude that the claimant should have received compensation for its JSA interests at a much higher level than the tribunal had determined. In its award, the tribunal made several comments on the valuation methods that were available for revenue-producing oil and gas assets. In terms of valuation method, it was one of the first investor–state cases to consider that the discounted cash flow (DCF) method, on which Phillips had valued its interest in the JSA, should be used to determine the fair market value of the contract rights that had been taken by Iran. This would calculate the claimant’s prospective net earnings over the term of the JSA and discount them to give their value at the date of the taking, drawing on a discount rate to take into account the perceived risks. The tribunal noted that the DCF valuation was ‘not an exclusive method of analysis and that all relevant considerations must be taken into account’.119 Relevant considerations included (1) the quantity of recoverable oil; (2) the probability of recovery; (3) the forecasts for oil prices; and (4) the costs of production. By contemporary standards, the tribunal’s approach

117 The Treaty of Amity was concluded between Iran and the United States. Its full title is Treaty of Amity, Economic Relations and Consular Rights Between the United States and Iran, signed on 15 August 1955, and entering into force on 16 June 1957, 284 UNTS 93; VIII United States Treaties and Other International Agreements No 3853, part 1, 899–914. 118 Phillips Petroleum, Award No 425-39-2 (29 June 1989), para 109; reprinted in 21 Iran–US Cl Trib Rep 79. The Treaty of Amity was concluded with the United States. 119 Phillips Petroleum, Award, at 113.

H. The Iran–US Claims Tribunal Cases 175 was unusual. Instead of analysing in considerable detail the DCF model proposed by Phillips or doing so with the assistance of a tribunal-appointed expert, it chose ‘to determine and identify the extent to which it agrees or disagrees with the estimates of both Parties and their experts concerning all of these elements of valuation’.120 It disagreed with several of Phillips’ assumptions, including the proposed discount rate of 4.5 per cent, which it thought was far too low. It did not take into account, the tribunal held, several key risks: first, the risk that not all recoverable oil might, as a practical matter and for various reasons, be produced during the remaining years of the JSA; second, the risk that world oil prices during the remaining term of the JSA might prove lower than during the range foreseen; and third, the risk of coerced revisions of the JSA in the future that would reduce its economic benefits.121

Holding that the real risk was ‘substantially’ higher than Phillips had claimed, the tribunal set a fair market value at US$55 million, thereby awarding only a fraction more than a third of the US$159.1 million sought by the claimant. 122

(4) Compensation Since both the Consortium Cases and the Phillips Petroleum cases did not discuss the relevance of the stabilization clause present in the agreement, the only clear statement on stabilization clauses from the tribunal is the one in the Amoco International Finance case, in which it confirmed that a clear and express stabilization clause of a limited duration could be enforceable against a state. It is a small consolation since the effect that a violation of a stabilization clause would have on the lawfulness of a taking was not discussed in the case; the tribunal held that no stabilization clause was present in the Khemco Agreement. The concurring opinions of Judge Brower provide a critique of the tribunal’s analysis of stabilization clauses in relation to the issue of compensation, however.

4.94

The tribunal’s broad approach to the issue of compensation for expropriated assets in Amoco was that deprived parties are entitled to ‘full compensation’ understood as generally equivalent to the ‘fair market value’ of their expropriated property. The practical significance of this view is only clear once it is translated into a quantification technique that in fact results in the award of full value. Differences of opinion developed over the method of valuation to be used: should the value of claimants’ property be based on its status as a ‘going concern’, including elements such as good will and the expectations of future profits? Typically, respondents have argued that the value of a business should be based on the ‘net book’ or ‘break-up’ value of the tangible assets of the company, omitting any compensation for goodwill or expected future profits. The objective of valuation is to determine the full equivalent of the property taken.123

4.95

The extent to which the contract was frustrated by the unusual conditions at the time ensured that the tribunal had to address the role of force majeure (in fact, its role was considered in each of the three cases considered above). The issue of whether a taking had in

4.96

120

Ibid., at 114. Ibid., at 138. 122 Award, at 158. 123 Amoco International, at para 261. 121

176 Chapter 4: The Classic Tests of Contract-based Stability fact taken place was more controversial than it appeared. Civil unrest in Iran began to affect the oil industry as early as 1977 and strikes affected oil production throughout 1978 until oil exports ceased entirely in November 1978. During this period some of the oil companies engaged in negotiations to try to restore commercial operations. In the tribunal’s view, the events of 1978 and 1979 constituted a classic state of force majeure. The force majeure defence was used by Iran in its case against Amoco IFC. According to Iran, the conditions were such that the contract at issue, the Khemco Agreement, had to be terminated. The tribunal rejected Iran’s argument, finding that the effects were only to suspend the performance of obligations and the exercise of rights under the Khemco Agreement. Since the parties continued to negotiate to resolve the situation during the force majeure period, the Agreement survived the force majeure conditions, and as a result the legislative act constituted an expropriation of the claimant’s interests, but a lawful one. 4.97

The definition of force majeure that the tribunal relied on in this and other cases was that first formulated in Gould Marketing, Inc v Ministry of National Defense of Iran: [b]‌y ‘force majeure’ we mean social and economic forces beyond the power of the state to control through the exercise of due diligence. Injuries caused by the operation of such forces are therefore not attributable to the state for purposes of its responding for damages. Similarly, as between private parties, one party cannot claim against the other for injuries suffered as a result of delays in or cessation of performance during the time force majeure conditions prevail, unless the existence of these conditions is attributable to the fault of the Respondent party.124

This definition leads to a rule of non-responsibility due to force majeure conditions unless the conditions are ‘attributable to the fault of the Respondent party’. However, in Amoco and elsewhere in the Tribunal’s jurisprudence force majeure was never accepted as a valid defence to a claim of expropriation.125 4.98

This illustrates some of the complexities involved in arguing that a taking had occurred. On a number of occasions the tribunal examined whether a breach of the terms of a contract in the process of an expropriation has the effect of transforming an otherwise lawful taking into an unlawful one; usually, this issue arose in cases involving Iran’s nullification of various petroleum agreements. I. AGIP v Congo

4.99

An Italian company, AGIP, had entered into an oil distribution agreement with the government of the People’s Republic of the Congo (Congo) in January 1974 involving the sale to the Government of shares representing 50 per cent of the capital of AGIP (Brazzaville) SA (hereinafter AGIP Brazzaville), a company in which AGIP owned 90 per cent of the shares. In return, the Government agreed to guarantee part of AGIP Brazzaville’s liabilities and its right to supply petroleum products to public entities. The wider context was one in which the Congolese government was in the process of nationalizing the oil and oil products industry. The compromise approach adopted in this agreement was presumably thought likely

124 125

Gould Marketing Inc v Ministry of Defence, Award No 136-49/50-2, 6 Iran–US Cl Trib Rep 153. Brower & Brueschke (1998) at 471.

I. AGIP v Congo 177 to insulate AGIP Brazzaville from these wider events. It contained several stabilization clauses and an arbitration clause. Following a number of operational difficulties, in April 1975 the President of the Congo ordered the nationalization of AGIP Brazzaville. The latter’s headquarters and offices were occupied by the army and all its assets, documents, files, and accounting records were seized, so that it was unable to manage its affairs. AGIP filed an application for arbitration in 1977.126 In 1978, the parties made an effort to settle the matter amicably, following a government Order that revoked the refusal to pay compensation contained in the Nationalisation Order of 1975, but the negotiations proved unsuccessful. In its claim, AGIP relied upon the guarantees of stability in its agreement with the Congo. Firstly, there was Congo’s guarantee of stability for the subsidiary’s legal status in its contractual undertaking ‘to adopt appropriate measures to prevent the application to the Company of future amendments to company law affecting the structure and composition of Company bodies’.127 Secondly, there was the undertaking in Article 4 of the agreement not to apply certain laws and decrees as well as ‘any other subsequent law or decree that aims to alter the Company’s status as a limited liability corporation in private law’.128

4.100

AGIP’s claim was not only for compensation for nationalization of its subsidiary, but also for damages for losses resulting from all of the contractual obligations not performed by the government. The tribunal considered that AGIP’s claim was justified since not only was there an act of nationalization but also a series of repudiations by the government of its contractual undertakings, which were quite distinct from the nationalization itself. However, while there was constitutional protection of private property in the Congo, this ‘cannot be regarded as depriving the Congolese State of the right that it possesses as a sovereign State to nationalize’, since other provisions of the Constitution permit such actions when, for example, ‘the general interest so requires’ in Article 33. The Order to nationalize was justified in terms of the damage that was being done to the Congolese state as a shareholder in AGIP Brazzaville. The fact that the state was nevertheless a shareholder in the company it nationalized could not in itself justify the conclusion that the step of nationalization was not taken in the general interest of the national community for which it is responsible (as AGIP tried to argue). In international law too, ‘there can nowadays be no doubt concerning the right of a State to nationalize’.129

4.101

The ICSID tribunal observed that the nationalization option was not the only or necessarily the most appropriate course of action for the government to achieve its goals. The state had a contractual relationship with AGIP, which under Congolese law obliged it not to unilaterally alter the status of AGIP Brazzaville. Moreover, the state ‘was not without responsibility for the economic difficulties experienced by the Company’ and ‘was not legally in a position from the point of view of commercial law to act in such radical fashion against the Company’.130 Rather than take the nationalization measures, it ‘should have respected the

4.102

126 AGIP SpA v People’s Republic of the Congo, ICSID Case No ARB/77/1; Award of 30 November 1979 reprinted from an English translation of the original French text, in 21 ILM 726 (1982). Article 15 of the Agreement stated that any differences arising would be definitively settled in accordance with the ICSID Convention, which Congo had ratified. However, Congolese law ‘supplemented if necessary by any principles of international law shall be applicable’ (cited in para 43 of the Award). 127 Article 11 of the Agreement, cited in the award at para 18. The company’s statutes were fixed for ninety- nine years. 128 AGIP SpA v People’s Republic of the Congo, Award, para 68. 129 Ibid, at para 81. 130 Ibid, at para 78.

178 Chapter 4: The Classic Tests of Contract-based Stability legal procedures available to it’ as a shareholder, called an extraordinary meeting of the company, or requested the courts to pronounce its dissolution. The tribunal held that the Congo had an obligation to perform the contract, but instead it unilaterally took a measure that dissolved the company, representing a repudiation of the stabilization clauses it had freely accepted. These clauses do not affect the principle of its sovereign legislative and regulatory powers, since it retains both in relation to those, whether nationals or foreigners, with whom it has not entered into such obligations, and that, in the present case, changes in the legislative and regulatory arrangements stipulated in the agreement simply cannot be invoked against the other contracting party.131 4.103

By referring to international law as a supplement to the rules of Congolese law, it was clear to the tribunal that the nationalization was incompatible with the existence of the stabilization clauses in the agreement. It was not necessary to go further and examine the discriminatory character of the measures, as AGIP had asked the tribunal to do.

4.104

The tribunal held that the government had an obligation to compensate AGIP in full for breach of contractual obligations not performed by the government, as well as for unlawful expropriation of its investment (similar to the position of Sole Arbitrator Dupuy in TOPCO). AGIP was entitled to seek compensation for the loss suffered and for the loss of profits. In the event, AGIP limited its three demands for loss of profit damages to a symbolic amount of one Congolese Franc for each demand. However, the tribunal also held that the government was obliged to pay AGIP damages for non-recovery of commercial debts, payments made by AGIP as guarantor of loans granted to its nationalized subsidiary, AGIP Brazzaville and for 50 per cent of the latter’s shares.132 This amounted to a sum equivalent to about US55.8 million in 1979 dollars.133

4.105

During the period of these classical tests, there were virtually no cases registered by ICSID concerning oil and gas that led to an award on the merits of the case. AGIP v Congo was the exception.134 Between January 1972 and January 2009, as many as seventy-two cases registered by ICSID involved companies and projects in mining and the oil and gas industries. Of 131 Ibid., at para 86. 132 Ibid, at para 115. 133 Around US$20 million dollars in 2018 equivalence: Investment Arbitration Reporter, 18 May 2018, ‘Looking Back: Early ICSID awards against Congo-Brazzaville in AGIP and Benvenuti & Bonfant cases touched on stabilization clauses, flouting of provisional measures, and questions of quantum.’ 134 That is not to say that issues concerning stabilization clauses did not arise in ICSID cases concerning non- energy resources during this period. In Liberian Eastern Timber Corporation (LETCO) v The Government of the Republic of Liberia (31 March 1986), for example, the tribunal cited a stabilization clause in a concession agreement for timber and other forest products, which had been breached by the host state by removing a substantial proportion of the concession area and transferring it to other foreign investors, and commented: ‘This clause must be respected . . . Otherwise, the contracting state may easily avoid its contractual obligations by legislation. Such legislative action could only be justified by nationalization . . .’: 26 ILM 647 (1987) at 667. In an interesting aspect of this case, the tribunal noted that while Liberia was entitled under the concession to revoke it with cause (and a list of nine events was provided on Article VII.4), its revocation was to be carried out according to a procedure that involved notifying the other contracting party of a breach, with a view to remedying it within three months or providing Liberia with reasonable compensation. The idea behind such a provision was ‘logical’ since a ‘long- term development contract is not speculative in nature and is meant to last, despite an occasional lack of proper performance’ (at 662). The tribunal contrasted it with a ‘typical sales agreement which usually requires perfect performance. In such a contract, any small delay or imperfection in the goods may cause the purchaser to suffer substantial hardship due to the vagaries of a volatile market’ (661–662). The parties had built into the concession some flexibility that might have allowed a long-term relationship to last had LETCO been given the opportunity to respond. LETCO obtained compensation for its lost investment and lost profits.

J. Conclusions 179 these, forty-one involved projects in the oil and gas sector. Of those that had been settled, the majority were concluded amicably. J. Conclusions For a modern investor seeking guidance on long-term contract stability, the jurisprudential contribution of the arbitral awards examined here may appear to be an obvious starting point. This impression would be reinforced by their presence in much of the available commentary on international investment law.135 However, the awards are associated with an approach to stabilizing long-term contracts which ultimately failed to provide investors with the level of security they could reasonably have expected to gain from having them in their contracts. They were not effective in preventing acts of expropriation and resulted in one-off payments of damages which were generally far below the levels sought by the claimants. Of course, it may be argued that they were never intended to prevent such abuses of sovereignty, that the amounts sought by claimants were tactical and that the claims were rather intended to deter similar ‘emerging’ disputes in other parts of the globe by firms with global operations, or were aimed at encouraging the states concerned to consider more modest instruments to achieve their public policy goals. Moreover, the economic context and the political perceptions at the time of these awards invite some caution in relying upon the awards as sources of authority today. Support for such a sceptical assessment by investors is evident in their reaction in the years immediately following these awards: innovation in the design of such clauses in contracts (discussed in the previous chapter). From governments and international organizations, there was a push for the adoption of international investment treaties to provide reassurance and encouragement to investors and—for energy investors in particular—to signal legal guarantees for a more durable stability in their international legal and business framework.

4.106

The evidence of unsatisfactory outcomes for the investor claimants is considerable. In several of the cases considered here, the tribunal or sole arbitrator questioned whether the contracts contained a stabilization clause at all. For example, in the Amoco International Finance case, the stabilization clauses which the claimant relied upon were declared by the tribunal to be nothing of the sort, and hence the nationalization by the host state was deemed to be lawful. In the Aminoil case, the argument was different, with the stabilization clauses being accepted and upheld even if deemed to be much reduced in their effectiveness by events occurring in subsequent years. The lawfulness of the host state measures benefited as a result of this approach and damages to the claimants were much reduced. Nor did the various attempts at providing contract stability through an internationalization of the contract produce clear, uncontroversial results. In the three Libyan nationalization cases, the sole arbitrators did indeed rule in favour of the validity of stabilization clauses. The aim of the stabilization clauses was to ensure that the concession contracts were operative for the full term provided in the contract, and so they targeted expropriation (or a similar confiscatory measure) as the ‘event’ to be prohibited. When that event occurred, the arbitration was concerned with the

4.107

135 Evidence of these early energy investment cases is widely prevalent. For example, Dolzer, R. & Schreuer, C. (2012) Principles of International Investment Law (2nd edn), Oxford: OUP, 82–86, and Blackaby, N. & Partasides, C. with Redfern, A. & Hunter, M. (2015) Redfern and Hunter on International Arbitration (6th edn), Oxford: OUP, 193–195, 199–202. Many of the articles in the Select Bibliography to this book discuss these ‘classical’ awards.

180 Chapter 4: The Classic Tests of Contract-based Stability consequences for the parties. However, the capacity of the stabilization clauses to ‘freeze’ the economic core of the contract over a long period of time was questioned by the tribunal. Ultimately, the damages awarded were significantly less than the amounts which the claimants had sought. An attempt by the sole arbitrator in the TOPCO case to order Libya to reinstate the contract proved impossible to enforce in the face of determined opposition by Libya, and compensation was the result. At the same time, it does appear from the awards examined in this chapter that if an action is clearly wrongful—if the stabilization clause has stated that expropriation may not take place and it has—the chances of obtaining higher damages are increased (using an argument based on lost profits). 4.108

Yet, against this slightly negative interpretation of the line of cases examined in this chapter, there are a number of reassurances for the prospective energy investor. Where stabilization clauses have been nullified or undermined by legislative actions of a host state, the historical line of awards suggests that stabilization clauses retain their validity and their value in protecting the fiscal regime on which foreign investors have made high-risk investments in those countries. In the three separate nationalization claims against Libya, the arbitrators held that Libya had undertaken binding obligations in the petroleum agreements it had concluded with foreign investors and had violated them. It was not left in doubt that a state had the power to bind itself by contract.

4.109

A striking feature is the behaviour of the IOCs as claimants. The pattern of cases heard before the Iran–US Claims Tribunal highlights a factor evident among many of the other disputes considered. For the most part, the IOCs involved took the view that settling claims on agreed terms was likely to improve their chances of a re-entry into the country at some future date. The Iran–US Claims Tribunal was therefore not required to pronounce itself on some of the key legal issues, even though the existence of the tribunal’s payment mechanism surely made a difference in facilitating both awards and settlements. While this does not in any way devalue the legal reasoning in the final awards made, it reminds us that a pragmatic approach to investor–state disputes can flourish in difficult conditions. It also underlines the perennial truth that the available body of final awards represents merely the tip of a dispute iceberg. A combination of anecdotal and publicly available evidence of settlements suggests that many disputes in energy cases are settled before they reach the award stage. Indeed, sometimes the award can trigger new and successful efforts at a settlement (for example, the award in the Anadarko v Algeria case discussed in chapter 9). A similarly pragmatic approach by the IOCs was evident in the cases which emerged from the oil industry restructuring that occurred at the time of the oil crises in the 1970s. Indeed, in the Aminoil case, the option of expropriation was only chosen by Kuwait as a result of the failure of negotiations or exasperation at their slow progress.

4.110

There are a number of extra-legal or contextual particularities for the above awards. Notably, most of them arose from disputes in the Middle East at a time when many states in that region had decided to take control over oil pricing and simultaneously to end their reliance upon IOCs as the motor for oil and gas resource development. This ‘wave’ of hostile sentiment to foreign investors had pronounced and unique regional, historical, and cultural features to it—a complex legacy factor. By contrast, the kind of political risk which a foreign investor will nowadays be seeking to mitigate is no longer one that can be easily categorized as one of ‘direct expropriation’.136 The risk of a full-scale nationalization has become less acute to the 136 See eg the kind of issues outlined inKolo, A. & Wälde, T. (2001) ‘Environmental Regulation, Investment Protection and Regulatory Taking in International Law’, ICLQ 50, 811.

J. Conclusions 181 foreign investor, and has come to lie in more subtle forms of regulatory action by host states, often designated by terms such as ‘creeping expropriation’ or ‘coercive renegotiation’. Where a nationalization per se has taken place, there is also general acceptance that under customary international law, states have the right to expropriate the property of foreign investors.137 This is subject to four conditions: (1) the expropriation must be undertaken for a public purpose; (2) it must be non-discriminatory; (3) it must comply with principles of due process of law; and (4) compensation for the expropriation must be paid promptly to the foreign investor. In this context, the classic stabilization clause, aimed at freezing the laws applicable at the time the bargain was made, has much less relevance. It is hardly surprising then that modern stabilization clauses often favour some form of negotiation in the face of unilateral action by the host state to identify and introduce the kind of rebalancing of benefits that would restore the original economic equilibrium.

4.111

There are other contextual differences of note. The classical awards addressed disputes arising from an international energy industry that bears only a passing resemblance to the one we have today. The producer–consumer dynamics have changed, but more importantly there are new market players both as producers (ie Kazakhstan, Azerbaijan, Russia, and several African states) and as consumers (ie China and India). The IOCs themselves have changed as questions have been raised by investor groups about the long-term future of the hydrocarbons industry at a time when public policy is reorienting towards support for a lower carbon economy. The current generation of IOCs has also had to adapt to a context in which NOCs operate in host states and globally as competitors. Attitudes to municipal law have changed too, with a declining need to internationalize a contract, given the maturing of law in many host states (and in this respect the notable development of Islamic law). Above all, the market place for stabilization mechanisms has changed dramatically, with a growth in hybrid forms of stabilization provisions in contracts, which frequently include the classic freezing kinds, provisions that expressly allocate fiscal risk to the NOC or state and the economic balancing variety of these clauses, as well as dedicated stability contracts. Further, the body of international investment law has been significantly changed with the addition of an intricate web of bilateral and multilateral treaties that has been spun in support of foreign investment. Indeed, the potential for increasing contract stability by linking substantive protections in such treaties to a stabilization clause in an energy investment agreement will be discussed in the following chapters. A more diverse range of dispute settlement options is also available to investors than was evident at the time these cases were heard.

4.112

137 See Fortier, L.Y. & Drymer, S.L. (2004) ‘Indirect Expropriation in the Law of International Investment: I Know It When I See It’, ICSID Review-FILJ 19, 293. This is perhaps the best source on this subject, containing a thorough analysis of all recent awards until the date of its publication. We may note the decision in the LIAMCO case holding that restitution of the contract is not available since it could only take effect by rescinding the nationalization itself.

5

Stability Based on Treaty

A. Introduction: Expansion of Guarantees to Investors 5.01 (1) The IIA framework (2) Scope of treaty-making and use

B. BITs and the Energy Sector

(1) BITs (2) Practicalities

C. Stability and Treaty-based Standards

(1) (2) (3) (4)

Fair and equitable treatment Legitimate expectations Full protection and security The umbrella clause

D. The Energy Charter Treaty

(1) (2) (3) (4) (5)

Why an energy treaty? Investment: definitions Denial of benefits Substantive protections Transit

5.04 5.07 5.10 5.11 5.13 5.14 5.15 5.19 5.23 5.26 5.31 5.31 5.43 5.47 5.52 5.69

(6) (7) (8) (9) (10)

Dispute settlement The tax carve-out Fork in the road Provisional application The ECT in practice

E. USMCA & NAFTA Chapter 11

(1) The USMCA (2) The legacy of NAFTA

F. Treaties with Investment Provisions

5.76 5.85 5.92 5.98 5.102 5.110 5.111 5.115 5.128 5.129

(1) ASEAN Investment Agreement (2) The Comprehensive Progress Trans-Pacific Partnership (CPTPP) 5.131 (3) DR-CAFTA 5.134 G. The Paramount Role of ICSID 5.136 (1) The grand bargain 5.141 (2) Arbitration procedures 5.143 (3) The additional facility 5.153 (4) Outcomes 5.155 H. Conclusions 5.162

Currently international arbitration is facing a new and existential risk. Brigitte Stern1

A. Introduction: Expansion of Guarantees to Investors 5.01

The emergence of a large, comprehensive network of International Investment Agreements (IIAs) changed the legal landscape for energy investment forever, offering a significant expansion of the substantive and procedural guarantees that an international energy investor can typically expect from a host government’s legal framework. Of equal importance, it offered the aggrieved investor the option of bringing an action against the state hosting its investment even if it lacked a direct contractual relationship to that state. Any award that results from the dispute resolution process can be enforced through the operation of international law. This network of IIAs numbers around 3,284 instruments2 and offers investors

1 Cited in Global Arbitration Review (GAR), London, 6 December 2019: ‘The pendulum has swung back’. 2 United Nations (UNCTAD) (2020) ‘The Changing IIA Landscape: New Treaties and Recent Policy Developments’, IIA Issues Note, Issue 1: of these, 2,654 were in force.

A. Introduction: Expansion of Guarantees to Investors 183 both rights and remedies. It has supplemented but not superseded the more established guarantees from international commercial law. It is important to note that this is a system that has been established incrementally by states themselves, and not by private investors, to try to motivate them to invest capital and specialist skills in their respective states. Common treaty requirements oblige states to provide investors with guarantees such as those encompassed by Fair and Equitable Treatment, including the protection of an investor’s legitimate expectations, as well as compensation in the event of expropriation, and in many cases offer them a broad cover under so-called umbrella clauses. A reasonable assumption is that these guarantees must provide a valuable enhancement of the traditional mechanisms for investor protection discussed in the preceding chapters. With such extensive international law backing, surely the expectations of an international energy investor of long-term protection from possible abuses by governments of host states has reached a state of comfort long sought but never achieved?

5.02

The purpose of this chapter is to review those features of the investment treaty regime that are most relevant to energy investment law and its goal of providing investors with the kind of long-term stability that is emblematic of energy investments. Subsequent chapters (chapter 6 and the case studies in c hapters 7, 8, and 9) will assess whether it can be said to have fulfilled its promise to both investors and states, and if so, how.

5.03

(1) The IIA framework IIAs include a plurality of treaty instruments. All are designed to provide investors with assurances that investments in the territories of host states will be protected by internationally recognized standards of treatment and access to impartial venues for claims of alleged violations. The majority take the form of Bilateral Investment Treaties (BITs),3 concluded between two states to facilitate economic cooperation by encouraging, promoting, and protecting investment in each other’s territories by companies based in either state. By contrast, a Multilateral Investment Treaty (MIT) is an instrument concluded among several states even if its content is, in part or wholly, like a BIT. For the energy sector, the relevant MIT is the Energy Charter Treaty (ECT), which has fifty-three signatories and contracting parties. The only other MIT of relevance—and much less so—is the USMCA, which has succeeded the North American Free Trade Agreement (NAFTA), entering into force on 1 July 2020. UNCTAD has estimated that about 20 per cent of all known cases arising from investor– state disputes have invoked the ECT (128 cases) or NAFTA (67 cases).4 Other treaties with investment provisions such as Free Trade Agreements (FTAs) are likely to have a wider economic subject matter than investment; nonetheless, they are also agreements concluded between or among states. FTA provisions do not necessarily include obligations commonly found in BITs, such as substantive standards of investment protection.

5.04

A key feature of the investment framework established by these IIAs is the enforcement regime: in the clear majority of cases, it includes the provision of recourse by investors to

5.05

3 For collections of IIAs, a useful source is the UNCTAD IIA Navigator: (accessed 2 February 2021); alternatively, there is the Italaw website (accessed 2 February 2021). 4 UNCTAD (2020) ‘Investor–State Dispute Settlement Cases Pass the 1,000 Mark: Cases and Outcomes in 2019’, IIA Issues Note, Issue 2, July 2020, 4.

184 Chapter 5: Stability based on Treaty international arbitration in the event of disputes between them and the states which hosted their investment. Underpinning the structure of protection is the regulatory work of national legislation and judiciaries, linked to it by means of international agreements, not least the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention), which no less than 166 states have ratified. This framework of global adjudication and enforcement has ensured that the old (and highly unsatisfactory) option of investors to resort to diplomatic protection from their home states in the event of a dispute is now largely superfluous.5 5.06

The initial driver behind the growth of IIAs was the idea that political risk,6 or at least the perception of a higher-than-average risk of state interference with negative impacts on an investment, would inhibit the flows of foreign investment into developing countries and emerging market economies. The very first BIT, concluded between Germany and Pakistan in 1959, is an example of this.7 Over time, many IIAs were concluded between developed states, such as BITs between member states of the European Union (EU), although a significant number of these were concluded with countries which at the time of signature were third countries and became members of the EU only subsequently. However, over time categories of state parties to IIAs based on the notion of ‘development’ or a country’s market status have become less helpful and potentially misleading with changes in gross national product patterns and investment flows. Political risk can in practice arise from government action in a wide range of economies; recent examples, leading to claims by foreign investors against developed country governments, would include Germany and Canada, and also the European Union.8

(2) Scope of treaty-making and use 5.07

A period of explosive growth in the conclusion of investment treaties by states led to their numbering 3,284 by the end of 2019, of which 2,895 are BITs and 389 fall into the more

5 Note the ICJ remarks in the Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo), Preliminary Objections, 24 May 2007 at para 88: ‘The Court is bound to note that, in contemporary international law, the protection of the rights of companies and the rights of their shareholders, and the settlement of the associated disputes, are essentially governed by bilateral or multilateral agreements for the protection of foreign investments, such as the treaties . . . and also by contracts between states and foreign investors. In that context, the role of diplomatic protection somewhat faded, as in practice recourse is only made to it in rare cases where treaty regimes do not exist or have proved inoperative.’ Among the various disadvantages of diplomatic protection were the uncertainty that the home state would indeed support the claim and if it did, the loss of control over the claim; usually the grant of support required an exhaustion of local remedies and even if the outcome was successful, enforcement of the outcomes of proceedings between states were thought to be unreliable. For a concise history of this process in international investment law, see Miles, K. (2013) The Origins of International Investment Law: Empire, Environment and the Safeguarding of Capital, Cambridge: CUP. 6 Political risk includes risk resulting from unstable governance, new and adverse legislation and adverse contract changes, imposed unilaterally, but also corruption and concerns about the availability, the neutrality and the efficiency of local courts. The vulnerability of the international energy industry to political risk is discussed in chapter 1. 7 Treaty for the Promotion and Protection of Investments (with Protocol and exchange of notes), Germany and Pakistan, 25 November 1959, 457 UNTS 24 (entered into force 28 November 1962) (available on the United Nations Treaty Collection website at (accessed 13 August 2018). 8 For example, Vattenfall AB and others v Federal Republic of Germany, ICSID Case No ARB/12/12; Lone Pine Resources Inc v The Government of Canada, ICSID Case No UNCT/15/2. Nord Stream 2 AG initiated an arbitration against the EU under the ECT on 26 September 2019 related to the EU Gas Directive Amendment, 2019: Nord Stream 2 AG v The European Union, PCA 2020-07.

A. Introduction: Expansion of Guarantees to Investors 185 varied category of treaties with investment provisions in them.9 Even though the resulting system ‘lacks a single definitive multilateral text or a single over-arching institution’,10 this fact has not prevented very large numbers of states from signing up to this new regime11 to attract investment in line with their domestic policies, to add protection to existing investments and to facilitate access to large capital markets. In what could be seen at the time as a trade of sovereignty for credibility, many capital-importing states followed the example of their neighbours in a competition for capital and signed up to BITs and sometimes MITs. This international legal framework has become global by bringing within it many states that had in the recent past stood outside the scope of international economic law, such as the countries of Central and Eastern Europe, Central Asia, and various Latin American states, which had resisted the application of international law standards to the protection of foreign investment for their own historical and cultural reasons. Unprecedented in its scope and degree of acceptance, this international investment regime appeared to offer enhanced prospects for the stabilization of long-term commercial agreements between states and investors in the energy industry, and a kind of stability that was more reliable than that offered by the norms of traditional public international law. As one of the most international of industries, energy companies and their partners have both been affected by and contributed to the development of this investment framework. The existence and use of the ECT as a dedicated MIT for the sector is evidence of this. Experience to date with IIAs strongly suggests that if use of their provisions by investors is a guide, they are now a popular supplement to contractual guarantees of stability even if they are unlikely ever to replace them as a source of investor protection.12 By 1 January 2020 investors had used them in 1,023 publicly known claims against states, although the actual number of disputes filed is likely to be higher since some arbitrations can be kept fully confidential.13 Claims have been brought against a wide variety of measures taken by states including legislative reform, domestic legal proceedings or court judgements, contract termination or revocation, alleged seizure or expropriation of investments, and tax- related measures such as alleged unlawful assessments or denial of tax exemptions. In terms of outcomes, the success rate for claimants has been estimated at an average of around 40 per cent.14 The average amount claimed has been estimated by UNCTAD at US$ 454 million and the average amount awarded at US$125 million (about 28 per cent of the amount claimed).15 9 UNCTAD, ‘The Changing IIA Landscape’ (2020) at 2. 10 Alvarez, J.E. (2011) The Public International Law Regime Governing International Investment, The Hague: Hague Academy of International Law, 26. 11 The regime constituted by the treaties is supplemented by other multilateral agreements and customary international law, as well as complementary principles applied by international financial institutions (IMF; World Bank) that apply to activities of international businesses and the manner of state regulation of them. 12 There is a very extensive literature on the evolution of IIAs, and no attempt is made here to summarize it. Examples of leading work in the field include Salacuse, J.W. (2015) The Law of Investment Treaties (2nd edn), Oxford: OUP; Alvarez (2011); McLachlan, C., Shore, L. & Weiniger, M. (2017) International Investment Arbitration: Substantive Principles (2nd edn), Oxford: OUP; Schill, S.W. (2009) The Multilateralization of International Investment Law, Cambridge: Cambridge UP; Dolzer, R. & Schreuer, C. (2012) Principles of International Investment Law (2nd edn), Oxford: OUP; Douglas, Z. (2009) The International Law of Investment Claims, Cambridge: CUP. For critical perspectives on these developments, see van Harten, G. (2007) Investment Treaty Arbitration and Public Law, Oxford: OUP, and Sornarajah, M. (2015) Resistance and Change in the International Law on Foreign Investment, Cambridge: CUP. 13 UNCTAD (2020), ‘Investor–State Dispute Settlement Cases Pass the 1,000 Mark: Cases and Outcomes in 2019’, IIA Issues Note, Issue 2, July 2020, 1. 14 UNCTAD (2018) IIA Issues Note: Investor–State Dispute Settlement: Review of Developments in 2017, issue 2, 5. 15 Ibid: these figures are adjusted to exclude the combined amount of US$114 billion claimed and US$ 50 billion awarded in three case related to the Yukos company which were brought by Hulley Enterprises, Veteran Petroleum

5.08

186 Chapter 5: Stability based on Treaty Yet, in response to wide-ranging criticism of their operation, a series of reforms have been initiated by states and arbitral institutions that may ultimately modify their content and operation, so any assessment of their contribution to investor protection must be an interim one16 (see section H of this chapter). 5.09

The high point of quantitative expansion of treaty-making has probably been reached. For the second time since 2017, the number of treaty conclusions in 2019 (at least twenty-two) was exceeded by the number of terminations (at least thirty-four).17 Poland, for example, terminated seventeen, and India seven. Intra-EU BITs became targets for termination following a ruling of the European Court of Justice (ECJ) in 2017 that an intra-EU BIT was contrary to several provisions of the Treaty on the Functioning of the European Union (the Achmea case).18 In May 2020, twenty-three Member States signed an agreement to terminate all intra-EU BITs to implement the ruling, with a list of 125 intra-EU BITs to be terminated when the agreement enters into force.19 B. BITs and the Energy Sector

5.10

The framework of international treaty law has created an entirely novel setting for an assessment of stability in long-term energy contracts. Well before any threat to an established commercial bargain, an energy company and any entities involving in financing an investment will usually seek to understand the rights and remedies in the network of available BITs when considering whether to make an investment or not, and beyond that, how to structure the investment to take advantage of them. In that calculation, the avenues open to it to pursue a claim against a host state based on a contractual breach or a violation of a provision in a BIT or both need to be considered. In doing so, it will have to examine whether its investment is one that qualifies under a BIT or MIT and that it is a qualifying investor under such a treaty. Clearly, this is a factor that will be anticipated in the initial structuring of an

and Yukos Universal against the Russian Federation. The awards were set aside by The Hague District Court, and an appeal against its judgment is pending. As the more detailed World Investment Report notes, these estimates of amounts do not include interest or legal costs. Moreover, some of the awarded sums may have been subject to set- aside or annulment proceedings: UNCTAD (2018) World Investment Report 2018: Investment and New Industrial Policies, New York: UNCTAD, 95. 16 The published criticism is too extensive and varied to summarize here, but some examples are: Sauvant, K.P. & Ortino, F. (2013) ‘Improving the International Investment Law and Policy Regime: Options for the Future’, Ministry for Foreign Affairs for Finland, Helsinki; Sornarajah (2015) at 300–420; the Review Essay of Sornarajah’s book by Koskenniemi, M. (2017) J World Investment & Trade 18, 343–353; the collection of views in Hindelang, S. & Krajewski, M. (eds) (2016) Shifting Paradigms in International Investment Law: More Balanced, Less Isolated, Increasingly Diversified, Oxford: OUP. A Public Statement on the International Investment Regime was issued by a group of several dozen academic lawyers on 31 August 2010 (‘. . . investment contracts are preferable to investment treaties as a legal mechanism to supplement domestic law in the regulation of investor–state relations . . .’); and the Institute for Policy Studies, ‘Mining for Profits in International Tribunals’ (2011). Journalism containing critical views has been extensive and probably also influential in shaping opinion: for example, the Economist, ‘The arbitration game’, 11 October 2014 (but see a positive appraisal several years later in ‘Treaty or rough treatment’, 8 June 2019; ‘The obscure legal system that lets corporations sue countries’, Guardian, 10 June 2015. For a view that supports much of the current investment treaty regime, see the submission by the Corporate Counsel International Arbitration Group (CCIAG) to UNCITRAL Working Group III, 18 December 2019. A valuable source of reference is the UNCTAD website . 17 UNCTAD, ‘The Changing IIA Landscape’ (2020) at 2. 18 ECJ, Slovak Republic v Achmea BV (Case C-284/16), Judgment, 6 March 2018. 19 Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union, OJ L169/1, 29 May 2020. Eleven had already been terminated.

B. BITs and the Energy Sector 187 investment prior to its being made. As was noted in chapter 2, there has already been considerable debate among tribunals about the eligibility of claims because of these definitional issues. Nonetheless, it is not an exaggeration to claim that this legal framework constitutes the most systematic effort ever made to depoliticize commercial disputes between investors and states and to submit them to independent legal processes. There have already been published awards that indicate its practical importance to investors in their pursuit of contract stability in the international energy industry. These include awards under the ECT and NAFTA/USMCA, as well as under various BITs. The ECT is examined in section D below, while NAFTA/USMCA is examined in section E. First, however, the instrument that is most widely used, the BIT, requires some consideration.

(1) BITs The proportion of BITs concluded by developing countries has been particularly high, at one stage amounting to around 60 per cent of the total.20 The attraction for developing states and transition economies for BITs is obvious.21 As an international agreement concluded between two states, typically including a developed and a developing country, a BIT commits the contracting states to offer both substantive and procedural protections to investors and to the investment which originates in the other state party. It allows an investor to initiate an arbitration claim directly against the host state, without relying upon the intervention of the home state in the prosecution of the claim. Such recourse to arbitration does not require a prior contractual relationship between the host state and the investor. For the state hosting the investment, the conclusion of a BIT offers the prospect of attracting a flow of foreign investment that might otherwise be impossible or reduced in amount. However, many years ago, Dolzer and Stevens hinted at a source of possible future tensions when they state that ‘BITs tend effectively to impose restraints and obligations on the host State without including similar undertakings by the home State’.22 In other words, there is no corresponding obligation imposed by a BIT on the home state to encourage or ‘send’ its investors to invest in the host state. However, in the context of energy markets, it is relevant to note that BITs—in contrast to trade instruments such as the General Agreement on Trade in Services—do not oblige the host state to open new segments of domestic markets to foreign investment or to engage in liberalization or privatization of energy industries or parts thereof. The host state remains free to determine which energy markets are open to foreign investment and on what terms an investment in those sectors may be made.

5.11

BITs tend to exhibit considerable similarities in their content, largely because of the influence of a few models that have been widely available, the US and Dutch models being two

5.12

20 UNCTAD, International Investment Rule-making: Stocktaking, Challenges and the Way Forward (2009), Geneva: United Nations, 23–24. 21 China, for example, had 125 BITs in 2020, with 107 in force (UNCTAD). Although a latecomer to international investment protection, the new generation of BITs which it has concluded reflect an acceptance of standard BIT language: Schill, S. (2007) ‘Tearing Down the Great Wall: The New Generation of Investment Treaties of the People’s Republic of China’, Cardozo J Int’l & Comp L 15, 73. Given the rapid expansion of Chinese companies on the international economic stage and particularly in energy investment outside of China, this development is hardly surprising. 22 R. Dolzer & M. Stevens (1995), Bilateral Investment Treaties, Leiden: Martinus Nijhoff, at 18. Appropriately, they add that one should recall the promotional character of BITs ‘as an additional indication of the circumstances under which bilateral investment treaties are most often entered into’.

188 Chapter 5: Stability based on Treaty notable examples of this.23 A BIT will typically include substantive protection for the treatment of foreign investment through the application of standards such as ‘fair and equitable treatment’, non-discriminatory and most favoured nation treatment, full protection and security, free transfer of currency and limitations on the sovereign right to expropriate, such as a prohibition to do so without due process, a public purpose goal and the payment of prompt, adequate and effective compensation to the investor. A BIT’s duration may be in the range of ten years or more but will often contain provisions whereby an investment made while it is in force will continue to be given protection for a specific time-period after the BIT has expired or been cancelled. In a sense, they create artificial light in the form of continuing obligations after the sun has set on the state’s relationship to the treaty instrument itself. Enforcement of these substantive protections is assured by the inclusion in the BIT of procedural protections, typically through guaranteed access to a neutral, international forum to resolve any claims that may arise against a host state. The BIT may give the investor the option of selecting administered arbitration under the ICSID Convention or its Additional Facility, or of selecting ad hoc arbitration under the UNCITRAL Rules. However, there are also BITs, especially involving states from Central and Eastern Europe, where the arbitral venue provided is the Stockholm Chamber of Commerce Arbitration Institute. This is expressly offered under Article 26 of the ECT as one of the three possible avenues for investors who wish to bring a claim against a member state. The International Court of Arbitration of the ICC is another venue commonly provided for. An important caveat about generalizing on the subject of BITs was made a long time ago but is still very relevant today. Each BIT reflects ‘a particular bargain struck between two discrete parties at a particular moment in time’.24 For that reason, it ‘must be interpreted in accordance with its own terms’.

(2) Practicalities 5.13

An important feature of BITs for foreign investors and host states lies in the consequences of their existence as well as their potential for enforcement. A host state may in developing a new policy be reminded by foreign investors or indeed the home state of a foreign investor of its BIT obligations25 and the risk of arbitral proceedings if that policy were to proceed in its present form. Even once developed, there is a possibility that the policy may be amended following the use of the state’s BIT obligations as a pressure point in negotiations with investors likely to be adversely affected by its implementation. This informal use of a BIT, as a bargaining chip in negotiations with a host state, is well known to legal advisers, and was evident in some of the disputes that arose in Latin American cases before ICSID (see c hapter 23 The Netherlands 2004 model BIT was replaced by a new one in 2019: for a commentary on it, see Duggal, K.A.N. & van de Ven, L.H. (2019) ‘The 2019 Netherlands Model BIT: Riding the New Investment Treaty Waves’, Arbitration International 35(3), 347–374. The US Model BIT has had influential iterations in its 2004 and 2012 versions. Their Article 12 has a modern emphasis on the linkage between investment and environment, which influenced the DR-CAFTA discussed below: it is ‘inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws’. 24 Alvarez, J.E. (1993) Opinion submitted to US Congressional Hearings on Bilateral Investment Treaties before the Senate Committee on Foreign Relations, at para 9. 25 For example, in 2004 the UK Foreign Secretary replied to a Parliamentary Question about possible expropriation of privately-owned common law mineral rights under the South African MPRDA legislation of 2002, that ‘under the provisions of the UK–South Africa Investment Promotion and Protection Agreement any dispute between a UK investor and the South African government may be submitted to international arbitration’: Hansard Written Answers, 4 October 2004 at (accessed 29 January 2010).

C. Stability and Treaty-based Standards 189 7). At the very least, the foreign investor’s threat conveyed by letter of commencing arbitral proceedings under a BIT can lead to consultations, renewed efforts by the parties to reach a settlement in their dispute, and potentially an adjustment in policy by the host state. The extent to which this happens is obviously hard to identify since such procedures are confidential, little-publicized and, if successful, do not lead to formal arbitration. Without the many BITs now in place in most states, this lever would not be available to the foreign investor. C. Stability and Treaty-based Standards The substantive protections provided by BITs and MITs ‘form the backbone of modern international law on foreign investment’.26 Several of them have important implications for the stability of the legal and business framework, and for the issues considered in subsequent chapters of this book. The sections below consider therefore those general standards most relevant to the notion of stability in international investment: namely, the Fair and Equitable Treatment (FET) standard and the meaning of ‘legitimate expectations’; the standard of full protection and security and the notion of an umbrella clause.27 Each has generated a great deal of scholarly analysis and has been utilized by tribunals in many international investment cases concerning energy and energy-related minerals. Another important area addressed in most BITs, that of expropriation, indirect and direct, is addressed extensively in the following chapter.

5.14

(1) Fair and equitable treatment A key standard of protection in virtually all IIAs is the standard of Fair and Equitable Treatment (FET). It has an ‘almost ubiquitous presence’ in current investment litigation28 and is the ‘most frequently invoked standard’.29 In BITs, ‘there is an almost universal acceptance of a standard of fair and equitable treatment’.30 The ECT requires each Contracting Party to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment’.31 An example of an FET provision in a BIT can be found in the Netherlands-Nigeria BIT at Article 3(1), which states: ‘Each Contracting Party shall ensure fair and equitable treatment of the investments of the other Contracting Party and shall not impair by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals.’32

26 Rubins, N., Papanastasiou, T.N. & Kinsella, S. (2020) International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide, 2nd edn., Oxford: OUP, 210. The language of individual BITs can vary, with some offering greater protections than others, making scrutiny of the text a matter of some importance. 27 For more comprehensive examinations of these and other standards in investment treaties, including for example National Treatment clauses, which essentially provide that a host state will treat the investments of an investor from a foreign state no differently than those of its own nationals, see among others, McLachlan, Shore, & Weiniger (2017); Dolzer & Schreuer (2012). 28 Dolzer, R. (2005) ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’, International Law 39, 87. 29 Rudolf Dolzer & Christoph Schreuer (2012) at 130. For a comprehensive introduction to the concept, see Klaeger, R. (2011) ‘Fair and Equitable Treatment’ in International Investment Law, Cambridge: CUP. 30 McLachlan, Shore, & Weiniger (2017) at 289. 31 Art 10(1). 32 Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Federal Republic of Nigeria, 1992, Article 3 (1): UNCTAD Investment Policy Hub.

5.15

190 Chapter 5: Stability based on Treaty 5.16

Ironically, and despite the attention it has been given by tribunals,33 FET was not given substantive content by arbitral tribunals until around 2000 with the Metalclad and Maffezini decisions.34 To some extent the subsequent surge of interest in interpreting the FET standard reflects the unexpected volume of arbitrations that have been triggered by BITs and by the ECT. Yet, as McLachlan, Shore, and Weiniger point out, this is a standard that is ‘primarily concerned with the process of decision-making as it affects the rights of the investor, rather than with the protection of substantive rights’.35 Key notions that arise in this context are therefore those of predictability, accessibility, impartiality, and natural justice. With respect to energy investments, the FET standard is particularly relevant to claims arising from so-called creeping expropriation where, for example, incremental tax increases have been imposed by a state to increase its share of the economic rent (but not to expropriate the investment). A claim based on FET may yield damages to the investor, and in such cases, would probably have a much greater likelihood of success than a claim for damages based on expropriation. In arbitral practice, its application has been typically ‘to unfold the standard on the basis of casuistic subgroups which will be seen as typical emanations of the standards’.36

5.17

An issue that has generated some discussion is whether the FET standard is equivalent to the minimum standard required by customary international law or whether it constitutes a distinct standard affording greater protection. Recent practice suggests that tribunals are not content to limit its scope to subject matter usually associated with the customary standard such as bad faith, wilful neglect, clear lack of reasonableness, or a lack of due diligence (see c hapter 6). Indeed, the issue is really whether FET has become part of customary international law and whether customary international law now includes FET. If it is part of customary international law, it need not be limited to the above-mentioned types of conduct. It would also appear that the ECT definition of FET may go further in its protection of investors than the minimum standard of treatment under international law, in contrast to NAFTA Article 1105, which contained an express reference to international law.37

5.18

In terms of its content, the FET standard several important principles, the most important for the purposes of this study is the protection of the investor’s legitimate expectations (discussed below and in c hapter 6). It also includes principles such as transparency, freedom from coercion and harassment, procedural propriety and due process, and good faith.38

(2) Legitimate expectations 5.19

A key element of the FET standard concerns itself with administrative decision-making by the State. Treatment may be ‘in breach of representations made by the host State which were 33 The literature is extensive and includes, among others: Yannaca-Small, K. (2018) ‘Fair and Equitable Treatment: Have the Contours Fully Evolved?’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements (2nd edn), Oxford: OUP, 501–531; McLachlan, Shore, & Weiniger (2017) at 296–329; Schreuer, C. (2005) ‘Fair and Equitable Treatment in Arbitral Practice’, J World Inv & Trade 6, 357; Dolzer, R. (2014) ‘Fair and Equitable Treatment: Today’s Contours’, Santa Clara J Int’l Law 12, 7; Mayeda, G. (2007) ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties’, J World Trade 41, 273. 34 Metalclad Corporation v Mexico, Award, ICSID Case No ARB(AF)/97/1; IIC 161 (2000), 30 August 2000; Maffezini v Spain, ICSID Case No ARB/97/7, IIC 86 (2000), 16 ICSID Rev 248 (13 November 2000). 35 McLachlan, Shore, & Weiniger (2017) at 356. 36 Dolzer (2014) at 14. 37 Liman Caspian Oil BV & NCL Dutch Investment BV v The Republic of Kazakhstan, ICSID Case No ARB/07/ 14, Award, 22 June 2010, para 263. 38 Schreuer (2005) at 373–374.

C. Stability and Treaty-based Standards 191 reasonably relied on by the claimant’.39 A doctrine has emerged that is concerned with due process in administrative decision-making, relevant to the investment treaty’s guarantee of FET but not yielding an independent treaty standard of its own.40 In many states there is a notion of ‘legitimate expectations’ in the domestic public or administrative law. The origins of the modern sense of legitimate expectations appear to be recent, however, in most jurisdictions. In England, the debate on this subject has been vigorous over the past ten to fifteen years,41 extending to many of the common and civil law jurisdictions.42 Essentially, it applies the principles of fairness and reasonableness to the situation where a person or entity has an expectation or interest in a state authority retaining a long-standing practice or keeping a promise. Disappointed expectations can in certain circumstances be relevant to a claim under international investment treaties. In the context of investment treaties, there are different and conflicting approaches to how the principle may be applied.43 A useful summary of the concept as it is expressed by the jurisprudence to date can be found in the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States: it is breached by conduct where ‘a [State] Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated’.44 However, the tribunal in Saluka v Czech Republic made the important observation that ‘(n)o investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged’.45 So, in order to determine whether the investor’s reasonable expectations had been frustrated, it was important to weigh this against the host State’s ‘legitimate right subsequently to regulate domestic matters in the public interest’.

5.20

An early case in which the tribunal considered legitimate expectations was TECMED v Mexico,46 where the tribunal held that the FET obligation required the Contracting Parties to afford treatment that did not undermine the reasonable expectations on which a foreign investor would base its decision to invest in the host state. This included the requirement that the host state would act in a non-arbitrary, transparent manner, allowing the investor to make plans and carry on its business. A failure by the host state to do so ‘affects the investor’s

5.21

39 Waste Management Inc v Mexico (Award) ICSID Case No ARB (AF)/00/3, 11 ICSID Rep 361, IIC 270 |(NAFTA/ICSID(AF), 2004, para 98. 40 See McLachlan, Shore, & Weiniger (2017) at 314–317 for a discussion of this. In relation to legal stability, see Kopar, R. (2019) ‘Stability and Legitimate Expectations’, PhD thesis, University of Dundee. 41 Schonberg, S. (2000) Legitimate Expectations in Administrative Law, Oxford: OUP, 133–140; see generally Dolzer & Schreuer (2008). 42 Quinot, G. (2004). ‘Substantive Legitimate Expectations in South African and European Administrative Law’, German Law J 5/1, 65–85; Groves, M. (2008) ‘Substantive Legitimate Expectations in Australian Administrative Law’, Melbourne University Law Review 32(2), 470–523. In EU law, see Case C-17/03 Vereniging voor Energie, Milieu en Water et al v Directeur van de Dienst uitvoering, June 2005, para 73. 43 An interesting clarification about international law in this area was given in a ruling from the ICJ in 2018. General international law does not contain any principle that generates binding obligations arising solely from a state’s legitimate expectations. In this it contrasted with references to legitimate expectations that may be found in arbitral awards concerning foreign investors and host states: these applied ‘treaty clauses providing for fair and equitable treatment’. There was no comment, however, on the relationship that an obligation to protect an investor’s legitimate expectations might have with the minimum standard of treatment in customary international law, rather than the treaty clauses it cited: Obligation to Negotiate Access to the Pacific Ocean (Bolivia v Chile), Judgment, ICJ Reports, 2018, p. 507, para 162. 44 CETA, Art 8.10(4)(2016). 45 Saluka v Czech Republic, UNCITRAL Partial Award, 17 March 2016, paras 305, 309. 46 Tecmed SA v Mexico, Award, ICSID Case No ARB(AF)/00/2; IIC 247 (2003), 29 May 2003, para 154.

192 Chapter 5: Stability based on Treaty ability to measure the treatment and protection awarded by the host state and to determine whether the actions of the host state conform to the fair and equitable treatment principle’. A key feature of the principle, as the case law demonstrates, is that it protects the investor from state actions that undermine the stability of the legal and business framework on which the investor has relied when making the investment. In the energy sector, such protection is particularly important since investments are often made in the knowledge that a return will only be achieved over the long term and will involve a significant outlay of capital in the initial phase before that return. 5.22

Some caution in treating the principle seems appropriate. The expectations of an investor cannot be understood in an entirely subjective manner. There needs to be robust evidence that such expectations have been encouraged by the state and that they derive from a specific period before the investment was made. Moreover, a legitimate expectation cannot be regarded as a substitute for a formal contractual right or a stabilization clause or as a way of insuring the investor against business risk; indeed, tribunals have increasingly sought to define the circumstances in which an expectation can be understood as legitimate.47 The interaction between legitimate expectations and stabilization in arbitral practice is addressed in Chapter 6.

(3) Full protection and security 5.23

Nearly all investment protection treaties contain the obligation to provide full protection and security to investors. In the ECT, the wording is ‘most constant protection and security’ in Article 10(1). However, the precise meaning of the term is elusive except by way of illustration from cases in which it has played a key role. It is perhaps best understood as the other side of the FET coin: instead of being a standard which applies when the host state has engaged in affirmative conduct, it is a standard that protects investors from a state’s failure to act as reasonably necessary to safeguard covered investors and their investments. This can include acts of host state officials or others who have acted within the host state’s jurisdiction.

5.24

In the first investment treaty case, Asian Agricultural Products Ltd (AAPL) v Sri Lanka,48 the tribunal required Sri Lanka to compensate AAPL for its failure to ensure full protection and security to the investment, which was one of the protections provided by the UK–Sri Lanka BIT. The respondent’s security forces had destroyed the claimant’s investment following a military operation against Tamil rebels. However, the tribunal agreed with the Sri Lankan argument that the BIT requirement of full protection did not amount to a strict liability standard, and held that it imposed on the host state ‘a standard of due diligence’ with respect to covered foreign investors and their investments. This interpretation was followed by the tribunal in the AMT case,49 finding that unreasonable inaction or omission by the host state was prohibited if it led to an injury to the investor or to the destruction of the investor’s assets. 47 See eg Potesta, M. (2013) ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’, ICSID Review-FILJ 28(1), 103; Kinnear, M. (2009) ‘The Continuing Development of the Fair and Equitable Treatment Standard’, in Bjoklund, A.K., Laird I.A. & Ripinsky, S. (eds) Investment Treaty Law: Current Issues III, London: BICL, 209–240 at 226–236; Crawford, J. (2008) ‘Treaty and Contract in Investment Arbitration’, Arbitration Int’l 24, 373. 48 Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka, ICSID Case No ARB/87/3, Final Award, IIC 18, (1990), 27 June 1990, 6 ICSID Rev (1991) 526. 49 American Manufacturing & Trading Inc (AMT) v Republic of Zaire, ICSID Award of 21 February 1997, IIC 14 (1997), 36 ILM 1531 (1997).

C. Stability and Treaty-based Standards 193 In the context of the stability of the legal framework, the decision in CME v Czech Republic is notable. If the change in the legal framework made it impossible to preserve and continue contractual relations which underpinned the investment, this was held to be incompatible with the full protection and security requirement.50 Nevertheless, unless the relevant treaty is clear about the provision of legal security (as distinct from physical security), a tribunal may conclude that the standard does not include a duty to maintain a stable legal and commercial environment for the investor.51 A line of authority exists to support a different and opposite conclusion,52 and even a position somewhere in between.53 By contrast, the wording used in the ECT draws no distinction between physical and legal security. However, a wider definition of this standard than physical security raises the question of its relationship to the standard of FET, since there would be a potential overlap with that standard, which is usually provided for as a separate base for liability.54

5.25

(4) The umbrella clause A so-called umbrella clause55 in an investment treaty typically has the effect of extending the protection of obligations assumed by the host state vis-à-vis the investor to the contractual obligations owed by a host state to a foreign investor. Article 10(1) of the ECT provides an example: ‘Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.’ In this case, the wording of the umbrella clause in Article 10(1) ‘is wide in scope since it refers to “any

50 CME v Czech Republic, 9 ICSID Rep (2003) 264, para 613. 51 EDF International S.A., SAUR International S.A. and Léon Participaciones Argentinas S.A. v Argentine Republic, ICSID Case No ARB/03/23, Award, 11 June, 2012, para 1109: ‘Nothing in the Argentina-France BIT incorporates a duty to maintain a stable commercial and legal environment, apart from the impact that such an environment may have in connection with fulfilment of other treaty obligations’. The ‘full protection and security’ requirement is, on this view, designed to protect the physical integrity of an investment against interference: see also BG Group plc v Republic of Argentina, UNCITRAL, Decision on Liability, 30 July, 2010, para 327: ‘the Tribunal notes that BG has not alleged physical violence or damage in the implementation of the measures adopted by Argentina, nor does the Tribunal see that such violence or damage has in fact occurred.’ 52 Frontier Petroleum Services Ltd v The Czech Republic, UNCITRAL, Final Award, 12 November, 2010, para 263: ‘it is apparent that the duty of protection and security extends to providing a legal framework that offers legal protection to investors—including both substantive provisions to protect investments and appropriate procedures that enable investors to vindicate their rights.’ 53 AES Summit Generation Limited and AES-Tisza Eromu Kft. V Republic of Hungary, ICSID Case No ARB/07/ 22, Award, 23 September 2010, para 13.3.2: ‘while it can, in appropriate circumstances, extend beyond a protection of physical security, it certainly does not protect against a state’s right. . . to legislate or regulate in a manner which may negatively affect a claimant’s investment, provided that the state acts reasonably in the circumstances and with a view to achieving objectively rational public policy goals.’ 54 See the discussion by Moss, G.C. (2008) ‘Full Protection and Security’, in Rheinisch, A. (ed) Standards of Investment Protection, Oxford: OUP, 131–150 at 150. 55 The application of umbrella clauses has sparked a considerable debate: see eg Sinclair, A.C. (2004) ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, Arb Int’l 4, 411; Schreuer, C. (2004) ‘Travelling the BIT Route: Of Waiting Period, Umbrella Clauses and Forks in the Road’, J World Inv & Trade 5, 231 at 249–255; Gaillard, E. (2005) ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims: The SGS Cases Considered’, in Weiler, T. (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, London: Cameron May, 325–346; Gallus, N. (2008) ‘An Umbrella Just for Two? BIT Obligations Observance Clauses to a Contract’, Arb Int’l 24, 157; Schill, S. (2009) ‘Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in International Investment Treaties’, Minn J Int’l L 18, 1–97; McLachlan, Shore, & Weiniger (2017) at 128–140; Yannaca-Small, K. (2018) ‘The Umbrella Clause: Is the Umbrella Closing?’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP, 395–416.

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194 Chapter 5: Stability based on Treaty obligation”. An analysis of the ordinary meaning of the term suggests that it refers to any obligation regardless of its nature, ie whether it be contractual or statutory’.56 5.27

However, the wording used in BITs can vary greatly and create uncertainty about their scope. Some BITs and MITs do not include umbrella clauses at all, such as NAFTA and indeed most BITs that are based on the US Model BIT. Of twenty-nine new IIAs concluded in 2018 no less than twenty-eight of them did not include an umbrella clause.57 After a survey of the jurisprudence interpreting the umbrella clause, Dolzer and Schreuer observe that ‘the purpose, meaning, and scope of the clause have caused controversy and given rise to disturbingly divergent lines of jurisprudence’.58 The principal source of uncertainty lies in the impact it has on any distinction between breach of contract (under the contract’s applicable law) and breach of a treaty (under international law). Does the inclusion of such a clause in the treaty have the effect of changing the character of the obligation being enforced so that a contract claim is internationalized and becomes a breach of a treaty (so that the investor can seek redress on the basis of that treaty’s dispute settlement provisions)? This issue was considered by tribunals in two cases with very similar fact-patterns, SGS v Pakistan and SGS v Philippines,59 but led to opposite conclusions. In the first case, the tribunal held that the umbrella clause was susceptible of ‘almost indefinite expansion’, and that such wording could not elevate a contract breach to the status of a treaty breach (the restrictive approach). The effect of this approach is to limit the effect of an umbrella clause by imposing various conditions on its application.60 An alternative understanding of the umbrella clause in the BIT would, in the tribunal’s view, have had a number of effects including ‘incorporating by reference an unlimited number of State contracts, as well as other municipal law instruments setting out State commitments including unilateral commitments to an investor of the other Contracting Party’.61 Instead, the tribunal considered that the clause ‘should be read in such a way as to enhance mutuality and balance of benefits in the inter-relation of different agreements located in differing legal orders’.62 In the second case, the tribunal held that an umbrella clause could apply to obligations arising under national law such as those arising from a contract. A host state would normally assume obligations ‘with regard to specific investments

56 Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/24, Award, 27 August 2008, para. 186. See also Burlington Resources Inc v Republic of Ecuador, 201–7: it is not only breaches of a contractual arrangement between the investor and the state that are potentially elevated into a treaty breach; breaches of other obligations owed under the domestic law of the host state could be included. In Burlington this was unsuccessful. However, in Khan Resources Inc, et al v Government of Mongolia, a Canadian investor with a majority interest in a uranium mine was successful in its claim that Mongolia was in breach of its obligations under Article 8.2 of the country’s Foreign Investment Law of 1993, meaning it was also liable under the ECT through the operation of the umbrella clause in Article 10(1): Award on the Merits, 2 March 2015, para 366. The case was subsequently settled. 57 UNCTAD, ‘Taking Stock of IIA Reform’, June 2019, 2. The figure represents those IIAs with texts available; the number of new IIAs was higher at forty. 58 Dolzer & Schreuer (2012) at 169. 59 SGS Société Générale de Surveillance SA v Pakistan, ICSID Case No ARB/01/13; SGS Société Générale de Surveillance SA v Philippines, ICSID Case No ARB/02/6. 60 Some tribunals have found the level of state interference in the contract to be a significant factor in assessing whether the breach of contract could be elevated to a treaty breach. For example, CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/8, Award, 12 May 2005, para 299: ‘[p]‌urely commercial aspects of a contract might not be protected by the treaty in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor’; Joy Mining Machinery Limited v The Arab Republic of Egypt, ICSID Case No ARB/03/11, Award on Jurisdiction, 6 August 2004, para 81: the restrictive approach would apply unless ‘there would be a clear violation of the Treaty rights and obligations or a violation of contract rights of such a magnitude as to trigger the Treaty protection’. 61 SGS v Pakistan, Decision on Jurisdiction, 6 August 2003, para 168. 62 Ibid.

C. Stability and Treaty-based Standards 195 in its territory by investors of the other contracting party’ under its own law.63 This (plain meaning) approach has been followed by several tribunals in a line of decisions.64 The relationship between the umbrella clause and a contractual stabilization clause is relevant here. If the umbrella clause provides an independent treaty standard which would require the state to uphold its original bargain no matter what subsequent changes took place in the law, it ‘would thus fulfil a similar purpose to that sought to be achieved through a contractual stabilization clause, but without the artificial attempt to exclude all changes in the host State law’.65 If this view is accepted, the umbrella clause would acquire ‘an independent and additional sphere of operation on the plane of international law’.66 This was the view taken by the tribunal in Sempra Energy International v Argentina,67 when it observed:

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Specific obligations undertaken not to freeze the tariffs or subject them to price controls, to compensate for any resulting differences if such actions were in fact taken, and not to amend the License without the licensee’s consent are among the obligations that typically come under the protection of the umbrella clause.68

However, that was not the view taken by the tribunal in the El Paso Energy v Argentina case, where a version of the restrictive approach was preferred: the umbrella clause would only be operational when the state acted in its role as sovereign and not as a commercial partner. It therefore covered, not ordinary commercial contract claims, but ‘additional investment protections contractually agreed by the state as a sovereign—such as a stabilization clause—inserted in an investment agreement’.69

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It is far from certain that an investor would need to persuade a host state to grant a stabilization clause in its contract before being able to gain the benefit of an umbrella clause. Even without one, the umbrella clause has the potential to provide a claimant with significant support.70 However, from the foregoing, the existence of such a clause in an agreement would seem highly likely to support a claim made by an investor under the umbrella clause, subject to the proviso that the claimant is party to the agreement which contains the stabilization clause.71

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63 SGS v Philippines, para 115. 64 Burlington Resources Inc and others v Republic of Ecuador ICSID Case No ARB/08/5, Decision on Jurisdiction, 2 June 2010, paras 190–199. See also SGS v Paraguay, which referred to the ‘ordinary meaning’ rule of interpretation (SGS Société Générale de Surveillance SA v Republic of Paraguay, ICSID Case No ARB07/29) and BIVAC v Paraguay, which emphasized the importance of interpreting the umbrella clause ‘in such a way as to give it some meaning and practical effect’: Bureau Veritas, Inspection, Valuation and Control, BIVAC BV v Republic of Paraguay, ICSID Case No ARB/07/9. In these cases, however, a difference emerged in relation to the effect of the forum selection clauses on the admissibility of an investor’s claim based on the umbrella clause. 65 McLachlan, Shore, & Weiniger (2017) at 138. 66 Ibid. 67 Sempra Energy International v Argentine Republic, Award, ICSID Case No ARB/02/16, 28 September 2007: the subsequent annulment of the Award was unrelated to the tribunal’s findings about the impact of stabilization clauses on treaty claims made based on umbrella clauses. 68 Sempra, at para 313. See also CMS Gas Transmission Co v Argentina, 301–303. 69 El Paso Energy International Co v Argentine Republic (Jurisdiction) ICSID Case No ARB/03/15, IIC 83 (2006), para 81; see also Pan American/BP v Argentina, Decision on Preliminary Objections, IIC 183 (2006), 27 July 2006. 70 However, note the comment by Crawford that ‘[i]‌n the absence of express stabilization, investors take the risk that the obligations of the host state under its own law may change, and the umbrella clause makes no difference to this basic proposition’: Crawford, J. (2008) ‘Treaty and Contract in Investment Arbitration’, Arbitration Int’l 24, 351–374 at 370. 71 See eg CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/8 (Annulment Proceeding), Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, 25 September, 2007, at para 90 (‘[T]‌he obligations of Argentina under the License are obligations to TGN, not to CMS, and CMS has no right to enforce them’), and 95–7; Burlington Resources Inc. v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Liability, 14 December 2012, para 220 (‘Burlington may not rely upon the Treaty’s

196 Chapter 5: Stability based on Treaty D. The Energy Charter Treaty

(1) Why an energy treaty? 5.31

No international investment treaty has an impact upon the energy sector greater than the Energy Charter Treaty (ECT). Like many international treaties, the ECT had its roots in dramatic historical events.72 In this case, the collapse of the Soviet Union led to the creation of a group of new states and substantial political reorganization in Central and Eastern Europe and in Central Asia in the early 1990s. A spirit of openness among states in the East and the West was accompanied by an awareness of reciprocal interests and opportunities for trade and investment that required new legal frameworks. A high priority was to develop a multilateral legal framework for closer collaboration in the energy sector, of strategic significance to all of them, albeit in different ways. More than twenty years after entering into force in 1998, the legal significance of the ECT has extended well beyond the time and place of its origins, confirming its status not only as an energy treaty, but also as one of the most dynamic, evolving treaty instruments in international investment law. The original Charter or political declaration on which the ECT was based was updated by a new declaration in 2015, the International Energy Charter,73 containing statements on investment as well as trade and other forms of cooperation. As the common interests which motivated its creation have receded into the past, and new priorities have emerged in the energy sector for many states, the parties initiated a ‘modernization’ process for the ECT in 2019.

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The treaty that emerged from the specific context of the early 1990s is a complex document, comprising eight segments known as ‘Parts’, 14 ‘Annexes’, five ‘Conference Decisions’, as well as twenty-two formal ‘Understandings’, agreed by the negotiators, and recorded in Part IV of the Final Act. There are also ‘Declarations’ of the Charter Conference, states or groups of states, recording individual views and positions about some aspects of the ECT, and set out in Part V and VI of the Final Act. Some Declarations are not recorded in the Final Act, such as a statement by the Chair of the ECT Conference at the time that the ECT was adopted and a Joint Memorandum of several delegations. They can all play a role in interpreting its provisions, although in contrast to Annexes and Decisions, the Understandings and Declarations are not part of the ECT itself and therefore ‘cannot be used to extend or modify the definitions provided for in Article 1’.74 Nevertheless, the Charter Conference has made it clear that umbrella clause to enforce against Ecuador its subsidiary’s contract rights under the PSCs for Blocks 7 and 21’) (with dissenting opinion by Arbitrator Orrego Vicuna); note too, Limited Liability Company Amto v Ukraine, SCC Case No 080/2005, Final Award, 26 March 2008 (contractual obligations vis-à-vis Amto were undertaken by a separate entity wholly owned by Ukraine, but not by Ukraine itself so the umbrella clause in the ECT did not apply). 72 The ECT was adopted in the Final Act of the European Energy Charter Conference and is contained in Annex 1 to the Final Act. For a review of the ECT’s early origins, see the first edition of this book, PD Cameron (2010) at 152–4; Coop, G. (2006) ‘The Energy Charter Treaty: More than a MIT’, in Ribeiro, C. (ed) Investment Arbitration and the Energy Charter Treaty, New York: JurisNet, 3–22; and Bamburger, C. & Waelde, T. (2007) ‘The Energy Charter Treaty’, in Energy Law in Europe: National, EU and International Regulation, Oxford: OUP, 145– 194. There is also an overview and related documents at (accessed 21 July 2021). The first steps to the creation of the ECT lay in a non-binding Declaration signed by fifty states and the European Community three years earlier on 17 December 1991, called the European Energy Charter, based on an initiative of the then Prime Minister of the Netherlands in 1990. 73 (accessed 18 August 2018). The statements on investment are in Title II at 4. It has been signed by ninety-three states and international entities. 74 Gaerts, D. and L Reins, ‘Definitions’, in R. Leal- Arcas, Commentary on the Energy Charter Treaty, Cheltenham: Edward Elgar, 14–48, at 17.

D. The Energy Charter Treaty 197 the Understandings ‘are part of the overall political package when setting the conditions for accession [to the ECT]’.75 Prior to examining the ECT itself, it is worth noting that during its negotiation and ratification, almost all the countries of Central and Eastern Europe were engaged in a frenetic rush to catch up with the West’s economic development by laying the legal foundations for a market economy. This followed almost half a century of rule by regimes that operated a state-controlled economy modelled on that of Soviet Russia, and deliberately constructed on principles antithetical to those of a market economy. The hectic burst of law-making included the adoption of laws on foreign investment, privatization, a raft of commercial matters absent in their then legal systems, and various other laws designed to promote a market-oriented energy sector, as well as the conclusion of BITs, at that time a fairly new legal instrument in all parts of the world. In many cases it also involved applications to join the EU and preparations—often assisted by EU financial and expert assistance to adapt their laws to the EU Acquis Communautaire in energy and related law. This process of domestic law-making gained speed prior to ratification of the ECT and in its early years. At the same time, specific agreements were reached between host states and western investors in a wide variety of economic sectors that reflected not only linkage of investment policy to catching up in development terms but also their fear of ‘missing out’ to neighbouring countries in the competition for capital. This context is relevant to note since a decade later a few successor governments in the same states expressed concern about the equity of the terms and conditions in contractual agreements their predecessors had signed in that first encounter with western investors; influential domestic groups took the view that their states’ inexperience and limited capacity had been exploited by foreign investors to reach binding legal agreements that were to their countries’ long-term disadvantage. This applied to power purchase agreements as well as oil and gas concessions. Discussion of how this reaction impacted upon the stability of investments in those countries is in chapter 8.

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The prospect of closer energy cooperation with the East encouraged the EU to throw its weight behind the development of the ECT as a dedicated legal instrument for energy co- operation.76 This contrasted with the more cautious approach of the then US government,

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75 Energy Charter Secretariat (2002) The Energy Charter Treaty: A Reader’s Guide (Brussels: Energy Charter Secretariat) at 61, available at . There are many published works on the Energy Charter Treaty available. The first of these was initiated and edited by my former colleague, Thomas W. Waelde, and provided a comprehensive analysis of the ECT before its ratification and entry into force: Waelde, T.W. (1996) The Energy Charter Treaty: An East–West Gateway for Investment and Trade, London: Kluwer. Subsequently, there have been important collections of papers initiated by the Energy Charter Secretariat and edited by its staff such as the former ECT General Counsel, Graham Coop: Coop, G. & Ribeiro, C. (eds) (2006) Investment Arbitration and the Energy Charter Treaty, New York: Juris; Coop, G. & Ribeiro, C. (eds) (2008) Investment Protection and the Energy Charter Treaty, New York: JurisNet LLC; Coop, G. (ed) (2011) Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty, New York: JurisNet LLC. A detailed commentary on each of the ECT provisions, provided by a range of specialist authors, is contained in Rafael Leal-Arcas’s collection: Leal-Arcas, R. (2018) Commentary on the Energy Charter Treaty, Edward Elgar. A concise analysis of the ECT’s investment protection provisions is provided by . Roe, T. & Happold, M. (2011) Settlement of Investment Disputes under the Energy Charter Treaty, Cambridge: CUP. There are also many articles on the ECT in scholarly journals and book chapters in edited collections on international investment law: for example, Gaillard, E. & McNeill, M. (2018) ‘The Energy Charter Treaty’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP, and Pinsolle, P. (2015) ‘Denial of Benefits under Article 17 of the Energy Charter Treaty’, in Gaitis, J.M. (ed) The Leading Practitioner’s Guide to Oil & Gas Arbitration, New York: Juris, 345–365. This body of scholarship has ensured that many of the provisions of the ECT have been rigorously examined and some doubts about interpretation cleared away. However, the continuing, extensive use of the ECT in investment disputes means that further significant contributions to the literature analysing the ECT and its jurisprudence are likely to be made in the foreseeable future. 76 [1998] OJ L69/1. Final Act of the European Energy Charter Conference: 69/5–69/114. The Treaty and related Protocol on Energy Efficiency and Environmental Relations entered into force on 16 April 1998, following

198 Chapter 5: Stability based on Treaty also pursuing policies of integrating the ‘new states’ into the global economy. The USA did not sign the ECT, even though it had been a regular and active participant throughout the negotiations on the treaty text. Although active in the negotiations, Norway and Russia signed but did not ratify the ECT, underlining the reluctance of states that were net producers of fossil fuels to be bound by a multilateral treaty instrument. 5.35

The purpose of the ECT is set out in Article 2 in rather broad terms. The ECT establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementaries and mutual benefits, in accordance with the objectives and principles of the [European Energy] Charter.77

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The text provides little enlightenment about the special character of energy in the world economy that might justify a multilateral treaty instrument.78 Three broad ideas seem to be implicit in its statement of purpose: a legal framework can and should promote cooperation over the long term, and therefore be predictable and stable in character; partnership among states and their investors can be built on common interests and yield benefits; and the treaty instrument will be in alignment with the objectives and principles of the political declaration signed in 1991. The Charter’s objectives and principles were therefore incorporated by reference into the ECT. Implicit in the notion of ‘legal framework’ is its multinational character. This is a treaty aimed at international energy cooperation.

5.37

In an early edition of the ECT, produced by the Secretariat, the Energy Charter’s principles were summarized as promoting the development of an efficient energy market amongst all the signatories based on the principle of non-discrimination and on market-oriented price formation, taking due account of environmental concerns; Creating a climate favourable to the operation of enterprises and to the flow of investments and technologies by implementing market principles.79

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A hint of present and future tensions was evident in the words that preceded these principles: ‘[w]‌ithin the framework of State sovereignty and sovereign rights over energy resources.’ A growing number of problems involving energy are not only trans-national in character but require more advanced cooperation among states than the drafters originally envisaged if they are to be fully engaged with. Not the least of these are the growing number of environmental issues, especially those related to climate change. The trans-boundary nuclear the deposit of the 30th instrument of ratification on 16 January 1998; see The Energy Charter Treaty and Related Documents (1996). 77 Art 2 ECT. The object of the ECT ‘was intended to be broad and far-reaching in scope’, broader than most investment agreements, usually based on reciprocity: Cem Cenzig Uzan v Republic of Turkey, Award on Respondent’s Bifurcated Preliminary Objection, Arbitration V 2014/023, 20 April 2016, at 150–151. 78 However, the Reader’s Guide (n 76 above) is more enlightening in this respect. It gives three reasons: ‘energy is the main driving force of all economies’; secondly, ‘for many partners with a developing economy, the export and sale of energy products is, and will be, one of the most important sources of “hard” foreign currency earnings and a major source of tax revenue. To make full and efficient use of their energy resources, developing countries and transition economies need to modernise their existing facilities. This will not be possible without a massive inflow of capital, technology and know how’; and finally, industrialized countries also have a keen interest in enhanced energy co-operation. Energy supply from the resource-rich countries helps them to meet increasing energy demands and results in an improved diversification of energy flows, thus reducing dependency upon one particular region’, at 7–8. 79 Energy Charter Secretariat, The Energy Charter Treaty and Related Documents (1996) at 20.

D. The Energy Charter Treaty 199 accident at Chernobyl provided an early and localized instance of what this might entail. Solutions probably require a degree of cooperation that departs from traditional conceptions of sovereignty. Even a quarter century later, this remains a difficult problem for states, with the EU being the only example in which this has been attempted and at least partly realized in the EU energy sector. The ECT text took a traditional approach to sovereignty over energy and resources, as was evident not only in its Article 18, but elsewhere: it does not address the regulation of domestic energy markets, the corporate legal structure of companies and expressly avoids any attempt to promote third party access to networks.80 Another notable feature of Title I of the Energy Charter was the objective of cooperation in the energy field which was to entail ‘formulation of stable and transparent legal frameworks creating conditions for the development of energy resources’. This goal resonates with many of the protections in what became Part III of the ECT.

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In at least four respects, the scope of the ECT’s application is wide: in energy terms, it covers the entire value chain from exploration and generation to end-use, and all energy products and energy related equipment and services; in a geographical sense, it is pan-European, covering the space from the UK and France in the west to the Central Asian states in the east; in an economic sense, it includes different kinds of market or market-oriented systems; and in a legal sense, it incorporates a wide range of commitments, ranging from the ‘hard’ to the ‘soft’ law kinds. It has been ratified by all the EU states and by the EU itself (although Italy has since withdrawn). For the contracting parties, the ECT creates rights and obligations in international law, and applies to both East–West transactions and West–East transactions (and intra-EU investment flows). In treaty terms, it is almost unique in having a subject matter limited to ‘energy materials and products’.81 However, this product-based definition, appropriate to the ECT’s trade rules, is expressly linked to the notion of ‘Economic Activity in the Energy Sector’ in Article 1(5), extending its scope to the entire energy cycle. The broad definition is appropriate to the scope of the ECT’s contents, principally concerned with the promotion and protection of investment, trade, the transit of energy resources, and energy efficiency. Other subjects covered by the ECT are either supportive of the provisions on these matters or have a lesser significance. For example, the provisions in Article 6 on the promotion of competition in energy markets would fall into the latter category.

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Several tribunals have commented on the objectives and principles of the ECT. The Plama tribunal emphasized the need for investments to contribute to economic development in the country concerned, taking into account ‘the totality of the Treaty’s purpose’.82 The commitment to stable and transparent legal frameworks creating a condition for the development of energy resources was reiterated in Article 1(2) of the International Energy Charter in 2015.83

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80 Reader’s Guide, at 9–10. 81 ECT, Article 1(4). The OPEC Statute by contrast is limited to coordination and unification of its members’ petroleum policies; the International Energy Agency was established by Decision of the Council of the Organization of Economic Cooperation and Development primarily to promote oil cooperation among IEA members. Neither founding documents are comparable in ambition or legal status to the ECT. 82 Similarly, in El Paso Energy International Co v Argentina at 650: ‘This Tribunal considers that a balanced interpretation is needed, taking into account both State sovereignty and the State’s responsibility to create an adapted and evolutionary framework for the development of economic activities, and the necessity to protect foreign investment and its continuing flow’ (ICSID Case No ARB/03/24, Award, 31 October 2011). 83 Energy Charter Secretariat (2016), The International Energy Charter: Consolidated Energy Charter Treaty with Related Documents

200 Chapter 5: Stability based on Treaty 5.42

Like most investment treaties, the ECT provides a definition of the investments and investors that may qualify for protection under it, thereby guiding an assessment of the scope of application of the ECT’s rights and obligations. These definitions are also key to determining the jurisdiction ratione materiae and ratione personae of arbitral tribunals (see below). They have proved controversial.84

(2) Investment: definitions 5.43

The intention to limit the scope of the ECT relative to other investment treaties to investments associated with an economic activity in the energy sector has resulted in a definition of a qualifying investment that presents some challenges. The definition provided in Article 1(6) of the ECT is an asset-based one, set out initially in general terms and then deepened by adding a comprehensive list of specific asset types. Article 1(6) defines ‘investment’ as meaning ‘every kind of asset, owned or controlled directly or indirectly by an Investor’.85 This wide definition includes:

tangible and intangible, moveable and immoveable property; shares, stocks, or other forms of equity participation in a company; bonds and other debt of a company; claims to money and claims to performance pursuant to a contract having an economic value associated with an investment; • intellectual property; and • returns (including profits, dividends, interest, capital gains, royalty payments, management, technical assistance, or other fees and payments in kind), and any right conferred by law, contract, or licence or permit ‘granted pursuant to law to undertake any Economic Activity in the Energy Sector’. 5.44

• • • •

This broad definition of ‘investment’ is then qualified with the limitation that it must be ‘associated with’ an economic activity in the energy sector. The nature of that association is not clear, nor is the intensity or duration of it. On this point, the definition of economic activity in the energy sector in Article 1(5) is not of much help: it is ‘an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products, except those included in Annex NI, or concerning the distribution of heat to multiple premises’. Seven illustrations of the kinds of economic activity meant by Article 1(5) are contained in Understanding 2 of the ECT.86 Article 1(6) further stipulates the date from which an investment may benefit from the protection of the ECT.

84 See for example the discussion by Gaillard and McNeill (2018) at 33–37. 85 Compare the approach in the Protocol of Colonia for the Promotion and Reciprocal Protection of Investments in MERCOSUR, 17 January 1994. Art 1(1) states that ‘the term “investment” shall mean any types of asset invested directly or indirectly by the investors of one of the Contracting Parties in the territory of the other Contracting Party, in accordance with the laws and regulations of the latter’. 86 The seven illustrations listed are ‘prospecting and exploration for, and extraction of, e.g., oil, gas, coal and uranium; construction and operation of power generation facilities, including those powered by wind and other renewable energy sources; land transportation, distribution, storage and supply of Energy Materials and Products, e.g., by way of transmission and distribution grids and pipelines or dedicated rail lines, and construction of facilities for such, including the laying of oil, gas, and coal-slurry pipelines; removal and disposal of wastes from energy related facilities such as power stations, including radioactive wastes from nuclear power stations; decommissioning of energy related facilities, including oil rigs, oil refineries and power generating plants; marketing and sale of, and trade in Energy Materials and Products, e.g., retail sales and gasoline; and research, consulting, planning,

D. The Energy Charter Treaty 201 The authors of the ECT were at pains to clarify what ‘control’ of an investment meant, and included a test. It means ‘control in fact, determined after an examination of the actual circumstances in each situation’. When applying this test, all relevant factors are to be considered including the investor’s financial interest, which includes equity interest, in the investment; ability to exercise substantial influence over the management and operation of the Investment; and ability to exercise substantial influence over the selection of members of the board of directors or any other managing body. Where there is any doubt about an investor’s control, direct or indirect, over the investment, the burden of proof lies with the investor claiming such control exists.87

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The ECT also defines the category of ‘investor’ that may benefit from its protection. This may include natural persons having citizenship of or being permanent residents in a contracting party or companies organized according to the law applicable in the relevant contracting party.88 In this context, it may be noted that the term ‘control’ by investors over investments is deemed to include both control in the financial sense (such as through shares in an enterprise) and the ability to exercise substantial influence over the management of the investment.89

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(3) Denial of benefits Under Article 17, parties may reserve the right to deny investors the benefit of the substantive protections in Part III (investment promotion and protection) under certain conditions. Known as the ‘denial of benefits’ clause, each contracting party ‘reserves the right to deny the advantages of this Part’ to legal entities owned or controlled by citizens or nationals of a third state if the legal entity has no substantial business activities in the territory of the contracting party in which it is organized.90 A contracting party also has the option of denying benefits to investments of third state investors if the denying contracting party does not maintain diplomatic relations or has prohibited transactions with investors of that third state. The two- part idea behind this provision—similar to the 2012 US Model BIT Article 17 and NAFTA Article 1113,91 and comparable to clauses in various BITs and some free trade agreements

management and design activities related to the activities mentioned above, including those aimed at Improving Energy Efficiency.’ 87 Energy Charter Treaty, Understanding with respect to Article 1(6). 88 Compare this with Art 201 NAFTA: ‘national means a natural person who is a citizen or permanent resident of a Party . . .’. 89 ECT, Understanding No 3. 90 Compare the denial of benefits clause in CAFTA Art 10.12(2), where a Contracting Party may deny benefits subject to prior notification and provision of information; also, Art 1113(2) NAFTA and several BITs to which the US is a party: ‘a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized’ (NAFTA 1113(2); emphasis added). In some of these treaties, the driver behind the denial of benefits is one linked to tax, but in the ECT’s case there is a specific tax carve-out in Article 21, so the drivers behind Article 17 are different. 91 Article 1113 (1): ‘A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investor if investors of a non-Party own or control the enterprise and the denying Party: (a) does not maintain diplomatic relations with the non-Party; or (b) adopts or maintains measures with respect to the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments.’

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202 Chapter 5: Stability based on Treaty with investment chapters92—is to require a real link between the investor and the state in which it is incorporated that involves ‘substantial business activities’ or in negative terms to allow states to prevent nationals from a third state from establishing a ‘mailbox’ company in a contracting party and then seeking to benefit in this indirect manner from the ECT’s substantive protections. The second part is to deny benefits to investors from third states with which the contracting state does not have diplomatic relations or with which it does not engage in transactions. The legal character of this Article was first tested in the case of Plama Consortium Ltd v Republic of Bulgaria (Plama).93 The respondent state (Bulgaria) had relied upon Article 17 to claim that it could refuse to arbitrate with the claimant, which was a Cypriot investment vehicle. The tribunal rejected the jurisdictional objection, and made three significant findings:94 (i) Optionality. Article 17 did not automatically deny benefits to companies falling within its terms, contrary to what was argued by Bulgaria. It merely provided a host state with an option to deny. The language of Article 17 is permissive, in contrast to that found in other investment treaties, such as the ASEAN (Association of South- East Asian Nations) Framework Agreement on Services Article VI (1995).95 In the Plama tribunal’s view, ‘the existence of a “right” is distinct from the exercise of that right’. The Contracting Party ‘is not required to exercise that right; and it may never do so. The language of Article 17(1) is unambiguous’. In relation to ECT’s object and purpose, the exercise of the right ‘would necessarily be associated with publicity or other notice so as to become reasonably available to investors and their advisers’. The Plama tribunal concluded that Article 17(1) itself ‘is at best only half a notice; without further reasonable notice of its exercise by the host state, its terms tell the investor little; and for all practical purposes, something more is needed . . .’.96 Until the host state exercises its right under Article 17(1), the covered investor has a legitimate expectation of enjoying the advantages set out in Part III of the ECT; (ii) Effect. The option to deny can only be exercised with prospective, not retrospective, effect from the date of invocation. Again, the Plama Tribunal relied upon both the text of the ECT and the object and purpose of the ECT, concluding that to find otherwise would counter the ECT’s stated objective of promoting ‘long-term cooperation’, and indeed would be in breach of the legitimate expectations of putative covered investors that they would enjoy the protection offered by Part III of the ECT;97

92 Other examples include the Agreement between Canada and the Republic of Peru for the Promotion and Protection of Investments (2006), Article 18, and the Agreement between the Lebanese Republic and the Republic of Austria on the Reciprocal Promotion and Protection of Investments (2001), Art 10. 93 Plama Consortium Ltd v Bulgaria, Decision on Jurisdiction, ICSID Case No ARB/03/24, IIC 189 (2005), 8 February 2005. See the interesting discussion in McLachlan, Shore, & Weiniger (2017) at 191, 348. 94 McLachlan, Shore, & Weiniger (2017) at 41–42. 95 ‘The benefits of this Framework Agreement shall be denied to a service supplier who is a natural person of a non-Member State or a juridical person owned or controlled by persons of a non-Member State constituted under the laws of a Member State but not engaged in substantive business operations in the territory of Member State(s).’ 96 Plama Consortium Ltd v Bulgaria, Decision on Jurisdiction, para 157. 97 This approach was supported by the tribunal in Liman Caspian Oil v Kazakhstan: the requirement in Article 17(1) for a state positively to exercise its right to deny benefits ‘can only lead to the conclusion that this notification has prospective but no retrospective effect’ (ICSID Case No ARB/07/14, Excerpts of the Award (22 June 2010), para 225). The respondent’s denial of benefits was ineffective ‘since it was more than a year after the Claimants had file their Request for Arbitration’ (para 226). Similarly, in Khan Resources, where the tribunal held that it would be contrary to the object of the ECT and its purpose ‘to create a predictable legal framework in the energy field’ if an investor ‘could be denied the benefit of the Treaty at any moment after it had invested in the country’ (Khan at para 426).

D. The Energy Charter Treaty 203 (iii) Scope. Any denial of benefits would only apply to the advantages contained in Part III on ‘Investment Promotion and Protection’, and not to all benefits to a covered investor in the ECT. This is in accordance with the wording of Article 17, which states: ‘Each Contracting Party reserves the right to deny the advantages of this Part . . .’ So, a right to arbitrate disputes under the dispute resolution provisions of Part V could not be denied.98 This was clarified further by the tribunal in Hulley Enterprises when it made clear that Article 17(1) did not implicate the tribunal’s jurisdiction.99 The Plama tribunal findings have been supported by tribunals in subsequent cases when Article 17 has been considered. The aim of Article 17(1) should not therefore be understood as providing a definition of the scope of investors covered by the ECT, but rather as establishing the conditions under which a state may deny the benefits of Part III to such investors.100

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An example of the subsequent cases that have considered Article 17 is Petrobart Ltd v Kyrgyz Republic.101 The dispute arose out of a contract made between Petrobart, a UK company incorporated in Gibraltar, and Kyrgyzgazmunaizat (KGM), a state-owned company in the Kyrgyz Republic, to sell 200,000 tons of gas condensate over a period of twelve months. The Respondent invoked Article 17(1) arguing that the claimant conducted its business through two persons not resident in Gibraltar and who did not carry on business in or from that place. The tribunal rejected the Respondent’s objection based on Article 17 because the conditions for the application of Article 17(1) were not present. It accepted the information presented by the claimant that showed that it was either owned or controlled by UK nationals or had substantial business there. Although the tribunal referred to the Fedax case as demonstrating that ‘investment’ can have a very wide meaning, it did not consider the criteria for defining ‘investment’ laid down in that award. Instead, it based its finding that an investment existed on the definition contained in the ECT. As we have seen, this definition of investment is wide, and, in the Petrobart tribunal’s view, it allows for the inclusion of a right to undertake an economic activity concerning the sale of gas condensate, with no exclusion based on concepts such as duration or importance for the development of the host state’s economy. The same investor had previously been unsuccessful in an arbitration under UNCITRAL rules which arose out of the same facts brought under the Law of the Kyrgyz Republic on Foreign Investments in the Kyrgyz Republic of 24 September 1997. That tribunal had found that the asset out of which the dispute arose did not constitute an investment under the relevant

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98 Plama Consortium Limited v Republic of Bulgaria, at 147–150. 99 Hulley Enterprises Ltd (Cyprus) v Russian Federation, Interim Award on Jurisdiction and Admissibility (November 30, 2009), paras 440–442. Similarly, in Khan Resources Inc, Khan Resources B.V. & Cauc Holding Co Ltd V Government of Mongolia, the tribunal stated that Article 17(1) ‘cannot affect the Tribunal’s jurisdiction over Khan Netherlands’ claims under the ECT’, UNCITRAL, Decision on Jurisdiction (25 July 2012), para 411. 100 Note the argument of Gaillard, E. (2008) ‘Investments and Investors Covered by the Energy Charter Treaty’, in Ribeiro, C. (ed) Investment Arbitration and the Energy Charter Treaty, New York: Juris, 54–73. 101 Petrobart Ltd v Kyrgyzstan, Award, SCC Case No 126/2003, IIC 184 (2005), 29 March 2005. There are many of these cases that can be cited. In addition to Plama and Petrobart, known examples include: Limited Liability Company Amto v Ukraine, Arbitration No 080/2005 of the Arbitration Institute of the Stockholm Chamber of Commerce, Final Award (26 March 2008); Hulley Enterprises v The Russian Federation, Interim Award on Jurisdiction and Admissibility, PCA Case No AA 226; Yukos Universal v The Russian Federation, PCA Case No AA 227, Interim Award on Jurisdiction and Admissibility; Veteran Petroleum Limited v The Russian Federation, PCA Case No AA 228, Interim Award on Jurisdiction and Admissibility (30 November 2009); Liman Caspian Oil BV and NCL Dutch Investment BV v Republic of Kazakhstan, ICSID Case No ARB/07/14 Final Award (22 June 2010); Libananco Holdings Co Ltd V Republic of Turkey, Final Award, ICSID case No ARB/06/8 (2 September 2011).

204 Chapter 5: Stability based on Treaty provisions of the Foreign Investment Law. Indeed, it would not have been found to exist under the ICSID Convention had the tribunal applied the criteria set out in the Fedax and Salini awards.102 5.50

In another case under the ECT, Amto v Ukraine, the tribunal reviewed the meaning of ‘substantial’ in the phrase ‘substantial business activities’, and reached the conclusion that the purpose of Article 17(1) was to exclude from the scope of the ECT’s protection those investors which have chosen a nationality of convenience.103 The meaning of substantial should therefore be contrasted with form and should not necessarily mean ‘large’. As one authority comments: it is ‘the materiality and not the magnitude of the business activity (that) is the decisive question’.104

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If we look beyond the ECT however and compare Article 17 with similar provisions of other investment agreements, two observations may be made. Firstly, the denial of benefits provisions in some investment treaties impose an additional requirement on the state party seeking to deny benefits to an investor: there should first be notification and consultation with the other party or parties, in contrast to Article 17(1) of the ECT, creating an additional step to its effective invocation.105 Secondly, in awards made in which the denial of benefits clause has been an issue,106 there have been different, contrary views taken by tribunals on whether denial of benefits has retrospective or prospective effect, in contrast to the clear view expressed by the tribunal in Plama (and subsequent tribunals in cases under the ECT). In Ulysseas v Ecuador, for example, where the denial of benefits clause in the US–Ecuador BIT was at issue, the tribunal ‘sees no valid reasons to exclude retrospective effects’ to the denial of benefits; it would not cause uncertainties about the legal relations under the BIT. After all, the possibility that the host state might exercise this right to deny benefits was known to the investor from the time the investment was first made.107

(4) Substantive protections 5.52

The ECT’s regime for the promotion, protection and treatment of investments is contained in Part III of the ECT (see Appendix I of this book).108 It was largely based on the BITs that had been concluded by Member States of the EU, but the ECT approach is to frame the

102 Fedax NV v Venezuela, Award, ICSID Case No ARB/96/3, IIC 102 (1998), 9 March 1998; Salini Costruttori SpA and Italstrade SpA v Jordan, Award, ICSID Case No ARB/02/13; IIC 208 (2006), 31 January 2006. 103 Amto LLC v Ukraine (Final Award) SCC Case No 080/2005, IIC 346 (SCC, 2008). 104 McLachlan, Shore, & Weiniger (2017) at 214. 105 For example, NAFTA Article 1113(1) states: ‘Subject to prior notification and consultation in accordance with Articles 1803 (Notification and Provision of Information) and 2006 (Consultations). A Party may deny the benefits of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized.’ Other examples include DR-CAFTA, Article 10.12 (1), and the Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments (11 March 1986) Protocol at (1): ‘whenever one Party concludes that the benefits of this Treaty should not be extended for this reason, it shall promptly consult with the other Party to seek a mutually satisfactory resolution of this matter.’ 106 McLachlan, Shore & Weiniger (2017) at 213, n 329. 107 Ulysseas Inc v Ecuador (2010) at para 173. 108 Key issues in the ECT investment regime are discussed in two very useful collections of essays: Ribeiro (2006); Coop & Ribeiro (2008).

D. The Energy Charter Treaty 205 protections more broadly than probably any BIT or model BIT. Article 10(1) sets out the basic protections: Each Contracting Party shall, in accordance with the provisions of this treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.

The remaining provisions of Part III contain protections against the unlawful taking of property, compensation for losses (resulting, for example, from war, civil disturbance, or a national emergency), and protection for transfers related to investments.

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In terms of investment structure, the ECT assumes the existence of two distinct stages in the investment process: a ‘pre-investment’ stage, involving the making of investments and setting of access conditions; and a ‘post-investment’ stage, concerning investments already in place and obligations relating thereto. It is the latter stage that is subject to a legal regime of ‘hard law’ obligations, like those common to BITs and binding on the contracting parties. Most importantly, these are enforceable by the provisions on international arbitration set out in Part V, Articles 26 to 28. Essentially, an investor can take legal action against a host state for a breach of the core investment obligations set out in Part III, but the only action that is open for a breach of pre-investment access obligations is through state-to-state dispute settlement procedures. The difference in approach here is easier to understand if one recalls the high degree of political risk that affects ‘sunk investments’ once made by investors (see chapter 2).

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Fair and equitable treatment Once an investment has been made, Article 10(1) of the ECT requires each Contracting Party to ‘encourage and create stable, equitable, favourable, and transparent conditions’ for foreign investors to make investments in their territories. One of those conditions is always to accord fair and equitable treatment to investments of investors from other contracting parties. In addition to providing for full protection and security, there is a sweeping requirement not to impair in any way the management, maintenance, use, enjoyment, or disposal of investments by unreasonable or discriminatory measures that might harm them.

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Legitimate expectations An important part of FET in Article 10(1) is the protection of legitimate expectations, even if it is not specifically listed. No-one is likely to argue that an investor’s expectations are other than fundamental to the investment process, nor that disappointed investors should not have an avenue to seek compensation where a host State has promised them FET. However, for the expectation to be protected under the ECT, the origin of the expectation needs to be considered: is it based on contractual commitments, on the host State’s legal order, on representations, or on circumstances or context? In relation to regulatory stability, and possible breaches thereof, the central issue was framed in a non- ECT case some years ago:

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206 Chapter 5: Stability based on Treaty The determination of a breach of [the FET standard] therefore requires a weighing of the Claimant’s legitimate and reasonable expectations on the one hand and the Respondent’s legitimate regulatory interests on the other.109 5.57

In the first of many renewable energy cases involving Spain, Charanne v Spain,110 the tribunal held that the legitimate expectations of the claimant had not been violated when the Spanish Government removed subsidies in the emerging renewable energy sector; neither the subsidies nor the literature that it had distributed to investors to encourage investments amounted to specific commitments. A specific commitment would, the tribunal held, have taken the form of a stabilization clause in the regulations or a declaration in the investors’ favour that the regulatory framework would not be modified, which were both absent in this case. Although several subsequent tribunals took a sharply divergent view (see c hapter 6), many of the key elements in any consideration of expectations in a particular case are evident in the above.

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Constant protection and security A further requirement of Article 10(1) is to provide investments with ‘the most constant protection and security’.111 The positive aspect of this obligation distinguishes it from the negative one in the FET obligation. The first part of sentence 3 requires the contracting party ‘to take reasonable steps’ for the protection of investors against conduct ‘by third parties or state actors’.112 Arguments have been advanced that this extends beyond the provision of physical protection and protection from physical violence and harassment,113 and potentially may include the provision of legal security ‘in the sense of a duty of due diligence in maintaining a functioning judicial system that is available to foreign investors seeking redress’.114

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Umbrella clause The last sentence in Article 10(1) contains the umbrella clause (see the previous section). The contracting parties at the time of signing the ECT had the option of withholding their consent to arbitrate disputes arising under this provision by listing themselves in Annex 1A. Only three contracting parties have exercised that option, however. The wording of the clause is drawn broadly in the sense that it does not distinguish between contractual and legislative undertakings by a host state and applies to obligations owed to either an investor or an investment of an investor. Does it then extend to all obligations ‘assumed’ by the state including both contractual undertakings and unilateral ones, such as obligations under foreign investment legislation or is it limited to contractual obligations alone?115 109 Saluka Investments BV v Czech Republic (UNCITRAL), Partial Award, 17 March 2006, para 306. 110 Charanne and Construction Investments v Spain, Arbitration Institute of the Stockholm Chamber of Commerce, Case No 062/2012, Award, 21 January 2016, para 490. 111 The second part of sentence three addresses non-impairment of the use of the investment, and is considered in c hapter 6. 112 AES Summit Generation Ltd, AES-Tisza Eromu Kft v The Republic of Hungary, ICSID Case No ARB/07/ 22, Award, 23 September 2010, paras 13.3.2, 13.3.3. See the discussion of this by Mejía-Lemos, D. (2018), ‘Article 10: Promotion, Protection and Treatment of Investments’, in Rafael-Arcas (ed) Commentary on The Energy Charter Treaty, 150–204, at 190–191. 113 Liman Caspian Oil (LCO) BV and NCL Dutch Investment BV v Republic of Kazakhstan, ICSID Case No ARB/ 07/14, Award, 22 June 2010, 289. 114 AMF Aircraftleasing Meier & Fischer GmbH & Co KG Hamburg (Germany) v The Czech Republic, Final Award, 11 May 2020, para 661. Note however that this is a non-ECT award. Where an attempt was made to link the requirement to an obligation to ensure legal stability in an ECT case, the tribunal did not accept it: BayWa et al., Decision on Jurisdiction, Liability and Directions on Quantum, 2 December 2019, ICSID Case No ARB/15/16, 529–31. 115 The latter ‘restrictive’ view is held by Yannaca-Small, K. (2006) Interpretation of the Umbrella Clause in Investment Agreements, Geneva: OECD; ‘What about this “Umbrella Clause”?’ in Yannaca-Small, K. (2018) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP.

D. The Energy Charter Treaty 207 Its applicability to contractual obligations between the investor and the host State is not in doubt,116 given the use of language such as ‘obligations it has entered into’ with respect to Contracting Parties to the ECT, even if such language is not unique to the ECT, and is present in the UK Model BIT,117 for example. and indeed in the very first BIT, the Germany-Pakistan BIT of 1959.118 The phrase ‘entered into’ (rather than ‘assumed’) has persuaded some tribunals that its meaning with respect to obligations in the ECT context is in effect restricted to contractual obligations, although the plain language of the text makes no such stipulation. An example of this choice among the Spanish renewable energy cases is BayWa, where the Tribunal found that the stipulation applies not to obligations generally, including legislation, taken on by the host State, but only to those ‘obligations specifically entered into by the host State with the investor or the investment’.119

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There is a body of opinion that considers the words ‘entered into’ in Article 10(1) of the ECT as not limiting the state’s obligation to contracts but extending it to all types of general arrangements that may be ‘entered into’ generally, including investment permits, licences, and authorizations.120 In an ECT case, Khan Resources, the tribunal treated ‘any obligations’ as including ‘the statutory obligations of the host state’ and the obligations that Mongolia had under its Foreign Investment Law.121 On this view, where an administrative or legislative promise was intended to induce an investment and was the main reason why it was made, it may qualify as a commitment for the application of the umbrella clause.122 A wider approach

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116 Plama, 2008; MA Al-Bahloul, 2008, for example. 117 UK Model BIT, Article 2 (2): (accessed 4 February 2021). 118 Treaty for the Promotion and Protection of Investments (with Protocol and Exchange of Notes), Germany and Pakistan, 25 November 1959, 457 UNTS 24, Article 7: (replaced in 2009). 119 BayWa R.E. Renewable Energy GmbH and BayWa R.E. Asset Holding GmbH v Kingdom of Spain ICSID Case No ARB/15/16, Decision on Jurisdiction, Liability and Directions on Quantum, 2 December 2019, at 422. Other examples include RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.a.r.l. v Spain, Decision on Responsibility and on the Principles of Quantum, ICSID Case No ARB/13/30, 30 November 2018, where the Tribunal held that the ECT provision applied only to contractual obligations, and in the absence of any contractual relationship between the investor and Spain, the majority concluded that the umbrella clause had ‘no particular role to play’, at para 287; Stadtwerke Muenchen GmbH, RWE Innogy GmbH et al v Kingdom of Spain, Award, ICSID Case No ARB/15/1, 379–384; Isolux Netherlands BV v The Kingdom of Spain, Award, 17 July 2016 (Arbitration SCC V2013/153) (laws directed equally to domestic and foreign investors ‘cannot, because of their general character, create’ obligations of this kind); Novenergia II v Spain, Final Arbitral Award, SCC 2015/063, 15 February 2018, para 715; Cube Infrastructure Fund SICAV et al v Kingdom of Spain, Award, ICSID Case No ARB/ 15/20, 19 February 2019, at para 452; Greentech Energy Systems A/S, Novenergia II Energy & Environment (SCA) SICAR, Novenergia II Italian Portfolio SA v The Italian Republic, SCC Arbitration V (2015/095), Final Award, 23 December 2018, another renewable energy case, took the view that the ECT’s clause is ‘sufficiently broad to encompass not only contractual duties but also certain legislative and regulatory instruments that are specific enough to qualify as commitments to identifiable investments or investors’ (para 464). In OperaFund, the Tribunal found the Isolux/Novenergia tribunals’ position ‘more convincing’: OperaFund Eco-Invest and Schwab Holding v Spain, ICSID Case No ARB/15/36, 569. In cases where Spain was found to be in breach of the FET standard, some tribunals declined to address the umbrella clause claim in the interests of ‘judicial’ or ‘procedural economy’ (eg Watkins Holding S.A.R.L., Watkins (Ned) BV, Watkins Spain S.L., Redpier S.L., Northsea Spain S.L., Parque Eolico Marmellar S.L., and Parque Eolico La Boga S.L. v Kingdom of Spain, Award, ICSID Case No ArB/15/44, at 629–630. 120 This wider view is taken by Gaillard and McNeill (2018) at 42–43. 121 Khan Resources Inc, Khan Resources B.V. & Cauc Holding Co Ltd v Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012, para 438. Similarly, in SGS v Pakistan, the tribunal considered the language, ‘commitments entered into’, in the Switzerland-Pakistan BIT to be sufficiently broad to embrace unilateral administrative acts: Decision on Jurisdiction (2003) ICSID Rev-FILJ 18, 307, 361 ff. In this instance, the state legislative measure in question was directed specifically at foreign investors, not foreign and domestic. 122 Yannaca-Small, ‘The Umbrella Clause’ (2018) at 411; Eureko BV v Poland, Partial Award (19 Aug 2005), para 251; LG&E Energy Corp v Argentine Republic, LG&E International Inc. v Argentine Republic, ICSID Case No ARB/ 02/1, Decision on Liability (3 Oct. 2006), paras 174–175.

208 Chapter 5: Stability based on Treaty may also have a special significance for energy cases,123 given the frequent usage of administrative licences, permits, and similar public law guarantees, and hence lie behind the choice of wording in the ECT Article. However, if so, the commitment may need to have a degree of specificity to it, demonstrating a commitment entered into vis-à-vis a specific investment, even if not necessarily so specific as to act as a ‘functional substitute for an investor-state contract’.124 A broader view of the sentence may therefore be possible in some circumstances, subject to the fulfilment of certain conditions. 5.62

National treatment and MFN The standard of treatment to be accorded to foreign investors is the better of national (NT) or Most Favoured Nation (MFN) treatment.125 From the date of signature, each Contracting Party agrees to treat foreign investors at least as well as it treats its national or domestic companies or investors. The exceptions to the NT and the MFN clauses are limited in scope, number, and time, while being clearly known and transparent at the time of signature. In practice, the exceptions claimed by states with transitional market economies were far fewer than initially expected and most of these have since been phased out.

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A supplementary treaty was originally envisaged to extend binding NT and MFN obligations (Article 10(4)). For the making of investments (defined as ‘establishing new investments, acquiring all or part of existing investments or moving into different fields of Investment activity’), the NT principle was to be implemented in two stages: • investments are to receive either NT or MFN treatment on a voluntary basis (‘best endeavours’)—whichever is the most advantageous; and • all signatories are committed to work towards extending the provisions on NT to the pre-investment stage, on a legally binding basis.126 This ‘best endeavours’ commitment on the making of investments in Article 10(2) is weaker than the commitments typically found in many BITs, NAFTA, and CAFTA to achieve non- discrimination, NT, and MFN in the life-cycle of investments, commencing with its establishment or acquisition. It was to be strengthened in a supplementary treaty, giving it the status of a legally binding obligation (Article 10(4)). Negotiations on this ‘second-phase’ investment treaty were to be concluded by 1 January 1998. However, although the commitment to negotiate was fulfilled, it did not result in agreement among the parties on the resulting draft instrument, the ‘Supplementary Treaty’.127

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Compensation for losses This is provided for in Article 12 in two ways. Where the loss is suffered through war, armed conflict, a state of national emergency, or civil disturbance, the investor is to receive treatment that is the most favourable of that which the state confers on any other investor. Where the host state is directly responsible for the loss, by

123 ‘(i)n energy investment, this distinction is important because undertakings by a host state may come not only via the execution of a contract, but arguably via the passing of legislation as well’: Hyder Ali, A. & de Gramont, A. (2015) ‘The Energy Charter Treaty and Related Jurisprudence’ in Gaitis, J.M. (ed) The Leading Practitioners’ Guide to Oil & Gas Arbitration, New York: JurisNet LLC, 265–344, at 300. 124 Schill, ‘Enabling Private Ordering’ (2009) at 92. 125 ECT, Art 10(7). 126 ECT, Art 10(4). 127 ECT website section on ‘Supplementary Treaty’. This coincided with the collapse of negotiations on the more general Multilateral Agreement on Investment.

D. The Energy Charter Treaty 209 means of a taking or an act of destruction of the investment, the investor is to be accorded restitution or compensation which is ‘prompt, adequate and effective’.128 Expropriation A separate provision on expropriations in Article 13 sets out three kinds of conduct. Expropriation arises when the investment of an investor is nationalized, expropriated or made subject to a measure or measures with equivalent effect. The last of these three forms of conduct is notable. Article 13(1) protects the investor against ‘indirect’ or ‘regulatory’ expropriations or interferences by the state that have an effect ‘equivalent to nationalization or expropriation’, such as measures that gradually erode the investor’s property interests.

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These three forms of state conduct are prohibited except under certain conditions: the purpose has to be in the public interest, non-discriminatory, carried out under due process of law, and accompanied by payment of ‘prompt, adequate and effective compensation’, the classical Hull Formula. This compensation is defined as amounting to the fair market value of the investment at the time immediately prior to the expropriation or impending expropriation became known in such a way as to affect its value.

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In its operation claims have been brought successfully against contracting parties for both direct and indirect expropriation. In Kardassopoulos v Georgia the tribunal held that a government decree cancelling and dismissing the claimant’s rights in its investment vehicle amounted to a classic case of direct expropriation.129 By contrast, in Electrabel v Hungary the tribunal dismissed the claim that the state’s termination of a PPA held by its local affiliate had deprived it of the use of its investment. It held that ‘the test for expropriation is applied to the relevant investment as a whole, even if different parts may separately qualify as investments for jurisdictional purposes’.130 For indirect expropriation, the deprivation has to be ‘substantial’, so if the investment has not been left financially worthless by the state’s conduct, no such indirect expropriation will have occurred.131

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Transfers related to investments The free transfer of capital and returns from an investment are addressed in Article 14. Contracting parties are required to guarantee the freedom of transfer into and out of their territory of items on an illustrative list including initial capital, returns, payments made under a contract, unspent earnings, proceeds from the sale or liquidation of an investment, payments arising out of the settlement of a dispute, and payments of compensation.132 Transfers are to be effected without delay and in freely convertible currencies. There are no NT provisions on taxes on income or on capital. Among the exceptions to this provision, a Contracting Party is permitted to protect creditors’ rights, ensure compliance with securities laws and ensure the satisfaction of judgments, and for Contracting Parties that were in the former Soviet Union there is an opt-out as concerns transfers among themselves. Returns-in-kind may be restricted by the host state in circumstances where this is permitted under the GATT/WTO.

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128 ECT, Art 12(2). 129 Ioannis Kardassopoulos v Georgia, ICSID Case No ARB/05/18, Award, 3 March 2010, paras 387–388. 130 Electrabel SA v Hungary, ICSID Case No ARB/07/19, Jurisdiction, Applicable Law and Liability, para 6.58. 131 Ibid, at para 6.53. 132 Art 14(1) ECT. Some of the difficulties in making these provisions work are mentioned by Haghighi, S.S. (2007) Energy Security: The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries, Oxford: Hart Publishing, at 203.

210 Chapter 5: Stability based on Treaty

(5) Transit 5.69

Although not directly an investment matter, it is worth noting the special regime for the transit of energy goods through a state that is a party to the ECT. Infrastructure investment in pipelines and grids for energy supply needs to take into account the need, more often than not, to transit the energy across States that lie along a projected route between the source and the destination. This subject has always had enormous importance for the operation of energy trade in the pan-European context (in a way that has no parallel in North America, itself a major area for substantial energy trade133) and therefore has important implications for the making of energy investments and the profitability of many investments once made. The subject of transit has become even more sensitive in the years since the ECT entered into force as interruptions have occurred in the supply and transit of gas from Russia through Ukraine to the EU. Further, its importance will grow with the greater electrification required by a less carbon-intensive energy system.

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The legal framework for relationships between Contracting Parties in relation to transit is established in Article 7. The rules it contains cover the following subjects: • non-discriminatory passage with no distinction allowed as to origin, destination, or ownership of products or materials; • non-discriminatory pricing; • absence of unreasonable delays, restrictions, or charges; • modernization of infrastructure; • offer of possible new-build infrastructure; and • non-interruption of transit in case of dispute, and clear dispute and conciliation procedures.

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The transit obligation Contracting states are required to take the necessary measures to facilitate the transit of energy materials and products so far as this is consistent with the principle of freedom of transit. These measures are to be taken without distinction as to the origin, destination or ownership of the energy materials or products. Article 7 also prohibits any distinction on pricing that may be based on such distinctions, and forbids the imposition of unreasonable delays, restrictions or charges. The key word in the obligation is ‘facilitate’. It is a weaker obligation than would have been the case if the drafters had chosen ‘ensure’ or ‘encourage’, and does not require the transit states to adopt specific legislation to improve transit access, although by implementing ECT provisions in domestic legislation a state may include provisions on access. However, the obligation of non-discrimination in transit relates to both the terms of access to the energy transport facilities and to the terms and conditions of carriage. The Contracting Parties are obliged to secure existing flows of energy in transit even in circumstances where such transit might endanger the security of supply in the transit state. The rights and obligations of states under this regime were to be clarified under

133 For comparative experiences of transit, see Stevens, P. (2009) Transit Troubles: Pipelines as a Source of Conflict, Chatham House Report, London: Chatham House, especially chapter 2, in which it is emphasized that not all transit pipeline experiences are unhappy ones; an earlier work by Stevens focuses on transit issues in the Middle East: Stevens, P. (2000) ‘Pipelines or Pipe Dreams? Lessons from the History of Arab Transit Pipelines’, Middle East J 54, 224–241. An account of how Tunisia’s attempts to extract very high transit fees from the Transmed pipeline (Algeria–Italy) in the 1970s nearly sabotaged the project in its early stages is given by Hayes, M.H. (May 2004) ‘Algerian Gas to Europe: The Transmed Pipeline and Early Spanish Gas Import Projects’ (Baker Institute for Public Policy, Working Paper, Geopolitics of Gas Series, No 27).

D. The Energy Charter Treaty 211 a further Protocol on Transit, which has been under discussion for many years, but which continues to exist only in draft form and is not effective.134 There are further, supplementary obligations on states in relation to transit in Article 7(2). These require Contracting Parties to encourage relevant entities to cooperate in:

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• modernizing energy transport facilities which are necessary for the transit of energy materials and products; • developing and operating energy transport facilities which serve the areas of more than one Contracting Party; • taking measures to mitigate the effects of interruptions in the supply of energy materials and products; and • facilitating the interconnection of energy transport facilities. However, it is not clear from this wording how a state might seek to ‘encourage’ an entity in private ownership to act in a way that allows the state to comply with its obligations under Article 7(2). Finally, the Contracting Party is required to treat transit energy in a manner that is no less favourable than its provisions treat materials and products that originate in or are destined for its own area (unless this is otherwise provided for in an existing international agreement).135 It therefore must apply the more favourable of NT or MFN treatment in its approach to goods in transit.

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In the event of a failure to secure transit on commercial terms to existing facilities, provision is made to facilitate the construction of new transit facilities. Under Article 7(4) a state is required not to place obstacles in the way of new capacity being established. Although the commercial terms are not defined, this is a matter that could be addressed by a court in terms of the aims of the ECT. However, this provision needs to be read alongside the following paragraph of Article 7, which contains several exceptions to the transit obligations. A transit state is not required to permit the construction or modification of existing energy transport facilities or to permit new or additional transit through existing energy transport facilities if it can demonstrate to the other states involved that this would ‘endanger the security or efficiency of its energy systems, including the security of supply’.136 In practice, the burden of proof would be difficult to discharge.

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The operation of the transit provisions to date has been a clear case of failure. Major transit disputes have arisen in East Europe between Ukraine and Russia from 2005 onwards, affecting supplies of gas to many European states, parties to the ECT. Yet, the ECT has played no role in their mitigation.137 In 2009, the conciliation mechanism provided in Article 7(7) was activated by the Secretariat in relation to a dispute between Russia and the Ukraine; a conciliator was identified and offered to the parties to assist them in seeking a resolution of the dispute or a procedure for doing so.138 In the event, the dispute was resolved without the

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134 Final Act of the Energy Charter Conference with respect to the Energy Charter Protocol on Transit, 31 October 2003: (accessed 6 July 2020). 135 ECT, Art 7(3). 136 ECT, Art 7(5). 137 For an overview of the ECT and the early disputes between Ukraine and Russia, see . Cameron, P.D. (2011) ‘The Energy Charter Treaty and East–West Transit’, in Coop, G. (ed) Energy Dispute Resolution: Investment Protection, Transit and The Energy Charter Treaty, New York: Juris, 297–313. 138 ECT: ‘Secretary General Issues Statement on Russia-Ukraine Gas Dispute’, 23 December 2008: (accessed 16 December 2009).

212 Chapter 5: Stability based on Treaty assistance of a third party. This is not a treaty failure so much as one associated with the unwillingness of states parties to use the ECT mechanisms.

(6) Dispute settlement 5.76

A critical feature of the ECT is that through Article 26 it grants foreign investors a direct right of action against a host state and state agencies or enterprises that exercise regulatory or administrative authority, without first having an arbitration agreement between the investor and the host state. This feature, activated for alleged breaches of the substantive investment protections in Part III, was taken over from the NAFTA and the various BITs that were being concluded at the time. It has proved to be of enormous practical importance. Other obligations, falling outside of Part III, such as those concerning trade, transit and technology transfer, are not included in the scope of Article 26.

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The ECT does not itself provide a dispute resolution forum but rather provides for reference to three established options for settling disputes. The investor has no requirement to exhaust local remedies before initiating action along one of these pre-existing avenues if it is considering the arbitration option: (1) investment disputes can be submitted to arbitration under another treaty, the ICSID or the ICSID Additional Facility; (2) a sole arbitrator or an ad hoc arbitration tribunal may be established under the rules of UNCITRAL; or (3) an application may be made to the Arbitration Institute of the SCC. Other options available to the investor for resolution of the dispute are to submit the dispute to the courts or administrative tribunals of the host state party to the dispute or to submit the dispute to any applicable, previously agreed dispute settlement procedure. The choice of institution has much practical significance for the next steps in making a claim. For example, if ICSID is chosen the claimant needs to demonstrate that a legal dispute has arisen directly out of an investment. Further, any challenge to the award can only be made before an ad hoc committee rather than the local courts of the country in which the arbitration has taken place.

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The provision for dispute settlement under Article 26 has a proven track record since there have been 130 reported cases brought by investors to international arbitration since the first arbitration commenced in 2001.139 Respondents have included both EU and non-EU states, and one case has been brought against the EU itself (Nord Stream 2).

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The starting point for all the disputes envisaged under the ECT is a three-month cooling- off period which is required for amicable settlement, failing which the investor may choose local courts or administrative tribunals, a previously agreed dispute settlement mechanism or ECT arbitration.140 The three-month cooling-off period is very short and contrasts with 139 . The first known request for arbitration was in AES Summit Generation Ltd v Hungary, ICSID Case No ARB/01/4. There is no obligation to register a claim under the ECT with the Secretariat so statistics provided by it may understate the number of cases brought. This statistic is accurate as at 1 June 2020. 140 ECT, Art 26(2).

D. The Energy Charter Treaty 213 the six-month period provided by NAFTA. The arbitral tribunal is required to decide the dispute in accordance with the ECT and applicable rules and principles of international law.141 International arbitral awards are binding and final on the parties, and each Contracting Party is obliged to make provision for the effective enforcement of such awards in its area.142 Moreover, binding state-to-state arbitration is provided for in Article 27. This option encourages the use of diplomatic channels for the settlement of disputes between states on the application or interpretation of the ECT (except for competition and environmental issues, which are subject to bilateral or multilateral non-binding consultation mechanisms). The subject matter is not restricted to the resolution of disputes arising from investment issues. Failing a negotiated settlement, either party may submit the dispute to an ad hoc tribunal under UNCITRAL Rules. The dispute settlement procedures may in fact be diverse, including international arbitration, and provide for final and binding solutions to many disputes. So far, there has been little recourse to the various state-to-state dispute settlement mechanisms. The Energy Charter Secretariat reported in 2008 that it knew of only one case in which a contracting party had initiated a procedure pursuant to Article 27 ECT. The dispute was settled through diplomatic channels.143

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Disputes over the transit of energy are the subject of a distinct set of rules and procedures in Article 7(7). The guiding principle is set out in Article 7(6). Essentially, it provides that in the event of a dispute over a transit issue, the transit state shall not interrupt or reduce the existing flow of energy materials and products prior to the conclusion of the dispute resolution procedures in Article 7(7); nor shall it allow the interruption or reduction of transit flows by any entity subject to its control or require any entity subject to its jurisdiction to interrupt or reduce the existing transit flows. The only exception to this is where such actions concerning interruption or reduction of existing flows are specifically provided for in a contract or other agreement on transit or which follow from the decision of a conciliator. An important qualification to this obligation is the exception in Article 24 which allows the transit state to adopt or enforce a measure in relation to transit that is ‘essential to the acquisition or distribution of Energy Materials and Products in conditions of short supply arising from causes outside the control’ of the transit state.144

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The ECT rules on transit are only triggered when all the relevant contractual remedies and other dispute resolution remedies agreed to by the parties have been exhausted. The process commences when a party to the dispute refers the matter to the ECT Secretary-General (SG) in a notification which summarizes the matters in dispute.145 The SG is then required to notify all states that are party to the ECT. Within thirty days the SG is required to appoint a conciliator whose task it is to seek agreement among the parties to a resolution or a procedure to achieve it. A failure to reach agreement within ninety days empowers the conciliator to make a recommendation and to decide interim tariffs and other terms and conditions to be observed for transit from a date set by the conciliator until the dispute is resolved. The parties to the dispute are obliged to observe and ensure that entities under their control observe the tariffs, terms and conditions set by the conciliator for a period of twelve months following that decision. Attempts have been made to amplify and strengthen

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141

ECT, Art 26(6). ECT, Art 26(8). 143 (accessed 4 February 2021). 144 ECT, Art 24(2)(b)(ii). 145 ECT, Art 7(7)(a)–(d). 142

214 Chapter 5: Stability based on Treaty these rules since ratification to minimize specific operational risks when a dispute is taking place.146 If successfully applied, the dispute resolution mechanism could function as a means of securing the continuity of transit flows when transit disputes occur between contracting parties. However, as is clear from the above, a referral to the SG of the ECT would carry a risk for the parties of losing control over the management of the dispute, a factor that is probably responsible for the lack of use of the procedures to date.147 5.83

Another mechanism for the settlement of disputes is provided for under Article 29 and Annex D for trade disputes between contracting parties provided that at least one of them is not a WTO member. It follows closely the WTO model.

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Regional or local governments and authorities are also drawn into the ambit of the ECT dispute settlement provisions. Article 23 specifically provides that contracting parties are responsible for the observance of all provisions of the ECT and must take such measures as may be available to ensure its observance by regional or local governments or authorities. The ECT dispute settlement provisions may be invoked in respect of measures taken by regional and local governments and authorities. A tribunal determining a claim arising out of a measure taken by this sub-central level authority may only award monetary damages. So, a tribunal cannot make an award requiring the central government to ensure that the local government carries out any specific action.148

(7) The tax carve-out 5.85

A curious feature of the ECT is the design of its provision on the exclusion of rights and obligations with respect to taxation measures of the Contracting Parties (Article 21). An investment treaty provision that expressly reserves to a state its powers to take measures (a ‘carve-out’) on taxation is common to investment treaties, so the general thrust of this provision is not itself unusual. However, in the ECT, the text of Article 21 is, as one commentator justly notes, ‘remarkable . . . for its complexity’,149 extending to about two and a half pages of treaty text. It distinguishes between several kinds of taxation and offers several exceptions to the carve-out provision. The Article played a role in the Yukos case discussed below (chapters 6 and 8), and for that reason alone is worth some consideration here.150

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The exclusion or carve-out from the ECT is contained at the very outset of Article 21. Paragraph 21(1) excludes what it calls ‘Taxation Measures’ from the ECT’s scope: Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the 146 Rules Concerning the Adoption of Transit Disputes (‘Rules’); adopted December 1998; more specifically, the unsuccessful attempt to introduce a Transit Protocol between 2000 and 2004. 147 There was an attempt to use this procedure in 2009 in a transit dispute over gas through Ukraine, but it met with passive resistance from the parties: see Cameron (2013) at 308–309. 148 In this context see Annex P: Special Sub-National Dispute Procedure (in accordance with Art 27(3)(1)). 149 Gaillard & McNeill (2018) at 55. For an overview see Ozgur, U.E. (2015) Taxation of Foreign Investments under International Law: Article 21 of the Energy Charter Treaty in Context, Energy Charter Treaty Secretariat, and Gloria Alvarez’s chapter on Article 21 in Leal-Arcas (2018) at 288–298. 150 Subsequently, it generated a considerable body of analysis. Among the many examples of commentary on Article 21 ECT, post-Yukos, are Nappert, S. (2015) ‘Square Pegs and Round Holes: The Taxation Provision of the Energy Charter Treaty and the Yukos Awards’, Les Cahiers de l’Arbitrage/Paris Journal of International Arbitration 7–28; Martinez, S.G. (2019) ‘Taxation Measures under the Energy Charter Treaty after the Yukos Awards: Articles 21(1) and 21(5) Revisited’, ICSID Review 34(1), 85–106.

D. The Energy Charter Treaty 215 event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency.

The definition of a Taxation Measure is set out in Article 21(7) and is narrow relative to some investment treaties. It includes provisions of domestic tax law (emanating from the state, a political subdivision such as a devolved parliament or a local authority), and double taxation treaties or other conventions to which the Contracting Party is bound.151 The key word here is the linkage of the term ‘Taxation Measure’ to ‘any provision’. It does not extend to the implementation or enforcement of domestic tax law or international treaties. In practice, it will also be necessary for a tribunal to analyse a measure beyond its formal name. For example, a ‘solar levy’ may require a review of its context and operation to ascertain whether or not it is a taxation measure.152

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Three distinct kinds of taxation are referred to in Article 21. Firstly, there are ‘Taxation Measures other than those on income and on capital’ (Article 21 (2), (3), (4), 7(b)). Secondly, there are ‘Taxation Measures aimed at ensuring the effective collection of taxes’ (Article 21 (2)(b)). Finally, there are ‘advantages accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement or arrangement described in subparagraph 7(a) (ii)’ (Article 21 (3)(a)). Other treaties tend to approach the matter of tax exclusion in simpler terms.153

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In the Yukos cases, the respondent, the Russian Federation, argued that all the taxation measures it had taken vis-à-vis Yukos fell under the carve-out provision of Article 21 and were therefore excluded from protection under the ECT. The Tribunal concluded inter alia that Contracting Parties were obliged to take measures in good faith if they were to benefit from the carve-out in Article 21. Secondly, the Tribunal held that the requirement to refer the issues at stake to the respondent’s tax authorities under the claw-back provision of Article 21(5) is not binding when its exercise would be futile, such as where the appropriate tax authorities would be unable to reach a timely and meaningful conclusion.

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There are five exceptions to the carve-out in Article 21, the most important of which concerns expropriation. Taxation measures that could amount to an expropriation or which are alleged to constitute an expropriation and may be discriminatory are excluded from the carve- out. The requirement on Contracting Parties in Article 13 (not to expropriate except subject to certain conditions) applies to taxes. Where the taxation measure is alleged to amount to an expropriation or is discriminatory, a procedure is set out under Article 21 (5)(b). Essentially, the investor or the Contracting Party (or an international body under Article 26 such as ICSID or the SCC) has to refer the issue to the Competent Tax Authority, which has six months in which to ‘strive to resolve’ the issue or issues referred to it. If non-discrimination issues arise, the Competent Tax Authorities have to apply the non-discrimination provisions of the relevant tax convention, or the OECD Model Tax Convention. Any conclusions

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151 ECT, Article 21 (7)(a)(i) and (ii). 152 In an application to set aside a UNCITRAL award on liability in Natland et al. v The Czech Republic, the Swiss Federal Tribunal declined, ruling that the tribunal did not err in determining that the measure, called a ‘Solar Levy’ was not covered by the ECT’s tax carve-out: GAR, 13 July 2020: ‘Swiss Federal Tribunal sees no abuse of rights in corporate restructuring, and declines to set aside liability award in Czech renewables dispute.’ 153 For example, the short provision in the US Model BIT (2012) begins by stating that ‘nothing in Section A (standards of protection) shall impose obligations with respect to taxation measures’, except for the provisions on expropriation: Article 21(1). Tax carve-out provisions are near-universal in BITs, largely because tax subject matter is already covered in double taxation treaties. For an overview and analysis of tax carve-out provisions in BITs, see Davie, M. (2015) ‘Taxation-Based Investment Treaty Claims’, J of Int’l Dispute Settlement 8, 202–227.

216 Chapter 5: Stability based on Treaty reached by the Competent Tax Authorities may be taken into account in any international arbitration proceedings.154 5.91

The tax provisions of the ECT have figured largely in jurisdictional submissions in the Yukos cases and in all of the renewable energy cases against Spain under the ECT. In the former, the tribunal found that it had indirect jurisdiction over claims arising under Article 13 (expropriation) since measure excluded by the carve-out in Article 21(1) would be brought back into the tribunal’s jurisdiction through the operation of Article 21(5), the ‘claw-back’ provision.155 In the renewable energy cases, the various tribunals accepted the jurisdictional objection of Spain on this point, holding that the taxation measure, known as the TVPEE, was a tax, was not discriminatory, and was not adopted in bad faith.156

(8) Fork in the road 5.92

The ECT contains a limitation on the investor’s right to a choice of forum for its claim. Like many BITs, it seeks to avoid conflicting decisions in relation to the same disputes by disqualifying claimants from submitting a claim to arbitration if certain conditions are present. The idea is that the investor must make a choice between litigating its claims in the host state’s domestic courts or to take its claim to international arbitration. Once the choice is made, there is no going back.

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The approach the ECT adopts to achieve this is unusual. Under Article 26(3) a contracting party gives its unconditional consent to the submission of a dispute to international arbitration and conciliation. However, a list (Annex ID) is provided of contracting parties that do not give this unconditional consent if the investor has previously submitted its dispute to the courts or administrative tribunals of the contracting party with which it has a dispute or ‘any applicable, previously agreed dispute settlement procedure’.157 This is known as the ‘fork in the road’ provision.

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The provision is only available to contracting parties listed in Annex 1D: ‘List of Contracting Parties not allowing an Investor to Resubmit the same dispute to International Arbitration at a later stage under Article 26 (in accordance with Article 26(3)(b)(i)).’ If a contracting party has not declared a wish to be listed, it is deemed to have extended its unconditional consent to arbitrate a dispute under the ECT even if that dispute has already been submitted 154 The second exception to the carve-out is for any Taxation Measure which arbitrarily discriminates against Energy Materials and Products originating in or destined for the area of another Contracting Party or which arbitrarily restricts benefits accorded under Article 7(3) (Article 21(2)(b)). A third exception is the interim provisions on trade-related matters which are to apply to taxation measures except for those on income or capital (Article 21(4)). A fourth is that Article 10(2) and (7) shall not apply so as to impose most favoured nation and national treatment with respect to either advantages given by a Contracting Party in double taxation agreements or following from membership of a regional economic integration organization (like the EU)(Article 21(3)(a)). Equally, Article 10(2) and (7) are not to apply to any taxation measure ensuring the effective collection of taxes, unless the measure arbitrarily discriminates against the investor or restricts benefit accorded under the ECT’s investment provisions (Article 21 (3)(b)). The fifth and final exception to Article 21’s provisions is in Article 21 (5), setting out a procedure to be followed when the extent of the tax amounts to expropriation or when a tax alleged to be expropriatory is discriminatory. 155 Hulley v Russian Federation; Yukos Universal Ltd (Isle of Man) v Russian Federation; Veteran Petroleum Ltd v Russian Federation, 1406. 156 For example, BayWa R.E. Renewable Energy GmbH and BayWa R.E. Asset Holding GmbH v Kingdom of Spain ICSID Case No ARB/15/16, Decision on Jurisdiction, Liability and Directions on Quantum, 2 December 2019, paras 297–314. 157 Article 26(2)(a) and (b).

D. The Energy Charter Treaty 217 elsewhere. This was confirmed in Petrobart where the tribunal held that the claimant could not be barred from submitting a claim to arbitration under the ECT because of the ‘fork- in-the-road’ provision since ‘the Kyrgyz Republic chose not to be listed in Annex ID of the Treaty’.158 On the face of it, the approach to the ‘fork-in-the-road’ provision in the ECT is stark: a submission of a dispute to a relevant forum can result in the arbitral claim being forfeit under Article 26(3)(b)(i). By contrast, the ‘no U-turn’ provisions in NAFTA and CAFTA are less strict, allowing the prior submission of the dispute to another forum but requiring the investor to irrevocably waive the right to ‘continue’ that proceeding as a condition to submitting the claim to treaty arbitration.159 However, since the ECT defines the relevant ‘dispute’ in narrow terms, as one that ‘concern(s) an alleged breach of an obligation of the (respondent) under Part III’ of the ECT, the only disputes that are barred are prior disputes in which the claimant alleges a breach of the ECT itself and not another source of law.160 NAFTA and CAFTA are more demanding in this respect, requiring the claimant to waive all proceedings referring to the same ‘measure’ at issue in the treaty arbitration.

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The ‘fork-in-the-road’ provision of the ECT was activated by the Russian Federation in the Yukos cases. It argued that the claimants’ claims were excluded under Article 26 (3)(b)(i) since various other proceedings had been brought by other entities before the Russian courts and the European Court of Human Rights. Other tribunals have developed guidance on the use of ‘fork-in-the-road’ provisions generally, so an objection based on Article 26(3)(b)(i) ECT would have to be based on a prior proceeding that satisfied the so-called ‘triple identity test’: identity of the parties, cause of action, and object of the dispute.161 Applying the test in the context of these facts, the tribunal concluded that the ongoing proceedings in the Russian courts and the applications to the ECHR did not trigger the ‘fork-in-the-road’ provision of the ECT.162 A further argument, made by the respondent, was also rejected: that the tribunal should look beyond the triple identity test in this instance since by accepting jurisdiction the tribunal would effectively be sitting in judgment over the various Russian courts that were already seized of the proceedings which the respondent referred to. In its rejection of this line of argument, the tribunal held that the purpose of the claim was not to review any decisions by the Russian courts, but rather ‘to determine whether Respondent breached Claimant’s rights under the ECT’.163

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158 Final Award at para 56. Less than half of the contracting parties who signed the ECT submitted a declaration under Article 26(3)(b)(i), and are listed in Annex ID. The original twenty-four signatories parties included Azerbaijan, the Czech Republic, the EU and Euratom (originally the European Communities), Hungary, Kazakhstan, Mongolia, Poland, Spain, Sweden, and Turkey (Italy has since withdrawn from the ECT; Russia, which signed, has since withdrawn from provisional ratification, and three signatories (Australia, Belarus and Norway) have signed but never proceeded to ratify the ECT). 159 NAFTA Art 1121 (1)(b); DR-CAFTA Art 1018 (2)(b); ASEAN Agreement, Art 22. CETA Art 8.22 requires that any existing proceeding with respect to the challenged measure be withdrawn or discontinued. 160 Gaillard and McNeill (2018) at 47. 161 Some of the substantial authority for this test is based on energy cases: for example, Occidental Exploration and Production Company v Ecuador, LCIA Case No UN3467, Final Award, 1 July 2004; CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No ARB/01/08, Decision on Objections to Jurisdiction, 17 July 2003, 42 ILM 788 (2003), para 80; Enron Corporation and Ponderosa Assets, LP v The Argentine Republic, ICSID Case No ARB/01/3, Decision on Jurisdiction, 14 January 2004, para 98. 162 Hulley Enterprises Limited (Cyprus) v The Russian Federation, Interim Award on Jurisdiction and Admissibility, UNCITRAL PCA Case No 2005-03/AA226, 30 November 2009, at 597. 163 Ibid, at paras 598–599.

218 Chapter 5: Stability based on Treaty 5.97

The ‘fork-in-the-road’ argument has been used in other ECT cases. In Khan Resources v Mongolia164 the respondent’s argument was similarly rejected: that the claimants were prevented under Article 26(3)(b)(i) from bringing an ECT claim since their Mongolian subsidiary had already initiated litigation in local administrative courts. It held there was ‘no reason to go beyond the triple identity test’; the test was not satisfied in Khan because the parties, causes of action and objects of the arbitration and the local administration proceedings were different.165 Similarly, in Charanne v Spain, the tribunal held that the fact that companies may be part of the same corporate group was insufficient to establish that there was a ‘substantial identity of the parties’.166 Moreover, in rejecting the objection to jurisdiction based on the fork-in-the-road provision, the tribunal held that the ECHR could not be considered a court of the contracting party within the meaning of Article 26 (2)(a), nor was a procedure before it ‘a process of dispute resolution previously agreed’ since there was no agreement between the parties to submit their dispute to the ECHR.167

(9) Provisional application 5.98

For many years Article 45 of the ECT, allowing for provisional application by signatories, has been a source of keen debate among scholars and practitioners alike. Article 45(1) of the ECT requires each signatory state ‘to apply this Treaty provisionally pending entry into force . . . to the extent that such provisional application is not inconsistent with its constitution, laws or regulations’. The idea behind this procedure is to allow for the time it may take some states to carry out domestic procedures for ratification of the treaty.168 This can sometimes be lengthy. Through this procedure, the treaty can be effective prior to the conclusion of these domestic requirements and enter into force immediately. A procedure was set out in Article 45 (2) for rejection of provisional application. A signatory state could ‘when signing’ supply a declaration (of non-acceptance) that it is ‘not able to accept provisional application’ and, in this way, it would be released from the obligation to apply the ECT provisionally (except for Part VII on structure and institutions). For the ECT, provisional ratification affects the Russian Federation and Belarus only since the other three signatory states, Australia, Iceland, and Norway, each filed declarations at the time of signature that they were unable to provisionally apply the ECT, in compliance with Article 45(2)(a). The presumption is that Parties that did not file a declaration of non-acceptance thereby agreed to provisionally apply the ECT. However, the tribunal in the Kardassopoulos case held that even a signatory that has not filed a declaration under Article 45(2)(a) can still invoke an alleged inconsistency with its own constitution, laws or regulations under the final clause of Article 45(1).169

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If a party wishes to terminate provisional application, it must submit written notice to the depository (Portugal) of its intention, and termination follows sixty days later.170 Nonetheless, 164 Khan Resources Inc, Khan Resources B.V., and Cauc Holding Company Ltd v The Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012. 165 Khan Resources, 392–6. 166 Charanne B.V. and Construction Investments v Spain, Arbitration Institute of the Stockholm Chamber of Commerce, Case No 062/2012, Final Award (21 January 2016) 408. 167 Ibid, at 409. 168 It is far from unique and referred to in Article 25 of the Vienna Convention on the Law of Treaties 1969. However, the ECT allows national law to prevail over the provisional application of the ECT in contrast to Articles 27 and 46 of the Vienna Convention which give priority to treaty law over national law. 169 Ioannis Kardassopoulos v Georgia, ICSID Case No ARB/05/18, Decision on Jurisdiction, 3 July 2007, 228. 170 Art 45 (3)(a).

D. The Energy Charter Treaty 219 the terminating party is still obliged to honour the ECT’s investment protections and dispute resolution obligations with respect to any investments made by investors of other signatories during the period of provisional application and to do so for a further twenty years.171 In 2009 the Russian Federation invoked this provision, and termination of provisional application became effective on 20 October 2009. The meaning of Article 45 is known to have been analysed by four tribunals to date.172 In Plama, the tribunal in its Decision on Jurisdiction of 5 February 2005, held that the application of the ECT on a provisional basis extends to the investor–state mechanism in Article 26.173 In Petrobart the issue arose of whether a company incorporated in Gibraltar could submit a claim against the Kyrgyz Republic where the UK had not at the time it ratified the ECT, listed Gibraltar as a territory on behalf of which it was ratifying the ECT.174 The tribunal held that since the UK had listed Gibraltar at the time of its signature, provisional application continued, so that an investor from Gibraltar that applies the ECT provisionally is entitled to submit a claim to arbitration under Article 26 ECT.175 In Kardassopoulos, the tribunal held that an interpretation of the ‘entry into force’ wording in Article 1(6) to mean the kind of ‘entry into force’ in Article 44 ECT would ‘strike at the heart of the clearly intended provisional application regime’, and assigned an ‘effective date’ to provisional application in the case.176

5.100

The most controversial analysis of Article 45 ECT is that of the tribunal in the Yukos arbitrations which rejected the Russian Federation’s challenge to its jurisdiction based on Article 45(1). Among other things, it held that the declaration in Article 45(2)(a) ‘can be made whether or not there in fact exists any inconsistency between “such provisional application” of the ECT and a signatory’s constitution, laws or regulations’.177 However, it also held that the Russian Federation, which made no such declaration, was required to apply the ECT provisionally on the basis that there was in fact no inconsistency between provisional application of the ECT and the constitution, laws or regulations of the Russian Federation.

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(10) The ECT in practice In the decade between 2009 and 2020 the number of known cases brought under the ECT was 130, more than five times the number in the previous decade. The number includes many 171 Art 45 (3)(b). 172 The issue arose in Anatole Stati, Gabriel Stati, Ascom Group S.A., Terra Raf Trans Trading Ltd v The Republic of Kazakhstan, SCC Arbitration No 116/2010, Award, 19 December 2013. One of the claimants was incorporated in Gibraltar. However, there was no detailed analysis of the issue of provisional application by the tribunal. 173 Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/24, Decision on Jurisdiction, 8 February 2005, para 140. 174 Petrobart Ltd v Kyrgyz Republic, Case No 126/2003, Arbitration Institute of the Stockholm Chamber of Commerce, Award, 29 March 2005. Due to a territorial dispute with Spain about Gibraltar, the UK did not include it when ratifying the ECT in 1997, while including Jersey and the Isle of Man. 175 Ibid, at paras 62–63. 176 Kardassopoulos, at paras 222–223. There are other aspects of this, for which see the discussion in Gaillard & McNeill (2018) at 50–51. 177 Hulley Interim Award (2009) at para 262; this aspect of the case is discussed in Gaillard and McNeill (2018) at 52–54. In April 2016, the Hague District Court vacated the Yukos awards on the ground that the tribunal lacked jurisdiction since arbitral proceedings were inconsistent with Russian law and so not part of the Russian Federation’s provisional application of the ECT. In February 2020 the Hague Court of Appeal overturned this judgment, ruling that the Tribunal had jurisdiction over the dispute, and reinstating the award. An appeal is pending before the Supreme Court of The Netherlands.

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220 Chapter 5: Stability based on Treaty cases brought against states that were the strongest advocates of the ECT at the outset. This remarkable expansion in the number of investment claims brought under the ECT has provoked some reflection among its supporters, some of it critical. For example, the use of The Netherlands as the home state of convenience for so-called letterbox companies which have subsequently launched claims against states under the ECT has been found ‘undesirable’ by the very Government that was the ECT’s strongest supporter in the past.178 Indirectly, the Netherlands facilitates in this way a substantial part of the more than thirty-five billion Euros in claims for damages under IIAs. Putting an end to this protection for investors was one of the official Dutch proposals in the negotiations on updating, clarifying, or modernizing the ECT. 5.103

In discussions on the potential scope of the ECT’s ‘modernization’ exercise, the argument was made that the ECT was negotiated as a package covering transit and trade as well as investment protection standards, and so all the provisions of the ECT should be considered and not only those concerning investment protection.179 However, given the very significant impacts made by its investment provisions relative to any other part of the ECT, and the wider context of IIA reform, it is hardly surprising that the Secretariat has listed a series of issues on investment protection on which it wishes to consult. Notable on the list are the topics of covered investments (Article 1(6)), covered investors (Article 1(7)), FET (Article 10(1)), the umbrella clause (Article 10(1)), and compensation for losses (Article 12). The language used suggests that some limiting of these provisions is being invited. For example, it notes that some recent IIAs qualify the FET standard by reference to the minimum standard of treatment of aliens under customary international law, and that there is a trend to define the standard through an open-ended list of FET obligations or to replace the general FET clause with an exhaustive list of what the Parties would consider to be a breach of the standard. In contrast to the ‘broad unqualified’ umbrella clause in the ECT, some IIAs limit the clause to ‘written commitments’ or state that the obligations must be ‘entered into’ with respect to specific investments.

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It would be odd (and possibly negligent) if the ECT periodic review process did not include a review of its investment protection provisions in the light of the wider IIA reform process that is currently underway. In the ‘Introduction’ to an early official compilation of the ECT documents, the Secretariat noted in the section on Investment that, even though ‘the

178 Ministerie van Buitenlandse Zaken, 6 July 2018: written answer to Parliament; BZDOC-473941680-47. The question from members of the Parliament arose from a media article: Follow the Money, 17 June 2018: . A study by UNCTAD/DIAE commissioned by the Ministry of Foreign Affairs in The Netherlands found that in about three quarters of cases brought under Dutch BITs, the ultimate owners of the claimants were not Dutch (data from 2013). Of these, the study found that in about two-thirds of cases, the relevant foreign-owned group of companies did not appear to engage in substantial business activities in the country: ‘Treaty-based ISDS Cases brought under Dutch IIAs: An Overview’. At around 20 per cent of the total, the data’s limited time frame probably understates the number of cases that are energy-related (they are not broken down exactly). In response, the new Dutch model BIT imposes a requirement that protected legal entities have ‘substantial business activities’ in their home state, including considerations whether an investor meets the test, to be assessed on a case-by-case basis: Agreement on Reciprocal Promotion and Protection and of Investments between ___and the Kingdom of The Netherlands (22 March 2019): . For a comprehensive analysis of the new model, see Duggal, Kabir, A.N. & Laurens H. van de Ven (2019) ‘The 2019 Netherlands Model BIT: Riding the New Investment Treaty Waves’, Arbitration International 35, 347–374. To date, The Netherlands has never had a claim brought against it under the ECT. 179 Energy Charter Secretariat (2017) Decision of the Energy Charter Conference: Modernisation of the Energy Charter Treaty, 28 November 2017 CCDEC 2017 23 STR.

D. The Energy Charter Treaty 221 majority’ of the ECT’s investment-related provisions are ‘self-implementing’, the Conference ‘maintains a constant political focus on investment climate issues, by providing regular assessments, through survey activities and peer reviews, of investment practices among its participating states’.180 A major challenge, however, is that modifications to existing investment protection standards are mostly not yet agreed on and a consensus has yet to emerge. That does not prevent the Charter Conference from reaching agreement on a set of changes to the ECT’s investment provisions, but it makes their task a more challenging one. To facilitate change, the drafters of the ECT included within it two important mechanisms for its further development. They also included important limitations on the consequences of a subsequent change of mind by States Parties to the ECT: they apply if a state subsequently elects either to withdraw from the ECT or from the ECT’s provisional application. Each of these future-directed elements in the ECT requires some comment.

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First, there is a requirement in Article 34(7) that the Energy Charter Conference (a periodic meeting of the Contracting Parties) ‘shall thoroughly review the functions provided for’ in the ECT. In 1999 and at intervals thereafter of no more than five years, a comprehensive review of these functions was to be carried out ‘in the light of the extent to which the provisions of the Treaty and Protocols have been implemented’. An initial review was carried out in 1999 and the first comprehensive review carried out in 2004. A further review was carried out in 2009, involving consultation of Contracting Parties by—inter alia—a questionnaire; another in 2014, and then a more ambitious sounding ‘modernization’ process that started in 2018–19. The review process may lead the Charter Conference to amend or abolish its functions as they are set out in Article 34(3), or to the activation of the negotiation mechanism in Article 33 (see below).

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A second mechanism for treaty amendment is contained in Article 33. The Charter Conference is empowered to authorize the negotiation of Protocols or Declarations to pursue the objectives and principles of the Charter. At an early stage, it was agreed to negotiate a Protocol on Energy Efficiency and Related Environmental Aspects. The mechanism may have uses in other areas such as transit in the light of the disputes that have occurred in Central and Eastern Europe in recent years. However, efforts to develop a distinct instrument on transit have been unsuccessful to date.

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If a state expresses an intention to withdraw either from the ECT or from provisional application of the ECT, it may do so by giving written notice to the Government of Portugal as the depository of the ECT.181 To date, this has included Italy (which withdrew from the ECT in 2015)182 and the Russian Federation (which withdrew from provisional application of the ECT in 2009). Withdrawal from the ECT takes effect on the expiry of one year from the date on which the written notice has been received by the depository or the date on which withdrawal has been specified in the notice, while withdrawal from provisional application takes effect on the expiry of three months from the date of receipt of written notice by the

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180 Energy Charter Secretariat (2004) The Energy Charter Treaty and Related Documents, 14. 181 ECT, Art 47(1) and Art 49. 182 Since Italy is a major capital exporting country and its investors among the leading claimants in international arbitration, this may seem a surprising decision. It may be a political decision related to the EU’s position in intra- EU investment arbitration: for discussion of this, see A. De Luca, ‘Renewable Energy in the EU, the Energy Charter Treaty and Italy’s Withdrawal Therefrom’, 3 TDM (2015): ; . Ross, A. (2019) ‘What Lies Behind Italy’s ECT Exit?’, Global Arbitration Review 10, 11–16.

222 Chapter 5: Stability based on Treaty depository. However, the ECT is careful to provide investors with long-term protection. During the period between submission of notice of withdrawal and its effect, and for a further twenty years from the date at which withdrawal takes effect, the provisions of the ECT ‘shall continue to apply to Investments made in the Area of a Contracting Party by Investors of other Contracting Parties or in the Area of other Contracting Parties by Investors of that Contracting Party’.183 Similar provisions apply with respect to withdrawal from provisional application. This ‘sunset clause’ does not apply to any Protocols to which the withdrawing state is a party; these cease to be in force for the state from the effective date of its withdrawal from the ECT.184 5.109

A different set of issues has arisen from the ECT’s use by claimants in states which are members of the EU for the settlement of disputes with states which are also members of the EU. This departs radically from the early reliance on an East–West investment paradigm in the original Charter. Claims by investors have been made against States Parties that are members of the EU, such as Hungary, Poland, Germany, Spain, Italy, and the Czech Republic. The European Communities are a party to the ECT but the organ charged with oversight of the EU Treaty, the European Commission, has made it clear it does not welcome the use of investment treaties to address disputes among EU member states (in a series of amicus curiae interventions and public statements), and has submitted proposals for modification of the ECT as part of the modernization process.185 E. USMCA & NAFTA Chapter 11

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Energy trade in North America involves three major energy producing and consuming nations: the United States, currently the largest producer of oil in the world, a major producer of refined petroleum and natural gas; Canada, with a major hydrocarbons producing region in the western part of the country, and Mexico, an important producer of hydrocarbons for many decades. In the US and Canada, the scale of renewable energy generation and consumption has also grown rapidly in recent years. In global terms, combined production from the US, Canada, and Mexico accounts for 19 per cent of crude oil, 28 per cent of natural gas, and 12 per cent of coal output.186 All are important energy consumers, and are members of the United States-Mexico-Canada Agreement (USMCA), the successor to the North American Free Trade Agreement (NAFTA), and the only other multilateral treaty with provisions important to investment in the energy sector.187 Investors have benefited from NAFTA’s protections of the overall legal and business framework for almost twenty-six years since its inception in 1994 and the entry into force of a successor in July 2020.

183 ECT, Art 47(3). 184 ECT, Art 47(4). 185 EU Text Proposal for the modernization of the Energy Charter Treaty: . 186 US Chamber of Commerce, Global Energy Institute, 13 December 2017: ‘NAFTA and North American Energy’: . 187 USMCA: (30 November 2018); Protocol of Amendment to the USMCA: (December 10, 2019).

E. USMCA & NAFTA Chapter 11 223

(1) The USMCA The intention of the new treaty is to replace NAFTA as part of a modernization process. Its aim is to ‘ESTABLISH a clear, transparent, and predictable legal and commercial framework for business planning’.188 Under NAFTA, a part of that predictable framework was the grant of rights to investors from one country to make claims against a government in another country if that government took actions that discriminated unfairly against their investment. However, the provisions on investor–state dispute settlement in the USMCA are very different from those in NAFTA.

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Five key differences between the USMCA and NAFTA The first notable difference between the two agreements is the asymmetric character of investor–state dispute settlement among the states parties in the USMCA. In effect, bilateral dispute resolution replaces what was a multilateral regime: each USMCA country will apply a different set of dispute resolution rules to the other members. This is a significant departure from the common rules approach of NAFTA. Secondly, there is no investor–state dispute settlement permitted between the US and Canada, limiting it to the US and Mexico. This probably reflects Canada’s experience with NAFTA claims: it been a respondent in more claims than the US or Mexico and has lost eight while the US has lost none; Canadian investors have also had a low success rate.189 This is also nuanced by the fact that both Canada and Mexico are parties to the Comprehensive Progress Trans Pacific Partnership (CPTPP), which entered into force in 2018, and have therefore consented to investor–state dispute settlement, so investors from either state can avail themselves of its mechanism to settle disputes arising from a breach of their obligations by either government. Unfortunately for energy investors, this access to the mechanism was removed from the final version of the CPTPP (see Section F).

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The treatment of energy investments is also different between the USMCA and NAFTA. In contrast to NAFTA, with its chapter 6 dedicated to energy, there is no chapter on energy in the USMCA. However, energy does figure in the USMCA in at least three ways. Firstly, it appears in an Annex to a side letter between the US and Canada on energy regulatory measures and regulatory transparency.190 Secondly, there is implied recognition of changes that have taken place in Mexico’s hydrocarbons sector. When NAFTA was signed, Mexico’s hydrocarbons sector was constitutionally limited to Mexican state investment. Once the constitution was changed in 2013, that sector became open to foreign investment for the first time in seventy-five years and attracted interest from US investors in particular. These and other investments made under NAFTA will remain protected by the USMCA under provisions like those in NAFTA.191 Finally, there is special treatment for energy investors in relation to

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188 Recital (7) of the Preamble to the USMCA. Recital (3) states that this treaty will replace NAFTA. 189 Garcia-Barragan, D., Mitretodis, A., & Tuck, A. (2019) ‘The New NAFTA: Scaled Back Arbitration in the USMCA’, Journal of International Arbitration 36(6), 739–754 at 742. 190 As such it forms an integral part of the USMCA, which contains thirty-four chapters and twelve side letters. Dated 30 November 2018, Article 4.2 has a focus on market stability and potential regulatory disruption, and states: ‘Each Party shall endeavour to ensure that in the application of a energy regulatory measure, an energy regulatory authority within its territory avoids disruption of contractual relationships to the maximum extent possible, supports North American energy market integration, and provides for orderly and equitable implementation appropriate to these measures.’ This provision is subject to among others the relevant provisions of Article 14 on Investment. 191 US Congressional Research Service, December 20, 2019: ‘Proposed US–Mexico–Canada (USMCA) Trade Agreement (In Focus/Fact Sheet).

224 Chapter 5: Stability based on Treaty any claims made in relation to Mexico.192 While the scope of claims by US investors against Mexico is generally more restricted than in NAFTA, there is an important exception to this: Annex 14-E provides for a limited form of an umbrella clause, extending to a category of ‘Covered Government Contracts’, in circumstances where these are terminated in a manner inconsistent with an obligation under Chapter 14. It is directly relevant to energy investments. Such contracts are defined in Paragraph 6(a) as a written agreement,193 between a national authority194 of an Annex Party and a covered investment or investor of the other Annex Party, on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.

The latter sector is defined in Paragraph 6(b) as including ‘activities with respect to oil and natural gas that a national authority of an Annex Party controls, such as exploration, extraction, refining, transportation, distribution or sale, and the supply of power generation services to the public on behalf of an Annex Party . . .’. The effect of this ‘carve-out’ provision on government contracts is to allow most energy investors—but not mining investors—to benefit from a range of protections such as FET and indirect expropriation that is less restricted than that available to other investors under the USMCA, and to be subject to a six-month cooling-off period with no requirement to resort to domestic courts. In this regard, it should be noted that, measured by UNCTAD’s investment claims indicator, between 1997 and 2019 only four claims against Mexico out of thirty-two reported were related to energy, and in only two cases was the USA the home state of the investor.195 5.114

This leads to the fourth and fifth notable differences between the two treaties. In addition to the ‘grandfathering’ of existing NAFTA claims, the USMCA provides for what it calls ‘legacy investments’. These are defined under Annex 14-C to Chapter 14 as investments established or acquired between 1 January 1994 and the termination of NAFTA and still in existence when USMCA came into force. If a claim in relation to these investments is brought against a host state within three years of NAFTA’s termination, they may still use NAFTA Chapter 11. Finally, there is a local remedies requirement in USMCA, not present in the procedural requirements of NAFTA. For Mexico-US investment disputes, Paragraph 5 of Annex 14-D requires claimants to initiate and maintain litigation proceedings in the respondent’s domestic courts for a final decision or thirty months from the commencement of the action before being able to initiate arbitration.

192 Energy is not the only exception, however. Government contracts also extend to include the supply of telecommunications and transportation services, and the ownership and management of roads, railways, bridges or canals that are not for the exclusive or predominant use and benefit of the government of an Annex Party. 193 In Paragraph 6(b) of Annex 14-E the meaning of ‘written agreement’ is clarified: it does not include ‘a unilateral act of an administrative or judicial authority, such as a permit, licence certificate, approval, or similar instrument issued by an Annex Party in its regulatory capacity . . .’. 194 A national authority is defined in Paragraph 6(c) as an authority at the central level of government, and ‘includes any person (including a state enterprise or another body) when it exercises governmental authority delegated to it by an authority at the central level of government’. 195 UNCTAD Investment Policy Hub: . This probably reflects the closure of the hydrocarbons sector until 2013.

E. USMCA & NAFTA Chapter 11 225

(2) The legacy of NAFTA Investors that have made investments covered by NAFTA have three years from the date of NAFTA’s termination to bring a claim under its provisions. Claims have already been brought under it during this period.196 Ongoing investment arbitrations under NAFTA continue even after its termination. A brief review of this highly influential treaty is therefore appropriate.

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As a product of the wave of economic liberalization in the 1980s and 1990s, NAFTA was signed by Canada, Mexico, and the United States of America in 1992, and entered into force on 1 January 1994. NAFTA created one of the largest free trade areas in the world, linking 450 million people and countries producing over US$17 trillion in goods and services. Its general aim was to create an expanded and secure market for the goods and services produced in the contracting parties’ territories, reducing distortions of trade and ensuring a predictable commercial framework for business planning and investment.197 For the most part, NAFTA deals with trade issues, thereby differing from a BIT. Chapter 11 deals with investment, establishing a regime for the settlement of a wide range of investment disputes between Parties to NAFTA and investors of another Party. A US investor has standing under NAFTA to bring a claim against Canada, for example, if it believes that Canada has breached an obligation listed in Chapter 11 (national treatment, or expropriation, for example). This would equally apply to a Mexican investor, but a US investor would not be allowed to submit a claim against the US Government. An investor is not able to bring a claim against its own government. This investor–state mechanism is the only means by which private individuals or corporations can bring a claim against a foreign government in the NAFTA block and seek damages from it. Once the claim is made, a tribunal is established according to Chapter 11. It will then determine if the established standards and/or obligations have been breached and further whether the investor is entitled to recover monetary damages. NAFTA’s provision of international arbitration was thought to provide investors with a more stable and predictable business framework for their investments than reliance on local courts. The principal features of Chapter 11 are examined below, even though this will be phased out by the end of 2022. From an early stage, NAFTA’s arbitration regime was frequently used by investors in disputes with NAFTA states. By 2018, when the USMCA was nearing completion, as many as sixty-one investment claims had been brought before tribunals under NAFTA.198 Among these cases there have been many concerned with various kinds of energy investment. Until the recent growth of ECT cases, it was the most frequently used investment treaty after the ICSID Convention.199

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Scope of protection The definition of a protected investment in NAFTA has a similar structure to that used by many of the BITs that followed it. It sets out a detailed list of qualifying investments in Article 1139, such as an enterprise, equity security of an enterprise, loan to an enterprise or real estate acquired for economic benefit, but it goes further by setting out a short list of assets that do not fall within this definition. The latter include ‘commercial contracts for the sale of goods or services’, the extension of credit about a commercial

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196 For example, Odyssey Marine Exploration, Inc v United Mexican States, ICSID Case No UNCT/20/1. 197 NAFTA Treaty, Preamble. 198 UNCTAD, IIA Issues Note (2018) at 4. 199 For details about the dispute settlement process, see the website of the NAFTA Secretariat: (accessed 14 August 2018).

226 Chapter 5: Stability based on Treaty transaction and claims to money that do not involve the kinds of interests defined as investments.200 In a recent ruling, a NAFTA tribunal upheld jurisdiction over a Canadian real estate investor’s claim against Mexico after determining that mortgages are protected investments under NAFTA (intangible real estate under local Mexican law) but non-negotiable promissory notes issued for a term of less than three years as security for credit agreements do not qualify as investments under Article 1139. The investor, Lion Mexico Consolidated LLP, had signed a titulo de credito (a non-negotiable agreement for repayment of money under Mexican law) but had not made a formalized commitment of capital and so did not meet NAFTA’s requirement for a formal contract underpinning the capital commitment.201 5.118

The definition of an enterprise specifically excludes corporations that have no substantial existence on the territory of a Contracting Party (in contrast to the ECT). To qualify for NAFTA, an enterprise has to be ‘carrying out business activities’ in the territory of a party.202 The range of qualifying enterprises is further restricted by allowing parties to deny benefits to enterprises which would otherwise qualify if the enterprise is owned or controlled by investors of a non-party which does not maintain diplomatic relations with the denying party.203 The benefits of Chapter 11 may also be denied by a party to enterprises owned by investors of a non-party if the denying party has adopted measures prohibiting transactions with respect to the non-party state.204

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Structure Chapter 11 contains three sections: they deal with the substantive obligations of the parties with respect to investors and their investments; with the dispute resolution options arising out of the obligations to investors; and with definitions concerning the scope of application of the Chapter. There are seven substantive rights which NAFTA protects:205 • national treatment;206 • MFN treatment;207 • minimum standard of treatment, including fair and equitable treatment and full protection and security;208 • the right not to have performance requirements imposed or enforced if they could act as barriers to trade. The long list of such requirements provides a degree of protection that goes beyond the type of protection found in BITs;209 • the right not to be subject to requirements that locally incorporated entities may appoint individuals of any nationality to senior management positions. States Parties may require that a majority of the board of directors are of a particular nationality or residency, but such a requirement must not materially impair the ability of the investor to exercise control over the investment;210 200 NAFTA, Art 1139. 201 GAR, ‘NAFTA covers morgages but not notes, says tribunal’, 1 August 2018; Investment Arbitration Reporter (Lisa Bohmer), ‘Arbitrators in Lion v Mexico case determine that mortgages fall under NAFTA’s investment chapter, but promissory notes do not’, 1 August 2018. 202 NAFTA, Art 1139. 203 Art 1113(1) NAFTA: ‘Close examination reveals that Article 1113 (1) of NAFTA is nearly identical to Article 17(2) of the ECT (although set out in reverse order)’: Jagusch, S. & Sinclair, A. (2008) ‘Denial of Advantages under Article 17(1)’, in Coop, G. & Ribeiro, C. (eds) (2008) Investment Protection and the Energy Charter Treaty, New York: JurisNet LLC, 17–45 at 33. 204 NAFTA, Art 1113. 205 See the discussion in McLachlan, Shore, & Weiniger (2017) at 36–38. 206 NAFTA, Art 1102. 207 NAFTA, Art 1103. 208 NAFTA, Art 1105. 209 NAFTA, Art 1106. 210 NAFTA, Art 1107.

E. USMCA & NAFTA Chapter 11 227 • currency transfers;211 and • the right not to be subject to expropriation or measures equivalent to expropriation. The exception is expropriation for a public purpose, on a non-discriminatory basis, in accordance with due process and minimum standards of international law and on payment of compensation.212 All three of the Contracting Parties to NAFTA have a federal structure. NAFTA therefore provides that subdivisions of the Parties (that is, states or provinces) are bound by the above obligations.213

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A NAFTA Free Trade Commission is established which allows the parties to issue binding interpretations of NAFTA provisions. For the most part, these are interpretations on procedural issues, although the power has been used to issue interpretations of NAFTA provisions in a statement of 31 July 2001.214 This declared that Article 1105(1) prescribes the customary international law minimum standard of treatment and that the concepts of fair and equitable treatment and full protection and security do not require treatment in addition to the customary international law minimum standard. As Gabrielle Kaufman-Kohler has observed, the use of interpretive powers by a non-judicial or political body is not unique to NAFTA. The WTO and the IMF have such mechanisms, and a great many are found in instruments entered into by the parties to NAFTA with third countries.215

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Dispute settlement NAFTA allows investors to bring two kinds of claims. The first kind is a claim by an investor of a party arising out of loss or damage suffered because of another NAFTA party breaching an obligation.216 The second kind of claim is one that is made by an investor of a party on behalf of an enterprise. Here, the investor will bring a claim on behalf of an enterprise with a different NAFTA nationality which the investor owns or controls directly or indirectly, where the investor has incurred loss or damage because of, or arising out of, a breach by a NAFTA party.

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There is a time limit on the introduction of claims. They may not be made if more than three years have elapsed from the date on which the investor or the enterprise acquired or should have acquired knowledge of the alleged breach and knowledge of loss or damage.

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NAFTA offers investors different forms of arbitration to choose from when making a claim against one of their host states. In this sense, it resembles the ECT. A claim may be brought under the ICSID Convention, the ICSID Additional Facility or the UNCITRAL Arbitration Rules.217 For many years, only one NAFTA party (the United States of America) was also a party to the ICSID Convention so all arbitrations had to brought under the ICSID Additional Facility or the UNCITRAL Arbitration Rules. NAFTA awards were therefore only enforceable under the New York Convention and were amenable to review by the courts at the seat. This changed with the ratification of ICSID by Canada in 2013 and by Mexico in 2018.

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211 NAFTA, Art 1109. 212 NAFTA, Art 1110. 213 NAFTA, Art 1102(3). 214 NAFTA Free Trade Commission (FTC), Interpretation of NAFTA Chapter 11 (31 July 2001), 6 ICSID Rep 567, 568. 215 Kaufmann-Kohler, G. (2011), ‘Interpretive Powers of the Free Trade Commission and the Rule of Law’, in Bachand, F. (ed.) Fifteen Years of NAFTA Chapter 11 Arbitration, NewYork: JurisNet, 175–194 at 176–180. She is positive about the use of interpretation in relation to the rule of law since it increases predictability of the norms but submits three tests that the exercise of such powers must meet. 216 NAFTA, Art 1116. 217 NAFTA, Art 1120.

228 Chapter 5: Stability based on Treaty 5.125

The differences between the available options are, as Antonio Parra has noted, less significant than they might be.218 ICSID is designated by NAFTA as the appointing body for arbitrators for all the NAFTA investment chapter proceedings. Common procedures for all proceedings, both ICSID and UNCITRAL, have been set out by the NAFTA parties, and ICSID has administered proceedings for both ‘as if they were proceedings under ICSID’s own rules’.219

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Three other features of NAFTA may be noted. Firstly, one or more claims may be consolidated by a tribunal established by the Secretary-General of ICSID at the request of a disputing party. Such claims need to have a question of law or fact in common. Once such a tribunal has been established and assumed jurisdiction, other tribunals lose their jurisdiction to decide claims. This provision allows multiple claims arising from a single measure taken by a NAFTA party to be ‘decided consistently in a way that relieves States from the administrative difficulties and potential legal perils of facing a multiplicity of actions arising out of the same underlying facts’.220 Secondly, there is a waiver of right requirement applicable to an investor or enterprise once proceedings have been initiated. Specifically, it must waive its right to initiate or continue proceedings before any domestic administrative tribunal or court seeking relief in respect of the measure alleged to be a breach. This does not apply to proceedings for injunctive, declaratory, or other extraordinary relief not involving the payment of damages, which may be brought nonetheless.221 However, a tribunal may order interim measures of protection.222 Finally, it may be noted that the only relief a tribunal may award is monetary damages or restitution of property. A NAFTA tribunal may not grant injunctions or make declarations.223

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One of the interesting, and perhaps ironic, results of NAFTA’s operation is the extent to which the traditional capital-exporting states (Canada and the USA) became respondents under Chapter 11 arbitrations.224 This was an early indication of what has since become the dominant feature of disputes brought under the ECT. F. Treaties with Investment Provisions

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A growing number of states are parties to a different category of IIAs that are largely concerned with free trade but also contain investment provisions. By one estimate there are more than 389 treaties with investment provisions (excluding any BITs or MITs).225 These 218 Parra, A.R. (2006) ‘Investments and Investors Covered by the ECT and Other Investment Protection Treaties’, in Ribeiro, C. (ed) Investment Arbitration and the Energy Charter Treaty, 51–54. 219 Ibid at 54. 220 McLachlan, Shore, & Weiniger (2017) at 38. 221 NAFTA, Art 1121. 222 NAFTA, Art 1134. 223 NAFTA, Art 1135. 224 Alvarez, G.A. & Park, W. (2003) ‘The New Face of Investment Arbitration: NAFTA Chapter 11’, Yale J Int’l L 28, 365. Early examples are SD Myers Inc v Government of Canada, Partial award, 13 June 2000; Pope and Talbot Inc v The Government of Canada, Award on the Merits of Phase 2, IIC 193 (2001), 10 April 2001; Mobil Investments Canada Inc. and Murphy OilCorporation v Canada, ICSID Case No ARB(AF)/07/4. More recent cases include a claim by ExxonMobil against Canada over research and development spending requirements imposed on offshore drilling investors in Newfoundland before ICSID: GAR 17 July 2018: ‘ExxonMobil’s NAFTA claim against Canada to proceed’. 225 UNCTAD, ‘The Changing IIA Landscape’ (2020) at 2. For a useful overview, see Echandi, Roberto (2018) ‘Bilateral Investment Treaties and Investment Provisions in Preferential Trade Agreements: Recent Developments in Investment Rule-making’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP, 3–30.

F. Treaties with Investment Provisions 229 vary a great deal: often they are organized on a regional basis and may be bilateral as well as multilateral. If we break down the nine agreements concluded in 2017,226 for example, we find that four of these contained obligations usually found in BITs, including substantive standards of investment protection: the Argentina–Chile FTA; the ASEAN–Hong Kong, China Investment Agreement; the China–Hong Kong, China Investment Agreement, and the Pacific Agreement on Closer Economic Relations (PACER) Plus. Among the other broad agreements, there was much diversity in content in their treatment of investment, with some omitting substantive investment protection provisions. Negotiations on several other agreements, regional in character, have been ongoing, with the African Continental Free Trade Area agreement a recent addition to those entering into force.227

(1) ASEAN Investment Agreement Among the more important of these agreements is the investment agreement between the ten member countries of the Association of South-East Asian Nations. This is known as the ASEAN Comprehensive Investment Agreement (ACIA).228 The general aim of the ACIA is to further the ASEAN goals of increasing investment among the member states and creating favourable conditions for investment. The ACIA sets out rules for the protection, facilitation and promotion of investments to benefit ASEAN-based foreign investors, providing for pre- establishment NT and MFN, according to a positive list approach. It resembles a BIT in its length and coverage. In case of disputes with host governments, the ACIA provides investors with a choice of bringing a claim to the domestic courts or to international arbitration. Investors are also assured that their investments will not be expropriated, except for public purposes and with compensation. This does not include non-discriminatory measures taken to achieve environmental objectives. There is also a ‘carve-out’ provision in Article 18 (security exceptions) which allows a member state to take any action it considers necessary for the protection of ‘its essential security interests’ in a domestic emergency (such as a balance of payments crisis or impacts from a public health emergency such as COVID-19).

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There are two restrictive conditions which distinguish it from standard BITs.229 Firstly, it allows member states to require in Article 4(a) that ‘covered’ investments be specifically approved in writing and registered by the host country in order to be covered.230 Secondly, it requires a corporation to have its place of effective management in the territory of the contracting party in order to qualify as a ‘company’ of a contracting party.231 This means that the ACIA will not protect assets owned by shell companies incorporated in ASEAN states. These provisions were analysed in the first ASEAN Agreement arbitration, Yaung Chi Oo Trading

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226 UNCTAD, World Investment Report 2018 (2018). 227 . 228 ACIA (2009): (accessed 15 August 2018). The ACIA entered into force on 29 March 2012 and replaces the 1998 Framework Agreement on the ASEAN Investment Area and 1987 ASEAN Agreement for the Promotion and Protection of Investments. The member countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. In January 2010 ASEAN also concluded two FTAs: the ASEAN-China FTA and the ASEAN-Australia-New Zealand FTA. Each has an investment component. 229 However, it may also be noted that Art 17(1)(f) expressly allows a member state to adopt or enforce measures ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’. 230 ACIA, Annex I. 231 ACIA, Art 19.

230 Chapter 5: Stability based on Treaty Pte Ltd v Government of the Union of Myanmar.232 Their aim is to limit the practice whereby a company adopts a local corporate form without any real economic link to the state simply to bring the investor or the investment within the scope of the ACIA’s protections.

(2) The Comprehensive Progress Trans-Pacific Partnership (CPTPP) 5.131

This regional free trade agreement involves eleven countries on the Pacific Rim.233 The overall goal is to promote ‘economic integration to liberalise trade and investment, bring economic growth and social benefits, create new opportunities for workers and businesses, contribute to raising living standards, benefit consumers, reduce poverty and promote sustainable growth’.234 The states parties include significant energy and minerals producers, such as Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, Peru, and Vietnam, and importers such as Japan and Singapore.

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The CPTPP incorporates by reference most of the provisions of its predecessor, the Trans Pacific Partnership (TPP), signed in 2016, but it excludes participation by the US, following its withdrawal from the TPP. The incorporation includes the TPP investment chapter (Chapter 9), which provides for investor–state dispute settlement, and the various restrictions on the scope of investor–state dispute settlement negotiated under the TPP, and provisions giving governments greater rights to ensure that public interest objectives can be met.

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While the treatment of energy in the TPP did not extend to a dedicated chapter, it did expressly refer to two categories of covered agreements, investment agreements and investment authorizations, that mostly concerned energy and public infrastructure. Annex 9-L of the TPP expressly lists three kinds of investment agreement: applicable to natural resources that a national authority controls, such as oil, natural gas, rare earth minerals, gold, iron ore, including for their exploration, extraction, refining, transportation, distribution, or sale; applicable to the supply of power generation and distribution services; applicable to certain infrastructure including pipelines. Interestingly, in Section B of the same Annex, there is a reference to ‘stability agreements’ that Peru may enter into in relation to covered investments or investors under domestic legislation (see c hapter 7, paras 7.33–7.38). Crucially, this protection to investors holding investment agreements, authorizations, or stability agreements has not been carried over into the CPTPP. Indeed, CPTPP provides that on entry into force the parties shall suspend the application of provisions set out in the Annex to the CPTPP.235 This Annex includes both categories of covered agreement in the TPP text and its Annex 9-L as well as the Peruvian stability agreements. Until the parties decide to remove this suspension, which was accompanied by the removal of all references to the two categories in the treaty text itself, these provisions are excluded from the scope of the CPTPP, and investors 232 ASEAN Arbitral Tribunal (ICSID Additional Facility Rules): Yaung Chi Oo Trading Pte Ltd v Government of the Union of Myanmar (Award), ASEAN Case No ARB/01/1, IIC 278 (2003) (3 March 2003). 233 (accessed 5 January 2020). It entered into force on 30 December 2018. 234 This wording is from the Preamble to the TPP, which was reaffirmed expressly in the Preamble to the CPTPP. The latter also reaffirmed ‘the importance of preserving their (ie States Parties’) right to regulate in the public interest’ (Recital 6, CPTPP). 235 CPTPP, Article 2: Suspension of the Application of Certain Provisions. The CPTPP entered into force on 20 December 2018.

F. Treaties with Investment Provisions 231 with such agreements will not have access to investor–state dispute settlement under the CPTPP in the event of breaches of any of these agreements by a government. This also removes a potential benefit from the interplay between the CPTPP and the USMCA: without this suspension, Canadian energy investors in Mexico and Mexican energy investors in Canada would have had recourse to investor–state dispute settlement, not available to them under the USMCA.

(3) DR-CAFTA A different example of an investment agreement can be found in Central America, where a regional FTA was concluded in 2004 called the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA).236 Its aim is to liberalize the member states’ markets including public services such as electricity and water, and to create a free trade zone like that established by NAFTA. This time the relationship is between the United States and a group of smaller developing economies which are neighbours in Central America. The seven signatories are Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States. All have ratified the agreement. The dispute settlement mechanism is modelled on Chapter 11 of NAFTA and allows investors similar rights.

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The DR-CAFTA agreement has already had several tests from investors in cases involving a railway concession,237 an electricity distribution concession and mining rights. In the electricity case,238 a minority investor in the Guatemalan electricity distribution sector, Teco Energy, claimed that the electricity regulatory authority had unilaterally set a tariff that was too low, causing Teco’s subsidiary to incur significant losses. Under the country’s General Electricity Law, the tariffs were fixed for five-year periods and set by a depoliticized process involving the distributors and the regulator. The dispute arose over the setting of tariffs over the third five-year period, which the claimant considered too low. Although the investor won its case in 2013 that a breach of CAFTA’s minimum standard of treatment had occurred, the damages set were barely one tenth of those sought, covering only ‘historical losses’ over a two-year period. Both Teco and Guatemala sought to annul some, or all the award and the case led to an annulment decision and enforcement proceedings in the US District Court for the District of Columbia in 2019. In the mining case,239 the investor contended that the host

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236 https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america- fta (accessed 15 August 2018). 237 Railroad Development Corporation v Republic of Guatemala, ICSID Case No ARB/07/23, Award (29 June 2012). The investor won but damages at US$14.6 million were low. This was the first dispute brought under the Treaty, and the first to reach an award on the merits. It was paid in December 2013. 238 TECO Guatemala Holdings, LLC v Republic of Guatemala, Award, 19 December 2013 (ICSID Case No ARB/ 10/23), IIC 623 (2013); there were two annulment proceedings concluded in 2015 and 2016, in which parts of the original award were annulled on the ground that the tribunal had failed to state reasons for its decision to dismiss the investor’s request for additional damages; also annulled was the decision to reject interest; TECO applied for a new tribunal to rule on the annulled portions of the award; in May 2020 the resubmission tribunal awarded about US$50 million in additional damages including pre-award interest: Resubmission Proceeding, Award, ICSID Case No ARB/10/23, 13 May 2020 (a supplementary decision on interest followed shortly afterwards). 239 Pac Rim Cayman LLC v Republic of El Salvador, ICSID Case No ARB/09/12; jurisdiction was declined under DR-CAFTA in 2012 (the company had no substantial business activities in the USA, being Canadian, a non-DR- CAFTA state, and claims of a breach of El Salvador’s domestic investment protection law dismissed in an award rendered on 14 October 2016; a second DR-CAFTA treaty based claim was made in 2009 against El Salvador by two US mining companies, Commerce Group Corporation and San Sebastian Gold Mines Inc, alleging damages in the region of US$100 million: ICSID Case No ARB/09/17, IIC 497 (2011). The award was rendered on 14 March 2011, with the claims dismissed, and an annulment proceeding was discontinued due to lack of payment of the required advances. A further mining claim was registered under DR-CAFTA in 2019 concerning damages for

232 Chapter 5: Stability based on Treaty state (El Salvador) had frustrated its efforts to develop its gold and silver mining interests in violation of DR-CAFTA. It arose from a failed application for a mining exploitation concession and other mining rights. G. The Paramount Role of ICSID 5.136

By far the most influential institution on the juridical landscape of international energy investment law is the International Centre for Settlement of Investment Disputes (ICSID), based in Washington DC.240 Established by the ICSID Convention, its overall goal was—and is—to leverage private investment for economic development by providing States and foreign investors with a neutral international facility for resolving disputes.241 In doing this, each year ICSID administers a caseload of international investment claims of which around 41 per cent of all cases are concerned with oil, gas and mining, electricity and other energy sources, without taking into account energy-related cases that fall within the categories of construction (9 per cent), transportation (9 per cent), and finance (8 per cent).242 In 2020 the number of new energy cases reached 50 per cent of the total. With a total of more than three hundred cases ongoing in 2020, this gives ICSID considerable influence on the evolution of jurisprudence on international energy investment law.

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ICSID’s influence is qualified by the fact that it does not conciliate or arbitrate disputes directly, but rather provides the institutional and procedural framework for independent commissions and tribunals constituted in each case to resolve the dispute. In this capacity, it administers more than 70 per cent of all known international investment cases, making it the leading institution in investor–state dispute settlement.243 Yet, in contrast to every other commercial or investment arbitration institution, ICSID is self-contained and de-localized: its Convention and arbitration rules contain all of the provisions necessary for the arbitration of disputes; its competence is derived from the ICSID Convention and

suspension of operations at Guatemalan gold and silver mines: Daniel W. Kappes and KCA v Guatemala, ICSID Case No ARB/18/43. 240 Established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, concluded in 1965 and entering into force in 1966 as one of five international bodies that make up the World Bank Group, with the express aim of providing facilities for conciliation and arbitration of international investment disputes. Its Regulations and Rules were last updated in 2006 but are currently under review. There are many guides to the Convention text, but an invaluable source is Schreuer, C.’s (2009) treatise, The ICSID Convention: A Commentary (2nd edn), Cambridge: CUP. At a more accessible length, with insightful comments is the work of Reed, L., Paulsson, J. & Blackaby, N. (2010) Guide to ICSID Arbitration (2nd edn), The Hague: Wolters Kluwer. For an authoritative guide to the ICSID Additional Facility Rules, see Richard, Caroline S. & Dechamps, Jean-Paul (2018) A Guide to the ICSID Additional Facility Arbitration Rules, Oxford: OUP. The definitive history of ICSID was written by its first deputy Secretary-General, Antonio R. Parra, and is highly recommended: Parra, A.R. (2017) The History of ICSID (2nd edn), Oxford: OUP. 241 ICSID (2019), ICSID Annual Report, Message from the Secretary-General, 1. 242 ICSID (2020), The ICSID Caseload—Statistics, Issue 2020-2, 12. The figures cover Fiscal Year 2020 (that is, 2019–20). Year-on-year the statistics vary but with respect to the share accorded to these two energy categories, the percentage is consistent around the lower 40 per cent range. By comparison, the ICC received 140 new energy cases in 2019 out of a total of 946, making it the largest category after construction/engineering. About one half of the emergency arbitration filings were in the fields of energy and construction/engineering: remarks made by Secretary-General Mourre at Ninth ITA/IEL/ICC, Joint Conference on International Energy Arbitration, 20–22 January 2021. 243 ICSID Annual Report 2017: (accessed 19 August 2018). There has also been a growth in the number of investment cases administered under non-ICSID sets of rules, especially UNCITRAL.

G. The Paramount Role of ICSID 233 international law, not from national law; its awards are immune from challenges brought before national courts in parties to the ICSID Convention and must be enforced as if they were judgments of those courts; and its system includes provisions for the internal review of awards. As one observer notes, the ICSID Convention ‘prevents domestic courts from reviewing any decisions issued by ICSID tribunals’, so that ICSID awards are ‘immune from challenges brought before national courts, which may have a local bias or be subject to the influence of the host government’.244 Under this unique system, investors are offered the prospect of bringing their disputes to neutral arbitration tribunals established on an ad hoc basis, administered by ICSID and functioning independently of local courts and local procedural laws. The outcome will be binding on the parties and not subject to appeal. Each contracting state is required to recognize the award and enforce its pecuniary obligations as if it were a final judgment of a court in that state. For investors, this is a very reassuring combination of features. For both investors and states, there is further reassurance in the sense that from time to time ICSID carries out a review of its rules involving extensive consultations with ICSID member states, and more recently with legal professionals and the public.245

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The ICSID caseload has built up significantly since its inception in 1965. In its early years, the caseload was modest, relying on arbitrations arising directly from cases where foreign investors and states had provided for ICSID arbitration in an investment contract to which the state was a party; only a very few of its cases were concerned with investments in energy. Until 1984, almost all the requests for arbitration registered at ICSID were based on the written consent of the parties expressed in such direct investment contracts. In the oil and gas industry, such consent would usually be recorded in a production sharing contract or concession. Then there was a period when ICSID cases were also commenced based on consents of governments expressed in their national investment laws. This changed significantly with the growth of BITs and MITs, which provide the advance consent to international arbitration by the respondent state.246 The proportion of ICSID cases expressly concerned with energy in one or other of its forms also increased, so that the range of energy and energy-related cases heard before ICSID is now very wide. It encompasses activities such as oil and gas exploration and production, all stages of the electricity cycle, gas transmission and distribution, and renewable energy. Several of the resulting awards consider issues of legal stability.

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Many BITs and the ECT commit the states parties to give investors the option of submitting a claim for redress where there is a breach of obligations by the relevant state to ICSID or another form of international arbitration as agreed in the treaty instrument (the ECT makes three options available). The growth in use of the arbitration mechanisms in these treaty instruments has therefore played a major role in expanding the scope of arbitration under ICSID and thereby its caseload, with the general form of state consent to ICSID jurisdiction

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244 Katia Yannaca-Small (2017) at 727. 245 In 2019–2021 ICSID was carrying out its fourth and most comprehensive consultation on amendments to its rules and regulations since its establishment. 246 In some cases, consent applies to constituent subdivisions or agencies of a contracting state designated by the state to ICSID under Article 25(1) of the Convention (ICSID jurisdiction may extend to any legal dispute arising directly out of an investment between a Contracting state and any national of another contracting state if the parties to the dispute consent in writing to submit to ICSID). Subdivisions or agencies designated as competent to become parties to disputes submitted to ICSID include such as the Nigerian National Petroleum Corporation, Perupetro S.A., and from Turkey, the Petroleum Pipeline Corporation (BOTAS) and the Electricity Generation and Transmission Corporation (TEAS): ICSID/8-c: Designations by Contracting States regarding Constituent Subdivisions or Agencies.

234 Chapter 5: Stability based on Treaty through specific BITs becoming the primary instrument for ICSID jurisdiction. Statistics of the ‘network of consents’ to ICSID arbitration show that states’ consent in investment contracts between the investor and the host state is now a distant second, and the ECT an even more distant third.247

(1) The grand bargain 5.141

The guiding idea behind the ICSID Convention was to provide enhanced stability for private international investments flowing into capital-importing countries and thereby to encourage economic development.248 It aimed to remove or at least mitigate obstacles to international flows of investment that were thought to arise from political and regulatory risks, and from the absence of a specialized international method for the settlement of investment disputes. At its core there was a sort of grand bargain. States Parties to the Convention would consent to accord to investors the standards of treatment recognized by international law and would agree in advance that claims by investors for perceived violations could be presented directly before neutral international arbitrators. In this way, investors would not need to approach their home states for diplomatic protection and a climate of mutual confidence between states and foreign investors would be facilitated. States Parties agreed to recognize awards made under the ICSID Convention as binding and to enforce the financial obligations imposed by ICSID awards within their territories as if they were final judgments of their own courts.249 In return, capital importing countries could expect that the enhanced investment in prospect would increase the potential for economic and social development. In this bargain, where states and investors considered it in their mutual interest to agree to international methods of settlement, ICSID’s role was to offer methods that took into account the special characteristics of the disputes covered, as well as the parties to whom they would apply. At the very outset, the Report of the Executive Directors on the Convention made it clear that ICSID was to strive to maintain a ‘careful balance between the interests of the investors and those of the host States’.250 A result of this commitment is that ICSID has provided for the institution of proceedings by host states as well as by investors.

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Membership of the ICSID Convention is very wide, comprising 155 contracting parties and 164 signatories in 2021,251 including more than half of the twenty countries in the world with the largest reserves of oil and gas, such as Iraq, Kazakhstan, Kuwait, Mexico, Nigeria, Saudi Arabia, and the United Arab Emirates. However, key energy states such as Iran, Libya, and Russia have not yet joined, although Russia has signed the ICSID Convention.252 In May 247 In 2019 the shares for establishing ICSID jurisdiction in new cases registered under the ICSID Convention and the Additional Facility Rules were 64, 15, and 7 per cent respectively: ibid (2019) (ICSID Press Release). A growing number of cases are also being instituted before ICSID under free trade agreements such as the DR- CAFTA, or the Canada–Colombia FTA, although still only 2 per cent: 2019 ICSID Annual Report, Washington DC, 21. 248 ICSID Convention, Preamble, Recital 1: ‘Considering the need for international cooperation for economic development, and the role of private international investment therein.’ 249 Art 54(1). 250 Report of the Executive Directors on the Convention point 13. 251 ICSID (2020) Annual Report: Excellence in Investment Dispute Resolution, 2; ICSID website: (accessed 4 February 2021). Ecuador signed the Convention in June 2021. 252 Moreover, some energy-exporting states have submitted notifications under Art 25(4) concerning classes of disputes considered unsuitable for submission to ICSID. For example, the Saudi Arabian notification of 8 May 1980 states that: ‘[T]‌he Kingdom reserves the right of not submitting all questions pertaining to oil and pertaining to acts of sovereignty to the International Centre for the Settlement of Investment Disputes whether by way of

G. The Paramount Role of ICSID 235 2007, the first denunciation of ICSID took place when the Republic of Bolivia invoked the procedure set up under Article 71 to withdraw from the ICSID Convention. The procedure was subsequently also invoked by Ecuador in July 2009 (since reversed), and in January 2012 by Venezuela. Denunciation takes effect six months after receipt of the written notice by the World Bank.253 In Venezuela’s case, the implications are very modest. Of the twenty-six BITs that it has, only two include ICSID as the sole option for arbitration, with other options still available to covered investors after withdrawal has taken place.254

(2) Arbitration procedures The form of arbitration and conciliation established by ICSID has some unusual features, deriving from its goal of establishing an autonomous and self-contained system for the institution, conduct, and conclusion of these proceedings.255 Like other forms of arbitration, ICSID arbitration is consensual in character. The consent of the parties need not be recorded in the same document and can be given before or after a dispute has arisen. However, a distinctive feature is that once the parties have given their consent, it may not be unilaterally withdrawn. It constitutes consent to ICSID arbitration to the exclusion of any other remedy under Article 26. A party may not attempt to seek court-ordered interim measures without the consent of both parties and indeed it is the tribunal (and not a judicial body outside the ICSID system) which is empowered to grant such measures.256 In addition, an arbitral award rendered under ICSID may not be set aside by the national courts of any contracting state on any ground whatsoever, underlining the finality of an ICSID award (Article 53(1)). It is only subject to the post-award remedies provided in the Convention, a condition that is mandatory and exclusive (Article 26). This internal review process has traditionally been viewed by commentators as very limited since the grounds for requests for annulment of an award under Article 52 are procedural and not concerned with the merits of the award. In recent years, however, there has been a trend for states to explore the potential of the ICSID review process if they have been dissatisfied with the award.

conciliation or arbitration.’ Jamaica has also notified ICSID that any ‘[l]egal dispute arising directly out of an investment relating to minerals or other natural resources’ (8 May 1974). These are contained in ICSID/8-D. on the ICSID website: . 253 On 6 July 2009, the World Bank received a written notice of denunciation of the ICSID Convention from the Republic of Ecuador taking place six months after the receipt (that is, 6 January 2010). Prior to this, Ecuador had submitted a note on 4 December 2007, under Art 25(4) of the Convention notifying the Centre of the class or classes of disputes which it would not consider submitting to the jurisdiction of the Centre: see ICSID News Release, 5 December 2007: (accessed 4 February 2021). 254 Sergey Ripinsky (2012) Investment Treaty News: Venezuela’s Withdrawal from ICSID: What it Does and What it Does Not Achieve, IISD: (accessed 4 February 2021). 255 Proposals for changes to The ICSID Rules and Regulations were made in August 2018, including new provisions on transparency, arbitrator disclosure, security for costs and third-party funding. They also include proposals for reform of the additional facility rules, and an entirely new set of rules on mediation. While amendment of the Convention requires unanimity among the member states, changes to the Rules of Procedure for Arbitration Proceedings require only a two-thirds majority. These are incorporated by parties into their arbitration clauses by reference. 256 ICSID, Art 47.

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236 Chapter 5: Stability based on Treaty 5.144

There are five grounds for review set out in the Convention, including annulment of the award (Article 52); a supplementary decision (Article 49), concerning a question which the requesting party considers the tribunal omitted to decide in the award; a rectification, following a request by a party to the dispute to rectify a clerical, arithmetical, or similar error identified in the award (Article 49); an interpretation, where a party to a dispute requests the tribunal to interpret the meaning or scope of its award (Article 50), or a revision of the award, if a party to the dispute requests the tribunal to do so, in circumstances where new facts emerge which may affect the award decisively and which were unknown to the tribunal and to the party seeking to introduce these facts, with the proviso that the latter’s ignorance was not due to negligence (Article 51). In the latter case, the new elements must be ones of fact and not law; they must be of such a nature that they would have led to a different decision had they been known to the tribunal. Time limits are set on applications for each of these remedies, except the remedy of interpretation for which no time limit is set.

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While a review is to be heard (if possible) by the same tribunal as that which made the original award, applications for annulment are heard not by the original tribunal but rather by a three-person ad hoc committee appointed by ICSID from its panel of arbitrators. By 2019 there had been 128 applications for annulment, twenty for rectification, eighteen for a supplementary decision, and eight for an interpretation. An example of the rectification process in an energy case is the one made concerning an award made in ConocoPhillips v Venezuela.257 It led to an application for rectification in 2019, submitted within the time- limit of forty-five days set by Article 49(1) of the ICSID Convention. The Decision resulted in a reduction of the amounts to be paid by the respondent to the claimant.

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Of all the methods of review, annulment is the most common and the most serious in terms of its practical import.258 It is therefore considered at length in section (4) below in relation to several awards in energy cases.

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Provided that any review proceedings are complete, the award is final. The recognition and enforcement mechanisms apply to all contracting states, whether they are parties to the dispute or not. Each state must recognize an ICSID award as binding and enforce the pecuniary obligations imposed by the award within its territories as if it were a final judgment imposed by a court in that state. Provision is also made for enforcement in states with a federal constitution. Execution of the award is a different matter, however. National courts do have a role here; they execute ICSID awards according to their own national law.

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Two jurisdictional conditions of note in the ICSID Convention are, firstly, the requirement that the dispute be one between an ICSID contracting state and an individual or company that qualifies as a national of another ICSID contracting state (Article 25), and secondly, that the dispute must qualify as a ‘legal dispute arising directly out of an investment’ (Article 25(1)). The ICSID Convention leaves undefined several key terms such as ‘nationality’, ‘foreign control’, and ‘investment’ (see Chapter 2, 2.37–2.44).

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Another feature of ICSID that is worthy of note is the default choice of law clause in Article 42(1). Where the parties have not agreed on the substantive rules of law under which a dispute is to be decided, a tribunal ‘shall apply the law of the Contracting State party to the 257 ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V., ConocoPhillips Gulf of Paria B.V. v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, Decision on Rectification, 29 August 2019. 258 The section on Annulment takes up no less than 205 pages in the Schreuer ICSID Commentary (see note 243 above).

G. The Paramount Role of ICSID 237 dispute . . . and such rules of international law as may be applicable’. Some have interpreted this provision as meaning that in the event of conflict between the host state’s domestic law and international law, the latter will prevail: an ‘internationalization’ is permitted, on that view. In practice, host state law rules play a role on certain questions through the BIT provisions, as well as the substantive provisions of a BIT (where a BIT is involved) and other sources of international law.259 Consistency An ICSID tribunal is not required to follow decisions made by other ICSID tribunals but such decisions are very likely to have influence, not least because the parties themselves will often refer to such decisions in their pleadings. An example of the thinking behind this is the statement by the tribunal in Noble Energy when it declared it ‘must give due consideration to earlier decisions of international tribunals’ since ‘subject to compelling contrary grounds, it should adopt solutions established in a series of consistent cases’.260 Indeed, it ‘should seek to foster the harmonious development of investment law and thereby to meet the legitimate expectations of the community of states and investors towards certainty of the rule of law’. A caveat to this is that any such approach by a tribunal is subject to the specific provisions of the given treaty, to the circumstances of the case at hand and the evidence that is submitted by the parties. Hence, there is indeed scope for a different outcome in a subsequent case.

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Controversy about this topic has arisen since tribunals have in certain cases reached opposite conclusions despite very similar fact-patterns, and even with some identical members on each panel.261 It may also be noted that ICSID tribunals draw on non-ICSID case law in their deliberations. For example, in a case brought under the ECT and a BIT between Cyprus and Bulgaria, the tribunal addressed the burden of proof on an issue of jurisdiction and relied upon the test adopted by Judge Rosalyn Higgins in her separate opinion in the Oil Platforms case before the International Court of Justice (ICJ).262 The dicta of the Iran–US Claims Tribunal also make a regular appearance in ICSID awards when a claim involves issues of indirect expropriation.263

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259 Reed, L., Paulsson, J. & Blackaby, N. (2011) Guide to ICSID Arbitration (2nd edn), The Hague: Wolters Kluwer, 71–72. The authors give examples such as whether or not a covered investment was made in accordance with local law or the calculation of compensation for expropriation is in accordance with the law of the expropriating state. 260 Noble Energy Inc and Machalapower Cia Ltda v Ecuador and Consejo Nacional de Electricidad, Decision on Jurisdiction, ICSID Case No ARB/05/12; IIC 320 (2008), para 50. 261 Examples of this in the context of ICSID are: Emilio Agustin Maffezini v The Kingdom of Spain, ICSID Case No ARB/97/7, Decision on Jurisdiction, IIC 85 (2000), 25 January 2000; Award, IIC 86 (2000), 13 November 2000, Rectification of Award, (IIC 87 (2001), 31 January 2001; Salini Costruttori SPA and Italstrade SPA v Jordan, ICSID Case No ARB/02/13, Decision on Jurisdiction, IIC 207 (2004), 9 November 2004; Siemens v Argentina, ICSID Case No ARB/02/8, Decision on Jurisdiction, IIC 226 (2004), 3 August 2004; Plama Consortium Ltd v Bulgaria, ICSID Case No ARB/03/24, Decision on Jurisdiction, IIC 189 (2005), 8 February 2005; Lauder v Czech Republic, Award, 3 September 2001, IIC 205 (2001), 9 ICSID Reports 66; CMS Gas Transmission Company v Argentina, Award, ICSID Case No ARB/01/8, IIC 65 (2005) and L&G Energy Corp & Others v Argentina, ICSID Case No ARB/02/1, IIC 152 (2006): Decision on Liability, 3 October 2006. The growing body of literature addressing this subject in the wider context of international commercial and investment law includes the contributions assembled in Gaillard, E. & Banifatemi, Y. (eds) (2008) Precedent In International Arbitration, New York: Juris; Paulsson, J. (2006) ‘International Arbitration and the Generation of Legal Norms: Treaty Arbitration and International Law’, TDM 3, 5; Kaufmann-Kohler, G. (2007) ‘Arbitral Precedent: Dream, Necessity or Excuse?’, Arbitration International 23, 357. 262 Case concerning Oil Platforms (Islamic Republic of Iran v United States of America), [1996] ICJ Rep 803 at 810. 263 See also Enron Corporation v The Argentine Republic, ICSID Case No ARB/01/3, Decision on Jurisdiction, IIC 92 (2004), where the tribunal considered its ability to issue non-pecuniary orders, such as specific performance, against sovereign states. For a discussion of this subject see di Pietro, D. (2007) ‘The Use of Precedents in ICSID Arbitration, Regularity or Certainty’, Int’l Arb L Rev 10, 92–103.

238 Chapter 5: Stability based on Treaty 5.152

ICSID awards are nearly always published, with the express aim of furthering the development of international law in relation to investments. ICSID may publish excerpts of the legal conclusions of awards even without the consent of the parties.264 Because of this positive stance on publication, many of its awards play an influential role on current thinking about substantive principles and procedures.

(3) The additional facility 5.153

In addition to the ICSID Convention, and its Regulations and Rules, a second set of procedural Rules has been provided for the initiation and conduct of proceedings. The ICSID Additional Facility is another way in which disputes may be brought to ICSID for conciliation and arbitration. These Rules came into effect in 1978. They allow the ICSID Secretariat to administer certain types of proceedings between states and foreign nationals which nonetheless fall outside the scope of the treaty-based structure of ICSID: that is, where one of the parties is not a member country or national of a member country or the dispute does not directly arise out of an investment. Fact-finding proceedings are also included in the category of disputes that are eligible for the Facility. These proceedings are not covered by provisions of the Convention and could therefore be subject to review by national courts, even if such review is limited in character. An example of this is the arbitration brought against the Republic of South Africa by a group of European mining companies, concerning its Black Economic Empowerment policies (see chapter 9, 9.23–9.25).265 The request for international arbitration was made under South Africa’s BITs with Italy and the Belgian-Luxembourg economic union, following attempts at an amicable solution and unsuccessful diplomatic intervention by both the Belgian and the Italian governments. It arose out of the 2004 entry into force of the South African Mineral and Petroleum Resources Development Act 2002, which placed what had been privately owned mineral resources under ‘state custodianship’. Current and projected losses to the investor arising from this alleged expropriation, and related damages, were placed (by the investor) at around €266 million. The conclusion of that arbitration was subject to limited review by the domestic courts in the formal seat of arbitration (England), by being conducted under the Additional Facility Rules. If South Africa were an ICSID contracting state, however, such a review would not be carried out.

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Another example is the NAFTA case of Metalclad Corporation v United Mexican States.266 Several NAFTA cases have been brought under the ICSID Additional Facility Rules because at the time neither Canada nor Mexico was a party to ICSID. In Metalclad, in sharp contrast to what may happen in the self-contained ICSID process, the tribunal’s award was partially set aside by the Supreme Court of British Columbia, which was the seat of the arbitration.267

264 Rule 48 (4) of the ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules). 265 Piero Foresti, Laura de Carli and Others v Republic of South Africa, ICSID Case No ARB(AF)/07/1; Media Release, ‘Marlin and RED Graniti investors institute €266m international arbitration proceedings against South African government over bilateral investment treaty breach’, 24 November 2006. The case was settled. 266 Metalclad Corp v Mexico, Award, Ad hoc—ICSID Additional Facility Rules; ICSID Case No ARB(AF)/97/1; IIC 161 (2000), signed 25 August 2000 despatched 30 August 2000. 267 Metalclad Corporation v Mexico, Supplementary Reasons for Judgment, 2001 BCSC 1529, IIC 163 (2001), 31 October 2001.

G. The Paramount Role of ICSID 239

(4) Outcomes In line with the drafters’ goal of ensuring the finality of awards, no appeal is possible from an ICSID Convention award. Requests for a review of a tribunal’s decision are possible only under the five specific remedies described above. Rightly, most commentators focus on the annulment provision as a potential threat to the finality of an ICSID award.268 Nonetheless, other review provisions have come into play in several energy cases. For example, an application for rectification under Article 51 played a part in one of the awards that resulted from the various many legislative actions taken by oil producing states in Latin America in the first decade of the century. In ConocoPhillips Petrozuata, ConocoPhillips Hamaca & ConocPhillips Gulf of Paria v Venezuela,269 the main tribunal rectified its earlier award of US$8.3 billion in favour of the claimants, removing US$227 million from the sums awarded. Venezuela raised three clerical and arithmetical issues, two of which were accepted by the claimant and one was not objected to. Since there was no clear disagreement between the parties, the principle that the losing party would bear the costs was not upheld, and the costs were shared equally. Again, Article 51 was the basis of an application for rectification of a currency mistake in an award made against Spain in September 2019, Opera Fund Eco-Invest and Schwab Holding v Spain. It seems that the tribunal made a currency error and that the amount of the award should have been expressed in Euros rather than US dollars.270 An application by Spain in Watkins Holdings et al v Spain was not successful but triggered a strongly worded dissent against the majority decision.271 A request for a stay of enforcement was also rejected by the tribunal on the ground that it did not consider it had the power to do so during rectification proceedings.

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Annulment Either party may ask for the annulment of the award in whole or in part, and if so, the Convention requires a new committee to be constituted ad hoc to review the application. This remains a matter internal to ICSID. For an applicant, the stay of enforcement that often accompanies an application may be an attractive incentive to deploy this review mechanism. However, as a percentage of the total number of awards issued, the number of annulments appears to have declined rather than increased.272

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268 In FY 2020 there were twenty-five applications and requests for post-award remedies under the Convention of which nineteen were annulment applications: ICSID, 2020 Annual Report, 29. 269 ICSID Case No ARB/07/30. The award was made in 2013 by majority finding that Venezuela had breached the Netherlands-Venezuela BIT by failing to make a good faith effort to negotiate fair market value compensation for the expropriation of the claimants’ investments in three oil projects. rectification was followed by an application for annulment on 16 December 2019 by Venezuela. In the rectification process, a complication was that there were two competing requests from two sets of counsel, one acting on behalf of the Maduro administration and the other one commissioned by the opposition, under Senor Guaido. The applications were identical, so the tribunal considered that it was not necessary for it to decide who was the lawful representative of the country. In December 2019, an application for annulment of the award was submitted. 270 ICSID Case No ARB/15/36; GAR, ‘Claimants ask for rectification of Spanish renewables award in order to correct perceived error in currency used for damages’, 17 October 2019. In two other awards rendered against Spain, rectification applications have been reported to be successful: SolEs Badajoz GmbH v Kingdom of Spain (ICSID ARB/15/38), where the tribunal reduced the amount awarded by half a million Euros, and 9Ren Holding S.a.r.l v Kingdom of Spain (ISCID Case No ARB/15/15), where a small reduction was made following a clerical error: GAR, ‘Spain challenges solar award’, 9 December 2019. 271 Watkins Holding S.a.r.l., Watkins (NED) B.V., Watkins Spain S.L., Redpier S.L., Northsea Spain S.L., Parque Eolico Marmellar S.L., and Parque Eolico La Boga S.L. v The Kingdom of Spain, ICSID Case No ARB/15/44, 13 July 2020. 272 ICSID, The ICSID Caseload—Statistics (Issue 2019-1), 18. The number of applications for annulment almost trebled in the decade from 2011 compared with the previous decade; yet the number of successful applications almost halved in the same period (the data covers the period 2011 to 2018). During the same period, the number of cases at ICSID grew from 96 to 170.

240 Chapter 5: Stability based on Treaty 5.157

A request based on Article 52 is the only way in which an ICSID award may be set aside. The grounds on which it is permitted are limited to five:273 that the tribunal was not properly constituted; that it manifestly exceeded its powers; that there was corruption on the part of a member of the tribunal; that there has been a serious departure from a fundamental rule of procedure, or that the award has failed to state the reasons on which it is based.274 The request may concern an award of damages, costs, or some other form of relief that the original tribunal has ordered. Often, a stay of enforcement of all or part of the award will be sought in the application and granted by ICSID once the application is registered.275 Even though some security for a stay of enforcement may be required by ICSID from the applicant, it is hardly surprising that annulment has been of growing interest to parties disappointed with the tribunal’s award.276 Equally, it is unsurprising that most ad hoc committees impose payment of costs on the parties seeking annulments.277 In Repsol v Ecuador, for example, the Committee required Petroecuador to pay all administrative fees and half of the legal fees of the party opposing the application for annulment, noting that ‘annulment proceedings should not be applied routinely, or as means of delaying the objectives of the award, or the enforcement thereof ’.278 The overwhelming majority of applications for annulment are in practice rejected. There is no appeal or further annulment proceeding possible.279

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Nonetheless, as one might expect, given the amounts involved in many energy cases, there have been several notable examples of applications for annulment.280 Ecuador, for example, made two applications for annulment of awards arising from disputes in the previous decade (see chapter 7). In the Burlington case, a settlement was reached by the parties soon after an ICSID ad hoc committee decided to lift the stay of enforcement of the award (in which Ecuador was ordered to pay over US$370 million in damages, although Ecuador’s counterclaims were accepted). In Perenco v Ecuador, the claimant, a partner company of Burlington, won compensation of US$449 million for damages resulting from the adoption of the 99 per cent ‘windfall profit’ tax, although Ecuador won US$54 million for its counterclaim based on environmental damage. In October 2019, days after the award, Perenco filed a petition in

273 Article 52(1). By contrast, under the New York Convention, recognition and enforcement of an award may be refused under seven grounds (Article V (1) and (2)). 274 For a comprehensive analysis of the annulment process see Yannaca-Small, K. (2018) ‘Annulment of ICSID Awards: Is it Enough or Is Appeal around the Corner?’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues (2nd edn), Oxford: OUP, 727–758. 275 This can be modified or terminated at the request of either party (Arbitration Rule 54(3)). It will terminate automatically once the ad hoc committee has issued its final decision. 276 ICSID has stated that more than one half of annulment proceedings have been initiated by respondents and about 40 per cent by claimants with a few cases in which both parties have filed an application for annulment: ICSID (2016) Updated Background Paper on Annulment for the Administrative Council of ICSID, 5 May 2016, at 12. 277 ICSID (2016) at 25. Since 1984, ICSID’s regulations have required applicants for annulment, pending the final decision of the ad hoc committee on the allocation of costs, to bear all the direct costs of the annulment proceeding (i.e. the fees and expenses of the ad hoc committee and the administration charges of ICSID). 278 Repsol YPF Ecuador S.A. v Empresa Estatal Petroleos del Ecuador, ICSID Case No ARB/01/10, Decision on Annulment (8 January 2007), para 86. 279 However, a resubmission of the annulled part of an award is possible. Indeed, under Rule 55, either party may request the resubmission of the dispute to a new tribunal if the original award has been annulled in whole or in part. In July 2020 the claimants in Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Spain asked ICSID for a supplementary decision under Article 49(2) following the annulment of an award in their favour, referring to Articles 53 and 9(3) on arbitrator disqualification: ICSID Case No ARB/13/36. 280 Examples include: Hydro S.r.l., Francesco Becchetti and others v Republic of Albania, 27 August 2019 (involving investment in a local hydroelectric project), ICSID Case No ARB/15/28; Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/36, Decision on the Kingdom of Spain’s Application for Annulment, 11 June 2020.

G. The Paramount Role of ICSID 241 the US District Court for the District of Colombia to confirm the award.281 Almost simultaneously, Ecuador applied for annulment to ICSID, which granted a stay of enforcement.282 Perhaps most importantly in this context of annulment applications, is the application for annulment which Ecuador submitted against the award in 2012 of US$1.8 billion to Occidental Petroleum in relation to the 99 per cent levy imposed on foreign investors. The ad hoc committee found a manifest excess of powers and reduced the damages by US$700 million, a significant improvement on the outcome for Ecuador.283 Subsequently, the parties reached a settlement. For other states, this might appear to provide a justification for the effort— and risk—involved in making an application for annulment to ICSID. However, there are many examples of dismissal of annulment applications, such as in Exxon-Mobil v Argentina, where the ad hoc committee declined to annul a US$196 million award,284 and Highbury v Venezuela, a case involving the alleged expropriation of mining concessions.285 A different and more systemic use of the annulment mechanism has since been adopted by Spain in several renewable energy awards before ICSID. Where these awards have led to an order to pay damages to the claimants, in each case Spain has applied for their annulment.286 In the Eiser case, the application led to the annulment of the original award in its entirety on the ground that the tribunal was improperly constituted and a serious departure from a fundamental rule of procedure occurred.287

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The use of the annulment mechanism has led to periodic reviews by ICSID.288 It is clearly a mechanism of great importance to the institution. A former Secretary General, Dr Ibrahim Shihata, cautioned in his 1986 report to the Administrative Council of ICSID: ‘The danger thus exists that if parties, dissatisfied with an award, make it a practice to seek annulment, the effectiveness of the ICSID machinery might become questionable and both investor and Contracting States might be deterred from making use of ICSID arbitration’.289 ICSID itself has comprehensively reviewed its workings in a series of publications and commentaries on

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281 GAR, ‘Perenco applies to enforce as Ecuador seeks annulment’, 3 October 2019: . 282 GAR, ‘Ecuador seeks annulment of Perenco award’, 6 October 2019. Some other examples where a stay of enforcement of an award has been granted in energy cases include Enron v Argentina, ICSID ARB/01/3; CMS Gas v Argentina ICSID ARB/01/8; Repsol v Petroecuador ICSID ARB/01/10 (security required); Duke Energy v Peru ICSID ARB/03/28; Togo Electricite v Togo ICSID ARB/06/7; Occidental v Ecuador ICSID ARB/06/11 (see Chapter 7). 283 Occidental Petroleum Coproration, Occidental Exploration and Production Company v the Republic of Ecuador, ICSID Case No ARB/06/11, Decision on Annulment of the Award, 2 November 2015. In the committee’s view, the tribunal had assumed jurisdiction over an investment that was beneficially owned by the investor who nonetheless lacked the nationality of the BIT-partner of the respondent state. 284 Mobil Exploration and Development Inc. Suc. Argentina & Mobil Argentina S.A. v Argentine Republic, Decision on Annulment, ICSID ARB/04/16 (in Spanish), 8 May 2019. Although the committee found that the tribunal had exceeded its powers by reading a ‘non-contribution’ requirement into the ‘essential security interests’ exception in the US-Argentina BIT (Article XI), it did not consider that this excess justified annulment since it was not ‘manifest’, as required by Article 52(1)(b) of the ICSID Convention. 285 Highbury International AVV and Ramstein Trading v Bolivarian Republic of Venezuela, ICSID ARB/11/1, Decision on Annulment, 9 September 2019. 286 For example, NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v Kingdom of Spain, ICSID Case No ARB/14/11; RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/30. 287 Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/ 13/36, Decision on the Kingdom of Spain’s Application for Annulment, 11 June 2020 (subject to resubmission procedure). 288 For example, ICSID (2016) ICSID Updated Background Paper on Annulment for the Administrative Council of ICSID, 5 May 2016. 289 Parra, A.R. (2012) The History of ICSID, Oxford: OUP, 187.

242 Chapter 5: Stability based on Treaty statistics on its use, and in new proposals for reform of its Rules.290 Yet, in seeking to uphold the principle of finality of an award, with no provision for appeal, it has to reconcile this principle with what Aron Broches once described as ‘the need to prevent flagrant cases of excess of jurisdiction and injustice’.291 Even if it is objected that this cautionary remark is not really about outcomes and more about the integrity of the process, the discussion about the principle of finality in ICSID proceedings is unlikely to go away.292 5.161

One further category of claim before ICSID should not be overlooked: many cases coming before ICSID are settled. Preserving the long-term relationship that is often central to an energy investment gives a settlement an especially attractive logic for the parties to an energy dispute. In FY 2020 twelve of the forty-five concluded cases were settled or otherwise discontinued.293 Of the remainder, the investor’s claim was fully or partially upheld in 27 per cent of cases, with all claims dismissed in 30 per cent of cases and jurisdiction declined in 7 per cent of cases.294 The timing of such settlements can vary considerably. In Burlington the settlement occurred not only after the award but after an unsuccessful application for annulment by the Respondent. H. Conclusions

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The global framework of international investment law constitutes the most systematic effort ever seen to depoliticize commercial disputes between investors and states and to submit them to independent legal processes. Through it, key substantive protections are offered to foreign investors that can reassure them when considering the making of large, long-term commitments of capital, both features which are common in the energy investment. It is an unusual system in that it lacks a central institutional core, with a form of adjudication that is fragmented, and prone to a degree of unpredictability and inconsistency. An important vehicle for the carriage of these standards into the adjudication of disputes in the energy sector has been the ECT. Claims of breaches of these standards have been made under it with respect to diverse kinds of energy investment, reflecting changing patterns in energy investment itself.

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However, the overview provided in this chapter has from time to time hinted that this is a legal regime that is still evolving. Consent by states to its operation is central to its success. As with the contract-based guarantees of stability considered in c hapter 3, states offer through this network of investment treaties a willingness to bind themselves by law to facilitate the flow of international capital to benefit them and their citizens. The bargain they have made is one that will be reviewed from time to time, as will the adequacy of the protections they offer to investors, not least by the investors themselves. It is a framework that co-exists and interacts with contractual instruments that include protections such as stabilization clauses and international arbitration, and a variety of national measures that are aimed at promoting and 290 The Fourth Working Paper on reform of the Rules (February 2020): . 291 Cited in the ICSID Updated Background Paper on Annulment for the Administrative Council of ICSID, 5 May 2016 at p. 3. 292 For example, the comprehensive review by Yannaca-Small, ‘Annulment of ICSID Awards’ (2018). It formed a major concern of the Task Force of the European Federation for Investment Law and Arbitration (EFILA) in its 2015 report on the proposed International Court System, chapter 1 (Brussels, 2015). 293 ICSID, 2020 Annual Report, 30. 294 ICSID, Caseload Statistics, 2021-1, 26.

H. Conclusions 243 protecting inward investment, including for example, Legal Stability Agreements. In Part II of this book we examine the operation of the international investment regime in the energy sector and consider the success or otherwise of its efforts to provide stability in international energy investments. The availability of many published awards provides a key resource for analysis of investment law in practice and how legal doctrine is applied to and shaped by that practice. It approaches this investigation in three different ways. Firstly, it reviews and assesses the debate among users of the system and third parties on the system itself, with respect to the core concern of this book, the legal guarantees for stability of long-term energy investments (chapter 6). Secondly, it adopts a case study approach to investor–state relationships in three broad regions where energy investments have played a key role in economic development: Latin America, East Europe and Central Asia, and Africa. Finally, it examines critically several areas of public interest over which states have always found it important to retain regulatory oversight. They might be described as ‘carve-outs’ from the system, or they may be understood as representing particularly sensitive interests of a fundamental state power that is also a driver behind the states’ support for the international investment regime.

PART II

Part

6

Meeting Challenges to Investment Stability—Across the Energy Spectrum

A. Introduction: Rethinking Stability B. Five Challenges

(1) (2) (3) (4) (5)

Regulatory acts Taxation measures States of necessity Procedural complexity The energy transition

C. Expropriation, Direct and Indirect (1) The tests (2) Restrictive interpretations

6.01 6.09 6.10 6.19 6.32 6.45 6.53 6.70 6.76 6.95

(3) Expropriation of contractual rights

D. Stability and Legitimate Expectations

E. F. G. H.

(1) The broad scope of FET (2) What is a stable and predictable framework? (3) The main questions

6.99 6.100 6.102

6.108 6.122 Making Claims: Treaty versus Contract 6.137 Investor Responsibilities 6.144 System Reform and Energy Investment 6.158 Conclusions 6.167

[T]‌he stability of the legal and business framework in the State party is an essential element in the standard of what is fair and equitable treatment.1 LG&E v Argentina

A. Introduction: Rethinking Stability A principal concern of this book has been to enquire whether the advent of an extended international investment law regime has enhanced the legal potential for stabilizing long- term contract-based investments in the energy and natural resources sector, and if so, how. For the protection of energy investments, the most important feature of international investment treaties is arguably their inclusion of the standard of Fair and Equitable Treatment (FET), and the weight given by arbitral tribunals to the element of legitimate expectations within that standard. An investor can expect the provision of a stable legal and business framework by the host state to be understood by a tribunal as one part of that standard, with potential benefits in its assessment of a claim depending on the individual fact pattern. Of course, there are other important substantive and procedural protections accruing to investors from the investment treaty regime. For energy investments, the first examinations of this promise of enhanced protection against the objective conduct of the state towards

1 LG&E Energy Corp and Others v Argentina, Decision on Liability, ICSID Case No ARB/02/1, IIC 152 (2006) at 125.

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248 Chapter 6: Meeting Challenges to Investment Stability investments were made by tribunals in disputes that included many arising from the Latin American, and especially Argentinian context, and others arising from the transition to a market economy among countries of East Europe and Central Asia. Tensions between states and foreign investors arose from two broad processes in policy formation and legal implementation: first, the familiar responses of populist governments to a context of rising commodity prices and second, the effects of economic liberalization policies that incentivized inward investment on a large scale. These initial encounters with the investment treaty regime that offered a peaceful resolution of the disputes between investors and states are considered in this and the following two chapters. 6.02

From an energy investment perspective, this initial phase of ad hoc jurisprudential review of treaty disputes has another dimension of interest. In addition to the familiar presence of hydrocarbons in investment cases involving Bolivia, Ecuador, and Venezuela, the Argentinian cases were largely concerned with electricity and gas utility provision. This latter focus arose from the measures taken in the years following a liberalization and regulation of domestic energy markets funded by an influx of foreign capital. The resulting disputes were the first experience of investment treaty law with energy investments that had a different business model from the fossil fuels sector. An analysis of the legal guarantees of stability offered by a state was a necessary exercise for a tribunal seeking to identify a possible breach of FET and the element of legitimate expectations therein. However, for the utility sector the guarantees of stability were likely to take different, more complex forms and raise different questions of interpretation than a stabilization clause (or clauses) in a concession-style contract. For example, if a special legal regime was introduced for a newly liberalized electricity sector, offering a guaranteed rate of return to a class of investors, could an individual investor reasonably base, wholly or in part, an expectation of long-term regulatory stability on this feature or not? Not only was the international system of legal protection for investments new, at least in its treaty part, but the parts of the energy sector that were open to international investment had broadened out to include different types of energy business in which assurances of stability were likely to be provided by states in more complex ways.

6.03

Arguably, a second phase of review of treaty-based protection for energy investments is well underway. Among the diversity of subject matter for disputes, the only theme common to a growing number of them is the impact of policies designed to promote a transition to lower carbon emitting fuels in national economies. These disputes have been concerned with various kinds of renewable energy, mostly wind and solar power. However, investment treaty protections are already being invoked by investors affected by government policies designed to foster disengagement with fossil fuel use in their economies. Initially, it has been those energy disputes arising from regulatory changes to renewable energy tariffs, mostly in European countries, that have generated a volume of arbitral proceedings on a range of legal issues and seem likely to continue to do so. One outcome of this is an evident generalization of the problem, once familiar only to international lawyers familiar with the oil, gas and mining industries, of how an investor might secure enforceable legal guarantees for the stability of long-term investment commitments, in the face of evolving public policy choices underpinned by sovereign power.

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A sub-theme in this second phase might comprise the ongoing reviews of investment treaties such as the ECT, but this has yet to produce any concrete outcome, only proposals. There is no evidence of a trend towards denunciation of treaties or a decline in disputes being submitted to arbitral institutions; indeed, the opposite appears to be the case.

A. Introduction: Rethinking Stability 249 This Chapter examines five principal challenges to the stability of energy investments (section B), and the role of international investment law in responding to them. Threats presented by regulatory acts, followed closely by taxation measures and especially by expropriation, direct and indirect, remain the primary ones that investors must consider and plan for. The latter category has a section to itself below (section C). Defences for state action in emergency situations—such as the well-known ‘state of necessity’—have arisen in various national or regional contexts and have been given a new relevance by the COVID-19 pandemic. Another challenge for the security of an investment is the time and complexity of arbitral procedures in investment arbitration. If the process has become more complex, this is partly due to the parties’ more vigorous use of procedural options, such as counterclaims, provisional measures, jurisdictional challenges, arbitrator challenges, and set aside actions. Several of the later chapters provide vivid examples of how this can tax the stamina and resources of investor-claimants, and indeed those of government departments responsible for the response, and for meeting domestic expectations of a robust national defence. Finally, the fifth and most far-reaching challenge of all to the long-term stability in international energy investments is the result of many, varied measures introduced by governments in their efforts at lowering carbon intensity in their energy use. The legal implications for this are only now emerging but it is already clear that some investors see the protections in international investment law as of practical use in defending their interests against sudden, unilateral, and unforeseen changes in public policies.

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The risk of expropriation, whether direct or indirect, remains important for energy investments (section C). The conventional wisdom is that it is now unusual for an investor’s claim to be based on an alleged direct expropriation or outright nationalization of its assets.2 This may, however, be the result of limited success with claims based on expropriation as a breach, rather than or as much as the incidence of expropriations. Indeed, a host state is more likely to impose measures which have incrementally a damaging effect upon the investor (creeping or indirect expropriation) in the performance of its policing role or, as in parts of Latin America and Russia, to encourage ‘voluntary’ participation in renegotiations of existing contracts. However, in the past decade there have been several examples of outright expropriations in the energy sector, with related questions about the extent of damages. Tribunals have nevertheless shown a reluctance to support claims based on the expropriation provisions that are commonly found in the texts of BITs, as well as MITs, in the face of divergent interpretations of the concept of expropriation. This contrasts sharply with the context of the 1970s and 1980s, in which large-scale nationalizations of International Oil Companies (IOCs) took place (and which were not subsequently rolled back) and forced renegotiations of mainly oil production interests. The number of such expropriations may well have declined but they remain a risk factor in the investment landscape for the energy and mining sectors.

6.06

A body of case law has now developed on the relationship between FET and especially the doctrine of legitimate expectations on the one hand and the provision of a stable and predictable legal and business framework on the other hand. This has proved to be a complex matter for tribunals. Published awards to date provide ample evidence that the protection offered is not equivalent to that of a stabilization clause3 and that a claim must negotiate

6.07

2 For example: ‘It should be emphasized that in practice this form of taking is rare’, in ‘Expropriation Regime under the Energy Charter Treaty’, Energy Charter Secretariat, 2012, 6 (and at 8, 9). 3 ‘A general stabilization requirement would go beyond what the investor can legitimately expect’: Schreuer, C. (2005), ‘Fair and Equitable Treatment in Arbitral Practice’, J World Trade 6(3), 357–386 at 374, cited by the tribunal in Total S.A. v Argentina, Decision on Liability, at 120.

250 Chapter 6: Meeting Challenges to Investment Stability several hurdles or tests before it is likely to receive FET protection. The initial outcomes of tribunals’ deliberations on this broad topic and some of their more influential decisions are reviewed and assessed (section D). The interaction between treaty and contract claims is also considered in the light of the above challenges (section E). The respective merits of treaty versus contract-based claims is a complex matter that most investors now must consider when faced with an emerging dispute with a host state. 6.08

Observing investor responsibilities is an important part of gaining access to investment treaty arbitration. The efforts by arbitrators to ensure that investors accept their responsibilities and carry out their side of the bargain that is made with host states are reviewed (section F). In this manner, and on a case-by-case basis, they are ensuring that the global adjudication system responds to claims by investors in a way that respects the principles of fairness and due process. Finally, there is a brief review of the debate on reform of the system itself, including the ‘modernization’ of the ECT (section G). B. Five Challenges

6.09

Investors seeking a long-term relationship with a host state are vulnerable to several distinct challenges to the stability of their investment. Some of the challenges are new, and some old ones such as those arising from the threat of direct expropriation by the host state are present but have become less frequent. Instead, diverse and more complex regulatory actions are more probable, amounting to ‘indirect expropriation’ of an investment. However, in the face of such uncertainties, the additional security offered by the extensive treaty framework would seem to warrant greater confidence among investors that over the long-term the stability of their investments can be guaranteed. The following sections briefly consider some of the major challenges from host states which energy investors have faced in recent years and the ways in which the legal framework of global adjudication for investments has impacted or may impact upon actual or emerging disputes.

(1) Regulatory acts 6.10

Available data4 on claims by investors against States indicates that in 2018 to 2019 the kinds of State conduct most frequently challenged by investors were firstly, the termination, non-renewal, or alleged interference with contracts or concessions, and secondly, alleged takeover, seizure, or nationalization of investments. These categories were followed by revocation or denial of licences or permits and legislative reforms in the renewable energy sector.

6.11

Many disputes arise from regulatory or administrative acts taken by states or their agencies that arise independently of contractual relations and impose onerous operating conditions or specifically target a foreign investor or disproportionately impact upon its operations. In exploration and production activities in the oil and gas industry (and mining), one of the most common risks faced by an investor is the threat that its concession or licence will be revoked by the host state for failure to meet some regulatory requirement arising from the

4

UNCTAD, IIA Issues Note, Issue 2 (2020), and Issue 2 (2019).

B. Five Challenges 251 concession itself or from the wider legal framework in which it operates.5 In the transmission and distribution of gas and electricity, the investor may find that tariff increases are limited or vetoed by the state authorities, undermining projected rates of return. Revocation of the relevant concession or licence may not occur but its economic value could be severely reduced. Several cases concerning investments in Argentina during its national emergency illustrate this vividly (see c hapter 7). In the extensive legal framework of BITs and other forms of investor protection, national and contractual, one might expect the investor to be in a stronger position vis-à-vis the host state in the face of such uses of regulatory powers. However, recent cases are a source of mixed signals. Recourse to forced contract renegotiations has been evident in energy disputes between investors and the governments of several Latin American states, states in the post-Soviet space, and in parts of Africa (see c hapters 7–9). In those cases, where the option of making a claim before an international tribunal has been available, it has been exercised by some but in other instances, it has been used more as a tool in negotiations with the host state. When followed through to the merits stage of an arbitral proceeding, it has proved a very lengthy process. In Russia and some other states from the former Soviet bloc, recourse to international investment law remedies has been infrequent, and notably absent in several forced contract renegotiations in both Russia and Kazakhstan (see chapter 8). There are other cases discussed below which illustrate some of the difficulties that can arise for investors.

6.12

Contract revocation There are a variety of grounds on which energy (and mining) contracts may be revoked or simply not extended. A state may have a strong interest in developing a discovery of oil or gas while the successful explorer may have commercial reasons for taking time over the design of a development plan for further investment.6 In Indonesia there have been several cases where energy and mining companies have been accused of violating their contracts for failure to develop an oil or gas field or failing to fulfil other contractual obligations.7 Where the development of a gas discovery is involved, the commercial and technical challenges may be very considerable, leading to long time-lags between discovery and development, with ample opportunity for dispute between the investor or investors and the host state and its agencies.8

6.13

5 The same comment may be made about the mining industry. In a recent example, Pakistan was ordered to pay an Australian mining company US$5.9 billion for denial of a lease to mine a copper and gold deposit: Tethyan Copper Company Pty. Limited v Islamic Republic of Pakistan, ICSID Case No ARB/12/1 (Award, 12 July 2019). Pakistan had created a legitimate expectation of being granted a mining lease based on three kinds of assurances: a joint venture contract, the federal and provincial regulatory framework and direct assurances from government officials. The denial constituted a de facto expropriation and was not a bona fide regulatory measure. 6 Cameron, P. (1988) ‘The Structure of Petroleum Agreements’, in Beredjick, N. & Wälde, T. (eds) Petroleum Investment Policies in Developing Countries, London: Graham and Trotman. 7 ‘Jakarta to seize gas field in Exxon dispute’, Financial Times, 20 February 2008. The dispute between Exxon and Indonesia over the Natuna D-Alpha gas field had already lasted three years by 2008, and an earlier dispute, involving the state company, Pertamina, and Exxon, over the Cepu oil block, lasted four years until it was resolved in 2006. In each case very large amounts of investment were at stake, in billions of dollars, and in the case of Natuna, a significant proportion of the gas is in the form of carbon dioxide which does not have commercial value and makes recovery of the remaining gas difficult. Arbitration was considered but ultimately never used. A US mining company, Newmont, was also threatened with termination of its contract in 2008 for allegedly defaulting on an obligation to divest shares to a local entity. 8 Wintershall AG v Qatar, Partial Award of 5 February 1988 and Final Award of 31 May 1988, 28 ILM 795 (1989). See generally, Bishop, D.R. ‘The Duty to Negotiate in Good Faith and the Enforceability of Short-Term Natural Gas Clauses in Production Sharing Agreements’, CEPMLP Online Journal 2-1: (accessed 16 December 2009).

252 Chapter 6: Meeting Challenges to Investment Stability 6.14

Two examples of arbitral awards provide an indication of how regulatory acts by the host state, highly detrimental to the investors concerned, may be reviewed by international tribunals. The first is based on an alleged breach of a contract provision. In 2008, the government of Yemen emerged as the victor in an International Chambers of Commerce (ICC) arbitral proceeding with two IOCs. Although the award is unpublished,9 it appears that the claimant, the Yemen Exploration and Petroleum Company (YEPC), a joint venture between Hunt Oil and ExxonMobil, was refused a five-year extension to a twenty-year Production Sharing Contract (PSC) despite assurances from the relevant Ministry that it would receive an extension. The dispute turned on the procedure for grant of an extension and on whether the PSC (which included within its provisions a possibility of extension) could be extended without the approval of the Yemeni parliament. Such approval had been required for the grant of the original PSC and had been obtained. However, the parliament had refused to grant an extension in 2005. The block is an important source of both oil and gas. It is the main source of gas for Yemen’s primary Liquefied Natural Gas (LNG) facility, in which the claimant remains an investor. However, it also contains large quantities of oil and is therefore an important source of revenue for the government. YEPC claimed US$1.6 billion for loss of profits because of its inability to extend the PSC for an additional five years, and Yemen launched a counterclaim for US$8 billion, which the tribunal denied.

6.15

It appears that the relationship broke down during the dispute and the normal settling of accounts that occurs at the conclusion of a PSC became difficult. This typically involves an environmental audit and a general accounting that would give rise to payments. In this context, Yemen made claims of reservoir mismanagement in breach of good oilfield practice. It was alleged that if appropriate technologies been applied at the right time, the production life of the block could have been extended. This did not prevent the state-owned company from taking it over and continuing operations, however, and may be an instance (not an unprecedented one) in which environmental arguments are used to bolster an essentially economic claim. It underlines an important consideration for an investor when considering whether to take a claim against a host state to international arbitration: there is a risk that relations with the state may worsen as a result, and the relationship could well break down irrevocably (although there are examples of disputes in which this has not happened).

6.16

The second example involves a regulatory measure addressed to the holder of a concession to supply water and is based on a provision in a BIT between France and Argentina. A consortium led by Vivendi, a French company, acquired a thirty-year concession from the province of Tucumán which envisaged significant price increases. In its claim,10 Vivendi argued that regulators had abused their powers by unilaterally lowering tariffs, contrary to the procedures envisaged in the concession, and by imposing illegal fines on the concessionaire. The provincial government acted to terminate the concession on the ground that the concessionaire had repeatedly violated its obligations under that agreement. The ICSID tribunal had to determine whether the Argentine authorities had acted in a ‘reasonable and proportionate’ manner in the face of an alleged failure by the concessionaire to fulfil its contractual obligations. The tribunal referred to the FET standard and held that it imposed on the government ‘an obligation not to disparage and undercut a concession (a ‘do no harm’ standard) that has 9 The account in Arabian Business.com appears to be reliable: ‘ExxonMobil and Hunt Oil Rocked by ICC’s Unprecedented Ruling’, 10 November 2008. 10 Compañía de Aguas del Aconquija SA and Vivendi Universal SA v Argentina, Award, ICSID Case No ARB/97/ 3, IIC 307 (2007), 20 August 2007.

B. Five Challenges 253 properly been granted, albeit by a predecessor government, based on falsities and motivated by a desire to rescind or force a renegotiation’.11 Argentina was also held to be in breach of the ‘protection and full security’ standard, which the tribunal treated in an expansive manner, holding that it provided protection against harassment that would impair the normal functioning of an investor’s business. The contractual rights were deemed to be protected investments under the relevant BIT and Argentina was liable for expropriating those rights, and for the illegitimate actions by the province that had ‘struck at the economic heart of, and crippled, Claimants’ investment’.12 However, the compensation received by the claimants was based on the actual investments made, not future lost profits, about one third of what they had originally sought in their claim. The revocation of licences and concessions is a common risk in the international energy industry and many examples may be cited.13 In the setting of international investment law, it is possible for investors to consider the submission of claims based either on a relevant treaty or contract or both. A milder but nonetheless onerous imposition on the investor is evident in the case of Mobil Investments Canada v Government of Canada, which concerned the application of a set of Research & Development (R&D) Expenditures Guidelines to the offshore oil operations of the investor. The effect of this was to require expenditure of a fixed proportion of revenues on R&D, and education and training in the Province of Newfoundland and Labrador. Mobil sought compensation under NAFTA for amounts it had incurred in complying with the Guidelines with respect to two projects. The dispute was settled.14

6.17

Outside of the energy and resources sector, there have been instances of denial or non- renewal of permits that have resulted in rulings by international tribunals on claims that an indirect expropriation has taken place. They may be useful by way of analogy. In Middle East Cement Shipping v Egypt,15 a permit to export cement was effectively withdrawn by the host state by a prohibition on the import of cement into Egypt, resulting in a cessation of the claimant’s business, which comprised the import, storage and dispatching of cement within Egypt. The tribunal held that the investor had been deprived of parts of the value of his investment, so that it amounted to an expropriation within the meaning of the relevant BIT, and compensation was required to be paid by Egypt. In Goetz v Burundi,16 the investor’s free zone status was revoked by the host state. Although no formal taking of property had occurred, the ICSID tribunal held that the state actions constituted a measure having similar effect to expropriation within the meaning of the relevant BIT as it ‘deprived their investments of all utility and deprived the claimant investors of the benefit they could have expected from their investments’.17

6.18

11 Ibid, at para 7.4.39. 12 Ibid, at para 7.5.25. 13 The breach may arise from a linked agreement and a failure to conclude it. For example, a Spanish renewable energy company, Dominicana Renovables obtained a concession from the Dominican Republic in 2012 to invest in a local wind power project, also containing a qualification for some incentives. It was required to conclude a PPA with the public power company, but the investor alleged that the concession was breached when this did not happen and it was unable to sell power to the State: IAR, 20 December 2018. 14 Mobil Investments Canada Inc. v Government of Canada, Award, ICSID Case No ARB/15/6, 4 February 2020. 15 Middle East Cement Shipping & Handling Co SA v Egypt, ICSID Case No ARB/99/6, Award, IIC 169 (2002), 19 ICSID Rev-FILJ (2003) 602, 12 April, 2002. 16 Antoine Goetz v Burundi ICSID Case No ARB/95/3, Award, IIC 16 (1999), 15 ICSID Rev-FILJ (2000) 457, 10 February 1999. 17 Ibid, at para 124.

254 Chapter 6: Meeting Challenges to Investment Stability

(2) Taxation measures 6.19

The use of fiscal instruments by states to intervene in economic activity has an exceptionally long history.18 It has the potential to cause enormous and lasting damage to the investor or investors which are the objects of such measures. Excessive and repetitive tax measures could amount to indirect expropriation due to their confiscatory effect.19 Moreover, these are instruments that may be applied by a variety of state authorities, usually with government collusion, ‘under cover of what appears on the surface and at first sight to be formally proper application of tax (or foreign exchange) audit, tax assessment, and tax collection procedures’.20 The Yukos case in Russia is only one rather dramatic illustration of this phenomenon. In this case, the Russian Federal Government acted against tax practices that had been widely tolerated for several years and required the tax authorities to carry out a re-assessment of the tax returns from a privately- owned company, Yukos. Through the imposition of penalties and interest charges amounting to 100 per cent of total sales of the company over a three-year period, the state authorities brought about the company’s economic and legal disintegration (see c hapter 8, paras 8.120–135). Several claims have been brought by shareholders in Yukos, with complex legal proceedings as a result; meanwhile, the company has effectively ceased to exist.

6.20

Curiously, only a few treaty awards concern themselves with tax disputes in the energy sector. Some of these are discussed extensively in chapters 7 and 8, particularly the EnCana and Occidental cases concerning revised VAT payments required by the state authorities in Ecuador (see c hapter 7), and the Yukos case (see chapter 8). In chapter 9 the discussion of tax is primarily about several contract-based disputes in Africa that did not lead to published awards, such as those concerning Algeria and Uganda, in which challenges were made against attempts by the state to increase its share of the rent by means of taxation measures. The reason for this lacuna may lie less in the absence of legal means of asserting claimant’s rights against the state authorities than in the complexity of the issues, the pragmatism of the parties,21 and the existence of tax carve-outs in many BITs.

6.21

It would be wrong to conclude that all or even most disputes about tax payments that arise between energy investors and host states are ones that have a potentially expropriatory character, such as Yukos; still less that they are in every or in most cases an attempt by host states at back-door expropriation. There are disputes that arise from a difference of interpretation of the tax requirements between the state authorities and the parties, perhaps relating to practices that originate some years previously, or which result from audits of returns in the past that require rectification. The source of the difference may arise not from negligence on the investor’s part but from a lack of capacity in the tax administration of the host state.22 It may be complicated by the presence of a state energy company with which the investor or 18 Kolo, A. & Wälde, T.W. (2008) ‘Coverage of Taxation under Modern Investment Treaties’, in Muchlinski, P., Ortino, F. & Schreuer, C. (eds) The Oxford Handbook of International Investment Law, Oxford: OUP, 305–362. However, it should be noted that states have need of a robust fiscal policy to ensure that aggressive tax planning of internationally operating corporations in the resources sector does not lead to a significant loss of revenue (through transfer pricing and thin capitalization): see the discussion in Mullins, P. (2008) ‘International Issues for the Resources Sector’, paper presented at IMF conference, Taxing Natural Resources: New Challenges, New Perspectives, Washington, D.C., 19 September 2008.. 19 Sornarajah, M. (2004) The International Law on Foreign Investment (2nd edn), Cambridge: CUP, 393. 20 Ibid, at 342. 21 Manciaux, S. (2001) ‘Changement de legislation fiscale et arbitrage internationale’, Revue de l’Arbitrage 2, 311–342. 22 Joint UNDP/World Bank ESMAP (2004) Taxation and State Participation in Nigeria’s Oil and Gas Sector 37–38. This could also apply to very new states such as Timor-Leste or states where the public sector is poorly

B. Five Challenges 255 investors have a joint venture, with the primary dispute taking place between these parties but ultimately involving the state tax administration. The matters in dispute may concern, for example, cost recovery in a production sharing arrangement, tax deductibility and calculations of tax, according to different and conflicting accounting models. In most cases the amounts at stake are likely to be large. The amounts are likely to be especially large if they coincide with or closely follow a hike in oil prices. To the extent that they are applied historically over a period of several years, the tax demands may be on such a large scale as to be capable of bankrupting the company. A recent example is provided by a dispute between Chevron and the Philippines over an attempt by the authorities to recover US$3 billion in back taxes from an offshore gas field project, involving Shell as the field’s operator. Under a 1990 service contract, the consortium was exempt from all taxes except income tax.23 In 2015 an oversight body responsible for public finances decided that the practice of sourcing the consortium’s taxes from the government’s share of the proceeds was an unlawful tax exemption. It had been endorsed by the department of energy in the past. Shell and Chevron filed an ICC claim against the government, and in April 2019 the tribunal found that Philippines was not entitled to recoup the taxes. Two further arbitrations have resulted however, with one based on the Switzerland-Philippines BIT,24 and another treaty claim brought by Shell under the Netherlands–Philippines BIT.25 The former appears to have been concluded soon after Chevron sold its interest and withdrew all its claims.26 Capital gains tax The unexpected levy of CGT has emerged as a significant tax risk for foreign investors (see c hapter 9). When ConocoPhillips sold its business in Vietnam to Perenco, it was reputed to have made a gain of around US$900 million. Several years after the transaction, the Vietnamese Government indicated an intention to impose CGT of around US$179 million on the transaction, which involved UK subsidiaries of the firms, and an arbitration followed based on the UK-Vietnam BIT. The case was settled in early 2020.27 There are other examples of CGT issues arising, especially at times of rising commodity prices, but few are known to reach the stage of international arbitration, with Cairn Energy’s case against India and Tullow’s claim against Uganda being exceptions.28 The latter is discussed elsewhere (chapter 9), but the award in the former dispute merits some review here, since its focus on issues of legal stability, legitimate expectations and retroactive taxation makes it unusual among investment treaty cases.

(a) Retroactivity: Cairn Energy v India

In Cairn Energy et al v India,29 the investor’s claim was based on the UK–India BIT and arose from a retroactive measure by the Indian tax authorities to assess CGT of US$1.4 billion on a sale of shares in Cairn’s Indian subsidiary to Vedanta Resources. With interest and penalties resourced as in parts of sub-Saharan Africa. Their capacity to carry out full-scale audits of taxpayers which are subsidiaries of large international companies and to enforce their own tax laws is likely to be limited. 23 GAR, 4 October 2019, ‘PCA panel hears Chevron’s treaty claim against Philippines.’ 24 Chevron Overseas Finance GmbH v The Republic of the Philippines, PCA Case No 2019-25. 25 Shell Philippines Exploration B.V. v Republic of the Philippines, ICSID Case No ARB/16/22. 26 GAR, 26 January 2021, ‘Arbitration against Philippines concludes after investor sells stake in offshore gas field’. 27 Investment Arbitration Reporter, 22 January 2020: ‘Conoco and Perenco settle BIT case against Vietnam.’ 28 Tullow Uganda Operations PTY LTD v Republic of Uganda, ICSID Case No ARB/12/34. Tullow argued that it was wrongly charged US$400 million in capital gains tax on hydrocarbons operations on Lake Albert. The case was settled in 2015, with Tullow agreeing to pay Uganda US$250 million. 29 Cairn Energy PLC & Cairn UK Holdings Limited (CUHL) v The Government of India, PCA Case No 2016-7.

6.22

6.23

256 Chapter 6: Meeting Challenges to Investment Stability added, the core tax demand had grown to US$5 billion by the time of the award in late 2020.30 The tribunal found in favour of the claimant holding that the retroactive tax assessment of the Cairn transaction was a breach of the FET standard of the UK–India BIT, which required stability and predictability.31 It ordered the tax assessment to be extinguished, damages of US$1.2 billion plus interest to be paid to Cairn for proceeds lost from the sale of Cairn India. 6.24

In its analysis the tribunal had to consider whether it had jurisdiction over claims that turned on a taxation measure, as well as whether the measure itself was in breach of the BIT. On the first point, the tribunal emphasized that the dispute was a tax-related investment dispute and not a tax dispute.32 This meant that the alleged violation was one of an investment treaty, following from certain sovereign actions within the field of taxation. By contrast, a ‘tax dispute’ was a dispute that concerns the taxability of a specific transaction under the applicable municipal law (or more than one if several countries were involved). All the tribunal had to do in Cairn was to determine whether the respondent had breached substantive standards of investment under the BIT through exercise of its authority in the field of taxation, and whether the result led to liability. Domestic tax law was not at issue; instead, the issue was whether the fiscal measures taken by the State violated international law.

6.25

This was much more than a dispute about a tax-related investment, however. The tax was levied in 2014 on a transaction concluded in late 2006, more than seven years after it had been carried out. It was based on a legal measure adopted in 2012 which had not existed at the time that Cairn sought to restructure its business operations, initiated, and carried out when there appeared to be no liability for such transactions to CGT.33 The law was therefore changed with retroactive effect to allow a tax assessment to be made and was enforced against Cairn’s remaining assets in India to obtain payment of the tax demand. For the claimants, this treatment was unfair and inequitable, in breach of India’s obligations under Article 3(2) of the BIT.34

6.26

There is no rule of international law that the taxation of offshore transactions is wrongful and cannot be done if there is a public policy interest, in the tribunal’s view, but this also cannot justify retroactivity. Taking the words of Waste Management v Mexico, the tribunal said that India’s conduct was ‘grossly unfair’ and so breached the FET standard in the BIT.

6.27

While the tribunal recognized the importance of legal stability as a reflection of the principle of the rule of law,35 and noted the weight given to it by the Indian Supreme Court in relation to foreign investment in the Vodaphone case,36 it did not consider the tax law to be settled enough to justify the creation of legitimate expectations on the part of the claimant. In general, it had doubts about the role that legitimate expectations could play in tax disputes. In this case, ‘there was no statement, representation or act on the Respondent’s part from which an assurance could be discerned’.37 However, the tribunal found no valid justification for

30 GAR, Cairn wins Indian tax dispute, 29 December 2020. 31 Award, 21 December 2020. 32 Ibid, at para 793. 33 Ibid, at para 862. 34 Ibid, at para 879. 35 Ibid, at paras 1746, 1749. 36 Vodaphone International Holdings B.V. v Union of India & Anr [2012] 6 SCC 613, para 91: ‘[c]‌ertainty and stability form the basic foundation of any fiscal system.’ 37 Award, at para 1767.

B. Five Challenges 257 the retroactive law and the taxation of Cairn’s transactions on that basis. India’s conduct was found to be ‘grossly unfair’ and in breach of the FET standard of the BIT.38

(b) Exclusion from treaty scope

When a taxation measure is challenged by claimants as being in breach of an applicable investment treaty, the tribunal needs to ask whether such a measure is included within the treaty’s scope. This question has arisen in a series of cases when the ECT has been invoked by claimants in connection with measures taken by states vis-à-vis their renewable energy sectors, with differing results. The ECT, like some other IIAs, contains a carve-out provision in Article 21, which means that if a specific measure is indeed a taxation measure within the terms of that provision, the tribunal will lack jurisdiction to decide claims based on it. Clearly, the absence of a definition of ‘tax’ in the relevant IIA provision on a carve-out will trigger discussion about whether a specific measure is indeed a tax.

6.28

A tool available to assist the tribunal in assessing the character of the measure in question is a four-part test: is the levy established by law; does it impose obligations on a defined class of persons; does it generate revenues for the State; and are these revenues used for public purposes? If established, these criteria would qualify the measure as a tax. Questions about whether a tax was imposed in bad faith or amounted to an intent to abuse the taxation power (for example, where enforcement is part of a pattern of behaviour aimed at destroying the claimant) are secondary ones, predicated on an assessment of the measure in question as a tax. In 9REN v Spain the tribunal applied this test and concluded that the Spanish tax known by its acronym as ‘TVPEE’ was indeed a taxation measure and so, in the absence of any allegation of bad faith, fell within the scope of Article 21. As a result, it was withdrawn from the tribunal’s consideration.39

6.29

A different conclusion was reached in a series of arbitrations under the ECT, involving the imposition of a levy on electricity generated from solar power in the Czech Republic. This measure was imposed with retroactive effect, and although upheld by the Czech Constitutional Court, it was held by several tribunals not to be a tax measure within the terms of Article 21 ECT. Following an analysis of the economic character of the measure, they concluded that its main objective—despite its nomenclature—was to reduce the incentives granted to solar investors, while the ECT tax carve-out was intended to exclude from its scope those measures that were designed to raise general revenue for the State.40

6.30

Leverage In an emerging dispute over tax issues the investor will consider any relevant investment instrument, whether it is a contract or a BIT, and the options it may offer. In this sense, the existence of an option to take the matter to international arbitration can become a source of negotiating leverage at an early stage of investor-state disputes, encouraging the parties to find a solution that is mutually acceptable rather than escalating and publicizing

6.31

38 Ibid, at para 1816. The tribunal is quoting Waste Management v Mexico (II) (ICSID Case No ARB(AF)/00/3, Award, 30 April 2004, at para 98. 39 9REN Holding S.a.r.l v Kingdom of Spain, ICSID Case No ARB/15/15, at paras 195–207. The same outcome was reached by tribunals in many other cases on this point: for example, Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/37, Award, 4 May 2017, paras 266, 270–271. The tribunal in an Italian case, also concerning solar energy, reached the same conclusion when assessing whether claims relating to imbalance costs imposed by AEEG Resolution No 444/2016 and charged to solar power plant owners fell within the meaning of Article 21 ECT: Belenergia v Italy, Award, 6 August 2019. 40 Europa Nova v Czech Republic, Award, 15 May 2019; I.C.W. v Czech Republic, Award, 15 May 2019; Photovoltaik Knopf v Czech Republic, Award, 15 May 2019; Voltaic Network v Czech Republic, Award, 15 May 2019; Antaris and Goede v Czech Republic, Award, 2 May 2018.

258 Chapter 6: Meeting Challenges to Investment Stability the dispute by formally submitting the dispute to an international arbitral institution. The international investment framework can act as a source of ‘bargaining chips’ in ongoing investor-state negotiations about tax payments.

(3) States of necessity 6.32

The COVID-19 pandemic was declared a Public Health Emergency of International Concern by the World Health Organization on 30 January 2020. Measures were taken by states in the public interest to contain and mitigate the spread of the disease and to counter the significant economic effects of the pandemic. For energy companies, there is a risk that they may be required to reduce consumer prices or to suspend charges entirely. The emergency raised the issue of whether claims by foreign investors under investment treaties might result from these actions. In this context, an investor may seek to claim that a measure is a breach of FET or amounts to indirect expropriation.41 .

6.33

In response, there are several defences that a state may draw upon to justify a decision to act unilaterally in violation of investment treaty obligations by reference to a national emergency to which it has no alternative but to respond. Investors had an early taste of this situation in the late 1990s with the measures taken by Indonesia in response to the Asian Financial Crisis of 1997. Its most comprehensive test came, however, a few years later with the government response to a domestic financial crisis in the Argentine Republic.

6.34

In the context of the Asian Financial Crisis, three Presidential Decrees were issued by the government of Indonesia in 1997 and 1998, which had the effect that the state-owned electricity utility, PLN, and the state-owned oil and gas company, Pertamina, could not perform their obligations under an energy sales contract and a joint operating contract respectively. Two foreign investors, Karaha Bodas and Himpurna, had contracted to develop geothermal energy and build, own and operate electricity generating facilities. The Decrees had the effect that they were obliged to suspend their operations and as a result they commenced arbitral proceedings against the state companies under the dispute resolution clauses of the contracts.42 They sought termination of the contracts and damages. The substantial awards43 in favour of the respective investors provoked a considerable debate on the calculation of compensation.44 A more comprehensive response to a financial emergency came when

41 For an overview of state defences in relation to COVID-19, see Paddeu, F. & Parlett, K. (2020) COVID-19 and Investment Treaty Claims, 30 March, .(accessed 23 July 2021) 42 It is relevant to note that while no fewer than twenty-seven power agreements in Indonesia were rendered inoperative by the Asian Financial Crisis due to their heavy reliance on dollar-denominated debt, the overwhelming majority of foreign investors elected not to commence arbitral proceedings against PLN. The investors concerned appear to have decided that a long-term relationship with the host state was likely to be threatened by such a course of action. 43 Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and PT.PLN (Persero), ad hoc arbitration under UNCITRAL Rules, Final Award of 18 December 2000 16 Int’l Arb Rep C-2 (2001); Himpurna California Energy Ltd v PT. PLN (Persero), ad hoc arbitration under UNCITRAL Rules, Final Award of 4 May 1999 (Paulsson, J.P., de Fina, A.A. & Setiawan, S.H. (2000) Comment on Awards, XXV Yearbook of Commercial Arbitration 13–108. 44 For example, see the analysis of Wells, L.T. & Ahmed, R. (2006) Making Investment Safe: Property Rights and National Sovereignty, Oxford: OUP, 204–247; Ripinsky, S. with Williams, K. (2008) Damages in International Investment Law, London: BIICL.

B. Five Challenges 259 the Argentine Republic tried to defend its actions by reference to the notion of a ‘state of necessity’.45 Before examining the ‘state of necessity’ defence, it is worth noting that there are other forms of defence available to a state in the face of investor challenges. In relation to investment treaties, the first would be use of exceptions, such as for measures that are needed to maintain public order. In the world of BITs, few contain general exceptions however, so this is of limited significance. It is in the realm of customary international law that the more likely defences are to be found: force majeure, distress and necessity.46 Neither the first nor the second have been much in evidence in investment treaty claims to date.47 However, the ‘state of necessity’ defence arose in several of the many disputes that followed the financial crisis in Argentina, in which Argentina appeared as respondent in ICSID claims concerning electricity and gas utilities, many arising from the application of the US–Argentina BIT. It is a controversial defence,48 which has so far enjoyed very limited success for the respondent and has been subject to keen scrutiny and conflicting interpretations by arbitral tribunals, which have also had to grapple with its relationship to similar provisions in BITs. It has been employed in several energy cases, all involving Argentina, but may be used by other states faced with severe economic disruption. There is already some evidence from the initial arbitral awards that a more sympathetic response is emerging towards a state that seeks to use this defence to legitimize conduct that would otherwise be considered wrongful.

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The circumstances which led to Argentina becoming a respondent in many investment disputes before ICSID arbitral tribunals are discussed elsewhere (chapter 7, paras 7.27–7.30, 7.210–7.233 ), so only a cursory review is provided here. Investment flowed into the country’s energy sector following liberalization and privatization in the 1990s. Investors bought into the gas and electricity transmission and distribution sector through the purchase of shares in local companies after a process of public bidding. These companies operated under long- term licences or administrative contracts which gave them the right to set gas and electricity tariffs in US dollars and convert them into pesos (the local currency) at the prevailing

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45 The electricity company, PLN, did seek to argue that it was independent of the Indonesian government and could not therefore be held liable ‘in circumstances where the Contract “was suspended by government action binding on the parties” ’ (at para 84). The tribunal noted, however, that there were three ‘independently sufficient grounds for declining to excuse PLN’s non-performance on the grounds of State action’: its de iure and de facto subservience to the government and the contractual allocation of risk with respect to action by the government (Himpurna, at paras 36–42). The Government Decrees did not amount to a breach of PLN’s and Pertamina’s obligations in the Karaha Bodas case: ‘since a Governmental event is not a force majeure event for them, their non- performance has no legitimate excuse and must be considered as a breach of contract’ (at para 56). 46 The other three defences are consent, self-defence and countermeasures: see ILC: ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’, with commentaries by rapporteur Crawford, J. (2001) at (accessed 1 August 2020). The relevant section is Chapter V (Circumstances Precluding Wrongfulness). 47 The necessity defence contrasts with that based on force majeure which has played no significant role in recent international investment disputes. The essential difference between the two concepts turns on the element of volition. If force majeure is invoked, it is due to the occurrence of unforeseen events outside the control of the state, which make it materially impossible to perform its obligations. In circumstances of necessity, the state is acting voluntarily in violating an obligation in order to safeguard an essential interest against a very significant threat: ‘under force majeure performance of the obligation must be impossible, while under necessity performance of the obligation is at least theoretically possible’: Bjorklund, A.K. (2008) ‘Emergency Exceptions to International Obligations in the Realm of International Investment: The State of Necessity and Force Majeure as Circumstances Precluding Wrongfulness’, in Muchlinski, P. & Ortino, F. (eds) Oxford Handbook of International Investment Law, Oxford: OUP, 459–523, at 462. 48 For a good discussion of this subject in the context of the Argentine disputes, see Bjorklund (2008). The defence was also raised unsuccessfully by Zimbabwe in a land expropriation case: Funnekotter et al v Republic of Zimbabwe, ICSID Case No ARB/05/6 (award rendered 22 April 2009).

260 Chapter 6: Meeting Challenges to Investment Stability exchange rate. These tariffs could be adjusted every six months, according to an international indicator (the US Producer Price Index-Industrial goods or PPI) that reflected the price of goods used in the industry and factors that were aimed at the promotion of efficiency and investments. Difficulties in implementing these tariff arrangements were already emerging by the late 1990s. However, a severe financial crisis gripped the country in 2001 and 2002, provoking a series of measures by the Argentine government that included the abandonment of a link between the peso and the US dollar that pegged the value of the former to the latter (so-called pesification).49 Importantly, the holders of gas licences as providers of a public service were required to comply with the pesification but submit to a renegotiation process, during which any projected tariff adjustments would be frozen. Tariffs remained as they were before pesification. As a result, considerable economic costs were imposed upon the foreign investors.50 For example, the claimant in the ICSID case of CMS v Argentina51 demonstrated that the government’s freeze of gas transportation tariffs and its forced conversion of private service contracts from dollars to devalued pesos at a one-to-one rate had the effect of massively reducing the local investment vehicle’s profitability. The claimant asserted that its investment had lost about 92 per cent of its value.52 Many of the licences contained stabilization clauses (see the discussion of the Sempra case: chapter 7, paras 7.221–7.224). Eventually, more than a dozen companies served notice of arbitration to ICSID under the US–Argentina BIT (and others under BITs with the UK, France, and Spain). 6.37

Argentina argued that ‘the very existence of the Argentine state was threatened by the events that began to unfold in 2000’. Noting the explicitly temporary nature of the emergency measures that had caused harm to the claimants’ investments, it chose to defend itself by virtue of being in a state of necessity. This defence was available in Argentine law, in customary international law and in the US–Argentina BIT at Article IX, which provides: This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

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The defence based on a state of necessity or emergency, whether made under a BIT or customary international law, has met with varied responses from arbitral tribunals. The tribunal in CMS v Argentina rejected it completely, holding that Argentina had failed to meet the conditions for the necessity defence, and stating: ‘If strict and demanding conditions are not required or are loosely applied, any State could invoke necessity to elude its international obligations. This would certainly be contrary to the stability and predictability of the law.’53 This decision and the method of analysis were followed in another case, Sempra v Argentine Republic.54 The tribunal adopted a restrictive interpretation of Article XI of the BIT between 49 The crisis had a political dimension too, with at one period five Presidents holding and resigning from office within five days. In economic terms a distant parallel is the crisis faced by Indonesia in 1998 when the national currency was devalued by 80 per cent. 50 UNCTAD (2008) Latest Developments in Investor-State Dispute Settlement. 51 CMS Gas Transmission Company v Argentina, Award, ICSID Case No ARB/01/8, IIC 65 (2005) 12 May 2005 10. 52 Ibid, at para 69. 53 Ibid, at para 317. Argentina sought to have the decision annulled under Art 52 ICSID, but this was rejected by the ICSID annulment committee due to the limited powers of such committees under ICSID: CMS Gas Transmission Company v Argentine Republic, Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic, ICSID Case No ARB01/8, IIC 303 (2007), issued on 25 September 2007. 54 Sempra Energy International v Argentina, Award and partial dissenting opinion, ICSID Case No ARB/02/16, IIC 304 (2007), despatched 28 September 2007.

B. Five Challenges 261 the Argentine Republic and the USA, drawing attention to the BIT’s general object and purpose to protect rights of investors in situations of economic difficulty and hardship. It stated that: The judicial control must be a substantive one, and concerned with whether the requirements under customary law of the Treaty have been met and can thereby preclude wrongfulness. Since the Tribunal has found above that the crisis invoked does not meet the customary law requirements of Article 25 of the Articles on State Responsibility, it concludes that necessity or emergency is not conducive in this case to the preclusion of wrongfulness . . .55

The tribunal found that Article XI of the US-Argentina BIT did in principle cover economic emergencies, but the provision was not self-judging. The same approach was adopted in the Enron case,56 in which Argentina also advanced the necessity defence. Enron’s argument was that the economic crisis was not severe enough to constitute grave and imminent peril in the sense of Article 25 of the International Law Commission (ILC) Draft Articles on State Responsibility. The tribunal accepted this and also denied that the abrogation of the tariff was the ‘only way’ to counter the crisis. It considered that Argentina contributed to the crisis, an issue that also excludes operation of the pleas of necessity. Similarly, the tribunal used the same analysis to decline the operation of a treaty-specific emergency clause. Finally, the decision in Enron reinforces the idea that even if a state of necessity was operative, compensation for material losses has nevertheless to be paid under Article 27 of the ILC Draft Articles.

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It has been argued that Enron demonstrates a different factual evaluation of the economic situation in Argentina.57 Moreover, Enron appears to assume a different burden of proof for elements that exclude the operation of necessity, and in particular the contribution of the state and the non-existence of alternative measures. The view taken by the tribunal in LG&E was that the burden of proof lay with the investor. The difference of view is therefore one that raises issues about the proper application of the state of necessity under customary international law. This is a contentious view after the conflicting interpretations in CMS and LG&E. The Enron award reinforces the position taken by the former tribunal by mainly repeating the conclusion without introducing new elements into the discussion.

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However, in LG&E v Argentina,58 the tribunal accepted the necessity defence, noting that ‘the conditions as of December 2001 constituted the highest degree of public disorder and threatened Argentina’s essential security interests’. It thus excluded the country’s liability under the US–Argentina BIT, although this exceptional situation was limited in time to a period of less than seventeen months.59 This decision followed from a treaty-based analysis rather than one based on customary international law. Such an approach could identify some flexibility in assessing the state’s circumstances. For a short period, an emergency had indeed existed, and during this time the state was excused from the consequences of its actions. For a limited

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55 Sempra, at paras 373–386. 56 Enron Corporation, Ponderosa Assets LP v Argentine Republic, Award, ICSID Case No ARB01/3, IIC292 (2007), 22 May 2007. 57 Schill, S.W. (2007) ‘International Investment Law and the Host State’s Power to Handle Economic Crises: Comment on the ICSID Decision in LG&E v Argentina’, Journal of International Arbitration 24, 265–286. 58 LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic, ICSID Case No ARB/02/1, Decision on Liability. 59 Ibid, at para 266.

262 Chapter 6: Meeting Challenges to Investment Stability period of time Argentina was exempted from a duty to pay compensation for damages incurred during a seventeen-month period, when it was held to have been in a state of necessity. Once that situation had been overcome and stability restored, however, Argentina was held to be liable for damages related to violations of treaty and contractual commitments. This approach to the necessity defence was subsequently followed by the tribunal in Continental Casualty:60 in that case, a claim was made by a US-based company about its investment in an Argentine insurance company which had incurred losses as a result of pesification and restrictions on asset transfers out of the country. A version of this was partially accepted in the National Grid case,61 where the tribunal did not accept the state of necessity defence but argued that the investor could not be totally insulated from situations such as the economic emergency that faced Argentina from December 2001 onwards. As a result, the breach of the FET standard which it held had taken place was deemed to have occurred almost six months after the Emergency Law was introduced in January 2002, with implications for the damages awarded to National Grid.62 Clearly, there is a major difference of approach and of conclusion in the LG&E and CMS awards, but the tribunal in LG&E made no effort to reconcile its different finding from that of the tribunal in CMS.63 The tribunal in National Grid did make such an attempt, referring to the differences between the BIT on which the claim was based and its implications for the burden of proof that a state of necessity existed, which shifted from the claimant to the respondent.64 6.42

The practical import of these matters for the investor claimant is clear enough from the damages awarded in the two cases in which Argentina was successful in making this defence. In the LG&E case, the ICSID tribunal issued a damages award for breaches of the BIT which required Argentina to pay LG&E a sum of US$57.4 million. It was in breach of FET, the umbrella clause, treatment in accordance with international law and the obligation to avoid discriminatory measures impairing investments. However, the partial success of the necessity defence meant that Argentina was to be exempted from liability for any losses suffered by LG&E during that ‘special’ period of seventeen months. The damages award covers the period falling outside that seventeen-month period. The methodology for calculating compensation was not however one that was proposed by LG&E. It had proposed a method which would have compared the fair market value with the depressed share price in 2002 leading to compensation of US$248 million. The second case in which the state of necessity defence was successfully used was the award in Continental Casualty v Argentina, which applied to a different (non-energy) set of measures taken by the state. The ICSID tribunal awarded Continental Casualty only US$2.8 million out of the US$46 million claimed, after finding that Argentina’s actions to stabilize the financial sector were ‘necessary’ and ‘proportional to the situation’.65 60 Continental Casualty Co v Argentina, Award, ICSID Case No ARB/03/9; IIC 336 (2008), 5 September 2008. 61 National Grid v Argentine Republic, Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 361 (2008), 3 November 2008. 62 The tribunal held (at para 180) that its decision ‘cannot be oblivious to the crisis that the Argentine Republic endured at that time . . . What would be unfair and inequitable in normal circumstances may not be so in a situation of an economic and social crisis.’ Nevertheless, it held at para 412 that Argentina’s contribution to the crisis was substantial; it could not then invoke the state of necessity doctrine under customary international law to excuse liability for breach of the UK–Argentina BIT or its obligation to pay compensation under the BIT. 63 Both tribunals (and also the tribunal in the Continental Casualty case) agreed however that a state of necessity should not be self-judged: that is, states could not be left with an unqualified right to evade the performance of their obligations under a BIT by making the necessity defence. 64 There was no equivalent in the UK–Argentina BIT to Art XI of the US–Argentina BIT, although Art 4 referred to compensation for losses in ‘a state of national emergency’. 65 Continental Casualty v Argentina (2008), at 56, 227.

B. Five Challenges 263 Behind the defence raised by Argentina in these cases is the question of whether the grounds for ‘public order’ or ‘essential security’ exceptions found in most BITs allow a state to invoke an economic necessity defence at all. They may well have been drafted with different kinds of security issues in mind such as civil unrest, and defence or military concerns.66 Assuming, however, that they do apply, the question arises of the extent to which the economic necessity defence should be evaluated in relation to the relevant BIT (as the tribunal found appropriate in the LG&E case) and in relation to customary international law (as in the CMS case, where Article 25 of the ILC took precedence over Article XI of the BIT in the tribunal’s analysis). At present, this question remains unresolved. Clearly, there are significant differences of view among tribunals which have important practical implications, particularly with respect to the issue of which party bears the losses arising during the state of necessity (with CMS and LG&E taking opposing views on this). The Argentine cases provided the first real test of whether the then relatively new international investment regime—on which so many states and investors have come to rely—could deliver a balanced and fair response to the unusual and unfortunate case of a national economic emergency. The more recent awards indicate that tribunals have appreciated that a careful appraisal of the relevant BIT and the facts of the case are likely to prove surer guides than a restrictive interpretation of customary international law.67

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Since the Argentinian cases, there have been cases in which states have sought to use the necessity defence under customary international law since the applicable BITs did not contain general or security exceptions. In Union Fenosa v Egypt,68 the exceptional circumstances of the Arab Spring were offered as a contributor to the Government’s unilateral actions. The claimant had alleged that supplies of gas to its LNG plant were suspended by a state-owned enterprise in breach of a gas purchase agreement (see chapter 9, paras 9.93–9.95). Given the circumstances, was this conduct excusable in relation to necessity? The tribunal held that the necessity defence was not proven: it was not the only way to safeguard the national interest in these circumstances and the claimant was affected disproportionately by the measure, breaching the FET standard. In another case,69 involving mining interests, the necessity defence was offered by Bolivia as a way of excusing a failure to pay compensation for expropriation. A Government decree had revoked mining concessions held by the claimant’s subsidiary, as a result of protests and social unrest among the indigenous peoples in the area of the mines. By majority, the tribunal rejected the necessity defence.

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(4) Procedural complexity With the maturing of the international investment regime, the variety of procedural features available to the parties in pursuit of their objectives in any single dispute has become 66 An interesting dimension to this is the impact of ecological or environmental damage, which could indeed be of such a catastrophic nature that a state of necessity defence might be deemed appropriate for the measures a state elected to take. The ICJ has already recognized that environmental damage could justify an invocation of necessity within the terms of the ILC, even when it is limited to a region and not the totality of the state’s territory: Case concerning the Gabcikovo-Nagymaros Project (Hungary v Slovakia) [1997] ICJ Rep 7 (25 September) 40. 67 Bjorklund (2008) at 522 is surely right when she notes: ‘At bottom is the question of risk allocation and determining who should bear the burden in situations of unforeseen events or economic crises . . . One should remember that the ILC Articles were drafted to serve general purposes; they were not drafted to serve the interests of investor-State arbitration, or even of investment generally.’ 68 Union Fenosa v Egypt, Award, 31 August 2018. 69 South American Silver v Bolivia, Award, 30 August 2018.

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264 Chapter 6: Meeting Challenges to Investment Stability more evident. Respondents especially have become aware of the opportunities that certain procedural devices offer to challenge the viability of a claim, such as the use of jurisdictional challenges and counterclaims. This ‘resistance’ by respondents has its roots (at least sometimes) in a sense that the arbitral process itself lacks legitimacy and fairness. In the following case studies, it is evident that the abundance of counterclaims, arbitrator challenges, applications for annulments, rectifications, stays of enforcement, set-asides, and so on, have become ways of stretching the standard arbitration process to its very limits. In energy disputes, a key consideration is usually to preserve the relationship, especially when one of the parties is a state or state agency. In some cases, however, the relationship is unlikely to survive and then the objective based on expectations of a long-term relationship which will not reach its term, is to secure the most favourable outcome in damages. In the latter group, the first time that a broad class of energy disputes emerged, capable of drawing upon the new world of international investment law with its unique mix of treaty and contract, was in Latin America with cases involving mostly Argentina, Ecuador and Venezuela (see chapter 7). Since then, the exposure of respondent states to a series of claims by investors has shifted geographically to the capital-exporting states, the treaty basis of many claims has changed so that many fall under the ECT, and the character of the energy in the disputes has modified too. However, the pro-active use of procedural mechanisms has built on that first experience with modern international investment law to the point that an understanding of the detail of procedure has become de rigeur, especially as those procedures have become more complex through usage. 6.46

Jurisdiction If a state becomes party to a dispute, it is open to it (and to the other party) to bring a threshold challenge to the tribunal’s jurisdiction. Such challenges by states have become quite common; they were particularly common in the cases involving Argentina before ICSID but have become almost a routine feature in other cases involving energy disputes. The main areas where such challenges have been made are ones that have concerned claims that investors either were not qualified (or covered) to invoke applicable investment treaties by virtue of third-party ownership or control of the claimant entity (see chapters 2 and 7), that investors were restricted to local forums by contractual dispute resolution clauses (chapter 9), disqualified by virtue of ‘fork in the road’ provisions in the applicable treaties (chapter 8), or that the dispute did not concern a covered investment (see chapter 2). Among the various objections to jurisdiction which Argentina filed in the El Paso case was the objection that the umbrella clause in the US–Argentina BIT did not transform contract claims into treaty claims. The tribunal rejected this objection on the ground that while the BIT’s umbrella clause could not raise breaches of ‘ordinary contracts’ to the level of international law, the BIT could nonetheless be applied to breaches of ‘investment agreements’.70

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In the majority of cases where such objections are known to have been raised, they have not ultimately proved to constitute an obstacle to the retention of the case: that is certainly true with respect to cases brought before ICSID. In recent years, the pattern of tribunals’ responses (taking ICSID cases as a sample) has been one in which claimants have been found to have standing as long as either they, or an entity they directly or indirectly control or in which they own a significant shareholding stake,71 are incorporated in a state that is party to 70 El Paso Energy International Company v The Argentine Republic, Case No ARB/03/15, IIC 83 (2006), Decision on Jurisdiction, 27 April 2006, paras 84–86. 71 The notion of a significant shareholding stake needs to be treated with some caution. Some tribunals have taken a quite liberal approach to the ‘shareholder’ and the size of the stake. For example, in RosInvestCo v Russia, a shareholder was able to claim to claim protection in respect of measures that directly affect shares.

B. Five Challenges 265 an investment treaty with the respondent state. Tribunals have also drawn a sharp distinction between contractual and administrative claims on the one hand and treaty claims on the other (see section G below). They have tended to reject arguments that pursuit of contract- based or administrative claims in host state courts or administrative tribunals, or forum selection clauses obliging such pursuit, acts to prevent access to ICSID for treaty claims, notwithstanding similar factual underpinnings. In several Argentine cases ICSID tribunals have also proved willing to overlook procedural requirements in the relevant BITs that require investors to submit a dispute to the local courts eighteen months before filing claims at ICSID; MFN clauses in such treaties allow investors to invoke other Argentine treaties that omit such procedural prerequisites.72 On their part, taking ICSID cases as a sample, a review reveals that states can rely upon a number of decisions that have allowed them to obtain dismissal of investor claims at the jurisdictional stage. For example, in Inceysa Vallisoletana SL v Republic of El Salvador, the claims brought by a European investor were dismissed by an ICSID tribunal because the investor had obtained his rights under a state concession contract through serious fraud in a public bidding process; the investment was thereby excluded from protection under ‘in accordance with the law’ clauses in the applicable treaty.73 In another case, involving Hungary as respondent, the state obtained a full jurisdictional dismissal of claims brought by a European telecommunications provider, on the grounds that the applicable treaty, the Norway–Hungary BIT, limited ICSID jurisdiction to conduct which constituted expropriation, and the sovereign’s regulatory actions did not cross the threshold requirement as a matter of international law.74 Ironically, shortly before its submission of notice to withdraw from ICSID in 2009, Ecuador had a success at the jurisdictional stage by obtaining a dismissal of a claim brought by EMELEC.75

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In the European context, jurisdictional issues have come to acquire a special status in debate on investment law. Since the adoption of a new EU treaty on 1 December 2009 that included a new approach to investments, there has been much debate about what this entails in specific terms. Article 207 of the Treaty on the Functioning of the EU (TFEU) expressly declared that foreign direct investment was an exclusive EU competence. Prior to this, the traditional practice was for the EU to deal with the pre-establishment phase and the market access aspects of investments. Under the new regime, investment protection became an exclusive competence of the EU. The potentially destabilizing effects of this were noted by the European Commission, which stated that ‘investors thrive in a stable, sound and predictable environment’. A first step in interpretation what this meant in practice was the judgment of the European Court of Justice (ECJ) in the case, Slovak Republic v Achmea

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The shareholder can claim protection for the effect on its shares by measures of the host state against the company. This view was cited by the tribunal in RREEF v Spain: RREEF Infrastructure (G.P.) Limited and RREEF Pan- European Infrastructure Two Lux S.a.r.l. v Kingdom of Spain, ICSID Case No ARB/13/30, Decision on Jurisdiction, 6 June 2016. 72 Suez, Sociedad General de Aguas de Barcelona SA and Interagua Servicios de Agua SA v Argentine Republic, ICSID Case no ARB/03/17, Decision on Jurisdiction, IIC 236 (2006), 16 May 2006; National Grid v the Argentine Republic, UNCITRAL Case, Decision on Jurisdiction, IIC 178 (2006), 20 June 2006. 73 ICSID Case No ARB/03/26, Award, IIC 134 (2006), 2 August 2006. 74 Telenor Mobile Communications AS v The Republic of Hungary, ICSID Case No ARB/04/15, Award, IIC 248 (2006), 13 September 2006. 75 Empresa Eléctrica del Ecuador, Inc (EMELEC) v Republic of Ecuador, ICSID Case No ARB/05/9, IIC 376 (2009) (Award rendered on 2 June 2009).

266 Chapter 6: Meeting Challenges to Investment Stability B.V., in which intra-EU BITs were deemed incompatible with the EU treaty. Subsequently, the European Commission has initiated infringement proceedings against member states requesting them to terminate intra-EU BITs.76 A number of EU states signed a Declaration in January 2019 regarding the legal consequences of the Achmea judgment, confirming that the arbitration clauses in intra-EU BITs were in their view in breach of EU law.77 The implications of this new approach for arbitrations arising out of claims about energy matters from investors located in one EU state and another EU state as respondent under the ECT are unclear. The European Commission has communicated an interpretation which argues that arbitral tribunals have no jurisdiction in cases such as these. A succession of awards by tribunals have taken the opposite view.78 For example, the relationship between EU law and investment treaties in the context of public international law was examined by the tribunal in the Vattenfall case.79 Germany had made an objection to the tribunal’s jurisdiction which was deemed admissible but was ultimately rejected by the tribunal. 6.50

Counterclaims Among the process features that present challenges in making claims about long-term stability, the submission of a counterclaim by the host state or its agent is one that appears occasionally, if not often, in the investment cases in the case studies in the following chapters.80 Above all, energy cases are susceptible to counterclaims that are based on a breach of environmental standards. This was evident as long ago as Aminoil and was also evident in Burlington v Ecuador (see chapter 7), and in Algeria v Total (see c hapter 9). As the Burlington v Ecuador case developed, Ecuador brought a counterclaim for environmental damages and the consortium of Burlington and Perenco agreed to ICSID jurisdiction. The tribunal found a jurisdictional basis in the parties’ direct agreement, and also found jurisdiction under Article 46 of the ICSID Convention, permitting jurisdiction over counterclaims ‘arising directly out of the subject-matter of the dispute’, subject to consent and other requirements of ICSID jurisdiction.81 The tribunal made a site visit to Ecuador. It awarded Ecuador US$41.8 million in damages for environmental reclamation and infrastructure remediation,82 and noted too that Ecuador should not recover this twice through its separate counterclaim against Perenco.83 Another example of a counterclaim based on environmental grounds, but from an earlier period, is in Yemen Exploration and Production Company (US) v Yemen. The claimant, YEPC, was expelled from Yemen in November 2005 at the end of a concession agreement after twenty years but it claimed that a five-year extension had been agreed and sought US$2 billion in an ICC arbitration. Yemen filed a counterclaim for US$8

76 European Commission, Press Release, 18 June 2015: Commission asks Member State to terminate their intra-EU bilateral investment treaties. 77 Declaration of the Member States of 15 January 2019 on the Legal Consequences of the Achmea Judgment and on Investment Protection: . 78 A long line of arbitral awards delivered under ICSID against Italy and Spain confirm this: see para 6.150 and cases cited in related notes. 79 Vattenfall AB and others v Federal Republic of Germany, ICSID Case No ARB/12/12, Decision on the Achmea Issue, 31 August 2018. 80 For an authoritative review of the subject, see Clodfelter, M. & Tsutieva, D. (2018) ‘Counterclaims in Investment Treaty Arbitration’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements (2nd edn), Oxford: OUP, 417–454; and note Douglas, Z. (2009) The International Law of Investment Claims, Cambridge: CUP, 256–263. 81 Burlington Resources Inc Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Counterclaims, 7 February 2017, paras 60–62. 82 Ibid, at para 1075. 83 Ibid, at paras 1080–1086.

B. Five Challenges 267 billion for an alleged failure to comply with environmental regulations. The tribunal rejected both claims. A more typical response to an application to submit a counterclaim is that experienced by Venezuela in Rusoro Mining v Venezuela when it sought to argue that the investor’s mining practices were inadequate and had damaged the mine and impaired its value.84 In the Canada–Venezuela BIT text, the scope of arbitral disputes was limited to those based on a ‘claim by the investor that a measure taken or not taken by the (host State) is in breach of this Agreement’,85 only investors could submit disputes to arbitration. The tribunal therefore dismissed the counterclaim for lack of jurisdiction.

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There are procedural challenges that arise in relation to damages and enforcement matters, but these are examined separately in c hapter 11.

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(5) The energy transition Possibly the greatest risk to the long-term stability of energy investments is the complex of issues in the so-called ‘energy transition’, a long-term historical shift in energy use away from carbon-intensive energy fuels to an energy mix that is significantly less carbon-emitting. This is an extra-legal feature of the global economy (at least in its origins) that implies large- scale, multiple interventions by the state in the energy sector. Clearly, such a process has significant legal implications. It is actual as well as prospective, since it is already providing tests for the protections that investors expect from the international investment regime. It functions as an invitation and a warning to energy investors: the process requires careful, targeted investment in areas that are likely to be supported by governments, and it augurs a period of decline for investments in fossil fuels. This section will examine some of the challenges it presents to IIAs and the emerging jurisprudence.

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The overall goal of public policies that are oriented to reducing the carbon intensity of energy use is to mitigate the effects of climate change and fulfil targets assumed under the UNFCC instruments, most recently the Paris Agreement (discussed in c hapter 10) or, in the European context, to reach mandatory targets for renewable energy set down in EU legislation. In a sense, the policies that are associated with the ‘energy transition’ are a subset of this grand, and urgent policy goal of climate change mitigation. Within the ‘energy transition’ subset, there is clearly an emphasis upon policies that favour the expansion of different kinds of renewable energy. Early efforts by states to design such policies and related regulatory frameworks have led in some cases to disputes with energy investors and multiple arbitrations. However, the expansion of renewables is only one element in the design of national policies that aim at lowering the carbon intensity of the economy. Appropriate policies also include ones aimed at changing the energy mix so as to reduce or phase out electricity that is generated from coal and oil and increase generation from natural gas or alternatives. The way this is implemented will influence the number and character of claims for damages by investors. Further, the effect of such policies is likely to be a decline in investment in hydrocarbons, not only exploration but also in mature production, with implications for the costs

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84 Rusoro Mining Limited v The Bolivarian Republic of Venezuela, ICSID Case No ARB(AF)/12/15, Award, 22 August 2016. 85 Ibid, at paras 623–627.

268 Chapter 6: Meeting Challenges to Investment Stability of decommissioning and environmental clean-up. It is also likely to be a process with more negative impacts on those states that rely on fossil fuels for economic growth than those with more diversified economies, and hence the proposal that any such transition should be ‘just’. The implications of the hydrocarbons exit are discussed in c hapter 10. 6.55

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For the treaty protection offered to energy investors, the implicit need for an increased tempo of government action to bring about an energy transition means that there is a new potential for investor-state disputes. This follows not only from the actions themselves and their timing but also from the risk of sudden policy swings, or reversals following unexpected effects of measures taken, such as a surge in costs for renewable energy support mechanisms, without which new energies themselves might not become commercially viable. From the government perspective, it may also be necessary to respond to investors’ decisions to reduce or cancel investment plans or decisions because of an assessment of the impacts of energy transition. Projections of market erosion, for example, by target dates set by government may lead the investor to curtail a planned investment or sell its interest in mature fields, hastening discussion of decommissioning of hydrocarbons assets (see c hapter 10).

(a) Renewable energy promotion

For some time it has been understood by governments that if electricity generation is to shift from dependence upon fossil fuels as its primary source, economic support of some kind is required to encourage consumers to take up low carbon alternatives such as wind or solar energy. There are several ways of achieving this overall objective. In Europe the initial form of support usually had at its core a so-called feed-in tariff that offered a fixed price to generators for each unit of energy projected and injected into the electricity grid. Payment of a FiT is typically guaranteed for periods of between fifteen and twenty-five years, linked to the economic lifetime of the project. It offers a higher rate of return than that typically available from conventionally generated electricity. By contrast, the preferred method in the USA and Latin America was the use of tax credits. At the initial stage, all governments had to design a method or regulatory regime to attract scarce capital resources to what is a relatively new energy sector and to compete with each other to do so. Given the high degree of reliance on government support for the renewable energy sources to be commercially attractive, the relevant scheme had to be designed in such a way as to counter regulatory risk. In terms of structure, the usual approach was to provide a framework law that guaranteed a reasonable or fair return and then, in implementing legislation, to offer prospective investors a specific scheme such as a feed-in tariff. In many cases, the success was greater than expected, with very large volumes of investment capital moving into the new sector. However, in addition to the cost of support being higher than expected, there were other reasons why certain governments experienced financial difficulty. In Spain, for example, the difference between the feed-in tariffs and the tariffs paid by consumers had earlier, historical roots and was exacerbated by the operation of the regulatory regime. Measures soon followed to modify key features of the regulatory frameworks so as to reduce the amount and duration of incentives for future investment. They included a reduction in the number of hours eligible for the FiT, imposition of additional taxes, and limitation on the number of green certificates issued, for example.86 Some measures had retroactive effect, some did not. For example, in Italy one set of reforms passed in 2013 were not retroactive, 86 European countries taking measures to revise their renewable energy schemes included the Czech Republic, Italy, Romania, Spain, and the UK.

B. Five Challenges 269 while another set of reforms, adopted in 2014, were.87 This pattern of unilateral state action has been evident in many countries and not only in Europe. It varies according to the incentives offered, the timing of changes and the municipal legal regime. Some of these measures had adverse impacts on investments already made. The manner in which this was done to existing investments by states determined the form and intensity of the legal response by investors affected. Among the investor responses was a very considerable amount of domestic litigation and many claims brought under the arbitration mechanisms of the ECT. In the latter group a striking feature was the reliance of many claimants on the FET provisions with respect to regulatory changes made in the respondent countries. Several dozen claims were brought under the ECT, mostly involving Italy and Spain. Recurring issues in the arbitrations were whether the regulatory and legislative changes introduced by the respective governments into their renewable energy schemes amounted to an indirect expropriation or breached the ECT’s guarantee of FET or both. A number also engaged the ECT’s umbrella clause in Article 10(1). Where a tax measure had been introduced it was also included among the measures challenged.

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By contrast, the incentives given to investors in Latin America have been mostly tax-based. So, potential renewable energy claims would likely have a tax dimension rather than be regulatory or tariff related. Since many investment treaties expressly exclude tax matters, there would seem to be at least prima facie less scope for making claims against governments.

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Mexico has also taken measures on renewable energy incentives that risk international arbitration proceedings. In October 2019, the Energy Secretariat decided to modify the guidelines applicable to the issue of clean energy certificates (Certificados de Energia Limpia). Originally, these applied to power plants constructed after 2014, and were aimed at encouraging private investments in the generation and use of clean energy. They had a duration of twenty years and could be sold in the free market. A condition for eligibility was that the applicant would make an investment to increase clean energy generation. Over a five-year period, private investors committed US$8.6 billion in clean energy projects; forty-four companies registered as clean generators, including domestic and foreign investors from North America, Europe, and Asia.88 The amendment would extend this to power plants pre-dating 2014, which were state-owned, with the risk of over-saturation of the market and a fall in prices for renewable energy, as well as a destruction of the value of clean energy plants in operation after 2014. In March 2021 a legislative measure was adopted to reverse all the main incentives for the renewable energy sector, and extend state control of the national power market.

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From the above characterization of the early experience of promoting investment in low carbon sources of energy, a pattern emerges of state support followed by significant revision of the regulatory regimes. This is evident in many states and several regions, suggesting that this form of low carbon investment carries with it a significant regulatory risk. The sharp increase in claims before international tribunals that has resulted from early instances of

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87 This made an important difference to the outcome in Eskosol SpA in liquidazione v The Italian Republic, ICSID Case No ARB/15/50 (the insolvent solar investor had its claims rejected as the tribunal found the reforms not irrational or arbitrary). 88 Fernando Perez-Lozada (13 January 2020) ‘Change of Clean Energy Rules in Mexico: Potential Impact for Investors’ .

270 Chapter 6: Meeting Challenges to Investment Stability such modifications by states has already led to many awards, some of which are examined below (section D). In relation to the energy transition, however, the interim conclusion that emerges from these awards is that the scope of treaty protection for such low carbon investments can vary greatly.

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(b) Mandatory closures and phase-outs

There are a growing number of investment disputes arising from policies that respond to emission reduction plans in different ways. In Europe and North America there are many examples. In the former, these include the many ECT cases in which feed-in tariffs have been revised in ways that have triggered international arbitrations involving the Czech Republic, Italy, and Spain. Some of these are discussed in this chapter (section D). In the latter region, there are fewer cases, but they are no less notable in terms of investment law. Aside from the feed-in tariff cases, there are other examples in the European context in which states have sought to change their national energy mix motivated, at least in public statements, by public policy goals, such as climate change mitigation. While their right to do so is unlikely to be contested by investors, any adverse effects of the policy realignments are likely to encourage those investors affected by the measures to initiate arbitral proceedings for compensation.89 There are several examples in Europe of policy decisions to phase out fossil fuels or nuclear energy in the generation of electricity: (a) The Netherlands Following a decision of the Supreme Court censoring a lack of action by the Government in addressing climate change issues (see c hapter 10), and the adoption of a Prohibition of Coal in Electricity Generation Act in 2019, a phased ban was introduced on the use of coal to generate electricity. The Act prohibits the use of coal as a fuel in those plants that generate electricity and does not affect other uses of the generating plants (for example, the use of biomass instead of coal to generate electricity). A transition period is offered until end-2029. Subject to certain conditions, compensation is available. This idea of a coal phase-out is not new and is being planned by both Germany and the UK with dates set for closure. However, in this case the compensation payments were deemed inadequate by RWE, a German- based utility that owned two coal-fired power plants in the country. In January 2021 a claim was submitted by RWE AG and RWE Eemshaven Holding II BV against The Netherlands under the Energy Charter Treaty before ICSID.90 This is the first ever claim against The Netherlands before ICSID. A second electricity utility, Uniper, also German-owned, had agreed to build a coal-fired power plant in 2007, following discussions with the Dutch Government, which was seeking at that time to vary its energy mix. The plant opened at Maasvlakte in Rotterdam in 2016 and cost a reputed €1.6 billion with an expected operating life of forty years.91 It initiated a claim against The Netherlands in April 2021.92 (b) Germany A similar phase-out decision was taken but with respect to the use of nuclear power, in the aftermath of the Fukushima accident in Japan. The German 89 In Romania too, changes to renewable energy legislation in September 2017 by limiting the number of ‘green certificates’ that may be sold have led to ECT claims: LSG Building Solutions GmbH and others v Romania, ICSID Case No ARB/18/19; GAR. 19 May 2020, ‘Wind farm investor initiates ECT arbitration against Romania’. 90 RWE AG and RWE Eemshaven Holding II BV v Kingdom of The Netherlands, ICSID Case No ARB/21/4. 91 GAR, 7 September 2019, ‘Netherlands poised to face its first investment treaty claim, over closure of coal plants’. 92 Uniper SE, Uniper Benelux Holding and Uniper Benelux v The Netherlands, ICSID Case No ARB/21/22.

B. Five Challenges 271 legislature adopted Nuclear Amendment No 13, a measure which imposed specific decommissioning dates for each nuclear plant. This triggered an ECT claim in 2012 by a Swedish investor, Vattenfall, for compensation to an amount of €4.7 billion.93 The decision to initiate arbitration was not a challenge to the policy choice itself but rather a request for compensation.94 In parallel domestic proceedings, initiated by Vattenfall, the German Constitutional Court (Bundesverfassungsgericht) held that Nuclear Amendment No 13 was unconstitutional, affecting Vattenfall’s right to distribute their residual energy, and affecting its right to property, guaranteed under the Basic Law.95 In 2020 it found that the legislature’s attempt to rectify this violation had failed.96 Germany faced other claims in respect of its renewable energy legislation. Germany amended its Renewable Energy Sources Act in 2016 so that the right to receive fixed feed-in tariffs from the State was replaced by a market-based pricing mechanism for renewable energy producers. In addition, a new Offshore Wind Energy Act required investors in offshore wind projects to participate in tariff auctions managed by the Federal Grid Agency, which would award to bidders according to those offering the cheapest rate to the consumer. In response to the changed regulatory framework, a claim was brought against Germany by Strabag, a large construction firm, and others, under the ECT on the ground that the regulatory changes combined with the exclusion of their projects from the public auction process meant that they had no alternative but to abandon the investments, which had been made in reliance on the legal regime for offshore wind producers.97 (c) France A different approach to fossil fuels is evident in France and Italy. In the former, there is the example of a proposal to prohibit the domestic production of oil and gas in France that sought to contribute to meeting the country’s commitments under the Paris Agreement on climate change. It would have ended all exploration and production of hydrocarbons in France and in its overseas territories. A Canadian oil and gas company was reported to be preparing an ECT claim as a result.98 (d) Italy Similar legislative actions against hydrocarbons exploration and production went from the proposal stage to law in the form of Act No. 11/2019. Article 11-ter of this Act suspends all exploration permits as well as new applications for production

93 Vattenfall AB and others v Federal Republic of Germany, ICSID Case No ARB/12/12. This is not to be confused with an earlier case with the same parties about a power plant construction project, which was settled in 2011: Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v Federal Republic of Germany, ICSID Case No ARB/09/6. The case concerned environmental restrictions imposed on a €2.6 billion coal-fired power plant under construction on the Elbe River. The final construction permit appears to have been granted by the City of Hamburg authority only subject to certain additional restrictions on the plant’s impact on the river. 94 Vattenfall Press release, 5 October 2016: ‘Why Vattenvall is taking Germany to court’: https://group. vattenfall.com/press-and-media/newsroom/2016/why-vattenfall-is-taking-germany-to-court. Interestingly, claims pursued by nuclear utilities in German state courts succeeded on their merits, survived appellate review, and entered into the damages phase, all in a very few years. 95 Press Release No 98/2020 of 12 November 2020; Order of 29 September 2020, 1 BvR 1550/19, ‘The Sixteenth Amendment of 10 July 2018 to the Atomic Energy Act has not entered into force; the legislator remains obligated to enact new provisions’: (accessed 9 February 2021). 96 Ibid. 97 Strabag SE, Erste Nordsee-Offshore Holding GmbH and Zweite Nordsee-Offshore Holding GmbH v Germany, ICSID Case No ARB/19/29. 98 GAR, 13 September 2018: ‘France threatened over oil and gas bill.’ An Energy Transition Act and Law No 2019-1147 dated 8 November 2019 on climate and energy made efforts at reducing the country’s overall consumption of oil.

272 Chapter 6: Meeting Challenges to Investment Stability concessions for a period of eighteen months.99 In effect, it is a moratorium during which time the Government is supposed to determine which areas are suitable for hydrocarbons activities, taking environmental factors into account. Administrative fees were also to be increased by twenty-five times because of the Act. In Italy’s case, there is a precedent for arbitration with foreign investors over hydrocarbons operations. In the Rockhopper v Italy arbitration, the investor is claiming compensation of €275 million from Italy for a breach of its obligations under the ECT, including legitimate expectations.100 6.64

In North America, there are examples of similar actions leading to arbitrations by foreign investors. In Canada, the decision by the Ontario Power Authority to delay the award of permits and authorizations to Windstream Energy led to a claim under NAFTA,101 which Canada ultimately lost. Following Ontario’s enactment of the Green Energy and Green Economy Act of 2009, and subsequent promulgation of implementing rules, a Feed-in Tariff programme was created for the development of renewable energy projects, including onshore and offshore wind projects. After the award of a Feed-in Tariff Contract to the claimant, the Provincial Government was alleged to have delayed approval of the necessary permits and authorizations for the project, a US$3.9 billion 300-megawatt offshore wind facility on Lake Ontario. A year later, the Ontario government imposed a moratorium arguing that more scientific research was required on the environmental impact of wind energy projects. This frustrated Windstream’s attempts to develop its wind project. The tribunal had to consider whether the acts of the Ontario Power Authority (OPA), a state enterprise with responsibility for signing long-term electricity purchasing contracts with companies, could be attributed to Canada, a question that had arisen in another wind energy case, Mesa Power v Canada.102 The answer was that it was not necessary to determine this since the conduct underpinning the NAFTA breach was found to be conduct of the Ontario government directly, not the OPA, according to the tribunal. The tribunal did not contest the reason given for the moratorium but rather the absence of any subsequent action taken ‘to address the scientific uncertainty surrounding offshore wind that it relied upon as the main publicly cited reason for the moratorium’.103 Canada had also failed to ‘address the legal and contractual limbo in which Windstream found itself after the imposition of the moratorium’.104 Hence, the tribunal found that Windstream had been treated unfairly and inequitably within the meaning of Article 1105(1) of NAFTA when the moratorium had been imposed on offshore wind energy projects. Windstream had claimed US$460 million in damages, but received only US$21 million in 2016, including legal costs.105 In calculating damages, the tribunal found that the project progress was insufficient to justify the use of a DCF method and favoured 99 Ruggero Di Bella, D. & Galvez, J. (13 March 2019) ‘Oil & Gas: Is Italy Doing it Wrong All Over Again?’, . 100 Rockhopper Italia SpA, Rockhopper Mediterranean Ltd and Rockhopper Exploration Plc v Italy, ICSID Case No ARB/17/14. 101 Windstream Energy LLC v Government of Canada, 27 September 2016, PCA. 102 Mesa Power Group LLC v Government of Canada, UNCITRAL, Award, 26 March 2016. The claim centred on a FiT scheme aimed at promoting the use of renewable energy in electricity generation in Ontario. Mesa claimed that Canada had imposed arbitrary requirements through the design and implementation of its FiT programme, preventing Mesa from participating and had given preferential treatment to rival companies. Mesa lost its claim in a majority decision. There was a robust ‘concurring and dissenting opinion’ by Judge Charles N. Brower. 103 Windstream Energy, at para 378. 104 Ibid, at para 379. 105 Windstream Energy Press Release, 25 February 2017: (accessed 9 February, 2021). The award was the largest made against Canada under NAFTA at the time.

B. Five Challenges 273 instead a comparables approach, entailing the examination of comparable projects around the world to determine the usual value of a project at the stage of progress that Windstream’s had reached.106 The investor had also not lost the full value of the project, which for the tribunal was a reason for denying the full value in compensation. A further claim arose out of Ontario’s renewable energy programme in late 2019. In Tennant Energy v Canada, claims were made that (among others) the administration of the FiT programme was non-transparent and opaque, and that the award of access to the electricity grid was unfair and gave preferential treatment to another consortium.107 An interesting aspect, however, is that Canada sought security for costs and disclosure of third-party funding.108 This request has its roots in delays it experienced in collecting on a final costs award from the earlier Mesa case. It is also a useful reminder that governments can have trouble in recovery of the costs of arbitration from certain investors.

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Canada found itself involved in another claim arising from the decision by a different Provincial government, this time Alberta, to phase out greenhouse gas emissions (GHG) and air pollutants produced by coal-fired power generation by 2030, and make transition payments to certain companies in relation to this policy.109 The decision was part of Alberta’s Climate Leadership Plan and addressed the second highest GHG emitting sector in the Province. Six of the existing coal-fired power plants were expected to operate beyond 2030, so the Province agreed to pay the operators around US$1 billion in transition payments, a form of compensation, between 2016 and 2030. In 2019 Westmoreland Mining Holdings (WMH), a US coal mining company, initiated arbitration proceedings under NAFTA Chapter 11. The allegation by WMH was that it suffered discrimination by the policy and the lack of payments made to it. Most of the recipients of payments were customers of WMH. It argued that its investment had been made at a time when a federal regulatory scheme contemplated a 50-year term for coal-fired power plants, and accordingly its mines were deliberately opened adjacent to power generators. Its losses would include revenue from early closure on or before 2030 and accelerated costs arising from the rehabilitation of land after closure. The case is ongoing.

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(c) New energies and treaty disputes

Even when the search for new forms of energy takes place, it is likely that the legal forms of access such as permitting, or licensing, will be familiar. If there is a dispute between the foreign investor and the host state, its legal character may not be unusual. An example is the production of biofuels in Panama, where an Italian company registered an ICSID claim against the government for an alleged series of measures that made it impossible for the investor to proceed with a plan to manufacture bioethanol through locally sourced material.110 The government passed a law requiring gasoline to be mixed with a certain percentage of bioethanol, with the result being a cleaner form of gasoline. The law set the price for the sale of bioethanol, taking care that the price covered the production costs, so that the local

106 Windstream Energy, paras 476–486. 107 Tennant Energy LLC v Government of Canada, PCA Case No 2018-54, Notice of Arbitration, 1 June 2017. There was a delay to the next stage: Government of Canada Statement of Defence, 2 July 2019 108 Ibid: Government of Canada Motion for security of costs and disclosure of third-party funding, 16 August 2019. 109 Westmoreland Mining Holdings LLC v Government of Canada, ICSID Case No UNCT/20/3. 110 Campos de Pese S.A. v Republic of Panama, ICSID Case No ARB/20/19; GAR, 23 July 2020, ‘Details of Panama biofuels dispute emerge’.

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274 Chapter 6: Meeting Challenges to Investment Stability product was not undercut by any cheaper international version of the product. On this basis, the investor committed capital to purchase land and invested more than US$100 million, concluding several long-term contracts with parties interested in buying its bioethanol. The investor claimed to have received assurances that this law was stable. A new government took office and set a new price formula for locally produced bioethanol, and also revoked the decree that required a proportion of bioethanol to be mixed with gasoline, in effect destroying the nascent industry in the country. The investor claimed that the government’s assurances over the stability of the legal framework had created a legitimate expectation that was not met. Among the claims made by Campos under the Italy–Panama BIT are expropriation and denial of justice, and others based on the MFN clause. Despite the novelty of the energy element, the process is from an investment law viewpoint a familiar one. 6.68

A different kind of energy, rarely known to be in commercial use, is geothermal energy. It figured in an investor-state arbitration arising from an investment in Kenya.111 A US-Canadian investor secured a thirty-year licence in 2007 to exploit geothermal resources in southwest Kenya. The government revoked the licence after five years, alleging a lack of performance of the licence duties and a lack of capacity to carry out the work. The claim for US$340 million was dismissed.112

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The importance of some seabed minerals has grown as their potential contribution to lower carbon technologies and vehicles. With innovative technologies these may be extracted commercially in the foreseeable future. Although not an energy dispute, some idea of how such minerals disputes might evolve and the issues arising from them may be gleaned from a recent claim concerning the regulation of phosphate sand deposits offshore Mexico. A US company, Odyssey Marine Exploration, brought a claim under NAFTA on behalf of its Mexican subsidiary, ExO, arising out of a refusal by the Mexican authorities to grant an environmental permit.113 In relation to NAFTA’s successor, USMCA (see Chapter 5), this is a ‘pending claim’ within the terms of Annex 14-C, paragraphs 1 and 4, for which Mexico has promised to maintain its consent after the expiry of NAFTA.114 The investor had been granted a mining concession for the deposit with a fifty-year duration, covering about 3,000 square kilometres. It sought to extract the mineral using dredging techniques which, in contrast to terrestrial mining, had both cost advantages and a smaller environmental footprint, they alleged. An environmental impact assessment and development plan involved four years of preparation but was rejected by the authorities, although in the same period Mexican companies and state agencies were alleged to have secured permission to carry out activities in areas that were more ecologically sensitive than this one. The argument was that Mexico was in breach of Article 1105 NAFTA which requires FET and full protection and security; Article 1110(1) which prohibits indirect expropriations and Article 1102 that requires treatment no less favourable than that which the host state accords to its own investors.115 The claim sought full compensation reflecting fair market value of the concession and the claimant’s investment in Mexico (US$2.36 billion, plus interest).116 Once again, the legal issues are familiar, as is the treaty protection sought, even though the way the natural 111 WalAm Energy LLC v Republic of Kenya, ICSID Case No ARB/15/7. 112 GAR, 13 July 2020, ‘Kenya declares win in geothermal energy dispute’. 113 Odyssey Marine Exploration Inc v United Mexican States, ICSID Case No UNCT/20/1; Claimant’s Memorial, 4 September 2020. 114 Claimant’s Memorial, para 207. 115 Ibid., at paras 217–352. 116 Ibid, at para 433.

C. Expropriation, Direct and Indirect 275 resource was to be extracted was one that relied upon recently developed and innovative technology. C. Expropriation, Direct and Indirect Energy assets and infrastructure are particularly prone to actions by host states to expropriate them. This is as evident from cases over the past decade as it is from the many cases arising from expropriations in the Middle East several decades ago (such as the Libyan and Aminoil cases: see c hapter 4). The six largest awards in the past decade are all ones involving expropriations in the hydrocarbons and mining sector (five in oil and gas and one in mining).117 Moreover, they were ones in which the claimant was awarded more than one billion US dollars and except for the three Yukos-related cases were direct expropriations. There are other less well-known examples. Repsol, a Spanish energy company, owned a privatized company, YPF SA, in Argentina, which was the country’s main oil and gas company. In 2012 the legislature adopted a law that expropriated 51 per cent of the company’s shares, effectively re-nationalizing it. There was much litigation and an ICSID arbitration,118 before the case was settled for US$5 billion.119 In the same year, Bolivia nationalized several electricity companies including Red Electrica de Bolivia owned by a Spanish electricity grid company. Two years before, it had nationalized four electricity companies including a local subsidiary of GDF Suez and UK-based Rurelec.120 Reports of expropriations of mining rights and hydrocarbons concessions are not unusual.121

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Yet, when a state does expropriate and fails to offer adequate compensation, the proliferation of BITs and MITs has given investors an opportunity to bring claims for a breach against states for such actions according to international law. Indeed, since the wording in investment treaty instruments has tended to be broad, a major role has fallen to arbitral tribunals to determine whether an expropriation has taken place in a particular case. Unfortunately, early experience of the global adjudication system has not been one that is likely to inspire confidence among investors faced with the necessity of responding to these serious actions taken by a host state. If the opportunities for investors to base their claims against host states on a violation of the FET standard in a treaty have increased significantly, the same cannot be said about the consequences of a reliance upon ‘expropriation’ in bringing a claim. For a variety of reasons, when tribunals have addressed the issue of expropriation, their support for investors appears to have moved in the opposite direction.

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117 Hulley Enterprises v Russia (PCA UNCITRAL)(US$40 billion); Veteran Petroleum v Russia (PCA UNCITRAL)(US$8.2 billion); Yukos Universal v Russia (PCA UNCITRAL)(US$1.8 billion); Occidental v Ecuador (ICSID Case No ARB/0611)(US$1.8 billion); Venezuela Holdings v Venezuela (ICSID Case No ARB/07/27)(US$1.6 billion); Crystallex v Venezuela (ICSID Case No ARB(AF)/11/2)(US$1.4 billion). 118 Repsol S.A. and Repsol Butano S.A. v Argentine Republic, ICSID Case No ARB/12/38. 119 Argentina paid this with Treasury bonds. An incentive for Argentina to pay seems to have been to bring to an end the legal actions in Madrid and New York courts brought by Repsol against international companies that were seeking to work with YPF in shale projects inside Argentina following the expropriation: GAR, 26 February 2014: ‘Repsol settles ICSID dispute with Argentina’. 120 GAR, ibid. 121 For example, at the end of 2017, Nicaragua faced an ICSID Claim for an alleged expropriation of a hydrocarbons concession brought by a US investor under DR-CAFTA: The Lopez-Goyne Family Trust and others v Republic of Nicaragua, ICSID Case No ARB/17/44; expropriation of silver mining rights in Peru and Bolivia: Bear Creek Mining Corporation v Republic of Peru, ICSID Case No ARB/14/21; South American Silver Limited v The Plurinational State of Bolivia, PCA Case No 2013-15; unlawful expropriation of rare earth mining rights in Stans Energy Corp. v Kyrgyz Republic, UNCITRAL 2019.

276 Chapter 6: Meeting Challenges to Investment Stability 6.72

The body of international law scholarship on the subject of expropriation is considerable.122 A consensus exists that customary international law allows a host state to expropriate foreign investments but attaches four conditions to the exercise of this sovereign power: that it be done in a non-discriminatory manner, for a public purpose, according to due process (the procedure that surrounds the expropriation),123 and accompanied by payment of compensation to the affected party.124 Even the presence of a stabilization clause in the energy investment contract will not be sufficient to prevent a lawful expropriation by the host state (although it will almost certainly increase the claimants’ chances of obtaining a higher level of compensation). However, the classic studies have little or no specific advice on an issue which has vexed many recent commentators: the implications of a shift from expropriation per se (direct) to indirect or creeping (that is, incremental) expropriation which involves the exercise of the state’s regulatory power.125 When is the exercise of a state’s police powers legitimate and bona fide to the extent that a complete deprivation of property implies no corresponding obligation to make compensation?126 Put another way, when can the host state 122 Among the classical texts, examples include: Higgins, R. (1982) ‘The Taking of Property by the State: Recent Developments in International Law’, Recueil des Cours 176, 259; Vagts, D.F. (1978) ‘Coercion and Foreign Investment Rearrangements’, AJIL 72, 17; Weston, B.H. (1975) ‘Constructive Takings’ under International Law: A Modest Foray into the Problem of Creeping Expropriation’, Va J Int’l L 16, 103. More recent literature on the subject includes Rubins, N., Nektarios Papanastasiou, T. & Kinsella, N.S. (2020) International Investment, Political Risk, and Dispute Resolution (2nd edn), Oxford: OUP, 171–208; McLachlan, C., Shore, L. & Weiniger, M. (2017) International Investment Arbitration (2nd edn), Oxford: OUP, 359–412; Yannaca-Small, K. (2018) ‘Indirect Expropriation and the Right to Regulate: Has the Line been Drawn?’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements (2nd edn), Oxford: OUP, 562–593. 123 In an interesting comment on the due process condition, Dolzer, R. & Stevens, M. (1995) Bilateral Investment Treaties, The Hague: Kluwer Law International, at 106, note that the absence of references to domestic law in BITs, where the due process condition is included, is indicative of the . ‘very purpose of the BIT, ie, not to accept standards established under domestic rules as ultimate standards of the legality of an expropriation’. The due process condition is said to express the minimum standard under customary international law and the FET requirement: Dolzer, R. & Schreuer, C. (2012) Principles of International Law (2nd edn), Oxford: OUP, 100. 124 In this context, see the list in Art 13(1) of the ECT, which has the same structure as NAFTA Art 1110(1), but which does not expressly refer to either direct or indirect expropriation; it also uses the wording ‘having effect equivalent to’ expropriation, rather than ‘tantamount to’ expropriation. Unusually, the ECT also includes express provisions on how compensation is to be calculated. 125 There are nevertheless wider problems with the classical model of expropriation with its analogy of a wrongful taking of property in private law. In relation to the control over natural resources, these are explored by Brownlie, I. (2008) Public International Law (7th edn), Oxford: OUP, at 536–539. He cites the ECHR observation in the James case (at 538): ‘. . . the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be considered justifiable under Article 1. Article 1 does not, however, guarantee a right to full compensation in all circumstances. Legitimate objectives of “public interest”, such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value’: Judgment of 21 February 1986, EHCR Ser A no 98, para 54; see, however, Brownlie’s summary conclusions on compensation for expropriation at 543–544: ‘it is significant that the right to compensation on whatever basis, is recognized in principle.’ 126 Several writers have addressed this issue, especially since the first awards made under NAFTA accorded a wide definition to expropriation: for example, Newcombe, A. (2005) ‘The Boundaries of Regulatory Expropriation in International Law’, ICSID Review-FILJ 20, 1–57; Lowe, V. (2002) ‘Regulation or Expropriation?’, Current Legal Problems 55(1), 447; Reisman, W.M. & Sloane, R.D. (2003) ‘Indirect Expropriation and its Valuation in the BIT Generation’, BYIL 74, 115; Paulsson, J. & Douglas, Z. (2004) ‘Indirect Expropriation in Investment Treaty Arbitrations’, in Horn, N. & Kroll, S. (eds) Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects, The Hague: Kluwer Law International, 145; Coe, J. Jr & Rubins, N. (2005) ‘Regulatory Expropriation and the Tecmed Case: Context and Contributions’, in Weiler, T. (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, London: Cameron May, 597. A principal concern is that regulatory measures that are designed to protect the public interest (environment, health and safety, for example) will be characterized by a tribunal as indirect expropriation. The NAFTA case of Ethyl v Canada, for example, involved the imposition of the use of restrictions on a fuel additive: was the Canadian federal government’s ban on the inter-provincial trade and import of the additive produced by Ethyl tantamount to an expropriation of Ethyl’s additive business? (38 ILM 1347). A similar issue arose in Methanex v United States, Final Award, IIC 167 (2005), 3 August 2005. Perhaps ironically, the cases involved investor claims against two of the most developed states in the world.

C. Expropriation, Direct and Indirect 277 affect the value of property by a regulatory measure or measures for a legitimate public purpose without effecting a taking and having to provide compensation for this act? A key issue here is where the distinction may be made between valid, non-compensable regulation on the one hand and compensable expropriation on the other.127 The difficulty lies in the perception that expropriation is not so much a single, direct act—such as the compulsory transfer of title to property to the state or a third party or the outright seizure of property by the host state—as a process through which a series of incremental acts by the host state may over time have the effect of depriving an owner of fundamental rights of property. This has spawned a variety of phrases such as: ‘indirect expropriation’; ‘creeping expropriation’;128 ‘measures equivalent to expropriation’; and ‘measures having an effect equivalent to expropriation’. The justification offered by a host state for such deprivation may be based upon legitimate regulatory powers, but the actions taken may slide over a dividing line and become expropriation. However, for the tribunal faced with an investor’s claim alleging expropriation, the most difficult question, in Professor Schreuer’s view, ‘is not so much whether the requirements for a legal expropriation have been met but whether there has been an expropriation in the first place’.129

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The customary international law on expropriation was—or so the treaty drafters thought— codified in the many investment treaties now in force: they all contain specific provisions that set out the preconditions for and the consequences of expropriation, including indirect expropriation or measures tantamount to expropriation. As we have seen in chapter 5, the investment instruments have tended to leave the definition of ‘expropriation’ to be understood in a wide sense, recognizing that the range of property interests to be protected in a modern economy is diverse. As a result of this codification, foreign investors have obtained direct access to international arbitral tribunals to advance claims on expropriation. By now, such claims, and the arbitral tribunals’ interpretation of treaty provisions, ‘have arguably overtaken customary international law and have become the focal point of the development of the international law of expropriation’.130 It is a body of law that is developing in an ad hoc manner as tribunals interpret the meaning of expropriation in the wording of a particular treaty instrument and apply it to the facts of a particular case.

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In their analysis of arbitral awards, scholars have identified a number of distinct tests or doctrines of expropriation: in particular, the sole effects doctrine, which is the dominant one at present; the legitimate expectations doctrine; the purpose doctrine, and the proportionality

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127 The existence of non-compensable takings has been recognized by a long line of authorities: in the Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, for example and the Restatement (Third) of Foreign Relations Law of the United States; respectively, Sohn, L.B. & Baxter, R. (1961) ‘Draft Convention on the International Responsibility of States for Injuries to the Economic Interests of Aliens’, AJIL 55, 545; and American Law Institute (1967) Restatement of the Law Third: The Foreign Relations Law of the United States, vol 2, note 6, para 712, comment g at 201. 128 The notion of ‘creeping expropriation’ (in practice a sub-category of indirect expropriation) in the petroleum industry is not of recent origin: see its use in Sedco, Inc v National Iranian Oil Co (NIOC), Award No ITL 55-129-3 (28 October 1985), 9 Iran–US CTR 248, at 276–279: ‘When . . . the seizure of control by appointment of “temporary” managers clearly ripens into an outright taking of title, the date of appointment presumptively should be regarded as the date of the taking’ (especially when on that date it was also found that there was no reasonable prospect of a return of control); Phillips Petroleum v Iran, 21 US–Iran CTR 79, at 112–119: ‘The conclusion that the Claimant was deprived of its property by conduct attributable to the government of Iran, including NIOC, rests on a series of concrete actions rather than any particular formal decree, as the formal acts merely ratified and legitimized the existing state of affairs’. 129 Schreuer, C.H. (2009) ‘The Concept of Expropriation under the ECT and Other Investment Protection Treaties’, in Ribeiro, C. (ed) Investment Arbitration and the Energy Charter Treaty, New York: Juris, 108–159 at 111. 130 McLachlan, Shore, & Weiniger (2017) at 360.

278 Chapter 6: Meeting Challenges to Investment Stability doctrine (all discussed below).131 However, the tribunals themselves have usually taken a different approach,132 identifying a standard that they are going to apply, given the facts of the particular case, and the objective observer can find one or a combination of the doctrines or tests in a single standard. It has rightly been said that the search for the ‘chimerical perfect rule on indirect expropriation need not preoccupy counsel and arbitrators’.133 Taking several awards together, differences in reasoning may at first sight suggest to the observer a degree of inconsistency or at least a lack of scholarly neatness. However, the apparent inconsistency is probably rooted in the different factual circumstances of each case, which have required the application of a different test or a combination of tests. Since a case-by-case, fact-finding approach lies at the heart of this exercise, the outcome of disputes concerning expropriation ‘is often difficult to predict’.134 One result of this pragmatic approach is that in recent years very few tribunals have found a government responsible for expropriation. For example, of six awards made in 2019 that examined claims based on indirect expropriation, only two decided in favour of the investor.135 Two decided that they did not involve a substantial deprivation of assets, while another two dismissed the claims for other reasons.

(1) The tests 6.76

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There are four principal ways in which international arbitral tribunals distinguish non-compensable regulatory measures from expropriatory measures taken by a state. Although more than one may be adopted by a tribunal in a particular case, they will at first be considered separately.

(a) The sole effect test

This test focuses upon the effect of the measure on the economic benefit, value, and control of the investment, and particularly on its degree of interference with the investment as the criterion for assessing state liability for expropriation. If a regulatory measure or a series of measures has a sufficiently restrictive effect on the owner’s rights to use, enjoy the benefits of or dispose of its property, it will constitute expropriation. However, the measure must interfere with the property rights with a certain magnitude, degree, or intensity, and be of a certain quality. The state’s intent is therefore irrelevant in a strict application of this test.136 131 The treatment of expropriation is inevitably brief in these pages; for extensive treatments of the subject in international law, see Reinisch, A. (2008) ‘Expropriation’, in Muchlinski, P., Ortino, F. & Schreuer, C. (eds) The Oxford Handbook of International Investment Law, Oxford: OUP, 407–458; Yannaca-Small, K. (2018) ‘Indirect Expropriation and the Right to Regulate: Has the Line Been Drawn?’ in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford: OUP, 562–593. 132 The writings of individual tribunal members are a useful guide to understanding this process: see eg Fortier, L.Y. and Drymer, S.L. (2004) ‘Indirect Expropriation in the Law of International Investment: I Know it When I See It’ ICSID Review-FILJ 19, 293. 133 Paulsson & Douglas (2004) at 146. 134 McLachlan, Shore, & Weiniger (2017) at 389. 135 UNCTAD (2021), IIA Issues Note, Review of ISDS Decisions in 2019: Selected IIA Reform Issues, 20–22. Neither was an energy case. However, taking into account both direct and indirect expropriation, during the same period three awards held that the lack of compensation rendered expropriation unlawful. In ConocoPhillips v Venezuela the failure of Venezuela to respect its obligation to negotiate in good faith on the basis of market value for compensation for its taking of the oil company’s investment rendered the expropriation unlawful: Award, 8 March 2019, Decision on the Rectification of the Award, 29 August 2019. 136 The classic statement on this is contained in Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, Iran-US Claims Tribunal, 22 June 1984, 6 Iran–US CTR 219 at 225–226: ‘The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact’.

C. Expropriation, Direct and Indirect 279 The early NAFTA case of Metalclad Corp v United Mexican States touched on an important issue raised by this doctrine:137 what is the threshold level of interference with property rights that will trigger state liability for expropriation? Measures taken by a host state that result in the total destruction of investment value are easily classifiable as expropriation. However, a claim will be much harder to maintain when most of the value of the investment remains. In its award, the Metalclad panel stated that expropriation in the context of Article 1110 of NAFTA includes:

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not only open, deliberate and acknowledged takings of property . . . but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State . . .138

In the Metalclad case, a US investor had acquired land in Mexico for use as a landfill for hazardous waste. The company had obtained assurances from the federal government that all necessary permits had been issued but the local authorities had refused to grant permission to begin construction. Work on the new facility, which included a clean-up of the residues left by the previous operators, was completed in March 1995 but opposition from local interests intensified and ultimately the municipal authorities denied Metalclad the necessary construction permit in a process that was closed to them. The tribunal concluded that the host government’s actions had deprived Metalclad of the ability to use its property for its intended purpose, and that this was sufficient harm to constitute expropriation. It also faulted the lack of transparency in the Mexican legal system for siting of hazardous waste disposal facilities. The tribunal identified standards to the effect that there must be a deprivation, that it had to affect at least a significant part of the investment and that all of it relates to the use of the property or a reasonably expected economic benefit. Little importance was placed on the justification provided by the host state for its action that was treated as equivalent to expropriation.

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The broad scope of claims that would fall within this definition of expropriatory action (in the Metalclad case) had a significant impact upon other cases involving claims of indirect expropriation.139 It also triggered a reaction from Canada and the US to minimize the risk that tribunals would in future reach excessively broad readings of expropriation clauses by introducing amendments into new investment treaties.140 However, there is one limitation to the significant interference threshold that the decision of the Metalclad case articulated. The test was included in dictum by the panel since in practice the investor’s landfill enterprise was completely prevented from operating and therefore determined to have lost all value. In

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137 Metalclad Corp v United Mexican States, Award (ICSID (Additional Facility) Case No ARB (AF)/97/1, IIC 161 (2000), 30 August, 2000, 16 ICSID Rev-FILJ (2001) 168. 138 Metalclad, para 103. 139 In CME v Czech Republic (2003), the claimant argued that the Czech Republic had deprived a local media company, in which the Dutch claimant corporation owned a share, of the ability to broadcast according to the initial conditions of its licence. The tribunal implied that this exclusion of the broadcast company from its sphere of activity constituted a complete destruction of its value. However, the final damages award revealed that the company’s loss of value was in fact only about 87 per cent. The tribunal followed the precedent of the Metalclad case to find indirect expropriation of the claimant’s investment. 140 The Canadian response is set out in Annex B13(1)(c) of the Canada Model Foreign Investment Promotion and Protection Agreement at ; for the amendment to the US Model BIT 2004 see n 85 above. Essentially, the Canadian government ‘clarified’ that it would be rare for good faith, non-discriminatory measures ‘that are designed and applied to protect legitimate public welfare objectives, such as health, safety and environment’ to be construed as a form of indirect expropriation under the treaty.

280 Chapter 6: Meeting Challenges to Investment Stability other situations, it might not be so easy to apply the ‘Metalclad formula’ to identify the level of damage to investment that qualifies as ‘substantial’. 6.81

Among the many other cases that apply the sole effects test are Feldman v Mexico (2002)141 and Pope & Talbot Inc v Canada (2000).142 In the first of these cases, also brought under NAFTA, the claimant sought compensation for tax rebates denied to his products. However, the tribunal found that no expropriation had occurred because some activities of the claimant remained unaffected by the practices at issue. The Metalclad case was considered but it was noted that in that case the assurances received by the investor from the host government were definitive, unambiguous, and repeated in stating that the government had the authority to authorize construction and operation of hazardous waste landfills and that Metalclad had obtained all the necessary federal and other permits for the facility. In the Feldman case, the Mexican authorities opposed the investor’s business activities at every step of the way, and assurances relied upon by the claimant were ‘at best ambiguous and largely informal. They were also in direct conflict with Article 4(III) of Mexico’s IEPS law requiring the possession of invoices stating the taxes separately as a condition of receiving tax rebates.’143

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Similarly, a rather limited interpretation of the term ‘tantamount to expropriation’ was given in Pope & Talbot, where a NAFTA tribunal found that it meant equivalent to expropriation. Pope & Talbot was a Delaware corporation which had invested in a Canadian subsidiary that manufactured and exported softwood lumber to the US. Following a bilateral agreement between Canada and the US to establish limits on Canadian exports of softwood lumber to the US, Canada introduced an Export Control Regime, a domestic measure that was aimed at ensuring compliance with this bilateral accord. Pope & Talbot had claimed that the Export Control Regime was a measure tantamount to expropriation since its effect was to deprive the claimant of its ability to sell its products to its traditional and natural market in the US. For Canada this was a non-discriminatory use of its police powers, which did not give rise to an obligation to pay compensation. The tribunal dismissed Canada’s contention on the ground that ‘a blanket exception for regulatory measures would create a gaping loophole in international protection against expropriation’.144 However, it held that even if the investor’s argument could be accepted that the profits of the enterprise had been significantly reduced by a change in Canadian lumber export quotas, it was necessary to produce more tangible forms of interference in business operations before it could be said that an expropriation had occurred.145

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The test has also been applied under the ECT. The case of Nykomb v Latvia concerned a dispute about the purchase of electricity by a state-owned Latvian company from a subsidiary of Nykomb, called Windau.146 The state had agreed to purchase surplus power at a ‘double 141 Marvin Roy Feldman Karpa v United States of Mexico (2002), ICSID Case No ARB(AF)/99/1, Award, IIC 157 (2002). 142 Pope & Talbot Inc v Government of Canada, Interim Award of 26 June, 2000, IIC 192 (2000), 40 ILM 258 (2001). 143 Feldman, at para 149. 144 Pope & Talbot, para 99. 145 A more recent case arising out of a measure ‘tantamount to an expropriation’ is Occidental Petroleum Corporation et al v Republic of Ecuador (ICSID Case No ARB/06/11, Award, 20 September, 2012; see the discussion in chapter 7). The majority found Ecuador liable for indirectly expropriating Occidental’s investment. As to the meaning of the words, ‘tantamount to an expropriation’, the tribunal cited Metalclad v Mexico. 146 Nykomb Synergetics Technology Holding AB v Latvia, Award, SCC Case No 118/2001, IIC 182 (2003), 16 December 2003. For a discussion of Nykomb, see Wälde, T.W. & Hober, K. (2005) ‘The First Energy Charter Treaty Arbitral Award’, J International Arbitration 22, 83–104.

C. Expropriation, Direct and Indirect 281 tariff ’ rate but subsequently changed its offer to purchase at only 75 per cent of the average tariff, in line with new domestic energy legislation. The start-up of generation was delayed as a result. A claim was brought by Nykomb under the ECT, and the tribunal held that regulatory takings may amount to expropriation or its equivalent: ‘the decisive factor for drawing the border line towards expropriation must primarily be the degree of possession, taking, or control over the enterprise the disputed measures entail’.147 In this case: there was no possession taking of Windau or its assets, no interference with the shareholders’ rights or with the management’s control over and running of the enterprise— apart from ordinary regulatory provisions laid down in the production licence, the off-take agreement, etc.

The refusal to make payment at the double tariff rate did not therefore qualify as an expropriation or its equivalent under the ECT. This test was also evident in a line of cases involving claims by investors against Argentina following the country’s economic crisis in 2001.148 It underlines the difficulties faced by investors in making claims of indirect expropriation (see chapter 7). In BG Group v Argentina,149 for example, the tribunal applied the effects test and concluded that no expropriation had taken place: the measures had not had a permanent impact upon BG’s shareholding in its subsidiary; they did not deprive BG of control over the investment or management of its day-to-day operations; they did not interfere in the management of the subsidiary or the appointment of its managers, and the subsidiary’s business continued to operate after the measures had been taken. The tribunal found a breach of FET, however, and awarded BG damages as a result.

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In an ECT case, Mamidoil Jetoil Greek Petroleum Products Societe SA v Albania,150 the claimant alleged that over a period of ten years a series of measures taken by the State were equivalent or tantamount to an expropriation under the ECT and the Albania-Greece BIT, since they had left the investment in a ‘completely uneconomical’ condition.151 One of the challenged measures, closing the port of Durres for the discharging of petroleum tankers with the effect that the claimant could not land petroleum, had a drastic effect on the economic viability of the investment. However, the tribunal held that it did not rise to the level equivalent to an expropriation:

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The result of the measure was not Claimant’s loss of any of the attributes of its property over the investment. Claimant remained entitled to continue to use, possess, control, and dispose of the property. It is not the Tribunal’s task to evaluate business opportunities but to determine whether the dramatic losses of benefit are caused by the one or all elements which constitute the essence of property.152

147 Nykomb, para 33. 148 For example, CMS Gas Transmission Company v The Argentine Republic, ICSID Case No ARB/01/8, Award, IIC 65 (2005), 12 May 2005; LG&E Energy Corp v The Argentine Republic, ICSID Case No ARB/02/1, Decision on Liability, IIC 152 (2006), 3 October 2006. 149 BG Group plc v Argentine Republic, UNCITRAL Arbitration, Final Award, IIC 321 (2007), 24 December 2007. 150 ICSID Case No ARB/11/24, IIC 682, Award, 30 March 2015. 151 Ibid, at para 515. 152 Ibid, at para 579.

282 Chapter 6: Meeting Challenges to Investment Stability 6.86

(b) Effects on the investor: legitimate expectations

A second test focuses on the effects of a measure, not upon the investment but rather upon the investor: have the investor’s reasonable and legitimate expectations been violated? The same issue arises here as under the sole effects test: the level of interference with the legitimate expectations of the investor is ‘a question of degree’. This is a doctrine that is commonly associated with the FET standard, but it also plays a role in the law applicable to indirect expropriation. In Metalclad, the investor had relied upon assurances given to it that the necessary permits were obtained for his project to go ahead. As a result, the tribunal held that: These measures, taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation.153

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Similarly, in the TECMED case, the tribunal found that the claimant ‘had legitimate reasons to believe that the operation of the Landfill would extend over the long term’, and that as a result the investment could yield an estimated return through the operation of the project ‘during its entire useful life’.154

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In a later case, Methanex Corp v United States of America, the tribunal commented on specific commitments offered by the state to an investor, remarking that: as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.155

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(c) The purpose test

A third test applied by tribunals focuses on the purpose or the character of the state measure to ascertain if an expropriation has occurred. The state measure is located within a contextual framework that permits a weighing up of various factors including its purpose and effect. If the purpose is a legitimate public one, such as public health, safety, or environmental protection, this may be sufficient to conclude that the measure is a normal exercise of police powers, and which therefore merits no compensation, irrespective of the scale of the effect upon the investment. If it is clearly one that discriminates against the investor and is intended to deprive him of the use and benefit of the investment, then it may be found to be expropriatory. Such intention on the part of the state may not be an easy matter for the investor to prove.156 Other factors that are more likely to be included in the weighing up 153 Metalclad, para 107. 154 Tecmed, para 149. 155 Award, 5 August 2005. The State of California had banned the use of a fuel additive, and thereby destroyed the profitable business of a Canadian investor. The US argued that the ban was a legitimate exercise of regulatory power to prohibit the marketing of a product that was a danger to public health. Methanex claimed that an expropriation had occurred. The tribunal found that it was a lawful regulation and not an expropriation. The award was reviewed critically by Weiler, T. (2005) ‘Methanex Corp v USA: Turning the Page on NAFTA Chapter Eleven?’, JWIT 6, 903. 156 In this context we may note the controversial award of Sea-Land Service Inc v Iran, Award No 135-33-1 (30 June 1984) reprinted in 6 Iran–US Cl Trib Rep 149 (1984). In his separate opinion, Justice Holtzmann disagreed strongly with the majority’s reliance on subjective intentions: ‘I believe that the critical question is the objective effect of a government’s acts, not its subjective intentions. Acts by a government which have the effect of depriving

C. Expropriation, Direct and Indirect 283 exercise by a tribunal under this approach include whether there is any clear benefit to the host state from a deprivation of the property rights of the investor, and whether it has contributed to the public welfare.157 The purpose test was applied by the tribunal in SD Myers v Canada but in conjunction with an effects test. Canada’s Environment Ministry had imposed a prohibition order upon the commercial export of waste from a synthetic chemical compound, PCB. SD Myers, a privately-owned US corporation, was in the business of extracting PCB from contaminated equipment and destroying the isolated PCB. It claimed that the ban amounted to an expropriation of its investment in violation of NAFTA Article 1110. Canada responded that the ban was an environmental measure. The tribunal accepted that ‘international law makes it appropriate for tribunals to examine the purpose and effects of governmental measures’ but it ‘must look at the real interests involved and the purpose and effect of the government’.158

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The tribunal in Quiborax v Bolivia considered whether an expropriation had been taken for a public purpose.159 Bolivia had carried out an expropriation by revoking a mining concession for an area that contained the world’s largest dry salt flat, which required protection. It concluded nevertheless that the revocation was unlawful and so was the expropriation of the investment. Other mining companies had been merely fined for the errors that the investor was alleged to have made.160 It also found that the revocation of the investments substantially deprived the claimant of the value of its investments in the country. The only business of the investor was to exploit those concessions so once they were revoked, its investment was rendered ‘virtually worthless’,161 making this an indirect expropriation, not justified by the public purpose.

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(d) The proportionality test

A fourth test is concerned with the proportionality of the measure taken by the state. In the TECMED case,162 the tribunal expressly drew upon the jurisprudence of the European Court of Human Rights163 to establish a test appropriate to determining whether a state measure, alleged to be bona fide regulation, was expropriatory or not. On this approach, the tribunal would consider ‘whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments’. It would also take into account that the significance of the measure’s negative impact on the an alien of his property are considered expropriatory in international law, whatever the government’s intentions’, at 207. 157 K. Hober comments: ‘[T]‌he public purpose criterion has not always been upheld in more recent international cases, at least with respect to nationalization’: Hober, K. (2003) ‘Investment Arbitration in Eastern Europe: Recent Cases in Expropriation’, Am Rev Int’l Arb 14, 377 at 381. 158 SD Myers Inc v Government of Canada, Partial Award, IIC 249 (2000), 13 November 2000, 40 ILM 1408, at paras 281, 285. 159 Quiborax S.A., Non-Metallic Minerals S.A. v The Plurinational State of Bolivia, ICSID Case No ARB/06/2, Award, 16 September 2015. 160 Ibid, at para 247. 161 Ibid, at para 239. 162 Tecnicas Medioambientales Tecmed SA v Mexico (TECMED), Award, IIC 247 (2003); 43 ILM 133(2004), 29 May, 2003. TECMED’s subsidiary obtained a one-year permit from the Mexican federal government environmental agency to operate a hazardous landfill, but the government refused to renew the permit for a second additional year. The claimant argued that this refusal constituted an expropriation of its investment and a violation of the Spain-Mexico BIT. 163 For a discussion of this, see Mountfield, H. (2002) ‘Regulatory Expropriations in Europe: the Approach of the European Court of Human Rights’, NYU Environmental LJ 11, 136–147.

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284 Chapter 6: Meeting Challenges to Investment Stability investment had ‘a key role upon deciding the proportionality’. There had to be ‘a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure’.164 The latter goal, however, is one that would reintroduce a consideration of purpose of the state measure which a number of international arbitration awards have expressly rejected.165 6.93

The co-existence of several of the above tests in a single award is evident in more than a few cases, suggesting that no one test has a predictive power to guide the investor about probable outcomes. The application of several tests is evident from the TECMED case. The tribunal found that the action by the host state had ‘negative effects on the Claimant’s investment and its rights to obtain the benefits arising therefrom’. In particular, ‘economic and commercial operations in the Landfill after such denial (of a licence) have been fully and irrevocably destroyed, just as the benefits and profits expected or projected by the Claimant as a result of the operation of the Landfill’. This effect of the measure was disproportionate to the aims of the Mexican government. These aims were legitimate but were not a ‘sufficient justification to deprive the foreign investor of its investment with no compensation’.166 The tribunal took the view that ‘a serious urgent situation, crisis, need or social emergency’ could be ‘weighed against the deprivation or neutralization of the economic or commercial value of the Claimant’s investment’ to lead to the conclusion that an otherwise expropriatory regulation does ‘not amount to an expropriation under the Agreement and international law’.167 Ultimately, neither the environmental concerns nor the threat of civil disturbance due to public protests could provide a satisfactory justification for the host state’s effective taking of the claimant’s investment. The tribunal therefore found in favour of the claimant.

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In the Azurix case, the tribunal also considered both the effect and the purpose of the measures taken by the Argentine state. In their pleadings the parties referred to the additional elements contained in the TECMED award and commented favourably on their guidance for an assessment of whether regulatory actions were expropriatory and therefore compensable (see chapter 7, para 7.213 ).168

(2) Restrictive interpretations 6.95

In a review of the above tests as they are applied by tribunals in international investment cases, Fortier and Drymer reached the conclusion that both the meaning of indirect expropriation and the protection which foreign investors can expect to receive against indirect expropriatory conduct are ‘clearly ambiguous’,169 and offer the advice: caveat investor. Exactly when and how conduct by a host state is likely to be found by a tribunal to constitute 164 TECMED, para 122. For a perceptive discussion of this, see Bishop, D.K. (2007) ‘Theories of State Responsibility in International Law: Expropriation and Fair and Equitable Treatment’, in 58th Annual Institute on Oil & Gas Law, Matthew Bender: New York, 302. 165 Tippetts, cited above, but also Phelps Dodge Corp v Iran, 25 ILM 619 (Iran–US Cl Trib, 19 March 1986) at para 22; Compañia del Desarrollo de Santa Elena SA v The Republic of Costa Rica, Final Award, 17 February 2000, 10 ICSID Review-FILJ 169 at paras 71, 72. For a recent instance of a tribunal using the proportionality test, see EDF (Services) Ltd v Romania (2009) at para 293: legislation which abolished duty-free activities in Romanian airports was ‘proportional’ to the goals pursued, and did not impose upon the claimant an ‘individual and excessive burden’. 166 TECMED, at para 147. 167 Ibid, at para 139. 168 Azurix, at para 312. 169 Fortier & Drymer (2004) at 326–327.

C. Expropriation, Direct and Indirect 285 an expropriation is likely to be the result of a balancing of the various factors considered in the above paragraphs, with the decisive element provided by the specific circumstances in which the issue arises. Yet, combined with the uncertainty that this creates is a trend in the case law to restrict the findings of expropriation but instead to find liability based on other theories of international responsibility such as FET.170 There are many examples of restrictive interpretations of state measures from arbitral awards in the energy sector. Only a few are mentioned here. In Sempra v Argentine Republic, the tribunal held that for a claim of indirect expropriation to be successful, it had to be proved that ‘the investor no longer be in control of its business operation, or that the value of the business, or that the value of the business has been virtually annihilated’.171 This was not present in the dispute so the expropriation claim was rejected (see chapter 7). In PSEG v Turkey, where a US investor, PSEG, had a dispute over the commercial terms of a contract entered into for the development of a power station, the view of the tribunal was that ‘some form of deprivation of the investor in the control of the investment’ was required, as well as in ‘the management of day-to-day operations of the company, interfering in the administration, impeding the distribution of dividends, interfering in the appointment of officials and managers, or depriving the company of its property or control in total or in part’.172 Since such extreme forms of interference did not appear to the tribunal to have been present, it rejected the investor’s claim of indirect expropriation. In Eastern Sugar v Czech Republic, the tribunal observed that ‘a substantial deprivation of the entire investment or a substantial part of the investment’ was required before a violation of the expropriation clause in a BIT could be found. The claimant had not alleged such an extensive effect had taken place and so the tribunal rejected the claim that an expropriation had taken place.173 In CMS v Argentina, the tribunal found that Argentina’s actions had violated other standards of protection contained in the relevant BIT, but it declined to hold that Argentina was liable for expropriation of the investment.174 The Argentine government demonstrated that the list of issues to be taken into account for reaching a determination on substantial deprivation was not present in the dispute (although it admitted that measures such as the suspension of a tariff adjustment formula for gas transmission had important negative effects upon the claimant’s business). The case provides further support for the view that other arguments are likely to prove a more reliable basis for a claim against a host state than one based on the assertion that a host government’s action has been ‘tantamount to expropriation’.

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More recent cases support the above trend in the energy sector as elsewhere, and underline the continuing relevance of Fortier and Drymer’s observations. In BayWa r.e. v Spain, for example, the claimants alleged that a series of disputed measures affected the management and enjoyment of their investment, amounting to an indirect expropriation. The tribunal rejected this claim, on the ground that an expropriation, direct or indirect, requires a substantial deprivation of assets. In this case, the claimants’ indirect interest in several project companies was still intact and operating under their ultimate control and oversight, even if their value was impaired. This view of expropriation as it operates under Article 13 of the

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170 For example, Occidental v Ecuador; Saluka v Czech Republic; LG&E v Argentine Republic; CMS v Argentine Republic; and Azurix v Argentine Republic. 171 Sempra, at paras 283–285. 172 PSEG case at para 278. 173 Eastern Sugar BV v Czech Republic, SCC Case No 088/2004, Final Award, IIC 310 (2007), 12 April 2007, para 210. 174 CMS Gas Transmission Company v Argentine Republic, Award, IIC 65 (2005), 12 May 2005.

286 Chapter 6: Meeting Challenges to Investment Stability ECT is typical of decisions in a long line of similar cases.175 Alternatively, the restrictive approach to expropriation may be based on what is claimed to have been expropriated. In 9REN Holdings v Spain, the investments took the form of corporate shares rather than a right to a revenue stream. These were significantly reduced in value by the regulatory measures, the tribunal found, but even so, the claimants retained ownership of the shares and the revenue stream continued to yield a return afterwards. Hence, the claim was rejected. Interestingly, it held that ‘the reduction in value is better analysed in terms of a violation of the Claimants’ legitimate expectation’, pointing to the realm of FET as a basis for making claims.176 6.98

Indeed, a contrast can be drawn between claims based on expropriation and FET. In Novenergia, the tribunal accepted the FET claim but rejected the claim based on expropriation. It observed that the claimant remained the owner of its plants and the holder of its shares and relevant capital, adding: ‘[w]‌hile the value of these assets diminished as an effect of the state measures which proved to be incompatible with the FET obligation, the assets as such were not expropriated nor affected by measures having an effect equivalent to an expropriation.’177

(3) Expropriation of contractual rights 6.99

A breach of a contract may have the effect of depriving an investor of the benefits from his investment; however, clearly not all contract breaches amount to an indirect expropriation.178 As noted in LIAMCO, ‘concession rights . . . may be included under the class of incorporeal property’.179 Given the crucial importance of investment contracts with the host state to the operation of any investment, it is not surprising that virtually all international investment instruments state that investment contracts are included in the term ‘investment’. They are therefore covered by the provisions against expropriation. Several recent awards have dealt with the issue of expropriation of contractual rights and highlight some of the challenges facing investors when making a claim alleging such expropriation. In Parkerings v Lithuania, the tribunal accepted that contract rights might be expropriated but helpfully it set three 175 Charanne B.V., Construction Investments S.a.r.l. v Spain (Final Award), 21 January 2016, para 464: ‘for a loss of value to be equivalent to an expropriation, it has to be so large that it equals a deprivation of property’; Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v The Kingdom of Spain, Final Arbitral Award, SCC Arbitration (2015/063), 15 February 2018, para 727: ‘It is uncontroversial in international arbitration that a State measure resulting in a ‘substantial deprivation’ of an investment—that is, when the measure substantially interferes with the control or the economic value of the investment—constitutes an expropriation’; Isolux v Spain, Award, para 839: ‘That is to say, the impact to the rights or goods of the investor of the measures, must be of such magnitude that its investment loses all or a significant part of its value, which amounts to a deprivation of its property’; AES Summit Generation Limited and AES-Tisza Eromu Kft v Republic of Hungary, ICSID Case No ARV/07/22, Award, 23 September 2010, para 14.3.1: ‘For an expropriation to occur, it is necessary for the investor to be deprived, in whole or in significant part. Of the property in or effective control of its investment: or for its investment to be deprived, in whole or in significant part, of its value’. 176 9REN Holding S.a.r.l. v The Kingdom of Spain, Award, ICSID Case No ARB/15/15, 31 May 2019, para 370. 177 Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v The Kingdom of Spain, Final Arbitral Award, 15 February 2018, para 762. 178 In Waste Management Inc v United Mexican States, the tribunal was careful to distinguish between expropriation of a right under a contract and non-compliance by the State with its contractual obligations: the latter ‘is not the same thing as, or equivalent or tantamount to, an expropriation’. For an expropriation, ‘it is necessary to show an effective repudiation of the right . . . . . . which has the effect of preventing its exercise entirely or to a substantial extent’: Award, IIC 270 (2004), 43 ILM 967 (2004), 30 April 2004. 179 Libyan American Oil Company (LIAMCO) v The Government of the Libyan Arab Republic, Award of the Arbitral Tribunal, 12 April 1977, 20 ILM 1 (1977) at 53 (see chapter 4); see also the discussion of Revere Copper & Brass Inc (chapter 4).

D. Stability and Legitimate Expectations 287 cumulative conditions without which such expropriation could not be deemed to have taken place. First of all, the state must have acted in its capacity of sovereign authority and not only in its capacity of party to the agreement.180 Secondly, the existence of a contractual breach under domestic law has to be determined by the appropriate forum to remedy the breach, unless a party is denied the possibility to complain about the wrongful termination of the agreement before the forum chosen by the contract. Finally, the breach of contract must give rise to a substantial decrease of the value of the investment.181 Since none of these conditions had been met in Parkerings, the tribunal rejected the existence of expropriation. By contrast, the tribunal in Vivendi v Argentine Republic focused on the first and third of these conditions set out by the Parkerings tribunal. It noted that the conduct of the Argentine Province amounted to ‘sovereign acts designed illegitimately to end the concession or to force its renegotiation’, which ‘struck at the economic heart of, and crippled, Claimant’s investment’. The tribunal concluded that the claimants’ concession rights had therefore been expropriated.182 D. Stability and Legitimate Expectations The large number of arbitral awards that have addressed and relied upon the doctrine of FET in their decisions invites the question: have they identified a way of encouraging (or requiring) states to provide greater stability to investors than would have been possible without the framework of BITs and MITs? In particular, are investors—when seeking to make or to protect investments in an energy or related activity—likely to benefit from greater protection in this legal setting than when they were solely reliant upon contract based stability mechanisms and whatever diplomatic protection might be available? An answer to this question involves consideration of two important and interrelated elements in the international investment law-making process. The first is its fundamentally ad hoc and case-specific character. The second is its continuing, evolutionary status. With respect to the development of the FET standard, both features are strongly in evidence,183 and recommend a conclusion that is deliberately provisional rather than one that seeks to be definitive.

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The evolutionary character of the FET standard is evident in various arbitral awards over a relatively short time frame, and has been commented on by a number of tribunals in their reviews of the case law. This developmental character is hardly surprising. FET is a standard that gains meaning when applied to a particular set of facts. Its meaning with respect to investment stability is evident only by examining the trend through a series of individual cases. On that basis, it is nonetheless possible to identify some common themes in relation to energy investments.

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180 Compare Siemens v Argentina, Award, IIC 227 (2007), 6 February 2007: ‘The actions of the State have to be based on its ‘superior governmental power’. It is not a matter of being disappointed in the performance of the State in the execution of a contract but rather of interference in the contract execution through governmental action’, at para 253. 181 Parkerings case, at paras 443–456. 182 Vivendi (2007), at paras 7.5.22 and 7.5.25. 183 For a more extensive review and analysis of the FET doctrine than is possible here, see Klaeger, R. (2011) ‘Fair and Equitable Treatment’ in International Investment Law, Cambridge: CUP; Dolzer, R. (2014) ‘Fair and Equitable Treatment: Today’s Contours’, Santa Clara Journal of International Law 12, 3–33; McLachlan, Shore, & Weiniger (2017) 296–329; UNCTAD, Fair and Equitable Treatment: UNCTAD Series on Issues in International Investment Agreements II, 2012, Geneva: United Nations. Much of the literature concerns the doctrine of legitimate expectations and the protection of the legal and business framework as an element of this.

288 Chapter 6: Meeting Challenges to Investment Stability

(1) The broad scope of FET 6.102

Many tribunals have ruled that the FET standard is intended to grant foreign investors broad protections including the enforcement of a stable and predictable climate for investment in order to maximize the volume and enhance the quality of foreign direct investments. This trend of thinking was summarized by the tribunal in the MTD v Chile case: Fair and equitable treatment should be understood to be treatment in an even-handed and just manner, conducive to fostering the promotion of foreign investment. [The BIT’s] terms are framed as a pro-active statement—‘to promote’, ‘to create’, ‘to stimulate’—rather than prescriptions for a passive behaviour of the state or avoidance of prejudicial conduct to the investors.184

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On the above view, a host state may have violated its obligation to grant FET to investments if it substantially alters the legal or regulatory framework under which those investments were made. In the case of CME v Czech Republic (involving the claimant’s investment in a joint venture to operate a local television station), the tribunal found that the Czech Republic’s legislative and regulatory changes had unlawfully harmed CME’s investment by changing the rules governing the investor’s business. It held that the government had ‘breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon [which] the foreign investor was induced to invest’.185 Citing the tribunal in the TECMED case (Tecnicas Medioambientales Tecmed SA v The United Mexican States), it noted that central to the concept of FET is the obligation to safeguard ‘pre-existing decisions that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities’.186 The CMS Gas Transmission case also emphasized the concept of investment stability, when it found that the alteration of the regulatory framework for gas transmission was unfair and inequitable: One principal objective of the protection envisaged is that fair and equitable treatment is desirable ‘to maintain a stable framework for investments and maximum effective use of economic resources’. There can be no doubt, therefore, that a stable legal and business environment is an essential element of fair and equitable treatment.187

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In CMS Gas Transmission, the state incurred liability irrespective of its motivation for taking the offending measures.188 This principle was reaffirmed in Occidental v Ecuador: The stability of the legal and business framework is . . . an essential element of fair and equitable treatment . . . Moreover, this is an objective requirement that does not depend on whether the Respondent has proceeded in good faith or not.189

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Support for the above approach is also found in an UNCTAD report,190 where it is stated that FET provisions may be construed as applicable not only to flagrant abuses of government 184 MTD Equity Sdn Bhd and MTD Chile SA v Chile, Award, ICSID Case No ARB/01/7; IIC 174 (2004), 25 May 2004, at para 113. 185 CME v Czech Republic, at para 611. 186 Tecnicas Medioambientales Tecmed SA v Mexico (TECMED), Award, IIC 247 (2003); 43 ILM 133 (2004), 29 May, 2003, para 154. 187 CMS Gas Transmission, at para 274. 188 Ibid, at para 280. 189 Occidental v Ecuador, at paras 183, 186. 190 Investor-State Disputes arising from Investment Treaties: A Review (UNCTAD, 2006). For a more recent analyses of FET in relation to legal stability, see Dolzer (2014); Ortino, F. (2018) ‘The Obligation of Regulatory Stability

D. Stability and Legitimate Expectations 289 power but to any open and deliberate use of government power that fails to meet the requirements of ‘good governance, such as transparency, protection of the investor’s legitimate expectations, freedom from coercion and restraint, due process and procedural propriety and good faith’.191 It is also relevant to consider whether the treatment is in breach of representations made by the host state that the investor reasonably relied upon.192 One issue that may be relevant concerns possible discriminatory treatment. Only a very few tribunals have directly applied ‘arbitrary and discriminatory measures’ clauses to particular facts. This was addressed in CMS Gas Transmission (as was the issue of how discriminatory treatment relates to national and MFN requirements that prohibit discrimination on bases other than nationality). The claimant argued that the suppression and freeze of gas transmission tariffs by the Argentine government through ‘pesification’ (abandonment of the pegging of the peso to the dollar) was de facto discriminatory and violated the relevant BIT. It was demonstrated that the measure affected only gas transmission companies and not other public services. Exporters (dominated by local interests) reaped exceptionally large benefits from the measure. The tribunal concluded that the measures were indeed unfair and inequitable but could not be deemed discriminatory since businesses in other sectors could not be proven to be in ‘similar circumstances’ to the gas transmission companies.193

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In Siemens v Argentine Republic,194 for example, the tribunal observed that in ordinary use, ‘these terms denote treatment in an even-handed and just manner, conducive to fostering the promotion and protection of foreign investment and stimulating private initiative’.195 In addition, the tribunal excluded a lack of good faith or malicious intention on the part of the host state as a necessary element in the failure to treat the investment fairly and equitably. This would be inconsistent with the purpose and expectations created by a BIT. The decision of the tribunal was that a breach of the FET standard took place but that it rested inter alia on the finding that Argentina’s conduct vis-à-vis the investor lacked transparency and failed to conform to the principle of good faith.

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(2) What is a stable and predictable framework? Since the early cases of MTD and TECMED, many tribunals have examined the FET standard and the host state’s obligation to maintain a stable and predictable legal and business framework in line with the investor’s legitimate expectations. The key question to answer is whether the host state has offered guarantees to the prospective investor to make a decision to invest, creating an expectation that the legal framework in which those guarantees are placed will remain stable (but not necessarily unchanging) over time. Significant changes in this legal framework would undermine the guarantees which induced the investor to invest and therefore violate the expectations created at the time of (or prior to) the in the Fair and Equitable Treatment Standard: How Far Have We Come?’, Journal of International Economic Law 21(4), 845. 191 UNCTAD (2006), at para 39. 192 In this context, see Waste Management Inc v Mexico, Award, ICSID Case No ARB(AF)/00/3; IIC 270 (2004), 30 April 2004. 193 CMS Gas Transmission, paras 293–295. 194 Siemens AG v Argentina, Award and Separate Opinion, ICSID Case No ARB/02/8, IIC 227 (2007), signed 6 February 2007. 195 Siemens, at para 290.

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290 Chapter 6: Meeting Challenges to Investment Stability investment. These actions would then be in breach of the FET standard, understood as an expression of the minimum standard of fair treatment in customary international law.196 Compensation would follow for the breach. By way of illustration, in CMS Gas Transmission, the tribunal found that: It has also been established that the guarantees given in this connection under the legal framework and its various components were crucial for the investment decision,197 [and] in fact, the Treaty (ie BIT) standard of fair and equitable treatment and its connection with the required stability and predictability of the business environment, founded on solemn legal and contractual commitments, is not different from the international law minimum standard and its evolution under customary international law.198 6.109

In their reflections on this topic, tribunals have tended to consider and be influenced by their fellow arbitrators’ decisions in other cases, even if they are not bound by them. An early instance of this jurisprudential effect was evident in CMS, when the tribunal was considering the relationship between the FET standard and stability and predictability. Beyond doubt, such a relationship was evident but its key feature was not ‘whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances’, nor was it about ‘whether the framework can be dispensed with altogether when specific commitments to the contrary have been made’.199 In seeking to identify a mid-point between these two poles, the tribunal noted how in the Metalclad case the tribunal had found that Mexico had failed to provide a ‘predictable framework for Metalclad’s business planning and investment. The totality of these circumstances demonstrate a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly . . .’200 Further, it cited the tribunal in TECMED to the effect that: The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations . . .201

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A key element of FET then, is the investor’s expectations, taken into account at the time of making the investment, which contribute to a balancing process in which the tribunal weighs up different considerations involving the interests of the investor and the state. This is evident in several of the next generation of cases that considered this element in the scope of FET. Four of them were decided at much the same time: PSEG v Turkey;202 Enron v Argentine Republic;203 MCI Power Group v Ecuador,204 and Parkerings-Compagniet AS v 196 This linkage of FET with long-term investments was noted by the tribunal in Eiser v Spain: the FET standard contains the ‘obligation to provide fundamental stability in the essential characteristics of the legal regime relied upon by investors in making long-term investments’ (Final Award, para 382). The question is then raised about what the essential characteristics are. 197 Section 275, p 80. 198 Section 284, p 82. 199 CMS, at para 277. 200 CMS, at para 278, citing Metalclad: 40 ILM 55 (2001) para 99. 201 CMS, at para 279, citing TECMED: 43 ILM 133 (2004) para 154. 202 PSEG Global Inc and Konya Ilgin Elektrik Üretim ve Ticaret Limited Širketi v Turkey, Award and Annex, ICSID Case No ARB/02/5, IIC 198 (2007), 19 January 2007. 203 Enron Corporation and Ponderosa Assets LP v Argentina, Request for Rectification and/or Supplementary Decision of the Award, ICSID Case No ARB/01/3, IIC 318 (2007), despatched 25 October 2007. 204 MCI Power Group LC and New Turbine Inc v Ecuador, Award, ICSID Case No ARB/03/6, IIC 296 (2007), despatched 31 July 2007.

D. Stability and Legitimate Expectations 291 Lithuania.205 In PSEG v Turkey, a claim involving a coal-fired power plant to be built as a BOT project, the tribunal emphasized that the changes in both the legislative environment as well as in the attitudes and policies of the administration vis-à-vis investments were contrary to the need to ‘ensure a stable and predictable business environment for investors to operate in’ which was required by the BIT and also by the Turkish Constitution.206 Instead, the continuing legislative changes had exercised a ‘roller-coaster’ effect, with respect to changes in the conditions governing the corporate status of the project, the constant alternation between private law status and administrative concessions that occurred and to which even the tax legislation was subject. Elements of forced renegotiation were also evident.

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In Enron v Argentine Republic,207 the tribunal linked the requirement of a stable framework for the investment with the protection of the expectations that were taken into account by the foreign investor to make the investment. It found that Argentina had violated the FET standard as ‘the stable legal framework that induced the investment is no longer in place and that a definitive framework has not been made available for almost five years’.208

6.112

In MCI Power Group v Ecuador, the tribunal emphasized the investor’s expectations of FET and good faith which had to be linked with a legitimate objective. While it rejected the FET claim, it did note that the ‘legitimacy of the expectations for proper treatment entertained by a foreign investor protected by the BIT does not depend solely on the intent of the parties, but on certainty about the contents of the enforceable obligations’.209 In other words, a subjective criterion was insufficient. The tribunal required some concrete evidence that the host state had entered into specific enforceable obligations.

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The case of Parkerings-Compagniet AS v Lithuania210 merits a fuller consideration, even if it is not an energy case. It concerned a private investment in a modern parking system in Lithuania, including the construction and operation of multi-storey car parks. The tribunal noted that the FET standard is violated when the investor is deprived of its legitimate expectation that the conditions existing at the time of the agreement would remain unchanged.211 It then set out four criteria for determining the legitimacy of an investor’s basic expectation about the stability of the legal system of the host state. These criteria were:

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• an explicit promise or guarantee made to the investor by the host state; • implicit assurances or representation from the host state that the investor took into account in making the investment;

205 Parkerings-Compagniet AS v Lithuania, Award, ICSID Case No ARB/05/8, IIC 302 (2007), despatched 11 September 2007. 206 PSEG v Turkey, at para 253; at para 254 the tribunal observed that ‘Stability cannot exist in a situation where the law kept changing continuously and endlessly, as did its interpretation and implementation . . . [T]‌he issue is that the longer term outlook must not be altered in such a way that will end up being no outlook at all. In this case, it was not only the law that kept changing but notably the attitudes and policies of the administration.’ 207 Enron Corporation and Ponderosa Assets v Argentina, Award, ICSID Case No ARB/01/3, IIC 292 (2007), despatched 22 May 2007. 208 Enron, at para 267; see also Sempra Energy v Argentine Republic ICSID Case No ARB/02/16, IIC 304 (2007), Award, 28 September 2007. In the latter case, the tribunal found that ‘the measures in question in this case have beyond any doubt substantially changed the legal and business framework under which the investment was decided and implemented’ (at para 303). 209 MCI Power Group, at para 278. 210 Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award, 11 September 2007. 211 Ibid, at para 330.

292 Chapter 6: Meeting Challenges to Investment Stability • where the host state made no assurance or representation, the circumstances surrounding the conclusion of the agreement; and • the conduct of the state at the time of the investment. The FET claim was rejected partly on the ground that the Republic of Lithuania had not given any explicit or implicit promise that the legal framework for the investment would remain unchanged.212 This can be used to support the proposition that a BIT does not in itself provide for stabilization. The third criterion played a decisive role, however: at the time of the decision to invest, the circumstances were not indicative of stability in the legal environment. The host country was then in transition from its communist past, and the evidently fluid legal context could not create a legitimate expectation that the laws would remain unchanged.213 If the host state had acted unfairly, unreasonably or inequitably in the exercise of its legislative power, or had modified the laws specifically to prejudice the claimant’s investment, the conclusion would have been different. It had not. 6.115

However, in an interesting remark, the tribunal noted how the investor might have mitigated his exposure to an unstable legal environment in the host country. It stated: By deciding to invest notwithstanding this possible instability, the Claimant took the business risk to be faced with changes of laws possibly or even likely to be detrimental to its investment. The Claimant could (and with hindsight should) have sought to protect its legitimate expectations by introducing into the investment agreement a stabilization clause or some other provision protecting it against unexpected and unwelcome changes.214

The tribunal’s view was that a stabilization clause creates a legitimate expectation that the law will not be changed. It was reinforced in the tribunal’s discussion of the host state’s power to legislate. It is ‘each State’s undeniable right and privilege to exercise its sovereign legislative power. A State has the right to enact, modify or cancel a law at its own discretion.’215 It continued: Save for the existence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.

The exercise of this legislative power must nevertheless be done in a manner that is fair, reasonable and equitable. It cautioned: ‘As a matter of fact, any businessman or investor knows that laws will evolve over time . . . Consequently, an investor must anticipate that the circumstances could change, and thus structure its investment in order to adapt it to the potential changes of legal environment.’216

212 Ibid, at paras 334–338. 213 It referred to Waste Management Inc v United Mexican States, TECMED and CMS v Argentina as support for this. Another case in which the unsettled context of a post-communist economy played a key role was Genin v Republic of Estonia, ICSID Case No ARB/99/2: Award, 25 June 2001, in which the tribunal found the prudence of the investment to be ‘without a doubt, highly questionable’ (para 356). The tribunal in Paushok wrestled with similar issues: Sergei Paushok, CJSC Golden East Company, CJSC Vostokneftegaz Company v The Government of Mongolia, Award on Jurisdiction and Liability, 28 April 2011 (UNCITRAL): the absence of a stabilization agreement does not preclude a treaty claim relating to windfall profits taxes, but to prevail the claimant needs to demonstrate that it had legitimate expectations that these were violated. The tribunal held that the claimants had failed to establish this (Paushok, at paras 301–302). 214 Parkerings, at para 336. 215 Parkerings, at para 332. 216 Ibid, at paras 332–333.

D. Stability and Legitimate Expectations 293 One possible reading of the above awards is that under international law, if a foreign investor risks its capital in reliance upon a stabilization obligation described as such in an applicable host state’s energy law regime, then a unilateral revision by the host state of that regime, to the detriment of the foreign investor, would constitute a breach of the stabilization obligation for which damages, and possibly (but in practice less likely) specific performance, would, depending upon the circumstances, be available to the foreign investor. If, however, there is no express stabilization provision in the energy regime, then the foreign investor could not reasonably claim that it had made its investment in justifiable reliance upon stabilization.

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On a different and less restrictive reading, however, the first criterion in Parkerings would seem to permit reliance upon other forms of promise or guarantee than a stabilization clause, expressly described as such. The second criterion also allows the tribunal to consider implicit assurances and representations given by the host state. The references to a stabilization clause may be explained by the uncertain legal climate of a post-communist, transitional society to which the tribunal makes explicit reference. In a less volatile legal framework the grant of a guarantee less explicit in character than a stabilization clause might be sufficient to create legitimate expectations. However, it should be clear that the principle of legitimate expectation is not equivalent to or near equivalent to an enforceable contractual right. It does not, as has been observed, ‘replace a formal and legally valid contractual commitment—such as a concession contract’, nor does it lead automatically to a claim but rather sets the scene for a weighing up by the tribunal of the investor’s legitimate expectation and the state’s legitimate interest in developing its policies.217 On the one hand, each host state has an undeniable right to exercise its sovereign legislative power in a fair and reasonable manner, while, on the other hand, each investor has to anticipate a possible change of circumstances and structure the prospective investment accordingly to fit the specific legal environment. This consideration is particularly evident in countries that are experiencing the kind of large-scale volatility that was characteristic of societies in transition to a market economy in the 1990s.

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If the legitimate expectations element of FET appears to increase the investor’s opportunities for ensuring the stability of its long-term investment, there is one factor that needs to be noted by way of a caution. There may be some express guidance in an international investment instrument and in many arbitral awards on the methodology for determining compensation for an expropriation (as in the ECT, for example). This guidance will not normally be available for a violation of FET. As a result, international tribunals may adopt quite different methods to the determination of damages for a violation of FET. It seems entirely probable, however, that breaches of the FET standard are likely to lead to the application by tribunals of similar types of calculation for the determination of damages as in expropriation cases.218

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A few years later, the relationship between an equilibrium form of stabilization clause and FET was considered when a claim was brought by a US company under the Ecuador–US BIT, Ulysseas Inc v Ecuador.219 The relevant part of this award concerns FET and legitimate

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217 Wälde, T.W. & Sabahi, B. (2009) ‘Compensation, Damages and Valuation in International Investment Law’, Oxford Handbook of International Investment Law, Oxford: OUP, 31–32. In this context, note the observations of the tribunal in EDF (Services) Ltd v Romania, ICSID Case No ARB/05/13, Award: 8 October 2009, at paras 217– 218: the investor ‘may not rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework . . . the FET obligation cannot serve the same purpose as stabilization clauses specifically granted to foreign investors.’ 218 Examples are CMS v Argentine Republic and Azurix v Argentine Republic. However, as D. Bishop (2007) at 302 has pointed out, finding responsibility based upon FET rather than expropriation has implications for political risk insurance, which may not cover state conduct that violates FET. 219 Ulysseas, Inc v Ecuador, UNCITRAL, Final Award, 12 June 2012.

294 Chapter 6: Meeting Challenges to Investment Stability expectations: FET protection posits stability of the legal and business framework, but it leaves space for the state to regulate in an evolving economy. 6.120

The tribunal rejected claims of expropriation, arbitrary treatment, and discrimination allegedly in breach of the FET standard. The true meaning of FET could only emerge from a scrutiny of the ‘objective expectations of the investor and the regulatory power of the State in the light of the circumstances of the case’. It found that Ulysseas was not entitled to expect ‘immutability of the regulatory framework in the electricity sector’. A key issue for the tribunal was the question of when the investor’s expectations were first developed. To determine the date on which the investment was made for the purposes of assessing the investor’s legitimate expectations, the tribunal examined a series of criteria sometimes used to define an investment in the ICSID system. These Salini factors were deemed to ‘inform the determination of the moment when the Claimant “invested” in Ecuador in the ordinary sense and began relying on any legitimate expectations that it may have formed’. These factors pointed to a date later than the date when Ulysseas had first bought its power barges to Ecuador. Instead, the tribunal deemed that the date on which the licence contract had been entered was the point when the following test had been met: ‘an actual contribution of economic value to the host State for a given duration in the expectation of a return but subject to an element of risk’.

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There was an economic equilibrium clause in the Claimant’s contract which was treated as evidence that the Claimant did indeed expect the possibility of changes. The company had claimed that the actions by the state entity had breached its legitimate expectations but the tribunal observed that a licence contract with the state company contained a provision providing for the possibility of compensation from the state in cases where laws or standards prejudiced the investor or changed the contract clauses and served to upset the economic and financial stability of the arrangement. Importantly, the tribunal took this contract provision as an acknowledgement by the claimant that laws or regulations could change instead of remaining frozen. This was deemed to be relevant to the claimant’s argument that it had a legitimate expectation that no prejudicial changes would be made to the country’s electricity system. The fact that the claimant did not pursue its contractual right to compensation and instead pursued a treaty claim was deemed by the tribunal to constitute a waiver of the contractual right to compensation. It appears that in the light of these facts, the tribunal was essentially engaging in the now familiar exercise of trying to find a ‘balance’ between FET protection (through the provision of a stable legal and business framework) and recognition that certain measures are a consequence of the host State’s role of regulating an evolving economy.

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Since this group of awards, tribunals’ review of this area—treaty protection of investors’ expectations about the stability of its investment—has been evident in a greater number of energy disputes and has included more diverse kinds of energy in its subject matter. The contribution of the ECT to this discussion about legal stability has also emerged as a highly visible influence. The diversity of views among tribunals, and disagreements evident in the number of majority decisions and dissenting opinions issued, underlines the continuing evolution of thinking about stability and its implications for the flexibility of a state’s regulatory

D. Stability and Legitimate Expectations 295 regime. As a way of grasping the main trends, a five-part scheme of questions will be utilized as follows:

(a) (b) (c) (d) (e)

Are the investor’s expectations of stability based on contractual commitments? Are the investor’s expectations based on the host state’s legal order? Are the investor’s expectations based on representations? Are the investor’s expectations based on circumstances or context? If the ECT is applicable, what expectations about stability are legitimate?

(a) Are the investor’s expectations of stability based on contractual commitments?

There appears to be a consensus that where a stabilization clause exists in the contractual or administrative instrument, the investor has a firm basis for an expectation of stability and if disappointed has an expectation of appropriate damages. What is deemed to be a stabilization clause may prove to be disputed, however.220 In its absence, tribunals have been required to ask whether there is an alternative source for expectations. For example, in Charanne, the tribunal sought an ‘equivalent’ commitment directed at the investor, arguing that the regulatory framework itself could not fulfil that role. Their conclusion was that

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in the absence of a specific commitment, the Claimants could not have a reasonable expectation that the regulatory framework established by RD 661/2007 and RD 1578/2008 remain unchanged.221

In countries with a fluid socio-economic context, the penalty for investors failing to include a stabilization clause in their agreements with states or state entities in such volatile circumstances was emphasized in the Paushok v Mongolia case (2011). The tribunal stated that an investor had no immunity from windfall profit taxes in the absence of a tax stabilization clause:

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. . . foreign investors are acutely aware that significant modification of taxation levels represents a serious risk, especially when investing in a country at an early stage of economic and institutional development. In many instances, they will obtain the appropriate guarantees in that regard in the form of, for example, stability agreements which limit or prohibit the possibility of tax increases. As a matter of fact, GEM attempted, although without success, to obtain such an agreement in 2001, a few years after Claimants’ initial investment and, in 2002, Vostokneftegaz—a company controlled by Claimants—did secure a stability agreement on a certain number of taxes. In the absence of such a stability agreement in favor of GEM, Claimants have not succeeded in establishing that they had legitimate expectations that they would not be exposed to significant tax increases in the future.222

This may be a relevant consideration in contexts wider than that of a post-conflict society or transitional economy. By analogy, it may be applied to that of a country that has embarked on a programme of rapid reform of a stagnant energy market to attract investment, or a series of reforms associated with a policy of transition to a lower carbon economy. 220 The disagreement among the parties in Occidental v Ecuador (II) discussed in chapter 7 is only one example of this. Scope for difference of opinion is increased by the tendency among many arbitrators to understand ‘stabilization’ as limited to freezing. The limits imposed by the parties on the scope of a particular form of stabilization (to cover certain types of tax only, for example) is a further way in which a clause can be distinguished so as to become irrelevant to a dispute: see Bogdanov v Republic of Moldova (2013), for example (environmental charges were not covered by the fiscal stabilization clause). 221 Charanne, at 503 (and 499), citing Electrabel, and early Argentinian cases such as CMS and El Paso. 222 Paushok v Mongolia, at para 302.

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(b) Are the investor’s expectations based on the host state’s legal order?

Some tribunals have sought to establish whether the expectations of the investor were based on the legal order of the host state at the time the investment was made.223 On their view, the source of the legitimate expectation could be based on general legislation and documents related to it.224 The tribunal in AES v Kazakhstan commented on this approach in connection with its potential as a source of constraint on the scope of host state action: it would require the very clearest of commitments on the part of the State to refrain from adjusting that regulatory framework in some specified manner to give rise to any expectation that an investment would be insulated from the effects of normal legal and regulatory revolution.225

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Words of caution were expressed by the Isolux tribunal, which found that ‘no reasonable investor could have the expectation that this framework would not be modified in the future and would remain unchanged’.226 The problem with this view is that it fails to address the wider issue of what limits an investor might reasonably expect in that legal order to safeguard against a modification of its fundamentals, a matter of the greatest importance in highly regulated utility sectors, where the scope for calculating the return on the investment is narrow, and vulnerable to state action.

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A recent example of the positive view is evident in Novenergia v Spain, the tribunal found that the registration in an official record, the RAIPRE, combined with the enactment of Law 54/1997 and RD 661/2007, and representations and assurances made by Spain with respect to the Special Regime aimed at incentivizing investors to invest in the Spanish electricity sector, created legitimate expectations for the investors.227 A sub-set within this category concerns attempts to base legitimate expectations on a part of the legal order that the state has stabilized. In Natland v Czech Republic the tribunal examined the question of whether it was possible for a state to make ‘expressly or implicitly’ a commitment to stabilize its legislative framework for a given period.228 The majority held that it could, since it ‘is indeed an attribute of State sovereignty that a State is entitled to give such an undertaking, just as it has the sovereign right to change its laws’.

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(c) Are the investor’s expectations based on representations?

The test here is to identify specific assurances or promises from an appropriate State body on which the investor could reasonably rely when deciding to invest. There appear to be two lines of thinking in recent awards on this question. For some tribunals, the claimants’ legitimate expectations can be based on ‘any undertakings and representations made explicitly or implicitly by the host State’.229 For others, the requirement is for ‘specific commitments’—that 223 AES Summit Generation Limited v Republic of Hungary, at paras 9.3.8–9.3.18; Frontier Petroleum Services Ltd v Czech Republic, Final Award, 287, 468. 224 Novenergia, at paras 667–669; 681; Eiser v Spain took the opposite view on this, at para 362. 225 AES v Kazakhstan, at para 289. 226 Isolux L, at paras 781–788. A similar approach was taken by the majority in Total v Argentina; see also Blusun v Italy: Blusun: laws do not amount to promises that could engender expectations in investors: laws are general while promises and contractual commitments are specific and only the latter could create legitimate expectations. 227 Award of 15 February 2018, paras 665–667. See also OperaFund v Spain, Award of 6 September 2019, paras 482–485; 9REN Holding v Spain, Award of 31 May 2019, paras 294–296. 228 IAR, 26 July 2018, Natland v Czech Republic (the partial award dated 20 December 2017 is unpublished). 229 Watkins v Spain, 2020. This view is evident in the dissenting opinion of arbitrator Guido Tawil in Charanne v Spain and Isolux v Spain.

D. Stability and Legitimate Expectations 297 is, a class of commitments that is specifically directed towards the investor, without which the conclusion cannot be drawn that legitimate expectations exist.230 Representations can be based on ‘certain features of a regulation aimed at encouraging investments in a specific sector’231 as evidence of expectations emanating from some ‘affirmative action of the State’ in the form of specific commitments or representations. Nonetheless, a specific assurance or representation is not always indispensable to a claim advanced under the FET standard.232 Where that is absent, the investor does need to establish from another source a relevant expectation based on reasonable grounds.233

(d) Are the investor’s expectations based on circumstances or context?

All kinds of FET are dependent on a particular context. The relevance of a specific set of circumstances in each case for an assessment of FET is worthy of emphasis. In the energy sector this is often relevant since the specific case may be linked to the implementation of a wide-ranging policy, often of national importance (privatization of utilities, market opening, decarbonization, for example). As the tribunal in Duke v Ecuador remarked:

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The assessment of the reasonableness or legitimacy must take into account all circumstances, including not only the facts surrounding the investment, but also the political, socioeconomic, cultural and historical conditions prevailing in the host State. In addition, such expectations must arise from the conditions that the State offered the investor and the latter must have relied upon them when deciding to invest.234

For energy investments, this consideration of circumstances is important for two main reasons. Firstly, in the past many governments were persuaded to introduce reforms by liberalization or privatization and related regulatory schemes to promote competition in their electricity and gas markets, and thereby achieve growth.235 The FET standard has appeared in disputes involving investors in such economies and has focused on this regulatory aspect. Tribunals have had to consider relatively new regulatory structures adopted by respondent states.

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This conclusion follows similar cases where the doctrine of legitimate expectations has been linked by tribunals to political, socio-economic, cultural, and historical conditions existing in the host state at the time. Three kinds of circumstances may be distinguished: the transition from a planned to a market economy (Alex Genin v Estonia;236 Parkerings v Lithuania); a national emergency and the measures taken by States to address this (the series of cases emerging from Argentina’s crisis) and the emergence of societies from severe internal conflict such as civil war (Libya, Iraq).

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230 Masdar v Spain. 231 Antin v Spain, para. 538. 232 Electrabel v Hungary, Decision on Jurisdiction, Applicable Law and Liability, ICSID Case No ARB/07/19, 30 November 2012, 7.78. 233 Ibid, Award, 25 November 2015, 155. 234 Duke v Ecuador, at para 340. They cite Southern Pacific Properties v Egypt, ICSID Arb/84/3 1992 at 82; LG&E, at 127–130; Tecmed, at 154. 235 Electrabel S.A. v. Republic of Hungary, ICSID Case No ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012. The FET standard was not breached since the State was trying to ensure the adaptation of long-term contracts to new conditions prevailing in a liberalized economy operating under EU law. The tribunal concluded that it was ‘not reasonable, or legitimate, for Electrabel to expect that PPA pricing would be fixed in accordance with factors established at the time of privatisation’. Among these time-specific factors were the accession of Hungary to the EU and the market liberalization and economic changes that would follow. 236 Alex Genin, Eastern Credit Limited, Inc. And A.S. Baltoil v The Republic of Estonia, ICSID Case No ARB/99/ 2: .

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(e) If the ECT is applicable, what expectations about stability are legitimate?

The ECT contains an express obligation on contracting parties to ‘encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area’ (Article 10(1)). What this first sentence means exactly, and its relationship to the FET obligation in sentence 2 of the same Article, is a question that has engaged several tribunals in recent years. At the most obvious, it suggests that legal stability is an important goal of the ECT, which is hardly surprising given both the context from which it emerged as a treaty and the often-noted importance of stability guarantees in all parts of the energy sector. Beyond this unremarkable observation, there are divergent views on its legal significance.

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Some examples may convey the diversity of views. In AES v Hungary the tribunal noted with reference to the ECT wording that a determination of the scope of the ‘stable conditions’ that a state ‘has to encourage and create is a complex task that will always depend on the specific circumstances that surrounds the investor’s decision to invest and the measures taken by the state in the public interest’.237 Other tribunals have engaged more directly with the wording, however. In Blusun the tribunal considered that there was an obligation on states not only with respect to the making of investments but extending beyond that to subsequent extensions of an investment and changes of form.238 For the majority in Stadtwerke Muenchen, the first sentence ‘does not contain an independent obligation whose breach would be actionable by investors’.239 It agreed with the tribunal in Plama that the duty of stability was part of the FET obligation in the second sentence of Article 10(1). In Stadtwerke, the dissenting opinion of Professor Hober found that while Art 10(1) did not amount to a separate obligation it did constitute relevant ‘context’ for an interpretation of the FET obligation in the second sentence. On this view, the investor’s expectation would be that the legislative framework is unlikely to be subject to ‘fundamental and radical changes’. However, in Isolux, the tribunal concluded that there was no obligation for states to create stable and transparent conditions for investments from this wording in Article 10(1);240 the obligation existed only as part of already existing standards, such as the FET standard and the associated obligation to respect investors’ legitimate expectations. Less controversially, another tribunal declared: ‘the minimum standard as applied traditionally in international law is included in the FET’.241

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A problem behind these interpretations is that in contrast to most IIAs, the ECT does not require legal stability to be read into the FET obligation to merit consideration as part of the investor’s ‘legitimate expectations’. That is indeed implied by the second sentence. However, the first sentence expressly refers to the creation of stable conditions by states as a requirement, which suggests that in the context of the world’s only sector-specific treaty for energy, the drafters considered the provision of stable conditions for this category of investments as having a particular importance and thus requiring reference in addition to the FET protection clearly set out in the second sentence. In this respect, the long-term and capital-intensive character of many energy industries, coupled with their vulnerability to adverse forms of state intervention in what are already highly regulated markets, may well be at the root of this unusual approach to legal protection of investments by treaty. Whether 237 AES Summit Generation Limited and AES-Tisza Eromu Kft. V Republic of Hungary, ICSIDE Case No ARB/ 07/22, Award, 23 September 2010, 9.3.30 238 Blusun, at para. 319(2). 239 Stadtwerke Muenchen v Spain, at para.195. 240 Isolux, at paras 513–518. 241 RREEF Infrastructure (G.P.) Limited and others v Spain, para. 258.

E. Making Claims: Treaty versus Contract 299 the energy investment is located in the ‘traditional’ (that is, extractive) sectors or in those less carbon intensive ones, the text would seem to be designed to provide investors with additional protection in the area of legal stability. E. Making Claims: Treaty versus Contract In the current international legal setting, the options open to an investor seeking to make a claim against a host state are largely ones based on a breach of contract or violation of a treaty or a combination of both remedies.242 Treaty claims tend to arise from an exercise of sovereign power such as expropriation or changes in fiscal terms. Actions taken by the state or a state-owned or controlled entity which have a commercial character will more likely generate a claim from the investor based on a contractual breach. The careful use of each remedy or a combination can function as a source of pressure in the negotiations between the parties that are almost certain to accompany such proceedings. However, as James Crawford has pointed out, ‘[n]‌o issue in the field of investment arbitration is more fundamental, or more disputed, than the distinction between treaty and contract’.243 To some extent, this is also a result of the success of the international investment regime itself. As BITs have proliferated and treaty based arbitrations have followed, there has been an influx of arbitrators and practitioners from the field of international commercial arbitration, and a clash of civilizations has sometimes appeared to be the result.244 This difference of professional views is all the more relevant in the international energy industry where a stability clause in investment contracts could lead to claims under investment treaties or under the terms of an agreement between an investor and a state or its national company, such as a production sharing contract. The governing law and the venue for dispute resolution may well exhibit important differences. Some comments are therefore offered on this issue insofar as it affects investments in energy and natural resources.

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With respect to a breach of contract, the first step considered by the investor will be to review the potential role of domestic legal proceedings. Two types of proceedings need to be reviewed. Firstly, there are administrative remedies, such as negotiations provided for in the contract, as well as provision for administrative claims (such as permitting or licensing). Secondly, there are judicial remedies. The investor may have the option of suing the state before competent national tribunals. However, there is also the possibility that a fork-in- the-road provision may force a choice upon the investor, either to pursue a national remedy or to seek arbitration by an international tribunal. The contract may provide for arbitration, either before a domestic or an international forum. For domestic arbitration, there is the issue of whether the competent tribunal would be ad hoc or institutional. The latter could be expected to include the local chambers of commerce. There is also the issue of the applicable

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242 Many examples are given in chapters 7, 8, and 9, including disputes where investors chose to pursue both contract and treaty claims (for example, Venezuela and Algeria). For a broader view of this subject, see Alexandrov, S. (2018) ‘Breach of Treaty Claims and Breach of Contract Claims: When Can an International Tribunal Exercise Jurisdiction?’, in Yannaca-Small, K. (ed) Arbitration under International Investment Agreements (2nd edn), 370–394. 243 Crawford, J. (2008) ‘Treaty and Contract in Investment Arbitration’, Arbitration Int’l 24, 351. 244 A session at the 2008 ICCA was devoted to this theme: Investment Treaty Arbitration and Commercial Arbitration: Are They Different Ballgames? The Rapporteur’s report summarizes the differences between the conduct of investment treaty arbitrations and that of international commercial arbitrations. With respect to the former, he notes the state’s ‘superior’ power to influence the law (states legislate; enforce laws and conclude treaties).

300 Chapter 6: Meeting Challenges to Investment Stability arbitration rules. This requires an examination of the domestic arbitration law since the award is subject to revision by the law of the seat. For international arbitration, these issues appear differently. Again, the competent tribunal may be ad hoc, meeting under the United Nations Commission on International Trade and Law (UNCITRAL) rules, or it may be institutional, which could involve the ICC, ICSID, or the London Court of International Arbitration (LCIA), for example. The parties will agree on the arbitration rules whether the form of arbitration is ad hoc or institutional. 6.139

For a claim based on a treaty violation, the options open to the investor are different. International arbitration under a BIT raises issues about the competent tribunal, the applicable rules and which rights under the BIT can be said to have been violated by the state action. Depending upon the options in the BIT, the competent tribunal would be constituted on an ad hoc or an institutional basis (through ICSID, for example). The applicable rules will usually be either UNCITRAL rules or those of ICSID. The legal basis for a treaty claim will usually be one of the following provisions (see c hapter 5): • no expropriation, or measures equivalent to expropriation, without prompt, adequate, and effective compensation; • FET (changing the legal and regulatory framework into which the investment has been made; violation of legitimate expectations); • ‘most favoured nation’ treatment; • national treatment and non-discrimination on the basis of nationality; • ‘full protection and security’ and, closely related, ‘due diligence’ in the protection of investments; and • free transfer of investments and returns.

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The two remedies are not necessarily incompatible and may be combined to maximize pressure on the host state. The procedural aspect is important here. The threat of arbitration under both the treaty and the relevant contracts has several notable features. It can be a negotiation tool and triggered by a letter. There is also no mutual exclusion of treaty and contract arbitration proceedings (but note the exclusivity provision in Article 26 ICSID and the fork-in-the-road provisions in many BITs). A combination of contract and treaty breaches will attract the widest possible coverage of potential breaches. In addition, a contract-based arbitration often has the potential to bring state-owned energy companies and their assets into the proceedings. Finally, staggered or simultaneous arbitration proceedings are sometimes possible (see c hapter 7).

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An important feature of these options is that they do not imply that negotiations with a view to a settlement should cease. They can result in agreed compensation and help to create a levelling of the playing field. In many cases, the resulting negotiations are successful. As is evident from the Latin American cases considered in c hapter 7, it is not usual practice for the investor to wait until its rights have been asserted under contract or treaty before pursuing negotiations with the host state.

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In assessing the investor’s options, it is obvious that the protections in the international investment treaty regime (if they are available in the particular case), offer an additional layer of security for the investor. However, they do not replace the terms of the particular investment agreement, which remains the beating heart of the investor’s overall stability. Without an intention to enter into a legal relationship, there is no investment; the key feature in this respect is the transaction or bargain struck between the investor and the host state. In designing that

F. Investor Responsibilities 301 investment contract, the investor will seek to allocate risks and opportunities in a way that is acceptable to both parties. In doing so, the investor may seek to include a stabilization clause, or similar clause that is aimed at ensuring long-term stability of the legal relationship. In the current context, where a plethora of international investment agreements are available to the investor, the application of a BIT, and particularly the application of the FET standard, might lend this key element of international law to the formula required for stabilization. Until recently, that formula appeared to require, for arbitration purposes, a stabilization provision in the energy investment agreement (or elsewhere in the legal regime) in the first place, and international law as the governing law in the second. However, as this chapter demonstrates, there are a number of recent cases which consider, directly or indirectly, the issue of whether a BIT can provide support to the element of stabilization in an energy investment agreement, even where an express stabilization clause is not present in the contract itself.

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F. Investor Responsibilities Given the special characteristics that energy investments typically have, it is important that investors take steps at the outset to ensure that the business risk is fully understood and mitigated as best as can be done. Given the extensive role of the state, and the potential role of treaty protection, it is especially important that the state’s role has been fully considered and potential change in its conduct has been considered.

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For some, the wide-ranging character of the FET standard may be taken as symptomatic of a lack of constraints upon investors arising from the typical BIT. Such a sweeping assessment would be mistaken. The constraints may not be multitudinous, but they do exist and are ignored by an investor at its peril. A number of tribunals have been careful to identify circumstances in which a failure of investor conduct will diminish the level of protection it can gain through operation of the FET standard (or indeed other standards typically found in a BIT).

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Due diligence If, for example, an investor elects to take action to enforce a contractual stability clause in the face of a unilateral legislative or regulatory measure by the host state, an initial test for the tribunal concerns the production of proof that the investor has taken the appropriate steps with respect to due diligence. In MTD Equity v Republic of Chile,245 the tribunal underlined the importance of this—perhaps rather obvious—first step in making an investment. If one considers the portion of this award relating to the foreign investor’s obligation to perform due diligence, one acquires some idea about the burden of proof on the foreign investor.246 In this instance, the claimant relied on self-serving statements by a prospective business partner and failed to carry out the most rudimentary of inquiries. Chile contrasted the practices of MTD with those followed by other foreign investors. It was alleged that MTD was quite unfamiliar with the host state’s business environment, had not secured the resources and services needed to implement the project and had not commissioned a feasibility study worthy of the name. The foreign investor was also alleged to have taken at face value statements made by an intermediary that land use restrictions could be

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245 MTD Equity Sdn Bhd And MTD Chile SA v Republic of Chile, ICSID Case No ARB/01/7, Award, 25 May 2004, 44 ILM 91 (2005). 246 Ibid, at paras 168–178.

302 Chapter 6: Meeting Challenges to Investment Stability modified and failed to carry out any further investigation to prove their validity. A piece of land it wished to purchase was valued for the foreign investor, but the latter failed to examine that valuation critically. Indeed, an examination of an extremely basic kind would have revealed its shortcomings (there was a failure to conduct reasonable diligence and consult with an urban planner, environmental expert, architect, or lawyer with experience in real estate development issues). It appears that the foreign investor was in a hurry to start the project and overlooked the necessity of taking the above precautions. 6.147

The tribunal concluded that as a group of experienced businessmen the foreign investor should bear the consequences of its own actions, adding that ‘BITs are not an insurance against business risk’.247 The investor’s choice of partner and acceptance of a land valuation based on future assumptions without protecting themselves contractually in case the assumptions would not materialize are all risks that it took irrespective of Chile’s actions.248 Essentially, if the investor did not make the necessary effort to understand what the legislative and contractual regime was in regard to the right that it thought that it had acquired, then the foreign investor could not be considered as having justifiably relied upon such a right being available to it, as an essential part of its decision to invest.249 Poor risk management by the investor is not therefore likely to attract the sympathy of a tribunal when the investment subsequently goes wrong and a dispute develops.

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This approach has been echoed in a line of cases since MTD. For example, the tribunal in Total v Argentina observed that the investor ‘has its own duty to investigate the host State’s applicable law’250 and cited the tribunal in Maffezini to the effect that BITs ‘are not insurance policies against bad business judgments’.251

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The due diligence factor is nevertheless not free from complications. The obligation of the investor to carry out due diligence and what the exercise requires to be sufficient will not usually be set out in an IIA. For example, faced with regulatory changes that have given rise to a dispute, the tribunal—in making an overall assessment of an FET claim—will probably treat the exercise as one that would seek to elicit some indications of the probability of future changes in the regulatory framework.252 Whether sufficient effort has been made to do so is ultimately a matter for the tribunal to decide upon, and differences among arbitrators can be expected to emerge in such an assessment.

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Some idea of the range of differences can be gained from various ECT cases arising from energy reforms that affected the regulatory framework for the renewable energy sector. In the first group, tribunals have held that an expectation can be reasonable if it arises ‘from a rigorous due diligence process carried out by the investor’,253 and rejected a claim where there was ‘no evidence of any real due diligence’.254 In the second group, the role of due 247 Ibid, at para 178. 248 Ibid. 249 Compare the caveats about business risk made by the tribunal in the context of an invocation of legitimate expectations in National Grid plc v Argentine Republic, Award, IIC 361 (2008), 3 November 2008, para 175. 250 Total v Argentina, Decision on Liability, at para 124. 251 Maffezini v Spain, ICSID Case No ARB/97/7, Award on the Merits, 13 November 2000, at para 64. 252 For a brief but concise account of this aspect of due diligence, see Yulia Levashova, ‘The Role of Investor’s Due Diligence in International Investment Law: Legitimate Expectations of the Investor, 22 April 2020: . 253 Stadtwerke Muenchen GmbH, RWE Innogy GmbH, and others v Kingdom of Spain, ICSID Case No ARB/15/ 1, Award, 2 December 2019, 264. 254 Antaris Solar GmbH and Dr Michael Goede v Czech Republic, PCA Case No 2014-1, Award, 2 May 2018, 432. See also: Belenergia S.A. v Italian Republic, ICSID Case No ARB/15/40, Award, 6 August 2019, 587; where

F. Investor Responsibilities 303 diligence by investors has been far less evident in the tribunal’s assessment of a breach of the FET standard. In one instance, they expressly stated that there was no requirement to carry out a formal due diligence process, in relation to the protection of legitimate expectations.255 Given this diversity of view among tribunals, there is no consensus about what evidence would meet the standard of adequate due diligence. Some examples, however, are possible to identify, such as general legal advice from a law firm,256 or legal opinions provided to a bank that had lent money to the investor;257 or formal, written legal advice about the potential impact of changes to the regulatory framework.258 In terms of predicting the stability of a regulatory regime, reference to the decisions of the local courts, especially the higher ones might also be considered relevant to the investor in carrying out a due diligence exercise with reference to the trend or potential trend of regulatory change.259 A less clear-cut area is the role of understandings or assumptions about common practices that impinge upon the making of an investment. Where it has been common practice, for example, for the National Oil Company (NOC) to absorb the cost of any additional fiscal obligations imposed by the host government, it would be important for an investor seeking to acquire an interest to ensure that the government practice or understanding is documented, that the host state had confirmed it and that evidence exists of this understanding having played an important role in the decision to invest in the first place.

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Unconscionable conduct If the investor engages in highly inappropriate conduct, the consequences may be a loss of protection of the FET standard. Peter Muchlinksi has argued that the FET standard can be read as imposing certain duties on investors in return for the FET protection offered by host states, and in particular, the duty to refrain from unconscionable conduct.260 This would include misrepresentation to government officials of their activities or their business experience. This is a bold interpretation but may have some justification if one takes into account certain cases in which tribunals have ruled that fraudulent misrepresentation, for example, may undermine a claim brought by an investor.

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the tribunal remarked that ‘a ‘prudent’ investor was required to examine the Italian PV laws and regulations, which suggest a clear trend toward incentives’ reduction’; its failure to do so meant that the due diligence was inadequate: ‘an investor cannot legitimately expect that the legal and regulatory framework will not change when any prudent investor could have anticipated this change before making its investment’ (para 584). 255 SolEs Badajoz GmbH v Kingdom of Spain, ICSID Case No ARB/15/38, Award, 31 July 2019, 331; see also Cube Infrastructure Fund SICAV and others v Kingdom of Spain, ICSID Case No ARB/15/20, 19 February 2019, 405–406; Novenergia II—Energy and Environment (SCA)(Grand Duchy of Luxembourg), SICAR v Kingdom of Spain, SCC Arbitration 2015/063, Final Arbitral Award, 15 February 2018: 679: ‘the Tribunal remains unconvinced that the type of legal due diligence into the stability of the Spanish renewables regime called for by the Respondent would have revealed the kind of changes which were later implemented . . .’ 256 Foresight Luxembourg Solar I S.A.R.L. and others v Kingdom of Spain, SCC Arbitration 2015/150, 277 (but note the strongly worded partial dissenting opinion from Arbitrator Raul E Vinuesa, who considered the due diligence carried out to be inadequate since it lacked inter alia advice on Spanish and EU law: 43–44). 257 Operafund Eco-Invest SICAV PLC and Schwab Holding AG v Kingdom of Spain, ICSID Case No ARB/15/36, Award, 6 September 2019, 487. 258 Stadtwerke Munchen and others v Spain, (above note) paras 347–348; Watkins Holdings S.A.R.L. v Kingdom of Spain, ICSID Case No ARB/15/44, Award, 21 January 2020, 578, 582, 588 (by majority). 259 Here again there is some difference among tribunals: those in Charanne, Isolux, and Stadtwerke took a positive view of consulting the decisions of the Supreme Court in Spain, while the tribunals in OperaFund and Cube Infrastructure were not convinced of the relevance of this. 260 Muchlinski, P. (2006) ‘Caveat Investor? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’, ICLQ 55, 567–598.

304 Chapter 6: Meeting Challenges to Investment Stability 6.153

In the second known case to be brought under the ECT,261 Plama v Bulgaria, there was an issue concerning the ethical character of the investor’s conduct. Plama was a Cypriot company that had invested in a privatized Bulgarian oil refinery, but it obtained government approval of its investment based on a fraudulent misrepresentation of the identity and qualification of its shareholders. Its conduct was found to be deceitful and in breach of Bulgarian law and contrary to the principle of good faith in both Bulgarian law and international law.262 That principle includes the obligation on the investor to provide the host state with relevant and material information concerning the investor and the investment. The claimant had argued that it had no obligation to disclose who its real shareholders were. However, in this instance, the provision of such information was required to obtain the state’s approval of the investment, a process which involved an assessment of the investor’s financial and technical qualifications. Material changes in the investor’s shareholding might have effects upon the state’s approval and had to be notified to the state by virtue of the principle of good faith. As a result of intentionally withholding such information, Plama’s conduct was contrary to the principle of good faith, and its investment was not therefore eligible for protection under the ECT. The decision demonstrated the importance of an investor’s conduct in determining whether its expectations are legitimate.

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Other BIT cases had already addressed the consequences of fraud and corrupt practices. For example, a case concerning a BIT between El Salvador and Spain involved an investor who had obtained a concession contract for vehicle inspection services in the country by means of fraud in the public bidding process.263 The tribunal accepted that El Salvador’s consent to ICSID jurisdiction did not extend to investments that were made fraudulently, and therefore not in accordance with the law. The investment was found to be in violation of general principles of law such as the principle of good faith (defined as ‘absence of deceit and artifice during the negotiation and execution of instruments that gave rise to the investment’)264 and the principle that no-one can benefit from his own wrong (defined as a prohibition on the investor to ‘benefit from an investment effectuated by means of one or several illegal acts’).265 In both this case and another, World Duty Free v Kenya,266 the notion of international public policy was invoked by the respective tribunals to support a finding that ‘claims based on contracts of corruption or contracts obtained by corruption cannot be upheld’.267

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Further clarification on this issue was provided in Fraport v The Philippines.268 The majority of the ICSID tribunal declined its jurisdiction based on the BIT between Germany and the Philippines once it had established that the claimant, a German company called Fraport, had not made its investment in the construction of Terminal 3 at Manila airport ‘in accordance with the laws of the Philippines’. In addition, Fraport was fully aware that its investment was 261 Plama Consortium Ltd v Republic of Bulgaria, Award, ICSID Case No ARB/03/24, IIC 268 (2008), 27 August 2008. It was registered in August 2003. The first case to be awarded on the merits was Nykomb Synergetics Technology Holding AB v Latvia in 2001 (see chapter 8, para 8.114). Another case that preceded Plama was AES Summit Generation Ltd v Hungary; it was settled by a negotiated restructuring of contractual arrangements in 2001. 262 Plama Consortium Ltd v Republic of Bulgaria, at paras 143–144. 263 Inceysa Vallisoletana SL v El Salvador, Award, ICSID Case No ARB/03/26, IIC 134 (2006), 2 August 2006. 264 Ibid, at para 231. 265 Ibid, at paras 240–242. 266 World Duty Free Company Ltd v The Republic of Kenya, ICSID Case No ARB/00/7, Award, IIC 277 (2006), 4 October 2006. 267 Ibid., at para 157; the investor had obtained a contract by making a payment to the Kenyan President as a bribe. 268 Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines, Award, ICSID Case No ARB/ 03/25, IIC 299 (2007), despatched 16 August 2007.

G. System Reform and Energy Investment 305 in breach of domestic law. The protection of the BIT was extended to investments that had been made in accordance with the respective laws of either contracting state, but in this instance the project did not constitute an investment for the purposes of the BIT. In particular, Fraport had entered into a series of confidential shareholder agreements through a cascade of companies to take effective control over a firm called PIATO, which held a concession agreement from the Philippines government. This was in breach of Philippine legislation that prohibited foreign investors from assuming managerial control of a company in this way. Subsequently, the government annulled the concession and Fraport initiated arbitration proceedings. In the tribunal’s view, it was the concealment of the shareholder agreements which demonstrated bad faith on Fraport’s part. It had been advised by local contacts of the risks that such arrangements were in violation of Philippines law, but went ahead to conceal its illegitimate control from the authorities. The Fraport award is only one example in a string of ICSID awards that address the issue of compliance with the host state’s laws as a jurisdictional requirement. However, it was the first of these to state clearly that a tribunal could refuse to hear the merits of a case where the claimant has behaved in a way that was in non-compliance with domestic law. In making such an assessment, an investor should normally be given the benefit of the doubt since transgression of a host state’s laws could have resulted from a lack of understanding of the host state’s law and an error in good faith. In this case, however, bad faith was clearly involved in making the investment, and this was a key factor in the tribunal’s decision in favour of the state.

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Despite the foregoing, investors do have some protection under BITs against allegations of illegality with respect to their investment. In Union Fenosa v Egypt, for example, allegations that the claimant, an investor in an LNG plant, had committed acts of corruption when developing the project and when concluding the gas purchase agreement were rejected, with the tribunal holding that insufficient proof was presented.269 In a mining case, South American Silver v Bolivia, the respondent alleged that the tribunal lacked jurisdiction because the claimant lacked ‘clean hands’ and failed to comply with the legality requirement in making its investment. The tribunal held that ‘the Respondent had not shown that the alleged violations go to the essence of the investment such that it must be considered illegal’.270 A violation must also be sufficiently serious to justify the denial of treaty protection as a proportionate response.271

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G. System Reform and Energy Investment Perhaps the greatest legal challenge of all to the long-term stability of energy investments is the widespread sense in the arbitration community that the global system of adjudication that has been constructed and operational for several decades is losing the support of many of the states that brought it into being in the first place. Given the very prominent role of

269 Union Fenosa Gas S.A. v Arab Republic of Egypt, Award, 31 August 2018, para 7.113, ICSID Case No ARB/ 14/4 (‘even the reddest of red flags does not suffice without proof of corruption before the tribunal’). 270 South American Silver Limited (Bermuda) v The Plurinational State of Bolivia, Award, 22 November 2018, para 470. 271 Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v Republic of Kenya, Award, 22 October 2018, ICSID Case No ARB/15/29, para 365. In this case, it was deemed justified.

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306 Chapter 6: Meeting Challenges to Investment Stability states in most kinds of energy investment, and therefore the long-standing pursuit by investors of enforceable guarantees of legal stability, this process of reform is significant, even if they do not have a direct part in it. Further, there is the fact that a large proportion of all disputes brought to this international system for resolution by law concern energy and energy-related activities. A growing number of claims are now being brought under the multilateral energy treaty, the ECT. Any changes to the system’s basic principles and practices will have implications for this portion of the international investment regime and those who rely upon it. 6.159

In one sense, change in the system at this stage of its life is entirely sensible and indeed almost inevitable if the lessons from more than two decades of experience are to be incorporated into it. There are also new challenges and priorities that may require some adaptation of the treaty texts. Since many existing BITs date from the 1980s and 1990s, this first generation of BITs is reaching the end of its initial term and is coming under review by the parties which concluded them. According to UNCTAD, more than 150 states have already taken steps to develop a successor generation of IIAs.272 In doing so, their deliberations and proposals have included a greater emphasis on among other things, sustainable development and global standards relating to it, the preservation of regulatory space, and modifications to or omissions of the dispute settlement mechanism.273 A few states have already issued interpretations of older IIAs or have decided to replace them entirely. Other states have suspended discussions on BITs or have abandoned unratified treaties. More than 480 IIAs that were concluded before 2008 have not yet entered into force, suggesting that the states concerned do not intend to continue the ratification process.274 Some states have signed IIAs but have not ratified them (Ecuador, Costa Rica, Pakistan, and Russian Federation, for example). Other countries have issued moratoria on the conclusion of new BITs (Botswana, Namibia, and Pakistan). In another kind of response, some countries that had previously negotiated BITs have ceased to conclude any new ones for the past five years (Malaysia, Namibia, The Philippines).

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On the multilateral side of developments, there has been a wide range of discussions and proposals on reform.275 .The ECT has entered a process of ‘modernization’ through meetings and discussions among the Conference Parties (see c hapter 5). Among the provisions that are likely to figure in the discussions is the substantive protection of FET, and within that the relationship between legitimate expectations and the regulatory space of states. The other major multilateral treaty, NAFTA, has already been replaced by a weaker instrument in terms of the protections it offers investors (see c hapter 5). Separately, ICSID has taken steps to update its procedural rules (see c hapter 5). The EU has prohibited the conclusion of BITs 272 UNCTAD (2018b) xiii, 96. 273 Ibid (2019), 2. UNCTAD identifies six common reform features in recent treaty instruments, including the preservation of regulatory space; a sustainable development orientation; improvements to or omissions of investment dispute settlement. At least five of the 2018 treaties included a definition of investment that conditioned treaty protection on the economic contribution of the investment to the host State economy. UNCTAD noted that 20 of the 29 IIAs concluded in 2018 contained at least nine reform features. 274 UNCTAD (2018b) 99. This paragraph draws on data at 99–102. 275 No attempt is made here to capture the diversity of views about reform. A useful attempt to organise and conceptualise the main reform approaches into three categories with different strategies and risks, as well as UNCITRAL’s role in these reforms as a venue and an actor, is made by Anthea Roberts in her essay, Roberts, A. (2018) ‘Incremental, Systemic and Paradigmatic Reform of Investor-State Arbitration’, American Journal of International Law 112, 410–432. Not all commentators see any kind of reform as the answer however to what they view as a systemic problem: for example, see the polemical study by Sornarajah, M. (2015), ‘Resistance and Change in the International Law on Foreign Investment’, Cambridge: Cambridge University Press.

G. System Reform and Energy Investment 307 among its twenty-seven member states and on energy matters, has adopted an increasingly critical stance vis-à-vis the ECT. As chapters 7, 8, and 9 show, a number of capital-importing states have stepped back from international arbitration in favour of a localized approach to dispute settlement. Within this process, the UNCTAD Working Group III has performed a sort of international think-tank and consultative role. Given the diversity of the states involved, and widely differing motivations behind their treaty-making, it is unsurprising that there are differences of opinion about how and what to reform. For some, reform may require termination of a treaty (or more than one). However, that does not mean the treaty suddenly ceases to have application. Most treaties contain survival clauses according to which the treaty application will be extended for existing investors after termination for a period of ten to twenty years. So far, terminations do not appear to include any concerning a multilateral treaty, only BITs (although there have been departures from the ECT by Italy and Russia). Further, when statistics show a reduction in the number of new treaty relationships between states, this does not permit a simple inference that there is a reduction in the overall number of treaty relationships, since a single regional IIA can create many treaty relationships. For example, the Pacific Agreement on Closer Economic Relations (PACER) Plus Agreement (2017) creates relations between Australia, New Zealand, and eight Pacific Island states.276.

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In general terms, the question about the existing treaty regime might, for states, be one of asking whether this is a structure that has served the original rationale. For investors, the question may be whether it can continue to provide a high level of protection, and in the energy sector, to enhance the stability typically sought by investors for long-term investments. In some cases, states have evinced disappointment about its operation,277 and many have sought to modify or adapt treaty provisions to changing state priorities when they have reached the end of their term. For investors, the response has been more uniformly positive, as is evident from the remarkable growth in international capital flows that has accompanied the expansion of this network.278

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In line with evolving state practice, treaties are likely to require modification to reflect the higher standards that are now common with respect to health, safety, labour, and environmental practices, and the principle that such standards should not be relaxed to attract inward investment.279 This may also include the conservation of exhaustible natural resources, and anti-corruption practices. The international energy industries are already familiar with these ‘best international practices’ and have adopted many of them on a voluntary basis both individually and through their industry associations. A second area, involving a closer definition of regulatory space, could lead to modifications in existing treaties. These might entail imposing limits on the treaty scope by excluding certain types of assets from the definition

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276 Pacific Agreement on Closer Economic Relations (PACER) Plus Agreement (2017) https://www.un.org/ ldcportal/pacer-plus/(accessed 25 July 2021) 277 Studies have shown mixed results about the benefits of IIAs to host states: for example, Skovgaard Poulsen, L.N. (2009–2010) ‘The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence’, YB Int’l Inv L & Pol’y 539 at 544 on ISDS (2010). 278 This is not a cause-and-effect relationship, and no argument is being made here about the effects of treaties on these flows. Foreign direct investment amounts to 38 per cent of global gross domestic product: UNCTAD World Investment Report 2019, Regional Fact Sheet: Developed Economies (June 2019), 1. However, in contrast to growth of 8 per cent a year between 2000 and 2007, it has averaged only 1 per cent in the decade since, with a fall of 13 per cent in 2018: ibid, at p.xi. 279 This is evident in the Pacific Agreement on Closer Economic Relations (PACER) Plus Agreement (2017) and the Intra-Mercosur Investment Facilitation Protocol (2017).

308 Chapter 6: Meeting Challenges to Investment Stability of investment, clarifying obligations and the notion of indirect expropriation, as well as making exceptions for obligations concerning the transfer of funds. The controversial umbrella clause has already been targeted by some states for omission in their reformed BITs. Given the long-term nature of most energy investments, and the structurally close links of foreign investors with host states, this would seem an area that requires careful consideration. Finally, the role of investor–state dispute settlement (ISDS), central to the system, may be adapted or, in line with some proposals, become more regulated, specifying which treaty provisions are subject to ISDS and excluding certain policy areas from its scope. The final version of the USMCA might be seen as an early attempt at this. 6.164

Two general observations may be made on the scope for change. The first concerns the limits to cooperation among states in this area. The striking success of the IIAs to date—at least in terms of their wide adoption by states—underlines the equally striking failure of earlier efforts to conclude a broad multilateral investment treaty over the years. Starting from the 1947 Havana Charter, the failures include the 1967 OECD Draft Convention on the Protection of Foreign Property and the 1998 Multilateral Agreement on Investment.280 An attempt to conclude a multilateral investment instrument failed in the Doha Round of the World Trade Organization (WTO).281 At a regional level, the ECT and NAFTA stand out as successful attempts to create limited, multilateral solutions in parts of the world where the contracting parties have clearly identifiable common interests. This context of failed efforts to establish a uniform, coherent framework of rules helps to explain why the current international investment regime has evolved in a patchwork manner and contains some features that are the antithesis of a systematic approach to regime design (lack of consistency, for example, and limited cohesion). It also suggests that a sweeping alternative design is highly unlikely in the foreseeable future. The second observation concerns the rate of progress in making reforms to the existing regime. It is naïve to assume that all states seeking to make reforms to existing treaties share the same access to human resources or the legal or financial means to reform them. Many states will lack capacity to engage in reform and others will face opposition from treaty partners to do so. There will also be challenges arising from internal procedures and coordination processes to build consensus for reform.282 For states keen to attract scarce capital inflows to stimulate growth, there will also be an awareness of the risks of too rapid a pace of reform.

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In the energy sector, the questions about the international treaty structure are slightly different. Parts of the international energy industry emerged at a time when their international protections were typically contract-based, and investment treaties played no role at all. Other parts of the international energy industry have evolved contemporaneously with the treaty-based regime (but not necessarily because of it). All this expansion has involved a close coordination with a multiplicity of states to secure mutual benefits.

280 Dattu, R. (2000) ‘A Journey from Havana to Paris: The Fifty-Year Quest for the Elusive Multilateral Agreement on Investment’, Fordham Int’l LJ 24, 275. See also UNGA Res 3201 (S-VI), Declaration on the Establishment of a New International Economic Order, 13 ILM 238 (1974). 281 The Second Revised Draft of the Cancun Ministerial Declaration, September 2003 at (accessed 16 December 2009), and the text of the July Package, agreed on 1 August 2004, WT/L/579; see the discussion in Kennedy, K.C. (2003) ‘A WTO Agreement on Investment: A Solution in Search of a Problem?’, U Pa J Int’l Econ L 24, 77. 282 UNCTAD (2018b) at 103. The specific challenges noted there include interministerial coordination; identification of priority treaties to be reformed; assurance of coherence between reform efforts at different levels of policymaking.

H. Conclusions 309 In this context of energy investment, the dominant question for states is likely to be whether the adoption of BITs has led to the making of investments that have accelerated the transformational potential associated with energy resources: increased access to electricity for expanding populations as much as the primary sources of energy for foreign exchange and domestic use. Has the state’s duty to provide greater access to energy for its citizens been facilitated by this treaty network, it may ask? For investors, the questions are fewer and simpler. The core question is whether the addition of a treaty layer of protection has provided a layer of legal protection that supports the making and protection of their investments. Given the expansion of capital accompanying treaty adoption, the answer would seem positive. For both parties, there is another, broader question that needs to be considered. Is a treaty structure that grew out of thinking and assumptions in the 1980s or earlier adequate to a context in which energy investments and society’s expectations of these investments have significantly changed?

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H. Conclusions The challenges to investment contract terms in the international energy industry derive from different sources. Several of them have been considered in this chapter. The international investment regime that has been built up over the past two decades and more, and the institutions which support it are being and will continue to be severely tested by the character and diversity of these claims. Unfortunately, the certainty about long-term contract stability which investors seek is still in statu nascendi with respect to the global adjudication system. This is a system which is still evolving, particularly as far as key substantive principles such as FET and expropriation are concerned. Nonetheless, the scale on which issues concerning the long-term commitments of energy investments figure among awards, and the seriousness with which tribunals approach them must carry some reassurance to both investors and the states that built the structure that it is striving to achieve its purpose.

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A long-standing and familiar challenge is presented by the fact that the exercise of a state’s powers is sometimes justified in terms of its regulatory power, and the takings element is not explicit. This power may be exercised in pursuit of broad economic goals but also for a declared environmental or fiscal objective. While this may be examined in the abstract in relation to legal principles, it should be clear from the many cases examined in this chapter that while international investment law evolves in an ad hoc manner, it does indeed evolve. Moreover, it is evolving in ways that undoubtedly strive to ensure that a balance is struck between investors’ rights and the interests of states that host an investment.

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With respect to indirect and direct forms of expropriation in the energy sector, it would seem that investors’ concerns are likely to be only slightly assuaged by the protections afforded by the abundance of international investment instruments. It is still unclear what acts of a state would amount to expropriation in international law. The various arbitral awards discussed above simply underline the following: the deprivation has to be very substantial, and the decision will turn on the specific facts of the case. In the following three chapters the operation of contract and treaty defences will be examined in relation to unilateral interventions by host states in the investments made in three large and important regions for energy investors.

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7

Latin America Treaty and Contract Stability in the Face of Policy Realignment and Crisis

A. Introduction B. The Pendulum Swings

7.01 7.11 (1) Venezuela 7.14 (2) Bolivia 7.20 (3) Ecuador 7.24 (4) Argentina 7.27 C. The Legal Stability Agreement 7.31 (1) Peru7.33 (2) Venezuela7.40 (3) Colombia7.45 D. Testing LSAs: Peru and Ecuador 7.47 (1) Duke Energy v Peru 7.48 (2) Aguaytia v Peru7.70 (3) Noble Energy and Machalapower v Ecuador7.76

E. Treaty v Contract: Forced Renegotiations & Outcomes (Venezuela) 7.83

(1) Recourse to international arbitration 7.95 (2) The use of worldwide freezing orders 7.100

(3) Further nationalization (4) Arbitration and remedies (5) Assessment

F. Testing the International Investment Regime: Rejectionism (Bolivia) G. Treaty-based Protection: Ecuador

(1) (2) (3) (4)

The VAT cases The Law 42 cases Electricity reform impacts Pipelines

H. FET, Stability and Legitimate Expectations: Argentina

7.106 7.108 7.119 7.122 7.130 7.131 7.148 7.197 7.209

7.210

(1) CMS 7.214 (2) LG&E Energy 7.215 (3) Enron and National Grid7.218 (4) Sempra7.221 (5) Total7.225 (6) Assessment7.233 I. Conclusions 7.234

[T]‌he stability of the legal and business framework in the State party is an essential element in the standard of what is fair and equitable treatment.1 LG&E v Argentina

A. Introduction 7.01

In no other part of the world have government policies initiated coordinated swings toward and then sharply away from foreign investment as often and as dramatically as in Latin America. Energy and mining investments have been at the centre of those pendulum swings for several decades. As a counter to this context, foreign investment promotion has usually included the offer of differing kinds of stability guarantees. Paradoxically, the very investment treaty regime that has grafted on a new and very substantial layer of protection for 1 LG&E Energy Corp and Others v Argentina, Decision on Liability, ICSID Case No ARB/02/1, IIC 152 (2006) at 125.

A. Introduction 311 international investment is also one that has presented challenges to the legal cultures in the region. Since the early years of this century the international investment treaty regime and particularly investor-state arbitration have been challenged robustly and sometimes rejected by several states in Latin America. Regional or domestic forums for dispute settlement have been championed as alternative, more appropriate venues for dispute settlement. As a case study of challenges to various kinds of stability guarantees, the Latin American region provides important examples of awards in proceedings that have arisen from state actions to comprehensively revise arrangements with investors in energy projects. A string of cases has examined unilateral state actions that have upset the stability of the legal and business framework for foreign investors. Investments in the energy sector have figured prominently in such disputes between foreign investors and host states, with claims based variously on a breach of either contract-or treaty-based stability, or both. Yet, the challenges have also done much to clarify and develop the principles of international investment law that aim to provide such stability. As the recent cycle of investor–state arbitrations is now at an end, enough legal material is available to carry out a review of how the legal protection of long- term energy investments has stood up to the variety of challenges which have been made in the Latin American setting.

7.02

Legal stability has been a priority concern for investors as a protection against the periodic waves of anti-foreigner sentiment that have been a marked feature of Latin American history.2 The roots of this phenomenon lie deep in the region, with the Calvo Doctrine being perhaps the most familiar legal expression of opposition to foreign intrusion in Latin American economic affairs.3 The idea behind this Doctrine was that foreign investors should not be entitled to treatment more favourable than domestic investors, and so the rights attributable to foreign investors ought to be governed entirely by domestic law. As a result, contracts often included a so-called Calvo Clause, under which foreign investors could resort only to local courts to defend their rights. This provision was included in the constitutions of several Latin American countries (for example, Mexico, Bolivia, Peru, Venezuela) and in contracts made between states and state entities on the one hand and foreign investors on the other. For decades, the investment law regimes influenced by this doctrine proved to be stony ground for the introduction of international arbitration. When the idea of the International Centre for the Settlement of Investment Disputes (ICSID) was proposed by the World Bank in the 1960s, Latin American countries collectively rejected this mechanism; it would have allowed investment disputes to be heard away from local courts and at the same time would have reduced the risk of their escalation into diplomatic conflicts between states.4 It was only in the late 1980s that a number of states began to abandon the Calvo Doctrine, and instead elected to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to join ICSID, to conclude Bilateral Investment Treaties (BITs), and to participate in various Free Trade Agreements (FTAs). All countries in South America have since ratified the ICSID Convention, except Brazil.

7.03

2 See for example Biggs, G. (2004) ‘The Latin American Treatment of International Arbitration and Foreign Investments and the Chile–US Free Trade Agreement’, ICSID Rev-FILJ 19, 61; Naón, H.A.G. (2005) ‘Arbitration and Latin America: Progress and Setbacks’, Arbitration International 21, 127–176. 3 Calvo, C. (1968) Derecho Internacional Teórico y Pratico de Europa y America [1868], Paris. See the discussion in Schrijver, N. (1997) Sovereignty over Natural Resources: Balancing Rights and Duties, Cambridge: CUP, 177–181. 4 Schreuer, C. (2001) The ICSID Convention: A Commentary, Cambridge: CUP, 1275–1276, and the works cited therein.

312 Chapter 7: Latin America 7.04

If this trend appeared to suggest a long-term shift away from the familiar economic nationalism, a closer review of the evidence suggests a more cautious interpretation. It is a fact that in the early 1990s onwards a number of states that were leading examples of this economic nationalism, such as Venezuela, Bolivia, Ecuador, and Peru, rejected such policies on Foreign Direct Investment (FDI) and actively sought to attract it with diverse programmes and initiatives. Among the instruments adopted was the so-called Legal Stability Agreement (LSA), a distinct contractual agreement concluded between the state and an investor, which has the effect of stabilizing the legal framework for the investment. Other guarantees were offered to investors, particularly by means of BITs, which during this period were concluded by Latin American governments with developed countries on an unprecedented scale.5 Chile, for example, concluded thirty-eight BITs, and Mexico eighteen.

7.05

By the turn of the century, this trend of ‘apertura petrolera’ (petroleum sector opening, although energy opening would be more accurate in regional terms) had stalled and in several states it was replaced by a sharp reaction to the economic liberalism of that brief period. Government regulatory actions against foreign investors, often for public policy reasons, have followed disenchantment with foreign investment and triggered several large claims by investors before international arbitral tribunals, especially ICSID. Bolivia denounced the ICSID Convention in 2007 and its withdrawal took effect on 3 November 2007 (see paras 7.13–7.15 below). Foreign investment is now subject to a 2015 Arbitration Act that requires arbitrations to be seated in Bolivia. Ecuador notified ICSID on 4 December 2007 under Art 25(4) that it no longer accepted ICSID jurisdiction over certain categories of dispute: specifically, disputes which arise from the extraction of natural resources such as oil and gas but also other minerals. In 2008 it denounced nine BITs, mostly with the country’s close neighbours, and in 2017 approved the termination of all its remaining BITs. Between 2009 and 2014 the Constitutional Court issued a series of decisions declaring that according to Article 422 the dispute settlement provisions in BITs were not constitutional. (Article 422 states that the government cannot enter into treaties or similar instruments where it ‘yields its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the state and natural persons or legal entities’.6) With the installation of a new government in 2018, Ecuador produced a new Model Bilateral Investment Agreement, and has taken several pro-investor steps in its legal regime. On 24 January 2012, Venezuela formally deposited its ‘irrevocable denunciation’ of the ICSID Convention, which took effect six months later, on 24 July 2012. At the time it had twenty cases pending at ICSID, second only to Argentina with twenty-five pending. A quite different approach was taken by Argentina which did not denounce the ICSID Convention but for many years managed to avoid making payments when an ICSID award so required.7

7.06

Many arbitral proceedings were triggered by the disputes from this period. The resulting awards brought successes for the respondent states as well as some losses, and damages awards that diverged considerably from the amounts claimed. They also led to a very 5 ‘Latin American countries have concluded over 380 treaties for the reciprocal promotion and protection of investments in order to promote their ‘investment friendly’ climate. They recognize that foreign investors take into account the existence of these treaties when assessing the political and legal risk profile of their potential investments in the region’: Blackaby, N. (2002) ‘Arbitration under Bilateral Investment Treaties in Latin America’, in Blackaby, Lindsey, & Spinillo, (eds) International Arbitration in Latin America, 379. 6 GAR, 3 July 2018: ‘Ecuadorean court to rule on constitutionality of ISDS clauses.’ 7 This began to change in 2016 when the government issued bonds for US$217 million to satisfy two awards related to gas transmission: an UNITRAL award in favour of the BG Group and an ICSID award in favour of the US company, El Paso. A further award was paid in 2017 with a bond sale for US$210 million to pay Total.

A. Introduction 313 considerable growth in knowledge and understanding of the procedural aspects of international dispute settlement, since many claims were challenged at the jurisdictional stage, and many awards led to applications for annulment, set-asides, and enforcement issues. Those that are publicly available are discussed in this chapter. In terms of energy investment, the words ‘apertura petrolera’ are significant. Until very recently, the experience of Latin America with foreign investment in energy has been in its oil and gas industry and later in its utility sector (electricity and gas). The bulk of available legal source material on energy investment in Latin America is concerned with investment and dispute settlement in these ‘traditional’ forms of energy (and in the energy-related area of mining). Yet, by the start of 2020, Latin America was attracting more foreign investment in its renewable energy sector than the Asia-Pacific region, to become the second most attractive region in the world for renewable energy investment, with ninety-seven projects valued at US$17.8 billion in the first ten months of 2019.8 Brazil, Chile, and Mexico lead in this sector, with Colombia and Argentina close behind.

7.07

This changing trend in energy investment should be noted when reading this chapter which is overwhelmingly concentrated on the traditional sectors. Moreover, much of the recent experience of dispute settlement in the energy sector fits into a narrative of ‘resource nationalism’. However convenient and indeed appropriate,9 it may not prove to be a pattern for energy investment in the future as the energy mix changes, although early indications suggest that these new resources will generate arbitrations in this region as they have done in other parts of the world.10 As a framing device for political risk, the notion of resource nationalism also oversimplifies the diversity of investor–state relations and the complexities of their respective histories vis-à-vis foreign investment. This applies as much in Latin America as elsewhere in the world. Two examples may serve to highlight this. A disproportionate number of Latin American cases appearing before ICSID have concerned Argentina, with disputes arising from measures taken by the host state in response to a severe national economic crisis in 2002–2003. This had nothing to do with resource nationalism, but the effects of unilateral state actions on investors’ interests were damaging nonetheless, leading to many claims being filed before ICSID and raising important questions for tribunals about investors’ legitimate expectations of the stability of a state’s legal and regulatory framework. A contrasting case is presented by Brazil, which has rejected the provision of investor security by treaty when it declined to ratify the fourteen BITs it concluded in the 1990s,11 or to join the ICSID Convention, which it has neither signed nor ratified, or to ratify two Mercosur Protocols on the promotion and protection of investments that include provision for investor–state

7.08

8 ‘Latam renewable energy investment hits record high’, Financial Times, 30 December 2019. 9 The hydrocarbons industry has been nationalized in Bolivia no less than three times in less than a hundred years: the first time was in 1937 and involved Standard Oil; the second was in 1969 and involved Gulf Oil, while the most recent, in 2006, has involved a number of international oil and gas companies. 10 An UNCITRAL claim against the Argentinian grid management company, CAMMESA, over a PPA to build a PV plant is only one indication of this emerging trend: GAR, 20 October 2020: ‘Argentine grid manager faces second PCA claim.’ 11 The majority were concluded with developed countries: Portugal (1994); Chile (1994); United Kingdom (1994); Switzerland (1994); Finland (1995); Italy (1995); Denmark (1995); France (1995); Venezuela (1995); Korea (1995); Germany (1995); Cuba (1997); the Netherlands (1998); the Belgium-Luxembourg Economic Union (1999). In spite of this, Brazil did introduce measures to stimulate foreign capital flows in the early 1990s, such as lifting private capital controls and removing specific restrictions on foreign capital in the petroleum and natural gas sectors; passing constitutional amendments from 1995–2002 to end public monopolies and open up new markets to the private sector, and adopting a specific policy to attract FDI in the provision of electricity, as well as telecommunications.

314 Chapter 7: Latin America arbitration.12 Yet it has achieved one of the world’s highest levels of FDI in spite of this, and the largest in Latin America.13 The reasons for this unique approach to investment have, at least on the face of it, nothing to do with resource nationalism. 7.09

Latin America provides us with a case study of the challenges by host states to the stabilization of long-term investments in the energy sector. As well as offering protection to investors by contract, many states in the region have introduced or enhanced protections for investors in their national laws, concluded BITs and adhered to ICSID, allowing recourse to investor– state arbitration. Moreover, in an unprecedented step, several states extended the opportunities for foreign investment beyond the traditional raw materials (oil and gas exploration and production) activities to include the generation of electricity, and transmission and distribution of electricity and gas. Have the many legal protections given to investors benefited them in the face of determined attempts by states (or more accurately, successor governments) to unilaterally amend existing contracts or the environment in which those contracts are operational? Further, we may ask if they have operated differently with respect to foreign investment in newly accessible parts of the energy sector than in the raw materials activities which have long been of interest to certain classes of foreign investor, both in Latin America and in many other parts of the world.

7.10

This chapter examines these questions in three main parts. Following a short introduction to the political context from which unilateral state measures have emerged (in B), sections C and D examine the distinctive approach to contract-based stabilization taken by several Latin American states as a way of attracting foreign investment: the use of LSAs. While the inclusion of stabilization clauses in petroleum exploration and production contracts between states and foreign investors is a well-established practice (see chapters 3 and 4), the LSA is a less familiar and more generic, contract-based instrument. In Latin America, it has been applied to investments generally and not only to energy investments. LSAs have also been tested by international arbitral tribunals, in contrast to the more recent (balancing) versions of stabilization clauses. Moreover, the adoption of BITs, and indeed the enactment of domestic legal protections for foreign investors have also offered the prospect of enhanced investment stability. Sections E to H examine state actions against several energy investors in four Latin American countries (Venezuela, Bolivia, Ecuador, and Argentina), and ask whether this additional combination of treaty-based protections with domestic legal instruments has fulfilled the promise made to prospective investors. In the first two states, the investments in question were in the petroleum sector, while in the case of Ecuador, they were in both the petroleum sector and electricity generation. In Argentina’s case, the investments in dispute crossed the full range of energy activities. They were also in dispute by virtue of a series of unilateral state measures that were justified by reference to a state of necessity or emergency in the national economy, making them (to date) unique in the region.

12 Protocol of Colonia for the Promotion and Reciprocal Protection of Investments (1993) (for investments made within the Mercosur bloc): (accessed 16 July 2020); Protocol of Buenos Aires for the Promotion and Protection of Investments from Non-Member Countries (1994) (for investments arising from non-Mercosur states): (accessed 16 July 2020). 13 In 2017 Brazil received US$62.7 billion in FDI, the seventh highest in the world, according to the UNCTAD World Investment Report 2018. As a capital exporting country Brazil has in recent years concluded BITs with several countries in the Global South such as Angola, Mozambique, and also in Mexico and Colombia.

B. The Pendulum Swings 315 B. The Pendulum Swings Foreign investment in Latin America’s energy sector has been significant over a period of several decades. For many years, the typical focus of investor interest was the oil and gas reserves of a few countries in the northern parts of the region. Important oil and gas discoveries were made in Venezuela in the 1930s in the area known as the Orinoco belt. Mexico had proven oil and gas resources even earlier. In 1972 oil fields were discovered in Ecuador in the East and in the Amazon area. In Bolivia, gas reserves were discovered in commercial quantities in the mid-1970s. In the 1990s, a more positive attitude to foreign investment in the development of these resources became evident in all countries with Mexico following a decade or so later.14 However, a new feature of this investment opening was the inclusion of other energy activities among those accessible to foreign investors: in particular, electricity generation, and in some cases, the transmission and distribution of electricity and gas. This new set of opportunities for investors arose from programmes of economic liberalization, characterized by privatization, deregulation, and trade liberalization, and affected a wide range of economic activities, not only energy.

7.11

The approach to foreign investment in the energy sector that was initiated by various governments in the 1990s was quite different in scope and ambition from anything that had ever been tried before. Government policy linked the attraction of investment flows to a policy of development of the national economy. This involved the establishment of a favourable investment regime by providing a variety of legal and contractual guarantees on the assumption that this would attract foreign investment on a large scale. In addition to the adoption of new or amended hydrocarbons laws, which usually allowed International Oil Companies (IOCs) to participate through some form of association with the National Oil Company (NOC), on condition that the foreign investor shouldered all of the exploration risk, domestic laws on foreign investment protection were introduced, and a policy of concluding BITs was adopted (see chapters 5 and 6). In the oil and gas sector, tax exemptions were introduced for new or difficult areas, stabilization measures were adopted to ensure the viability of long-term projects and some of the NOCs were dismantled or sold off (Bolivia, Argentina, and Peru), while others limited the monopolies of their NOCs and allowed private companies to enter the market (Brazil, Colombia). In Venezuela, which had nationalized IOCs’ assets in 1975 to 1976, several steps were taken to encourage oil resource development. The measures aimed at rejuvenating existing fields, developing the country’s resources of extra-heavy crude oil, and discovering new fields of medium and light crude oil outside of the traditional producing areas without either borrowing money or selling equity to private investors.

7.12

By the end of the 1990s this swing of the pendulum towards liberal, market-based reform had begun to change direction. New governments were elected in Venezuela, Ecuador, an, with mandates to limit this economic course and eventually to dismantle the favourable investment regimes. This did not happen suddenly: it began in Venezuela, but the new, reforming governments of Rafael Correa in Ecuador and Evo Morales in Bolivia were not elected until 2006. In the meantime, three developments had occurred. Firstly, the economic reform process in Argentina ground to a spectacular halt with an economic crisis in 2002–2003,

7.13

14 A new hydrocarbons law was adopted in 2013, modifications to the Constitution and secondary legislation, allowing several rounds of bidding, with a view to opening the sector up to foreign participation. The pace of reform has slowed since 2018.

316 Chapter 7: Latin America accompanied by unilateral measures to devalue foreign assets in the country. A significant number of claims were submitted to international arbitration as a result, many of which involved the country’s energy utilities. The second important development was the 1400 per cent increase in the prices of oil and gas between the end of 1998 and June 2008 (from just over US$10 to US$143).15 Finally, disenchantment with the results of the economic reform agenda of privatization and deregulation set in, leading to a reaction. As governments initiated unilateral measures to address the new context, they became aware of a notable difference between unilateral state actions vis-à-vis energy investments and previous experiences of changing economic policy: the foreign investment had been attracted by the establishment of an investment law regime that granted investors legal rights, including the right to register claims that such state actions constituted a breach of the legal guarantees granted to them under BITs or national laws.

(1) Venezuela 7.14

The pattern of treating foreign investment in Venezuela in the 1990s can probably be regarded as one that set an example for several other states in the region. It reversed a policy of oil nationalism which had established Petroleos de Venezuela SA (PDVSA) in 1975–1976 as the state-operated oil and natural gas company, and had terminated all concessions with foreign oil companies in force at the time.16 That nationalist policy had reserved to the state the exploration, exploitation, production, refining, storage, transportation, and commercialization of hydrocarbons. The result had been inefficiency in hydrocarbons production and indeed PDVSA had proved to be incapable of developing the country’s full resource potential due to limitations on available capital and expertise. When oil prices fell dramatically in the 1980s, these shortcomings had more serious economic implications for a country so dependent upon its revenues from oil exports. In the 1990s, Venezuela responded to this by opening its upstream oil sector to a limited degree of private investment.17 The collection of policies was known as the apertura. They introduced a wide range of incentives including tax benefits, with stabilization and only one per cent royalty levied on projects from the Orinoco Basin (where large quantities of extra-heavy crude oil and bitumen deposits were located). At the same time, a legal framework for investment protection was put in place to attract foreign investors. No fewer than twenty-five BITs were signed between 1993 and 2001 (and a further BIT with Iran in 2005 and Belarus in 2008). A modern investment law was introduced, Decree No 356, on 3 October 1999, to promote and protect investments,18 offering protections similar to those contained in a BIT.19 All of the BITs provide for recourse to investment 15 Blackaby, N. (2008) Presentation at AIPN/AAA Conference, Oil and Gas Disputes in Latin America, Rio de Janeiro, 21 October. 16 The sector had been nationalized and existing concessions with foreign investors ended as a result of the Organic Law that Reserves to the State the Industry and Commerce of Hydrocarbons (the Nationalization Law), Extraordinary Official Gazette No 1769, 29 August 1975. 17 In application of Art 5 of the Nationalization Act, which allowed the participation of private investments into the exercise of the reserved activities through association agreements previously approved by the National Congress. 18 Decree Law No 356 with Rank and Force of Law for the Promotion and Protection of Investments, Special Official Gazette of the Republic of Venezuela No 5.390 of 22 October 1999. 19 Article 22 has proved controversial since it appeared to offer ICSID arbitration to foreign investors. It states that disputes arising between an international investor whose country of origin has a treaty or agreement in force with Venezuela on the promotion or protection of investment to which the MIGA or ICSID Conventions are applicable shall be submitted to international arbitration according to the terms of the respective treaty or agreement. This is without prejudice to the possibility of using, when applicable, the judicial means contemplated in

B. The Pendulum Swings 317 arbitration, usually through ICSID (Venezuela ratified the Convention in 1995) but some also provide for ad hoc arbitration under UNCITRAL Rules. Others provide for arbitration under ICSID’s Additional Facility Rules and one provides for International Chambers of Commerce (ICC) arbitration. Venezuela also adopted a Commercial Arbitration Law in 1998,20 which was closely based on the UNCITRAL Model Law and became a party to the New York Convention on recognition and enforcement of awards.21 In the oil sector, a standard form of agreement was introduced, called the Operating Services Agreement (OSA or Convenios Operativos). This was a form of service contract (see chapter 2, paras 2.118–2.119), under which the investor was given the exclusive right to provide exploration, development, and production services to PDVSA or its affiliate within a given area. The contractor assumed all the risks and costs of the operations and was subject to certain minimum work commitments, which included compliance with reporting and approval obligations, but otherwise was left with control over its operations. In return, the contractor received a fee in cash, calculated according to various formulae.22 The contractor also received a direct reimbursement for certain payments made to purchase goods and services for the operations. All hydrocarbons produced had to be delivered to PDVSA or its affiliate, which retained all title, rights and interests in it, although the contractor had the right to purchase produced crude oil at a price pegged to market rates. All applicable royalties were also to be paid to PDVSA or its affiliate. They were subject to a normal service company corporation tax rate of 34 per cent instead of the 50 per cent rate applicable to oil-producing companies (although in practice that meant only PDVSA). In fields where PDVSA was unable to operate economically, auctions were held to attract new investors: in the first and second round auctions, twenty-seven oil companies were attracted, and fifteen oil fields were made available. Thirty-two of such OSA contracts were concluded between new IOC investors and a PDVSA subsidiary, PDVSA Petroleo SA.

7.15

Three other kinds of contract were used to attract foreign capital. Firstly, a Risk Exploration and Profit-Sharing Agreement was offered by PDVSA for eight blocks: risk/profit sharing arrangements were awarded which gave the PDVSA subsidiary, CVP, an option to purchase up to a 35 per cent equity stake in the project if the foreign operator discovered commercial quantities of oil at the exploration stage. Secondly, four Strategic Associations were established between Venezuela and IOCs, which applied to the production of extra-heavy crude oil, and in which PDVSA held a financial interest. Finally, an Association Agreement was awarded to produce heavy crude or a product known as Orimulsion. All these contracts were concluded between various affiliates of the state oil company, PDVSA, and foreign investors.

7.16

the Venezuelan legislation in force; see Eljuri, E. & Tejera Perez, V.J. (2008) ‘21st-Century Transformation of the Venezuelan Oil Industry’, J Energy & Nat Res L 26, 475–622 at 486, n 32. In October 2008 the Constitutional Chamber of Venezuela’s Supreme Tribunal of Justice (the Supreme Court) held that Art 22 is not an offer to arbitrate disputes before ICSID. This means that parties to a dispute cannot submit to arbitration at ICSID without additional authority such as a BIT or contract. The ruling was the result of a government request for interpretation of the Article (and Clause 258 of the Constitution), possibly in connection with its ongoing disputes with foreign investors before ICSID: GAR, 3 November 2008, ‘Venezuelan Court Rules on Article 22.’ 20 Venezuelan Official Gazette No 36.430 of 7 April 1998. 21 Venezuelan Official Gazette (Special Issue) No 4.832 of 29 December 1994. It ratified its regional counterpart, the Inter-American Arbitration Convention (the Panama Convention) in 1985. 22 They took into account the costs of operating the baseline production; the net value of the incremental production and certain chargeable expenditures specifically identified in the accounting procedures: Randón de Santó, H. (2008) El Regime Jurídíco de los Hidrocarburos: El Impacto del Petrolero en Venezuela (Caracas) 327–378.

318 Chapter 7: Latin America 7.17

The above regime was dismantled by a series of measures, consisting of three instruments of primary law, a number of presidential decrees, and various model form agreements for new contracts issued by the government.23 It began with the adoption of a new hydrocarbons law in 2001 (the Organic Law of Hydrocarbons (OLH, or Decreto con Fuerza de Ley Orgánica de Hidrocarburos)).24 Article 1 asserted that all hydrocarbon reservoirs in the national territory of Venezuela, including those under the territorial sea bed, the continental shelf, and the exclusive economic zone and within the national borders belong to Venezuela, are in the public domain, and are inalienable and not the subject of adverse possession. All activities related to exploration, extraction, gathering, transportation and the initial storage of hydrocarbons could only be carried out by the state directly, or indirectly through wholly-owned state companies, or through joint ventures or Mixed Companies (Empresas Mixtas),25 which were to be both controlled and more than 50 per cent owned by the state. Commercialization and export of hydrocarbons may only be carried out by wholly owned state companies.26 This measure triggered a debate about the legality of the existing OSA contracts. There were arguments based on the Civil Code of Venezuela and the non-retroactivity principle in the Constitution to support the view that the OLH could not affect previously acquired rights.27 However, the government insisted that the OSAs were illegal since they allowed privately owned oil companies a direct participation in the volumes and price of crude oil produced and were in effect disguised concessions.

7.18

In April 2005, the Minister for Energy and Petroleum declared that all OSAs signed by PDVSA were inconsistent with the terms of the Hydrocarbons Law and were therefore illegal. Holders of OSAs were required to negotiate a transfer to the new empresas mixtas under pain of losing their entire interests without compensation if they failed to do so by a state- imposed deadline. Transitional committees were established to allow the state to negotiate the migration process into empresas mixtas prior to making any compensation payments or a formal transfer to empresa mixta status. At the same time as these structure and control issues were addressed by the government, fiscal measures were adopted to increase royalty rates, and the tax authorities conducted wide-ranging audits to recover alleged unpaid ‘back taxes’ dating from 2001. Another measure included the discontinuation by PDVSA of payment of its full-service fee in US dollars. A second law was passed by the National Assembly in the same month which had the immediate effect of unilaterally terminating the OSAs.28 Known as the Regularization Law, it stipulated that contracts for petroleum activities could only be established under the empresa mixta regime, and the Venezuelan state or entities owned by it would henceforth take control of all petroleum production-related activities relating to the OSAs. Following the re-election of President Chavez in December 2006, a new,

23 For a comprehensive overview and analysis of the transformation of the Venezuelan oil industry, see Eljuri & Perez (2008) at 475–622. A collection of articles on various aspects of these events is contained in a special issue of OGEL (2008) edited by E. Eljuri. Many of the legal documents on Venezuela referred to in this chapter are available in English and/or Spanish at the OGEL website: (accessed 16 December 2009). 24 Official Gazette No 37.323 of 13 November 2001. The OLH was amended in 2006: Official Gazette No 38.443 of 24 May 2006; modified in Official Gazette No 38.493 of 4 August 2006. Ironically, one of the very few features of continuity over the years in Venezuela’s oil sector was its Hydrocarbons Law. Prior to this, the basic legislation had been the Hydrocarbons Law of 1943, modified in part in 1967: Official Gazette No 1149 of 15 September 1967. 25 OLH, Arts 9 and 22. 26 OLH, Arts 27, 56, and 57. 27 Keffer, J. & Vargas, M.V. (2006) ‘Venezuela: Migrating Away from the Apertura Petrolera’, OGEL Special Issue on Venezuela, 2–3. 28 The Law of Regularization of Private Participation in Primary Activities: Decree No 1.510, 18 April 2006, Official Gazette No 38.419 of 18 April 2006.

B. The Pendulum Swings 319 enabling law was passed which authorized him to proceed with fast-track nationalization plans and rule by decree for eighteen months in eleven different economic sectors. A second round of expropriations began with the Presidential Decree No 5200 (the Migration Law), which expropriated the foreign interests in heavy oil projects in the Orinoco Basin, and created new joint venture companies with PDVSA taking a majority equity interest. A deadline of 30 April 2007 was given to the existing contractors to negotiate new terms and conditions to fit this framework. Under this new regime, Venezuelan law was to govern all disputes with domestic courts having jurisdiction. Although the National Assembly recommended that the executive should denounce the ICSID Convention in 2008,29 it has to date refrained from taking that step. In terms of the outcomes of this process, most IOCs agreed to renegotiate and signed up to the new terms, amounting to more than twenty contracts. The government’s promise to respect the strategic associations for the complex production of extra-heavy crude oil from the Orinoco Basin area was not kept. In 2007 the four associations were required to migrate to new structures with majority PDVSA ownership. Six companies were involved in these projects and two agreed to reduce their holdings to permit a larger PDVSA share (Total and Statoil), two maintained their previous stakes (Chevron, BP) and two rejected the government’s offer (ExxonMobil and ConocoPhillips), preferring to pursue arbitrations through ICSID and ICC. Venezuela then failed to renew its BIT with the Netherlands with effect from 1 November 2008,30 and renewed its threats to withdraw from ICSID. Its subsequent attempts to attract foreign investment shifted to the internationally operating NOCs from China, India, Iran, and Russia. In May 2009 it introduced a new law to take state control over assets and services related to the performance of oil and gas activities.31

7.19

(2) Bolivia Throughout the 1990s Bolivia introduced incentives to foreign investors. A total of 22 BITs were entered into between 1990 and 2001, and a Foreign Investment Law 1182 was introduced in September 1990. In 1996, a new Hydrocarbons Law allowed the conclusion of Shared Risk Contracts (SRCs), which gave a foreign company the right to prospect, explore, extract, transport and market oil production.32 They also included a right to free disposal of oil subject only to ensuring that domestic demand was satisfied. Payments to the state were stabilized for the duration of the contract; royalties amounted to 18 per cent in non-traditional areas, while participation was 6 per cent of production. In terms of market opening, the state-owned oil and gas company, YPFB, unbundled its assets into three companies: Andina and Chaco (E&P activities), and Transredes (pipeline transportation), and opened 29 National Assembly’s Accord of 12 February, No 2998, in Official Gazette No 38.869 of 13 February 2008. 30 In the absence of a BIT between Venezuela and the US, this was a popular BIT for several US corporations which have subsequently brought cases before ICSID: Fedax, I&I Beheer, as well as ENI, ExxonMobil, and ConocoPhillips. Article 14.3 of the BIT contains a survival clause: ‘In respect of investments made before the date of the termination of the present Agreement the foregoing Articles thereof shall continue to be effective for a further period of fifteen years from that date’. This raises issues such as whether or not dividends reinvested from existing projects will be treated as new investments and therefore outside the scope of the survival clause. 31 The Organic Law that reserves to the State the Assets and Services related to Primary Hydrocarbons Activities, Official Gazette No 39, 173 of 7 May 2009. This followed an extraordinary profits tax measure introduced a year earlier: Official Gazette No 38, 910 of 15 April 2008. 32 Law No 1689/96. In practice, and in spite of its official designation, this was a tax/royalty regime where the contractor carried the exploration risk and costs, with no actual cost sharing with the state.

7.20

320 Chapter 7: Latin America up their capital. Entities were established called Sociedades Anonimas Mixtas with a capital contribution plus minimum investment obligations. In addition, a Gas Sales and Purchase Agreement of up to 30 MM m3/d was concluded with Brazil, which agreed to finance the construction of a cross-border pipeline between the two countries. Other portions of YPFB were privatized, giving birth to CLHB (a liquids pipeline and logistics company) and EBR (comprising the largest refineries). The new regime led to the entry of several IOCs into the country: Total, BG, BP, Petrobras and Repsol. 7.21

The dismantling of this investment regime began in July 2004 with the Hydrocarbons Referendum, where the majority of Bolivian citizens voted in favour of the state’s taking back full ownership of the country’s hydrocarbons resources. Subsequently, a New Hydrocarbons Law (Law 3058) was adopted in 2005.33 This had a number of consequences: the shares held in the capitalized companies (Andina, Chaco, and Transredes) by investors were returned to the state (a renationalization); the right of property over petroleum at the wellhead was returned to the state; the Superintendency of Hydrocarbons was empowered to determine the price of hydrocarbons; a direct hydrocarbons tax was introduced with a flat rate of 32 per cent of the value of production at the measuring point, in addition to the existing 18 per cent34 (this was indistinguishable from the royalty established under section 55 of the previous Hydrocarbons Law) and mandatory new contracts were introduced for foreign companies, challenging the legality of the SRCs. A further legislative step was taken by the Heroes del Chaco Decree of 1 May 2006,35 in which an obligation was imposed on oil companies to deliver their production to the NOC, YPFB, which was charged with commercializing all oil and gas produced in the country (determining the conditions, volumes and prices for sale in both domestic and export markets); a deadline of 180 days was set for the conclusion of negotiations on new contracts,36 under threat of a forced taking of operations and an ‘additional participation’ charge of 32 per cent had to be paid to YPFB on the value of production in the major gas fields, defined as fields that produced more than 100 mmcfpd of gas in 2005. This covered a six-month period from May to October 2006 and was in addition to the existing 50 per cent and the payment of any applicable taxes.

7.22

Subsequent measures to implement the Heroes del Chaco Decree included an audit of the returns of and investment by each of the oil and gas producing companies by the Ministry of Hydrocarbons and Energy which would form the basis of an assessment of appropriate terms for the contracts to be renegotiated; adoption of Ministerial Resolution 202/0637 by the Ministry which established a payments schedule for the six-month additional charge of 32 per cent to YPFB; finally, army and police reinforcements were sent to the gas fields and oil company installations. In March and June 2008, a direct nationalization of all Transredes shares was ordered by Decrees Nos 29272 and 29586. The shares in Andina and CLHB were also nationalized. Andina agreed an ‘amicable’ nationalization with the state while CLHB opened negotiations with a view to obtaining a fair compensation for the seizure of its assets.

33 Law No 3058 of 17 May 2005; Official Gazette, 19 May 2005. For an overview of these events, see Arias, D. (2008) ‘10 Años de Cambios del Marco legal y Contractual’, Petróleo & Gas 55, 42–49. 34 Introduced by Law No 1689 on 30 April 1996; Official Gazette No 1933. 35 Supreme Decree No 28701; Official Gazette, 1 May 2006. 36 In effect, this is a service contract form, whereby the contractor to YPFB agrees to carry out operations at its sole risk and expense, in return for reimbursement of certain costs and a fee. Production is sold by YPFB, and proceeds are divided as follows: first, royalties of 18 per cent and a direct tax of 32 per cent are taken by the state; then, the contractor is reimbursed for the contractually recoverable costs. 37 31 August 2006.

B. The Pendulum Swings 321 In terms of outcomes, renegotiations took place between the state and oil companies under the threat of arbitration proceedings. Nearly all foreign investors operating in the sector submitted notification of disputes under the arbitration provisions of the relevant BITs. However, arbitration was avoided since all foreign investors concluded new Operation Contracts. Agreements were reached for the state’s purchase of shares in Andina, Chaco, and Transredes, and for an orderly transfer of the shares. CLHB is still negotiating a fair compensation and may yet have recourse to arbitration. Bolivia announced its intention to withdraw from ICSID in May 2007, which took effect later that year.

7.23

(3) Ecuador A favourable investment regime was established from the early 1990s. Ecuador entered into fourteen BITs between 1994 and 2001, adopted a Foreign Investment Law in 1997,38 and a Law on Arbitration and Mediation in the same year.39 It also acceded to ICSID.40 Attempts to revitalize the hydrocarbons industry had started earlier in the 1980s with six bidding rounds between 1983 and 1993 to offer private investors a service contract. The State remains owner of the produced oil and benefits from higher revenues accruing from increases in the price of oil. It covers the contractor’s costs and pays a monthly fee. Only a few bids were received however and in response, an amendment was made to the Hydrocarbons Law in November 1993 which permitted the use of PSCs and transformed existing service contracts into ‘participation contracts’ (similar to a PSC). At that time, the low price of oil (at around US$15 per barrel) made service contracts too expensive for the state. Under the new contracts, the contractor would assume all the costs of investment and expenses in exploration and production with the infrastructure to be transferred to the state. Investors were granted exclusive rights over a participation share of produced oil, a free right of disposal of oil at international prices if required to market the oil domestically for domestic supply. Tax stabilization was provided: a limit on the fiscal burden was established so that if the tax regime was modified, there was a right to adjust the share of production to offset the economic impact of the tax change. Royalties were exempted too. It proved successful in attracting large-scale investment.

7.24

The principal measure that dismantled this regime was the measure known as Law 2006-42, or the Law Amending the Hydrocarbons Law (Law 42). It was introduced in April 2006 and implemented by Decree 1672 in July 2006. Certain revenues were classified as ‘extraordinary’ when they derived a sales price for oil that was well above the price in effect at the time the contracts were signed by PetroEcuador. For such revenues, the contractors were required to recognize in favour of the state a participation of at least 50 per cent. The choice of this level of percentage change in the participation share appears to have been an attempt to avoid triggering the correction factor required by the stabilization clause in existing contracts (see chapter 3, para 3.57. This operated to ‘correct’ the production sharing percentage to absorb any increase or decrease in the tax burden. Subsequently, in October 2007, a further measure applied powers taken under the Hydrocarbons Law 2006 Decree 662 to increase the share of these ‘extraordinary’ revenues from 50 to 99 per cent. The measures were accompanied by

7.25

38 Investment Promotion and Guarantee Law, Official Register (OR) No 129, 19 December 1997. 39 OR No 417, 14 December 2006. This follows the UNCITRAL Model Law, but in practice has not been much used compared with dispute settlement through the courts. It was amended in 2005. 40 The ICSID Convention entered fully into force on 21 April 2001: Executive Decree No 1417-B, published in OR No 309, 19 April 2001.

322 Chapter 7: Latin America threats from the authorities that if the increased share were not granted, there would be a requirement imposed on the contractors concerned to return the fields to the state with immediate effect. Ecuador also announced that under Article 25(4) ICSID it no longer consented to ICSID arbitration in disputes relating to natural resources under Article 25(4) ICSID41 and subsequently, it denounced the ICSID Convention in its entirety.42 A new Constitution was adopted following a referendum in September 2008. Its provisions included a prohibition on the state from entering into international treaties or agreements that waive jurisdiction to permit international arbitration on commercial or contractual issues, functioning as a version of the Calvo Clause.43 A little more than ten years later, in June 2021, Ecuador rejoined the ICSID Convention, with ratification following by Presidential Decree in July. 7.26

In terms of results, these domestic measures for the hydrocarbons sector generated three claims before ICSID, as well as one UNCITRAL claim. Negotiations to settle the claims were unsuccessful and arbitral proceedings commenced (see Section G below). The partial denunciation of ICSID had no impact upon the contractual claims and it is doubtful if it had an impact upon any other claims. Under so-called survival clauses, treaty protections would continue to be available for a further period of ten years, for ‘investments made or acquired prior to the date of termination’.

(4) Argentina 7.27

From 1990 onwards, the state acted to sweep away a state-controlled regime for all forms of energy. At this time, the state controlled all phases of the oil and gas industry and the provision of energy services such as electricity and gas. In the oil industry, the state-owned Yacimientos Petrolíferos Fiscales SA (YPF) had a monopoly, with private companies able to carry out exploration and production only on the basis of service contracts to YPF. The natural gas transmission and distribution networks were owned and controlled by state-owned companies. Both oil and gas produced domestically had to be delivered to the state companies under a controlled pricing regime. During an economic crisis, characterized by deep recession and hyperinflation, a new government was elected in 1989, led by Carlos Menem,

41 The text in the letter sent to ICSID reads as follows: ‘The Republic of Ecuador will not consent to submit to the jurisdiction of the International Centre on Settlement of Investment Disputes (ICSID) the differences arising on matters pertaining to treatment of investments deriving from economic activities relating to the utilization of natural resources such as oil, gas, minerals or others. All instruments containing the willingness previously expressed by Ecuador to submit those disputes to the jurisdiction of the Centre and not yet finalized by means of the express and explicit consent of the other party before the date of presentation of this notice are withdrawn by Ecuador, with immediate effect as of this date.’ 42 On 6 July 2009 the World Bank received a written notice of denunciation of the ICSID Convention from the Republic of Ecuador. In accordance with Art 71 ICSID, the denunciation took effect six months after the receipt of this notice (that is, 6 January 2010). 43 Art 422. This has no effect upon the international treaties to which Ecuador was a party before the new Constitution entered into force. In the minutes of the debate in the legislature the Calvo approach is clear: the Article ‘takes up an aspiration having had much national support as a consequence of the abuses that have impaired Ecuador’s juridical sovereignty. That provision expressly states that it will not be possible to enter into international conventions or treaties compelling the Ecuadorian state to waive jurisdiction to international arbitration venues involving contractual or commercial matters. Historically, Ecuador has executed treaties that have been considered detrimental for the country’s interests because they transfer jurisdiction and venue in cases of companies to supranational arbitration venues where, it seems, the states are placed at the same level as a commercial company’: report from the majority, Working Group 9, National Constituent Assembly, 14 April 2008, cited in Jijon-Letort, R. & Robalino-Orellana, J. (2009) The Arbitration Review of the Americas 2009, Ecuador: National and International Arbitration in Ecuador.

B. The Pendulum Swings 323 and it began an ambitious recovery programme which included privatization, deregulation and trade liberalization. It also included the Convertibility Law, which ordered the implementation of a fixed exchange rate, pegging the Argentine currency to the US dollar. In the 1990s Argentina concluded over fifty BITs.44 The state energy companies were privatized, and regulatory agencies established to oversee the energy industries: notably, gas and electricity production, transmission and distribution. Private companies were awarded oil and gas concessions directly by a state agency and concessionaires owned production at the wellhead. The fiscal regime for oil and gas production became a low tax one with a 12 per cent royalty, and limited bonus payments and area fees payable. This regime was dismantled following a new economic crisis that developed in the late 1990s. By 2001, a financial crisis had developed in the wider economy, making it impossible to maintain the fixed exchange rate and leading to the greatest default on foreign debt in history and the collapse of Argentine financial markets. Argentina enacted Emergency Law 25,561 followed by other laws and decrees (the Emergency Laws). The principal result of this was the amendment of Law 23,928 of 1991, which had fixed the currency (peso) to the US dollar at parity (1 peso = US$1). Within twenty-four hours the exchange rate sank from parity to four pesos to the US dollar. The legislation provided alternatives for the settlement of differences between parties who had entered into agreements on the assumption and with the expectation that parity between the currencies would continue. It also provided for the renegotiation of private and public agreements to adapt them to this exchange system. Public service contracts which established tariffs and prices for public services were to be calculated in pesos, instead of US dollars, eliminating among other things, all indexing mechanisms.

7.28

By a separate decree, natural gas transmission and distribution licences were made subject to mandatory renegotiation by a government committee. The government was free to sign or to rescind the contract. A further measure instructed the state regulatory agency to discontinue all tariff reviews and to refrain from adjusting tariffs or prices. A subsequent measure in 2003 extended the renegotiation process in which investors had to participate under threat of having their contracts rescinded. Exploration and production of gas and oil was affected by the emergency. Domestic prices were reregulated and exports (mainly to Chile) were restricted and taxed. A new state-owned oil and gas company was established: Energía Argentina (Enarsa). It lacks capital and needs to be carried through the exploration stage. Fiscal incentives are only available to companies which agree to associate with Enarsa. Article 19 of the Emergency Law described its measures as having a public order character. However, most of the disputes that concerned the scope of its applicability could be the subject of a transaction and were therefore arbitrable.

7.29

The outcomes of this dismantling of the investment regime are dominated by the large number of disputes brought before ICSID and various enforcement proceedings that have followed. However, a decline of investment in gas and oil development has also occurred, bringing with it fuel and power shortages. Domestic shortfalls of gas have been made up from imports from Bolivia through Enarsa, paid for at a higher price than the domestic, regulated one. Argentina has also attempted to oppose the enforcement of ICSID awards in

7.30

44

UNCTAD (2000) Bilateral Investment Treaties 1959–1999, UNCTAD/ITE/IIA/Z, Geneva: United Nations.

324 Chapter 7: Latin America its courts with the argument that the Constitution prevails over international treaties, permitting a review of an ICSID award.45 C. The Legal Stability Agreement 7.31

The most striking innovation in contract-based stability has been the introduction of legislation by six Latin American states to authorize their governments to use special agreements for the provision of state guarantees to a particular investor. Legislation for such LSAs was introduced first by Peru,46 and then Chile,47 Colombia,48 Ecuador,49 Panama,50 and Venezuela.51 Although the progress of such LSAs has been chequered, they have been widely used in some of these countries and one of them triggered a dispute that led to an ICSID award on the subject of tax stabilization, discussed in section D below.

7.32

An LSA in these countries has the effect of reinforcing rights and protections that are already available to all investors under the country’s investment law and its legal regime in general. The host government offers a contractual guarantee through the LSA as an added protection of the stability of some of these rights and protections, both express and implied. Because the authorization to enter into these agreements and sometimes the very approval process applicable to a specific LSA arises from a legislative act, LSAs are held by some to ‘enjoy a stronger legal platform than stabilization clauses’.52 In practice, legislation has been used in some countries to provide for stabilization or to authorize a particular contract that contains a stabilization clause (Kazakhstan, Azerbaijan, Egypt, and Syria are examples: see chapter 3) . In this case, however, the instrument created by law is a dedicated stabilization instrument, almost like a stabilization clause writ large and elaborated in great detail.

(1) Peru 7.33

Of the countries that adopted LSAs, Peru has been the most active in using them. They were often linked to the privatization of state assets between 1992 and 2003, during which time more than six hundred LSAs were concluded. Twenty-nine per cent of these concerned privatized companies. The legal basis for entering into these LSAs was in legislation adopted in the early 1990s to attract and protect foreign investment, reversing the policies of previous governments. The LSAs typically incorporate by reference the relevant guarantee provisions

45 Alfaro, C.E. & Lorenti, P.M. (2005) ‘The Growing Opposition of Argentina to ICSID Arbitration Tribunals: A Conflict between International and Domestic Law?’, J World Inv & Trade 6, 417: such actions are in violation of ICSID Arts 53 and 54 on the finality of awards. 46 Framework Law for the Development of the Private Investment, Legislative Decree No 757 of 8 November 1991, Arts 38–45; Foreign Investment Law, Legislative Decree No 662 of 29 August 1991, Art 10; Regulation of the Guarantee Regimes for Private Investment, Supreme Decree 162–92 of 9 October, 1992, Arts 24–28. 47 Foreign Investment Statute: Decree-Law No 600 of 16 December 1993, Art 8. 48 Law 963 of 2005, Art 1. 49 Law on Promotion and Guarantee of Investment: Law No 46, R/O219 of 19 December 1997, Art 30. 50 Law No 54 of 22 July 1998. In contrast to the other countries mentioned, it is not necessary for the investor to enter into a separate agreement to benefit from the stabilization guarantees. Protection arises automatically from completion of the investment registration process. 51 Law on Promotion and Protection of Investments: Decree No 356 of 3 October 1999, Art 17. 52 Vielleville, D.E. & Vasani, B.S. (2006) ‘Sovereignty over Natural Resources Versus Rights under Investment Contracts: Which One Prevails?’, OGEL Special Issue on Venezuela.

C. The Legal Stability Agreement 325 of these laws. LSAs represent at least US$14 billion in investment commitments and at least US$9.9 billion has been collected by the Peruvian Treasury as a result of investments made under these LSAs.53 By September 2008 there were 680 LSAs in force (they are public documents and are accessible through a government website).54 A recent example involving AEI Peru Holdings, a company registered in the Cayman Islands, and a Colombian-based entity, Promigas, was concluded on 6 December 2007, and comprised ten articles in a seven-page document.55 The legal consequences of an LSA are set out in the Foreign Investment Law and the Investment Regulations.56 A party protected by the LSA:

7.34

will continue to be subject to the same legislation in force at the time of the agreement’s execution, without being affected by the amendments thereto on the matters and during the term foreseen in such agreements, including the derogation of legal rules, even in the case of more or less favourable provisions.57

The tribunal in Duke Energy v Peru summarized the legal character of LSAs in the following manner: [P]‌ursuant to the investment laws of Peru, the main features of LSAs are that (i) the stabilized legal regimes cannot be changed unilaterally by the state, and (ii) the agreements are subject to private or civil law and not administrative law. As private-law contracts, the negotiation, execution, interpretation and enforcement of the provisions set forth in LSAs are subject to the general principles applicable to contracts between private parties under the Peruvian Civil Code. As such, the fundamental rights granted by Peru pursuant to an LSA are private contractual rights that are enforceable against the state as if it were a private party.58

Further clarification is provided by Article 39 of the Peruvian Investment Law, which states:

7.35

Legal stability investment agreements shall be concluded subject to Article 1357 of the Civil Code and shall have the [legal] effect of contracts enforceable as law, such that they may not be modified or terminated unilaterally by the state. Such contracts shall have a private rather than administrative character and shall only be modified or terminated by agreement between the parties.

These principles are reinforced by Article 26 of the Peruvian Private Investment Regulations, which emphasize that the agreements are civil law contracts, governed by the Civil Code, and have the force of law between the parties so may not be unilaterally amended for any reason while they are in force. They are also guaranteed by the Peruvian Constitution. Article 62 states that through ‘contracts-law [special investment-related private contracts of a 53 Ibid, at note 59, citing a ‘recent study’ as the source. 54 ProInversion: the agency responsible for the promotion of private investment in Peru, at (accessed 16 December 2009). 55 Convenio de Estabilidad Jurídica con AEI Peru Holdings Ltd, de Islas Caiman, y Promigas SA ESP de Colombia. 56 Respectively, the Legislative Decree No 662; Regulations of the Regime to Guarantee Private Investment, approved by Supreme Decree No 162-92-EF. An Annex to the Investment Regulations contained the standard text for all LSAs. 57 Private Investment Regulations, Art 24. 58 Duke Energy International Peru Investments No 1 Ltd v Peru, Decision on jurisdiction; ICSID Case No ARB/ 03/28; IIC 30 (2006), 1 February 2006, at para 31.

7.36

326 Chapter 7: Latin America mandatory character], the state may establish guarantees and grant securities. These may not be modified by legislation . . .’. 7.37

Specifically, there are five sets of rules that are stabilized for foreign investors under the LSA regime:59 (i) The rules of the tax regime60 A foreign investor may not be subject to a higher tax than that contemplated by the various LSAs relating to the investment in relation to (a) the income tax payable by the target company that is the recipient of the investment; (b) the taxes imposed on the profits attributed to the target company; or (c) the dividends distributed by the target company. Faced with an increase in income tax as a result of actions by the government, the investor is entitled to receive compensation in an amount equal to that increase. This protects the investor’s net return on the investment for the term of the stabilization that the government has agreed to. (ii) Stability of the right to non-discrimination61 The LSA guarantees that the government will treat the foreign investor and the enterprise in which it invests on an equal basis with Peruvian nationals. Both foreign and Peruvian investors have identical rights and obligations irrespective of nationality, geographic location or sector of economic activity they are engaged in. (iii) Stability of the right to use the most favourable rate of exchange62 Foreign investors are granted the right to use the most favourable rate of exchange that is available. (iv) Stability of the free availability of foreign currency63 Foreign investors are granted the right of access to foreign currency at the most favourable rate of exchange that is available. (v) Stability of the right of free remittance64 Foreign investors are guaranteed the right to transfer profits, capital, and dividends abroad without any restraints. The investor is permitted to do so in freely convertible currency and does not need to obtain prior authorization from governmental entities.

7.38

The stability regime that results from this use of LSAs is one in which the state contractually reinforces a set of constitutional and legal guarantees to provide further protection to private investment, and voluntarily agrees to limit its sovereign right to terminate or modify unilaterally its agreements with a private party. The idea is to protect the investor’s legitimate and investment-backed expectations on the return on its investment. Since the LSAs are private law contracts, they are subject to the principle of good faith which is enshrined in Peru’s domestic law. Under this principle, the LSAs have to be interpreted in the light of the meaning and purposes which both parties shared when concluding the agreements. Conduct which is contrary to these mutually shared expectations will constitute a breach of the LSAs.

7.39

It should not be assumed that this model of LSA is one that was universally adopted among Latin American states. Ecuador elected to restrict the scope of its LSAs by providing for the stability of the tax regime and no more.65 Colombia included a general provision which established the stability of those regulations identified in the LSA as essential to the agreement

59

Foreign Investment (FI) Law and Private Investment Regulations (PIR). FI Law, Art 10(a); PIR Arts 19(a) and 23(a). FI Law, Art 10(c); PIR Art 19(e). 62 FI Law, Art 10(b); PIR Art 19(d). 63 Ibid. 64 Ibid. 65 Law on the Promotion and Guarantee of Investment, Art 22; repeated in the Award (2008) at para 44. 60 61

C. The Legal Stability Agreement 327 which formalizes the investment. Panama provided the stability of its customs and employment regimes and expressly included any legal provision affecting acquired rights to the extent that the measure is taken for a public purpose. Venezuela took a different approach, which is examined at some length below.

(2) Venezuela Another country that was active in the design of LSAs was Venezuela. In a Presidential Decree in 1999 the idea of an LSA was introduced, to be concluded by the parties before the actual investment is made.66 Both Venezuelan and foreign investors would be able to execute an LSA with the relevant National Competent Agency of the government. Through the LSA, the government would guarantee that certain economic conditions would remain constant for the investment made on or after 22 October 1999, so that the investment would be unaffected by any less favourable regulations introduced subsequently during the term of the LSA.

7.40

The stability provided by an LSA was only to extend to one or more of the following three elements. Firstly, it could apply to the stability of the regime of national taxes (but not state or municipal taxes) in force at the time of execution of the LSA. Secondly, it could apply to the stability of the regime of promotion of exports. Finally, it could apply to the stability of one or more specific benefits and incentives to be identified in a Presidential Decree. If the stabilization was to extend to national taxes, it had to first receive the prior favourable opinion of the National Integrated Service of Tax Administration and the prior authorization of the National Assembly. The maximum term of an LSA is ten years. If the investor breached the LSA, the government had the right to terminate it, and may impose appropriate contractual penalties on the investor, and suspend any benefits or incentives from the time that the breach occurs.

7.41

In July 2002 the requirements and conditions applicable to LSAs were elaborated in Regulations.67 They set out conditions for eligibility to sign an LSA. Parties eligible to sign an LSA on the government side included the Minister of Energy and Mines and the Finance Minister. On the investor side, eligible parties were the company receiving the investment or the investors that participated in such recipient company. Where joint ventures were involved, the investors were the parties that signed the LSA. The relevant recipient company or the investors had to comply with conditions that included the following:

7.42

(i) the recipient company or investor had to be an individual, legal entity, joint venture, or consortium, with full capacity to enter into such agreement and to prove its economic, financial, technical, and professional standing; (ii) it had to submit an investment project, which would be the object of the LSA; and (iii) it had to satisfy at least one of a number of criteria, such as: creation of fifty or more new direct employment posts; submit an agreement that would lead to the 66 Presidential Decree No 356 for the Promotion and Protection of Investments, 22 October 1999. For a discussion of the Presidential Decree, see Venezuela Protection and Promotion of Investments Bulletin, published by Despacho de Abogados miembros de Macleod Dixon, 26 March 2001. 67 Presidential Decree No 1.867. For a discussion of the Decree, see Bulletin on the Regulations to the Protection and Promotion of Investments Law, published by Despacho de Abogados miembros de Macleod Dixon, 26 July 2002.

328 Chapter 7: Latin America production and competitiveness of the Venezuelan companies involved; include technology transfer to the recipient company, and include an element of training of personnel and to carry out research and development, with the cooperation of Venezuelan universities or research centres. In the event that Venezuelan legislation enacted after the execution of an LSA established a more favourable regime than the one established by the LSA, the parties had the right to adjust the terms of the LSA for the purpose of adopting the new regime. However, this did not result in any change to the original duration of the LSA. Both parties to the LSA would have to agree to such adjustment. 7.43

However interesting this LSA regime may appear, its practical impact is unknown since no LSA has ever been signed under the Decree.

7.44

In an interesting coda to the LSA episode in Venezuela, an action was brought to the Constitutional Chamber of the Supreme Tribunal of Justice, claiming that the Decree was unconstitutional. In particular, the petitioners argued that the introduction of stabilization agreements violated the Constitution. The measure limited the Republic’s powers to tax and restrained the freedom of the National Assembly to legislate on matters within its competence. In addition, the LSAs would discriminate against national investors (in violation of the Constitution); the requirements to execute an LSA were also more demanding for national investors than for foreign investors. Further, they argued that the Decree’s provisions for recourse to international arbitration as a method for resolving any disputes that arise from the interpretation and scope of application of LSAs was in breach of public policy and set aside the powers of the Venezuelan courts. The Chamber issued a Decision on 14 February 2001, dismissing all of these claims. The provision establishing the right to conclude an LSA did not create, modify or extinguish any kind of taxes, nor did it regulate or define any of the elements of a tax. An LSA would in fact have to be approved by the National Assembly following a favourable opinion from the tax authority, giving them the character of legislative acts rather than contracts. Moreover, under the Constitution the legislator is expressly required to encourage arbitration. However, it added a less encouraging note for investors that in disputes concerning public interest contracts and issues affecting public policy, the competent authority to review such cases is the Venezuelan courts under the Constitution.

(3) Colombia 7.45

Commencing rather later than its neighbours, Colombia introduced Law 963 on 8 July 2005 which provided a legal basis for the conclusion of LSAs. Under this regime,68 an LSA gives the investor an assurance that if certain legal provisions specifically identified in the individual LSA are adversely modified or eliminated, the investor is entitled to require their continued application throughout the remaining term of the LSA. The minimum duration is three years, extending to a maximum of twenty years.69 It applies to laws, decrees, and administrative acts of a binding character as well as binding interpretations that are issued by

68 For a detailed analysis of the operation of the Colombian LSAs in their early years, see Pereira, A. (2013) ‘Legal Stability Contracts in Colombia: An Appropriate Incentive for Investments?’, Rich J Global L & Bus 12, 237–278. 69 Procolombia: (accessed 22 July 2021).

D. Testing LSAs: Peru and Ecuador 329 government entities, regulatory commissions, and autonomous regional corporations, and other entities and agencies that enjoy a special status under the Constitution (but not the Central Bank). For an investment to qualify for protection under an LSA, it must be destined for new projects or additions to an existing project and must be directed to certain sectors, including oil, mining, electricity generation, or the efficient use of hydro resources. Excluded from the scope of an LSA are provisions on social security, taxes, or other mandatory instruments that the government may impose during a state of emergency; indirect taxes; regulations of the financial sector; and tariffs for public services. An important exclusion from the scope of an LSA is the category of changes made with respect to measures or interpretations by regional state bodies: an LSA cannot provide for international arbitration. The law requires that any provision for arbitration in dispute settlement is to be exclusively governed by Colombian law, the venue must be Colombia and the arbitrators must be Colombian citizens. However, as one observer notes, arbitration in Colombia is ‘fairly and adequately regulated and developed, as Colombian arbitration laws essentially follow the model arbitration law of UNCITRAL’.70 Yet in spite of this track record of LSAs in parts of Latin America, several of the countries that introduced them have subsequently elected to revise existing contracts with investors in the energy industries, in ways which have triggered international arbitrations in some of the cases. The clearest example of a challenge to an LSA was in the Duke Energy case brought against Peru.

7.46

D. Testing LSAs: Peru and Ecuador Several cases have arisen in which the LSAs granted by states have been used to support claims by investors that a specific action or actions have constituted a breach of the stability guaranteed by these agreements. While some cases are pending, there have already been a number of awards that provide an indication of how these stability guarantees are going to be interpreted by arbitral tribunals. Of interest is the interaction between the LSAs, the relevant BITs, and the law of the host state concerned, in offering the investor potential ‘layers’ of protection. In this section, two awards are considered that arise from LSAs granted in Peru, and one case involving an LSA granted by Ecuador in which the investor agreed to settle the dispute before it reached the award on merits stage. Their wider significance—beyond the Latin American context—lies in the character of an LSA as a very detailed, elaborated version of the stabilization clauses that are commonly found in contracts on the international energy scene.

7.47

(1) Duke Energy v Peru The first known case in which an arbitral tribunal pronounced on alleged breaches of an LSA between an investor and a host state was in the ICSID case between Duke Energy International (DEI), a Bermuda-based corporation, and Peru.71 The LSA had the objective 70 Vargas, M.V. (2005) ‘Colombia Approves Legal Stability Law’, Latin American Law & Business Report 13(7), 16–17. 71 Duke Energy International Peru Investments No 1, Ltd v Peru, Award and Partial Dissenting Opinions; ICSID Case No ARB/03/28; IIC 334 (2008), 25 July 2008 (hereinafter DEI Peru). But note the Separate Opinion

7.48

330 Chapter 7: Latin America of protecting DEI from, among other things, any unilateral alteration of the tax regime. However, a key issue was whether the legal stability offered by the contract covered both the formal text of the laws and regulations and their specific interpretation and application at the time of execution of the contract. This touched on the role of discretion that state authorities have. The case has additional relevance because of the growing number of disputes in the international oil and gas industry that affect the interpretation of tax rules.72 In Angola and Nigeria, for example, these are areas of emerging disagreements between host states and foreign investors. 7.49

The facts During the 1990s Peru initiated a regime to attract foreign investment, including the establishment of a foreign investment law and regulations, a private investment law, and a privatization law, which led to the privatization of a number of industries including electricity and gas. These laws authorized the government to enter into LSAs for specific investments, and the government published a model form text as an annex to the Investment Regulations (see paras 7.33–7.38 above). This was done with the express aim of attracting the participation of foreign investors, for which legal guarantees were required. In this favourable context, DEI acquired Egenor, a newly established and privatized subsidiary of the state- owned power-generating company, Electroperu, and subsequently concluded two LSAs with Peru on 24 July 2001. The LSA with DEI Bermuda contained an ICSID arbitration clause, while the other, between Egenor and Peru, provided that disputes would be referred to national or international arbitration. Both were effective immediately. In clause 3, section 1 of the DEI Bermuda LSA, the tax regime was stabilized in the traditional, ‘freezing’ manner:73 Stability of the tax regime with respect to the Income Tax, as stipulated in subsection a) of Article 10( 0) of Legislative Decree No 662, in effect at the time this Agreement was executed, according to which dividends and any other form of distribution of profits, are not taxed, in accordance with the stipulations of subsection a) of article 25 of the Amendment Text of the Income Tax Law, approved by the Supreme Decree No 054-99-EF in effect at the time this Agreement was executed. Neither the remittances sent abroad of amounts corresponding to DUKE ENERGY INTERNATIONAL for any of the items contemplated in this subsection are taxed pursuant to the aforementioned law.

Clause 5 of the LSA contained a further form of stabilization of the ‘intangibility’ kind: This Legal Stability Agreement shall have an effective term of ten (10) years as from the date of its execution. As a consequence, it may not be amended unilaterally by any of the parties during this period, even in the event that Peruvian law is amended, or if the amendments are more beneficial or detrimental to any of the parties than those set forth in this Agreement. 7.50

However, the stabilization of the tax regime went further than this. It also included protections in the Peruvian Investment Regulations applicable to foreign investors in Peru.74 in this award, which argues that the tribunal had powers by virtue of contract to make their own assessments of the Peruvian tax rules; see the analysis by Peterson, L.E. (2008) ‘Million in Damages’, Investment Arbitration Reporter 1, 8. 72 Probably the best known of such cases are those concerning VAT payments in Ecuador (see section G(2) below): Occidental Exploration and Production Company v Ecuador, Award, LCIA Case No UN 3467, IIC 202 (2004); 43 ILM 1248 (2004), 1 July 2004; EnCana Corporation v Ecuador, Award and Partial Dissenting Opinion, LCIA Case No UN3481, IIC 91 (2006); (2006) 45 ILM 895, 3 February 2006. 73 DEI Peru, at paras 186–187. 74 Regulations of the Regime to Guarantee Private Investment; approved by Supreme Decree No 162-92-EF.

D. Testing LSAs: Peru and Ecuador 331 In particular, Article 23 of the Regulations set out a balancing provision in the following manner: in case the income tax were amended during the effective term of the Stability Agreement [and] results in a variation of the tax base or the aliquots imposed on the profit generating company, or new taxes were created and imposed on the company’s income, or in the percentage reduction of the investor’s available profit or dividends with regard to the profit before income as compared to the one subject to allocation or available at the time of setting the guarantied [sic] tax system due to any other cause with equivalent effects, under the stability granted by the agreement, the tax aliquot(s) with regard to the profits or dividends the investor is entitled to will be reduced in order to allow that the profits or dividends finally available or subject to allocation are equal to the ones guarantied [sic] up to the possible limit as to the tax imposed on the profits or dividends.75

Subsequently, a tax assessment was imposed on DEI which it challenged, arguing that it violated certain guarantees to stability given by the LSA, and activating the arbitration provision in the DEI Bermuda LSA. In making its claim, it did not seek to argue that the tax liability was the result of a new law unilaterally imposed (since it was not), but that it resulted from an assessment based on a radically new interpretation and application of the tax law regime to such an extent that it violated the stability guaranteed in the LSA. DEI also alleged that the tax violated the applicable Peruvian law doctrine of actos proprios (good faith).

7.51

The tax assessment was for a liability of about US$12.4 million against DEI Egenor for alleged underpayments over several years, and a further US$35.9 million in interest and penalties. It had two component parts arising from tax minimization practices adopted by the claimant:76

7.52

(i) a Depreciation Assessment, based on SUNAT’s view that Egenor should have depreciated assets that were transferred to it by Electroperu in the privatization process using a special decelerated rate which SUNAT had provided to Electroperu instead of using a general statutory rate set out in the income tax regulations; and (ii) a Merger Revaluation Assessment, based on the view of the tax authority, SUNAT, that a merger in 1996 had been a sham transaction to take improper advantage of tax benefits under a law called the Merger Revaluation Law. SUNAT interpreted the rules so that it had the authority to disregard the merger since it was held to have been aimed at circumventing the payment of taxes. Applicable law These facts gave rise to five claims against Peru,77 the most important of which were that the two-part tax assessment was in breach of the guarantee of tax stabilization under the LSA, and that it was a breach of the implied duty of good faith and the Peruvian doctrine of actos proprios. Because the LSA did not provide for an applicable substantive law, the tribunal had to examine what law should apply and concluded that Peruvian law was consistent with international law but, where there was a conflict, international law applied, following ICSID Rules in this respect (Article 42(1)). However, in an interesting

75 DEI Peru, at para 190 (italics added). 76 Ibid, at paras 128–130. These practices were widely used at the time and were not unique to DEI Peru. 77 The other claims were that there was a breach of the guarantees of non-discrimination and the free remittance of capital in the LSA, and a breach of the minimum standard under customary international law: DEI Peru, at para 138.

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332 Chapter 7: Latin America interpretation of the LSA as a legal instrument, the tribunal held that it was not a creature purely of domestic law and that principles of international law were already contained in it: specifically, they included good faith and FET principles.78 In this sense, the LSA could be internationalized, providing some support for the proposition that a stabilization clause alone is sufficient to indicate that there is some internationalization of a contract. With respect to the question of a breach, the majority of the tribunal decided that Peru was indeed liable for breach of the guarantee of tax stabilization under the DEI Bermuda LSA and that the tax assessment for this part of the claim constituted a violation of the implied duty of good faith. 7.54

Stabilization An important issue for the tribunal was to consider whether the tax commitments that had been frozen by the stabilization provision in the LSA extended beyond the tax rules in place at the time that the LSA was executed to include the specific interpretation and application of such laws and regulations at that time. The LSA did not expressly refer to the words, ‘interpretation’ or ‘application’ in its text, but the tribunal held that they were indeed included. It held that: if, at the time when the guarantee was granted, the application of the existing rules resulted in a consistent interpretation, such interpretation must be deemed to be incorporated into the guaranteed stability. In a broad sense, stability is the standard by which the legal order prevailing on the date on which the guarantee is granted is perpetuated, including the consistent and stable interpretation in force at the time the LSA is concluded . . . [T]‌he maintenance of such stable interpretations of the law, existing at the time the LSA was executed, is part of ‘the continuity of the existing rules’.79

7.55

The challenge was rather to identify whether a change in interpretation or application of the tax regime, if any, fell into the stabilized category, in addition to amendments or modifications of Peruvian laws and regulations. To answer this question, the tribunal—in a rather creative vein—distinguished two kinds of analysis that it could apply, adding that it had no jurisdiction to review the correctness or otherwise of SUNAT’s decisions and assessments or the decisions of the Peruvian Tax Court as matters of Peruvian tax law:

(i) In the first stage, it would apply a comparative rather than an absolute standard. Its analysis would involve determining whether the relevant decisions or interpretations of SUNAT and/or the Tax Court are consistent with the tax regime stabilized for the claimant in the LSA (even though such decisions or interpretations are not mentioned in the LSA itself). To what extent were decisions of SUNAT or of the Tax Court in the present case a departure from their respective decisions prior to the entry into force of the LSA? This would be a challenge for the claimant to prove where an interpretation or application of a law or regulatory instrument was involved. Here, the claimant had a burden of proof with respect to two matters: to prove that there existed a stable interpretation or application at the time the tax stability was granted and that there was a decision or assessment after the LSA that modified that stable interpretation or application. Only then, when the application of the existing rules led to a consistent interpretation, could that interpretation be incorporated into the

78 DEI Peru, at paras 161, 181–182, 241. This offers a potential authority for other tribunals in considering the effects of stabilization clauses. 79 DEI Peru, at para 219.

D. Testing LSAs: Peru and Ecuador 333 guaranteed stability.80 The claimant under this test would need to produce more than evidence of statements or actions of a state agency that simply imply that a specific interpretation or application of the law existed. (ii) A second kind of analysis may be required if there had not been sufficient time available for the development of a stable interpretation or application of the relevant law and regulations (as was the case here); in a context of rapid energy market reform such circumstances are easy to imagine (as in this case, of course, but also in the post-communist states of Central and Eastern Europe, Central Asia, and certain African states). Proof of a change in the legislation or regulations or of a stable interpretation or application of the rules might be absent but this did not bring to an end the tribunal’s investigation into tax stabilization guarantees. In this case, the tribunal could go further and evaluate the decision or assessment at issue against a standard of ‘reasonableness’.81 Where an interpretation or application of the tax law was patently unreasonable or arbitrary, it would be a violation of the stabilization character of the LSA. The above distinction was carefully phrased to ensure that the tribunal’s approach in the case did not appear to infringe upon the jurisdiction of the Peruvian courts. However, there is little doubt about the tribunal’s creativity here since this test was entirely absent from the LSA. The application of this ‘reasonableness’ standard led the tribunal to conclude that:

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tax stabilization guarantees that: (a) laws or regulations that form part of the tax regime at the time the LSA is executed will not be amended or modified to the detriment of the investor, (b) a stable interpretation or application that is in place at the time the LSA is executed will not be changed to the detriment of the investor, and (c) even in the absence of (a) and (b), stabilized laws will not be interpreted or applied in a patently unreasonable or arbitrary manner.82

This was supplemented by a further observation, indeed almost a caveat, to investors about the limits of their contractual stability. The mere fact of tax stabilization should not be taken to mean that the beneficiary will be favoured by an interpretation or application that is in line with the investor’s interpretation or that of its advisers: ‘[a]‌n interpretation adverse to the investor cannot per se be considered a modification or violation of legal stability unless it is so unreasonable that, in practice, it violates the very stability that was guaranteed’.83

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In applying this view to the facts of the case, the tribunal concluded that the Depreciation Assessment was not based upon a patently unreasonable or arbitrary interpretation of the tax rules.84 However, it held that SUNAT had violated the guarantee of tax stabilization by

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80 In a broad sense, stability is the standard by which the legal order prevailing on the date on which the guarantee is granted is perpetuated, including the consistent and stable interpretation in force at the time the LSA is concluded’: DEI Peru, at para 219. 81 ‘By their very nature, laws often invite different interpretations based on fairly reasonable principles. For this reason, and in order to preserve the proper balance of fairness between the parties in this arbitration, it must be demonstrated, absent a demonstrable change of law or a change to a stable prior interpretation or application, that the application of the law to DEI Egenor was patently unreasonable or arbitrary’: DEI Peru, at para 226. 82 Ibid, at para 227: this cautious view of the tribunal’s role and its limits was the subject of criticism by Dr Guido Santiago Tawil, in his partial dissenting opinion: ‘in my opinion, in such cases the tribunal is entitled to depart from a strictly comparative analysis and determine the precise scope of the stabilized regime’ (at para 6); see in particular section 2 of his opinion. Dr Tawil went on to find fault with the ruling of the Peruvian tax courts on the question of the proper rate to be applied in relation to the depreciation of assets. 83 Ibid, at para 228. 84 Ibid, at paras 300–307.

334 Chapter 7: Latin America using the tax rules to change the stable interpretation of the Merger Revaluation Law that had prevailed until 1996 and was therefore a part of the legal regime stabilized in the DEI LSA.85 7.59

Good faith In an important clarification of the protection granted by the LSA, the tribunal held that DEI Bermuda was also protected by guarantees that are implied in the LSA by Peruvian law. The most important of these is the government’s obligation to act in good faith, based on the Peruvian Civil Code.86 In Peruvian law, an essential aspect of good faith is the doctrina de los actos proprios, which corresponds to estoppel or the principle of consistency. This is implied from all contracts, including LSAs, in Peruvian law, and is therefore an additional layer of protection for investors holding LSAs. In a general analysis of the applicability of this doctrine to LSAs, the tribunal noted that it was obliged to take into account the perspective of a reasonable foreign investor ‘perceiving, observing and interacting with the government of Peru, the host state’.87 It compared and contrasted the doctrine’s effects with those of state responsibility in customary international law.88 Unlike the latter, the actos proprios doctrine involves conduct that induces reliance by a third party as to the state’s position on a specific matter, and not necessarily any wrongful behaviour that leads to damage. The tribunal held that there was a contrast between the tests used in the context of customary international law and what is essential for actos proprios, which is that there has been a reasonable impression given through declarations, representations, or conduct that the state will be bound by them, and which a third party acting in good faith would treat and rely upon as expressing the state’s position. It did not hold that all representations made would have a binding effect upon the state, but insisted that the decisive element is of a ‘reasonable appearance that the representation binds the state’.89 This means that the competence or the manifest lack of competence of a state organ is relevant ‘given that no one can reasonably have confidence in representations or statements coming from an organ which manifestly lacks the competence to make them’.90 It would appear that the host state must therefore ensure that its various agencies act coherently, and that they should avoid ambiguity and inconsistency.

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In applying this view to the facts of the case, the tribunal examined the specific acts and statements that were alleged to have induced reasonable reliance on the part of DEI. The investor maintained that the tax assessments by SUNAT were inconsistent with representations given by other government agencies or entities and that Peru should be held liable therefore. With respect to the first part of the tax assessment (the depreciation rate applied to fixed investments), the tribunal held that the claimant had not met its burden of proof in establishing that Peru, through its agencies and officials, had ‘unequivocally committed to Egenor that it should apply the general statutory rate’91 (instead of the rate demanded at a later date by officials in SUNAT). With respect to the second part of the assessment (the merger revaluation), the tribunal examined the signals sent by the state agencies and officials (other than 85 Ibid, at paras 344–366. The tribunal was less sympathetic to DEI Peru’s case that it had a stabilized right to free remittance of profits and dividends and that the tax assessment had violated this. This right was a guarantee to free remittance and not an indirect guarantee of tax stabilization (that is, DEI Peru could remit what it had but not what it might have had): ibid, paras 260–266. 86 Art 1362 states: ‘contracts [must] be negotiated, entered into and executed according to the rules of good faith and common intention of the parties’. 87 DEI Peru, at para 241. 88 Ibid, at paras 242–251; 431–434. 89 Ibid, at para 247. 90 Ibid. 91 Ibid, at paras 320–323, at 320.

D. Testing LSAs: Peru and Ecuador 335 SUNAT) on this issue, and the process of completing the privatization of Egenor to DEI, and concluded that they had legal effect. In this case, the actions of state agencies or entities gave the investor reasonable grounds for believing that its merger and revaluation would not result in additional tax liabilities; indeed, the government actively encouraged the acquisition by DEI. This part of the tax assessment was therefore held to constitute a breach by Peru of an implied duty of good faith owed to DEI under the LSA. Clearly, this is a ruling with wider implications. It would appear to limit the power of a state tax authority to impose rulings or assessments on tax liability that are detrimental to investors if they conflict with actions and representations of competent state agencies made and relied upon by a foreign investor with respect to tax liability and the investment regime at an earlier date. On this view of estoppel, the investor would have an actionable claim even if there were no stabilization clause expressly included in the contract itself. This view of estoppel was the subject of a second partial dissenting opinion, however. While in agreement that the assessment imposed by SUNAT on the tax benefits of the merger contradicted the actions of several state agencies, Dr Pedro Nikken argued that this was not in itself a breach of a rule of law resulting in the responsibility of the state towards the investor. Rather, the ‘manifest lack of competence’92 of a given state agent or organ with respect to tax matters should be relevant to determining whether an investor can reasonably rely on such representations (in accordance with the doctrine of good faith, to the effect that the state will not reverse course).93 He did not however contest the applicability of the doctrine of actos proprios to the LSA. Rather, he argued that the tribunal could have gone further: it had the power to interpret Peruvian law and could therefore determine the scope of the stabilized regime instead of limiting its review by use of a ‘reasonableness’ standard.

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The significance of the good faith point in relation to stability is considerable. For an investor, it underlines the importance of a third layer or tier of protection for its investment. In addition to the contractual layer, in this case a special contractual instrument (the LSA), which offers guarantees as an inducement to invest, there is the level of protection (although not explicitly stabilization) that may be offered by the relevant BIT, or MIT, and additionally, implied protection of the contract by the domestic law of the host state. Obviously, the availability of any or all of these protections is dependent upon the investor’s structuring of the legal arrangements, what the state is prepared to offer and the nature of the legal system in the host state, and the international investment law arrangements it has concluded with other states. Nor is there any suggestion made here of ranking of these protections in importance since the importance of a particular layer of protection will vary according to the facts and circumstances of the case.

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The award The tribunal awarded the claimant US$18,440,746 in damages, plus pre-and post-award interest.94 This was roughly half of what the claimant had sought for the two elements in the tax assessment. The cost element provides an interesting coda: the claimant’s total costs amounted to slightly more than US$10 million, with US$8.8 million spent on

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92 Ibid, at para 247. 93 ‘If an agent of the state that is manifestly incompetent in tax matters has approved a taxable act, every investor must know that that tax authority remains entitled to object to it within the prescribed period. The only facts creating a reasonable appearance that a taxable act will not be challenged in the future are either its approval by the tax authority or the expiration of the term within which it can be challenged’ (ibid, at para 10). 94 Ibid, at para 488.

336 Chapter 7: Latin America three teams of lawyers and about US$2 million on experts.95 The respondent’s costs were considerably less. 7.64

In December 2008, Peru filed a request with ICSID for an annulment, relying upon three of the five grounds available under the ICSID Convention: the tribunal had manifestly exceeded its powers; it had failed to state reasons for its decision; and there was a serious breach of a fundamental rule of procedure. The fact that there were two dissenting views on the tribunal may have encouraged Peru to take this step.

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Annulment The award was upheld by the annulment committee in 2011.96 There were several elements to this decision, which provides some additional analysis of the LSA as a form of state assurance to investors. The principal claim made by Peru was that the tribunal had manifestly exceeded its powers by asserting jurisdiction over a dispute that was outside the parties’ consent to arbitrate as expressed in the DEI Bermuda LSA. It argued that the applicable law was Peruvian law, and that it had not been applied to the arbitration agreement (which the tribunal had internationalized), and also that the LSA was interpreted more widely by the tribunal than it should have been. The committee supported the tribunal however by holding that the law governing the part of the LSA that contained the parties’ consent to submit disputes about its interpretation to ICSID arbitration could be different from the law governing the rest of the LSA, even when the consent derives from an agreement (the LSA) governed by domestic law. Since the parties had not expressly chosen any law to govern the arbitration agreement, the committee agreed that the tribunal had been correct in applying international law including ICSID jurisprudence to the arbitration agreement itself.97

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The interpretation of the LSA by the tribunal was not deemed by the committee to be too wide. It was rooted in the diversity of Duke Energy’s investments in Peru. They comprised many different transactions and separate LSAs for various entities. The Bermuda LSA and its tax guarantees at issue in the arbitration only applied to one slice of Duke’s investments, with the other slices being governed by separate LSAs. Many different transactions were involved and several LSAs were involved for the various Duke Energy entities. The Bermuda LSA and the guarantees of tax stability it offered applied only to one specific ‘slice’ of Duke Energy’s investments, with other LSAs governing the other ‘slices’. The tribunal had taken a holistic approach to the investment and assessed the Bermuda LSA in that light: there did not seem to be any reason why the parties would seek or grant tax stability to the specific transaction addressed in the LSA. The tax stability only made sense if it was applied to the totality of Duke’s investment. The committee approved the approach taken by the tribunal to hold the scope of consent to arbitration in the Bermuda LSA to extend beyond the scope of the narrow transaction described by it.98 The interpretation of the LSA adopted by the tribunal was correct in taking account of its surrounding circumstances and other relevant documents, with a view to identifying the parties’ common will.

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Peru also claimed that the tribunal had failed to address a question put to it on its jurisdiction ratione temporis.99 The tax assessment had been issued in November 2001 and triggered the dispute, but the tax authority was applying tax rules in force from 1996 to 1999 to facts 95 Ibid, at para 492. 96 Duke Energy International Peru Investments No 1 Limited and Republic of Peru (Annulment Proceeding), Decision of the ad hoc Committee, ICSID Case No ARB/03/28, 1 March 2011. 97 Ibid., at para 143. 98 Ibid, at paras 159–160. 99 Ibid, at paras 170–182.

D. Testing LSAs: Peru and Ecuador 337 occurring during that period. The LSA had only entered into force in July 2001 and contained no obligation to stabilize tax rules in force before 2001. In accepting jurisdiction, the tribunal was accepting that the guarantee of legal stability could be applied retroactively, a matter which the tribunal had failed to address. The committee decided that the tribunal had been correct in deciding on the only relevant issue at the jurisdictional stage: the time at which the dispute arose, and was able to review all the earlier facts at the merits stage, to decide whether the LSA had been breached. Against a further objection on the meaning of the tax stability clause, the committee acknowledged that an LSA could not be merged into another: in this case, the Bermuda LSA was not ‘fused’ with the Egenor LSA (the tax assessment has been on DEI Egenor which had its own LSA) but the tribunal had supported Duke’s argument that the assessment breached the DEI Bermuda LSA.100 Was this not a mistake? The tribunal had argued that the two LSAs were linked through the operation of Article 23(a) of the Investment Regulations (damage to the profit-generating business of one entity protected by an LSA could impact upon another business owned by the same entity which has its tax stability protected by a different LSA; thus, separate but linked). These Regulations were adopted to implement the Private Investment Law and made detailed provision for the system and contents of the LSAs.101 The linkage of the two LSAs arose since any changes to DEI Egenor’s tax situation could influence the tax stability granted to DEI Bermuda in its own LSA. There was no contradiction here, the committee decided since DEI Bermuda could indeed rely only on its own LSA in bringing the claim.

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Finally, the innovation by the tribunal in linking the LSA to changes in the interpretation of tax laws as well as to changes in the law itself was supported by the committee. The tribunal had found the process of interpretation to be an integral part of the law itself so that stability meant stability of interpretation and application. Peru had criticized this mainly based on Article 52(1)(e) (failure to state reasons), since the tribunal had not submitted a line of authority for its decision. The committee noted the guidance for a review from observations in the Vivendi annulment decision that ‘Article 52(1)(e) concerns a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons . . .’.102 The committee found that the tribunal was engaged in a process of logical reasoning that did not require the citation of authority and that in this case it benefited from a considerable amount of expert evidence on Peruvian law when formulating its reasons in the way that it did.103

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100 Ibid, at para 208. 101 Article 23(a) provided: ‘The stability regime granted to investors as provided for by section (a) of Article 10 of Legislative Decree No 662 implies that, in the event the income tax should be modified during the effective term of the stability agreement in such a manner that it results in a variation of the tax base or the percentages imposed on the profit generating company, or in the creation of new taxes imposed on the company’s income, or for whatever other cause of equivalent effects the profits or dividends distributable or available to the investor is reduced in terms of percentage with respect to pre-tax profits in comparison with the ones distributable or available at the time the guaranteed tax regime became effective, by virtue of the protection granted by the agreement the tax rate(s) applicable to the profits or dividends the investor is entitled to shall be reduced in order to allow the profits or dividends finally available or subject to allocation are equal to the ones that were guarantied [sic], up to the possible limit as to the tax imposed on profits or dividends.’ The parties disagreed as to whether this provision was merely an offset mechanism or could also support a claim for damages. 102 DEI Peru (Annulment), at para 204, referring to Compañía de Aguas del Aconquija SA and Compagnie Générale des Eaux/Vivendi Universal (‘Vivendi’) v Argentina (First Decision on Annulment) (2002) 6 ICSID Rep 327. 103 ibid, at paras 219–221.

338 Chapter 7: Latin America

(2) Aguaytia v Peru 7.70

In separate ICSID case involving an LSA, Peru was more successful than in the earlier case of Duke Energy. It appears that it decided not to pursue certain lines of argument that had been unsuccessful in the latter case, and was able to resist a private investor’s claim that the stability guaranteed in the LSA extended to the right to non-discrimination.104 The dispute centred on a claim by a US-owned company, Aguaytia Energy, LLC,105 regarding an investment it made in 1996 in an integrated energy project that involved natural gas extraction and electricity generation and transmission, pursuant to certain government concessions. In particular, there was a licence agreement for hydrocarbons production, a concession for electricity transmission, and a Stability Agreement (Convenio de Estabilidad Jurídica con Aguaytia Energy, LLC de Estados Unidos de America), which was entered into by Peru and Aguaytia Energy in 1996, concluded on the letterhead of the Comisión Nacional de Inversiones y Technologías Extranjeras. In contrast to many other cases considered in this chapter, there was no claim that the host state had made a unilateral legislative change or other legal framework change to the detriment of the claimant’s investment. It was purely a claim that the investor had been discriminated against.

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The core of Aguaytia’s claim was that a recent entrant into the Peruvian electricity transmission sector, a Colombian investor called ISA, had been accorded more favourable concession terms than Aguaytia in an unrelated Build-Own-Operate-Transfer (BOOT) contract granted by Peru pursuant to an international public bid some years after Aguaytia’s entry. Aguaytia alleged that this constituted discriminatory treatment by Peru in breach of a stabilization commitment made by contract to Aguaytia. After raising this matter of alleged discriminatory acts in the Peruvian courts (since they would if proven have violated Peruvian law as well as the law of the concession), but finding the remedies available unsatisfactory, Aguaytia commenced ICSID arbitration against Peru, seeking initial damages of US$140 million, but reducing this amount at the hearing to US$91 million.106

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Aguaytia premised its claim on a 1996 LSA between Aguaytia and a Peruvian state agency. The LSA (see extracts in Appendix V) provided for the stability of certain laws relating to, among others, taxation, free remittance of profits, exchange rates, and the right to non- discrimination. Peru described the LSA as a ‘freezing agreement’ that provides for the stability of the right to non-discrimination, and freezes certain laws for a period of ten years.107 Aguaytia argued that the stability of the right to non-discrimination constituted a substantive guarantee of non-discrimination against the investor. The tribunal disagreed.

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Once again, there was no applicable law provided for in the LSA. The tribunal followed DEI Peru in holding that Peruvian and international law applied. It then examined whether the LSA created a separate right not to be discriminated against. In its award, it agreed with Peru that the LSA stabilized specified laws by freezing them with respect to the signatory investor for a period of ten years. Stability undertakings are of undoubted importance for investors, it observed, and there was no need to dwell on the importance for investors of the stability 104 Aguaytia Energy LLC v Peru, Award, ICSID Case No ARB/06/13; IIC 359 (2008), signed 28 November 2008, despatched 11 December 2008. Once again, there was no choice of law clause in the LSA, and the tribunal elected for a combination of international law and national law principles. 105 The company was majority-owned by Duke Energy. 106 Aguaytia, at para 31, n 7. 107 Ibid, at paras 33–34.

D. Testing LSAs: Peru and Ecuador 339 guarantees given in the field of taxes, foreign currency, free remittance of profits, and capital and exchange rates.108 The stability of the right to non-discrimination was also ‘of obvious importance for a foreign investor’. Specifically, the tribunal noted that: It freezes the laws, rules and regulations applicable to it, as they were in existence at the time the Agreement was concluded. This means that no new law may be passed which would state that certain rules regarding non-discrimination would no longer apply to the Claimant. It especially guaranteed the constitutional right to equality before the law.109

The LSA was expressly aimed at ‘securing the continuity of the established rules’ as they existed at the time the LSA was concluded between the parties. The tribunal cautioned: ‘Nowhere, however, are any individual, substantive rights created or guaranteed. What is guaranteed is the stability of the legislative framework as it existed on 17 May 1996.’110 The guarantees it contained on legal stability did not include the grant of ‘most favoured investor’ status to the claimant. Indeed, if any such status were to be granted, it was within the jurisdiction of the Peruvian legal authorities in applying the non-discrimination provisions of the Constitution, and not within the competence of an ICSID tribunal. Essentially, the investor had negotiated a stability clause and that is what it had secured. The LSA had not therefore been violated; if Peruvian law had been violated, that was a matter for the Peruvian courts to decide.

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The tribunal’s characterization of the LSA as a legal instrument that ‘freezes’ the existing law at a specific date is a striking echo of the kind of stability that investors in the international oil and gas industry have long sought. Its availability is a reminder that in designing stability mechanisms a host state will not necessarily treat the balancing form of stability as the maximum that is compatible with its sovereignty.111 The provision of a legal guarantee to a prospective investor that a wide range of specified laws will remain frozen for a period of time is one that Peru was—and apparently still is—willing to offer to prospective investors to entice them into its large-scale projects. In this case, the development of natural gas deposits in remote areas for power generation and transmission would probably not have been possible without an LSA, and—astutely—the authorities not only made it available but several years later, upheld its guarantees. However, they clearly did not accept an interpretation of the benefits of the LSA which would have broadened its scope beyond freezing the law as of a particular date, and this interpretation of the scope of the LSA was supported by the tribunal’s award (and by the Peruvian courts).

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(3) Noble Energy and Machalapower v Ecuador In another case, Noble Energy and Machalapower v Ecuador,112 the LSA was described as an ‘investment agreement’ and was concluded between the investor, Machalapower, and

108 Ibid, at para 95. 109 Ibid. 110 Ibid, at para 89. 111 Of course, neither the freezing version of stabilization nor the balancing or allocation of burden variety actually prevents the host state from exercising its sovereign power to adopt new laws that have economically detrimental effects upon the investor (see chapter 2). 112 Noble Energy Inc and Machalapower Cia Ltd v Ecuador and Consejo Nacional de Electricidad, Decision on Jurisdiction, ICSID Case No ARB/05/12; IIC 320 (2008), 5 March 2008.

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340 Chapter 7: Latin America Ecuador. Under Article 3.1 of the agreement, the state guaranteed full legal stability of the legal framework in force at the time of signature, which (i) may not be unilaterally modified by law or by any other provisions of any kind affecting them, or by changes in the interpretation or application thereof and (ii) may be modified only by mutual written agreement of the Parties expressly stating such modifications . . . [nor should] the economic and financial conditions considered for the Project and the Investment [be affected, altered or modified].113

Ecuador was alleged to have breached this clause (and others) in the LSA. Further, it was alleged to have breached its treaty obligations under the US–Ecuador BIT not to discriminate, not to expropriate without compensation and to provide national and most favoured nation treatment. It is not possible to say whether the existence of the LSA made a significant difference in determining the outcome of this case, since a settlement was reached between the parties and the proceedings were formally discontinued in May 2009.114 However, the complex, four-layered approach to the design of stability provisions did persuade the tribunal to hear both contract and treaty claims together and created a solid basis on which to make the various claims. 7.77

The claimants were Machalapower, an independent electricity generating company, and Noble Energy, a US-based company, which indirectly owned the former company (see the discussion in c hapter 2, paras 2.37–2.44. The LSA was concluded at the same time as a separate concession contract between Machalapower and Ecuador, represented by CONELEC, the regulatory authority for the electricity sector. The concession contract was for the construction, installation and operation of an electricity generation plant. It authorized Machalapower to generate electricity and to own the electricity generated, and to deliver this electricity to the wholesale electricity market created by the new electricity legislation. It had an obligation to despatch the electricity generated by lowest cost power generators first. CONELEC was authorized to grant concession contracts on Ecuador’s behalf for public electricity generators, distributors, and transmission companies. Its origins lay in a privatization programme and the corresponding electricity legislation of 1996. CONELEC was given responsibility for enforcing the legislation and regulating the tariffs of the generation, transmission and distribution companies. During the thirty-one-year term of the concession, an investment of more than US$228 million was to be made.

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The stability framework There were four linked instruments of stabilization created by the parties for the investment—in this scheme of investor protection, the LSA constituted only one of them. First, there was the LSA itself, which in its third item stated that its object was ‘to set forth clearly the treatment given to the Investor and the Recipient Company with respect to the general and special guarantees and assurances that will protect their investment’.115 The tribunal noted that the LSA appeared to contain a stabilization clause ‘which may constitute an obligation of a state capable of falling within the scope of an umbrella clause’.116 However, the concession agreement too contained stabilization provisions, which froze the legal framework that applied to it at the time of signature. It also contained a provision in

113 Ibid, at para 161. The provision in (ii) is of the intangibility variety. 114 The proceeding was discontinued at the request of the parties following a settlement; an order taking note of this was issued by the tribunal on 20 May 2009: (accessed 14 February 2021). 115 Ibid., at para 199. 116 Ibid, at para 157.

D. Testing LSAs: Peru and Ecuador 341 section 24 which stated that if ‘the contract, particularly the competitive conditions of this contract’ are altered or modified, ‘causing damages to [the company], the state shall recognize a compensation for the damages inflicted’ in order to restore or maintain economic and financial stability. Third, the domestic law of Ecuador provided several important guarantees for the investment. Under Article 249 of the Constitution, contractual conditions were not to be unilaterally modified by virtue of laws or other provisions, while in Article 33, legal certainty was declared to be one of the fundamental rights that the state must recognize and guarantee. Moreover, the preamble of the Investment Law stated that foreign investment must be fostered and promoted so that it contributes, together with national investment, to Ecuador’s economic development, ensuring the legal certainty required for investments to be adequately made, on the basis of a stable legal and institutional framework.

Finally, the US–Ecuador BIT offered a measure of treaty protection for the concession and investment agreements by protecting of the investor’s legitimate expectations derived from the contractual and legal obligations of the state. The various legal instruments were carefully linked in the design of the stability framework. The concession contract and the investment agreement were signed on the same day and contain many cross-references in the respective texts. The term of the investment agreement is based on and covers the duration of the concession contract. The legal stability provided in Article 4(c) of the investment agreement is linked in the same way. Most importantly of all, the aim of the investment agreement is declared to be ‘to set forth clearly the treatment given to the Investor and the Recipient Company with respect to the general and special guarantees and assurances that will protect their investment’.117 This provision confirms that the investor is to benefit from all of the protections in both national law and in the relevant international treaties. It is worth quoting in full:

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Therefore, the state ratifies that the Investor, its Investments, the Recipient Company, this Investment Agreement and the Basic Contract shall enjoy all the guarantees set forth in Title IV and in Articles 22 and 23 of the Substituting Regulations to the Investment Promotion and Guarantee Law pursuant to the provisions written at the end of the first paragraph of Article 249 and in the last paragraph of Article 271 of the Constitution, and the provision of Titles IV, VI and VII of the Investment Promotion and Guarantee Law, as well as in all international treaties executed by the state regarding investment promotion and guarantees and international double taxation.118

The dispute settlement provisions were also coordinated in the agreements, and expressly provided for the referral of disputes to arbitration under the ICSID Convention.119 The Republic of Ecuador was also a party to the two agreements and to the BIT. The state electricity authority (CONELEC) entered into the concession contract ‘acting as the competent public authority on behalf of the State’ and could therefore be designated as ‘the State’ under the concession agreement. The BIT also recognizes that an investment dispute could be one that arises out of the investment agreement, thereby establishing a further linkage. Further linkages between contract and treaty disputes were identified by the tribunal in the

117 118 119

Noble Energy, at para 199. Ibid, at para 199. Ibid, at paras 200–202.

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342 Chapter 7: Latin America Investment Promotion and Guarantee Law Regulations. They stated that, in the event of a failure by the state to comply with its obligations undertaken in the contract, the investor and the investment vehicle: shall be entitled . . . to request the application of all the remedies and to exercise all the actions applicable under the Ecuadorian legal system and under the international conventions signed and ratified by Ecuador including the right to demand compliance with its rights arising out of the contract, the Constitution, and the international conventions . . .120 7.81

In this context, the claimants argued that various measures adopted by Ecuador (a series of decrees, resolutions, decisions, policies, practices, acts, and omissions) had altered the economic, regulatory, legal, and contractual framework that had been specifically designed to induce investment, and on which the claimants had relied in making their investment in the country.121 In their claim, the words used include ‘the economic equilibrium of the Concession Contract upon which Claimants made their investments in Ecuador’122—obligations that Ecuador had assumed had been fundamentally breached. Specifically, the treatment of VAT by the authorities was changed by means of a Resolution so that Machalapower could no longer include the VAT paid on gas purchases for its plant as a cost declaration; the mechanism for the payment of Machalapower’s invoices was changed by government decrees so that there was a dramatic increase in its unpaid receivables; various agreements were concluded between Ecuador and Colombia which enabled Colombian generators to export electricity on a preferential basis to the detriment of Machalapower’s business, and finally that Ecuador ‘generally refused to enforce the legal framework . . . contrary to the Government’s alleged undertaking’.123 Further decrees in 2004–2005 set an artificially low price for residual oil (a low quality type of fuel) bought from PetroEcuador for several state- owned generators, granting them subsidies.

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Although the tribunal took the pragmatic view that the contractual and investment treaty issues could be heard together since the claims were related, the case did not proceed further. It was settled in late 2008, after many months of discussions between the parties. Ecuador agreed to pay Noble Energy a settlement in two instalments of US$60 million and US$10 million.124 Originally, however, the claim had been for as much as US$370 million. E. Treaty v Contract: Forced Renegotiations & Outcomes

(Venezuela)

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Against a background of rising oil prices (the price cycle referred to in Section A), several South American governments demanded that foreign investors in their petroleum industries commence a renegotiation of their contracts from 2005 onwards. These ‘forced renegotiations’ were evident in Venezuela, Bolivia, and Ecuador. The legislative measures were part of wider government programmes to replace investment regimes that had been established in the 1990s (see section B), and led some investors to launch claims before international

120

Ibid, at para 203. Ibid, at paras 14–21, 154–164. 122 Ibid, at para 22. 123 Ibid, at para 19. 124 GAR, 12 January 2009: ‘Noble and Ecuador Settle as Port Dispute Looms.’ 121

E. Treaty v Contract: Forced Renegotiations & Outcomes (Venezuela) 343 arbitral tribunals, as well as requests for interim measures from national courts and, in a few cases, to exit the country concerned altogether. The pattern of a forced renegotiation was established by Venezuela but was similar in each case:

(i) A legislative measure is adopted by the host state, declaring illegal certain contractual structures and introducing new ones, and setting a timetable for transition by existing contractors from the former contractual regime to the new one, with penalties for investors which fail to reach agreement; (ii) Negotiations take place between the contractors and the host state designated entity; and (iii) The overwhelming majority of contractors reach agreement on the terms of new contracts which include acceptance of domestic law for the settlement of disputes and possibly also incentives, such as access to new acreage and extensions to existing rights, subject to conditions that are compatible with the new contract regime. The process of transition by existing investors has been described by various host states as a ‘migration’ to new contract structures, but the neutral implication of this process should not allow its mandatory character to be overlooked. It was not a voluntary process but one in which the host state set the framework for negotiations, drafted the agreements, set a timetable for their conclusion and most importantly of all, defined the outcomes of the process. In practice, therefore, the processes at work in these states were instances of forced renegotiations. Its paradigmatic features were set out by the first country to take this route away from the former one, based on the attraction of private capital into the petroleum sector, Venezuela. Arguably, it was the only state in Latin America that could afford the potential cost of such a radical reversal of the ‘open door’ investment policies of the 1990s. It was at the time ranked among the few countries with the largest proven reserves of hydrocarbons in the world, had been a founding member of OPEC and was one of the principal suppliers of crude oil to the US. From 2003 onwards, the government of Venezuela, more than any other in Latin America or beyond, defined the pattern of ‘resource nationalism’ in the early twenty- first century through its programme of highly publicized, unilateral measures against oil companies in its petroleum sector. In doing so, it reversed a liberal, apertura petrolera policy to foreign investment that had been applied in the country in the preceding decade. Its relative success in achieving a new set of policy objectives in what initially appeared a high-risk strategy was influential internationally and regionally, setting the pattern for subsequent, similar actions by other Latin American states. In presenting investors with these measures, it tested their willingness to draw upon the legal protections in what was then a relatively new and untested framework of international investment treaties, as well as the contract- based security, long familiar in the international petroleum industry. The Venezuelan case is therefore considered in some detail below.

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A two-stage process The contract negotiations process may be distinguished into two stages. In the first stage, the government’s target was the Operating Service Agreements (OSAs: see para 7.15). In the second stage, its focus was on the remaining oil contracts concluded with IOCs in the 1990s.

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During the first stage, the legal basis for renegotiations was the Hydrocarbons Law of 2001 (see section B(1) above). However, it was not until 12 April 2005 that the renegotiations commenced, as the Ministry of Energy and Petroleum (the Ministry) acted to implement the Law’s provisions with respect to the existing contracts. It announced that the existing thirty-two petroleum agreements (OSAs) were illegal and that holders of these contracts had

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344 Chapter 7: Latin America to migrate to new arrangements involving joint ventures or mixed companies (the empresa mixta structure). Special committees were established by the Ministry to facilitate this transition: these Transitory Executive Committees were charged with planning the activities to be carried out in each OSA area for the following year and with coordinating the conversion into mixed companies. Further instructions were issued by the Ministry stating that the existing OSAs were in violation of the basic petroleum law, the OLH, and should cease to exist by 31 March 2006. 7.87

By December 2005 a series of interim or Transitory Agreements had been concluded with almost all the OSA contractors. The IOCs were encouraged to waive their existing rights through these agreements prior to moving on to the new mixed enterprise arrangement. This strategy—encouraging IOCs to leap before they could see whether there was a safety net or not—was later adopted by both Bolivia and Ecuador. The agreements included a commitment to pay all amounts of tax owed to the state authorities and set the date of 31 March 2006 as the deadline by which the parties were to reach mutual agreement on the various documents required to complete the migration process.125 Negotiations began between each OSA contractor and the government once these agreements were completed. The process was a complex one, requiring in each case the conclusion of a contract for conversion into a mixed enterprise, the charter and by-laws of that mixed enterprise, as well as its business plan, policies, and procedures, and a contract for the sale of hydrocarbons between the mixed enterprise and PDVSA. The Model Forms used in these negotiations were subsequently approved by the National Assembly.126 The process was concluded by the deadline with the signature of a Memorandum of Understanding (MoU). There were only a few IOCs that did not complete the process by the deadline, notably Total and ENI. Under the Regularization Law of April 2006, the National Assembly formally terminated all the OSAs. On 1 April 2006, the oil fields of ENI and Total were taken over by the state (a compensation agreement was subsequently reached by the parties).

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It is worth noting some of the features of the mixed company structures to understand what the IOCs were conceding when they accepted them.127 Once the OSA was terminated, the former contractor had no right to any payment or compensation under it except for some amounts due in the first quarter of 2006. The former contractor also had the obligation to indemnify and hold harmless the state, the mixed company, PDVSA, and its affiliates from and against any liability, damage, or loss related to OSA operations, with only a very few, limited exceptions. Nor was the mixed company to assume any liability for the activities, acts, or omissions of the former OSA contractor in relation to its OSA, including without limitation its labour liabilities. The new structure, including the conversion contract, the charter and by-laws, the hydrocarbons sale contract, and all conversion documents were to be governed by the law of Venezuela and all disputes were to be subject to the exclusive jurisdiction of the courts and tribunals of Venezuela. Moreover, oil reserves held by a mixed enterprise could not be ‘booked’ by the IOCs for accounting purposes, with implications for the share price of the IOCs involved. Remarkably, given the concessions required by the new corporate form, the only IOC that registered a claim for ICSID arbitration was ENI. Among the IOCs

125 For a detailed analysis of the various documents relating to the legal structure of the empresas mixtas, see Keffer & Vargas (2008). 126 Official Gazette No 38.410, 31 March 2006. 127 See Keffer & Vargas (2008).

E. Treaty v Contract: Forced Renegotiations & Outcomes (Venezuela) 345 that accepted the new conditions were Chevron (US), BP (UK), Repsol (Spain), Petrobras (Brazil), and Perenco (France). The second stage of the negotiations began after the issue of a Presidential Decree (the Migration Law)128 in February 2007 which required contractors with association agreements in the Orinoco Basin and contractors with Risk Exploration and Profit Sharing Agreements (see para 7.16) to enter into negotiations for a transition to the mixed company form in which PDVSA would own a majority interest of at least 60 per cent. The Orinoco Basin is a region that offers considerable technical and geological challenges for petroleum extraction, and had therefore been assumed with apparent government support to merit separate (and less controversial) treatment by the government in its programme of extending state control over oil operations. This assumption proved to be unfounded. In the new structures for these projects the state shareholding was to amount to a minimum participation of sixty per cent. This step forced six international oil companies into contract negotiations with the government over four heavy oil projects located in the Orinoco Basin.

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The regulatory framework for this second migration process was set out in the Migration Law. It included a timetable for the completion of the negotiations and the consequences that would follow in cases where an amicable agreement between the investor and the state was unable to be concluded. Article 4 established two deadlines:

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(a) Four months: commencing from the date of publication of the Migration Law in the Official Gazette, the parties to the existing association and Risk Exploration and Profit Sharing Agreements had to agree on terms and conditions for their possible participation in the empresas mixtas (that is, until 26 June 2007); (b) Two months: a further period was allowed for the submission of agreed terms and conditions to the National Assembly for authorization (that is, until 26 August 2007). Article 5 of the Migration Law stated that if, after the term set out in Article 4 (a total of six months) had expired, no agreement for the incorporation and operation of the empresas mixtas had been reached, the state (acting through PDVSA or its affiliates) would directly assume control over the activities carried out by the private participants. In effect, the interests of the companies concerned would be expropriated. A further legislative measure was adopted in 2007, which formally terminated the Association Agreements, and the Risk Exploration Agreements and Profit Sharing Agreements of the apertura era. The Law on the effects of the Migration Process of the Association Agreements of the Orinoco Belt and of the Exploration At-Risk and Profit Sharing Agreements into Mixed Companies entered into force on 8 October 2007. It also terminated the agreements held by IOCs which had failed to conclude a new agreement after negotiations on a migration to a mixed company. The property interests, shares, and participation of such companies were either transferred to the new mixed companies if an individual company participant in an association agreement was involved or to PDVSA if none of the parties were able to reach an agreement on migration to a mixed form of company. The Law contains no statement at all that compensation was to be paid.

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The IOC response The reaction of the IOCs to the government’s demand for renegotiation of their contracts was overwhelmingly one of engagement with the state authorities. In this respect, the pragmatic response echoes the investors’ behaviour generally evident in the

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128

Decree Law No 5.200; Official Gazette No 38.632 of 26 February 2007.

346 Chapter 7: Latin America Middle East several decades earlier (see c hapter 4 above). Each IOC made a calculation based on its business interests in an unusually resource-rich country, its own global operations and prospects, and constructed a corporate strategy vis-à-vis the new state oil policy on the basis of the resulting assessment.129 A total of forty-eight out of fifty companies participated in the various negotiations: all except two elected to agree to new contract terms, reflecting the very considerable optimism about long-term potential benefits from developing reserves of oil in Venezuela (and the context of high oil prices at the time). As a way of rewarding cooperation in the negotiation process, the government was careful to ensure that some companies benefited through compensation and a profitable set of arrangements for future operations. For example, Sincor, a consortium including Statoil, successfully concluded a negotiation with the government on the main terms and conditions for its participation in a new mixed company to be created from Sincor.130 Statoil signed a Memorandum of Understanding with the Venezuelan authorities for compensation terms and governance conditions that made it possible for Statoil to continue as a partner in the project. The compensation was based on the project’s future value as an Extra Heavy Crude Oil project. In January 2008 Statoil signed an agreement with Venezuela to increase its operations in the country, quantifying the reserves of the Junin-10 block in the Orinoco Basin, along with an option of production subsequently.131 7.93

An example of a company that benefited from its agreement to cooperate was ENI, the Italian national energy company. Its initial response to the government’s demand that it ‘negotiate’ the transfer of 60 per cent of its contract for the Dación oilfield to PDVSA was to file a claim for arbitration before ICSID.132 Subsequently, PDVSA took over the oil field. Yet in February 2008 ENI withdrew the claim after agreeing to less than the book-value compensation for its assets from Venezuela, which also agreed to pay US$700 million in cash to ENI over a seven- year period. One of the conditions of the settlement was that ENI terminate the ongoing arbitration claim against PDVSA/Venezuela within five days. It is hard to believe that the initiation of a claim did not assist ENI in its negotiations. As a result of the settlement, ENI was invited to participate in new joint venture projects with PDVSA. In the same month, ENI signed an agreement with PDVSA on a 40–60 joint venture basis for the prospection and exploitation of the Junin-5 block in the Orinoco Basin. ENI declared that: Upon the successful completion of the joint studies, the award of the prospective area to a PDVSA (60%)–Eni (40%) joint venture will be requested and the development plan will then be sanctioned. The development will be aimed to achieve early production of 30,000 barrels per day (in 2010) and a long-term production plateau of 300,000 barrels per day (in 2014).133

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Subsequent developments confirmed the long-term commercial benefits that ENI had obtained by making this compromise. In September 2008 ENI signed a Memorandum of 129 Venezuela’s creditors were in a much stronger position than the IOCs. PDVSA requires about US$2 billion a year in debt financing and therefore needed continued access to sovereign credit markets. The legal ramifications of a default required a robust effort at compliance with existing financial contracts: see the discussion of this issues by Dargin, J. (2008) ‘The Rising Tide of Expropriation in Venezuela: A Look at 21st Century Resource Nationalism’, OGEL Special Issue on Venezuela. 130 (accessed 14 February 2021). See especially para 67: ‘The obligations of the host state towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have. A tribunal which sought to generate from such expectations a set of rights different from those contained in or enforceable under the BIT might well exceed its powers, and if the difference were material might do so manifestly’. 312 MCI Power Group, at para 278. An application for annulment was subsequently dismissed (19 October 2009). 313 Ibid, at para 279. 314 Ulysseas Inc v Republic of Ecuador, Interim Award, UNCITRAL 28 September 2010. 315 Final Award, 12 June 2012, at para 216.

386 Chapter 7: Latin America the State, through the GRANTOR, may establish special guarantees and security assurances to the investor to ensure that the agreements will not be modified by laws or other provisions of any type which have an impact on their clauses. If laws or standards are enacted which prejudice the investor or change the contract clauses, the State will pay the investor the respective compensation for damages caused by those situations, in such a way as to at all times restore and maintain the economic and financial stability which would have been in effect if the acts or decisions had not occurred.316

The tribunal considered the effect of the stabilization clause in Article 24. Had the investor, it asked, by entering into the Licence Contract, accepted that a change in laws and regulations could be made by Ecuador, which might prejudice it as an investor? This lay at the core of the claim for breach of legitimate expectations317. The tribunal held that it did indeed show that the investor had accepted that changes might be introduced to laws that would be prejudicial to it. If they were introduced with such effect, compensation would have to be paid for the damage caused. Since the investor elected to bring a claim based on the BIT, the tribunal held that it had waived its right to see compensation under Article 24 of the Licence Contract.318 This was a contributory factor in the tribunal’s decision to dismiss the claim of a breach of FET.

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Pipeline infrastructure has also been the source of tensions between the tax authorities and foreign investors despite the existence of fiscal stability clauses in the relevant agreements. An example of what seems to be a negotiation on this is provided by the circumstances surrounding an UNCITRAL arbitration claim filed by Oleoducto de Crudos Pesados S.A. (OCP), a major oil pipeline entity, part owned by Repsol, the Spanish energy company, against the Republic of Ecuador in 2018. OCP had a US$1 billion contract from the Government of Ecuador to construct a pipeline from the Amazon to the Pacific coast and began operating in 2003. A dispute arose ten years later when the then government criticized OCP’s financing arrangements that involved its parent company (based in the Cayman Islands) lending it US$465 million with an interest rate of between 18 and 21 per cent. Ecuador claimed this minimized the subsidiary’s taxable profits with large expenses being incurred through interest payments which were sent to the parent company. It brought seven separate tax claims against OCP in the domestic courts, for each year from 2003 to 2009.319 The matter was directed to the national courts and, following a decision against the SRI, three of its judges were dismissed, and the matter was appealed to the Constitutional Court, which rendered the previous ruling null and void, and ordered a new one. OCP then submitted the claim to arbitration. In its claim OCP alleged among other things that Ecuador had breached contract provisions on tax and legal stability.320 In another dispute, the SRI challenged the sale price of oil from one of Repsol’s blocks for the years 2003 to 2010. Following a dismissal of its appeal against the tax, Repsol submitted a notice of dispute under the Spain-Ecuador 316 Ibid, at para 229. 317 Ibid, at para 257. 318 Ibid, at para 258. 319 GAR, 18 May 2018, ‘Ecuador hit by claim over tax measures.’ 320 In a separate dispute, the Inland Revenue Service (SRI) in Ecuador disallowed the deduction from income tax of payments for the transportation of crude oil to OCP and challenged the treatment of subordinated debt issued to finance OCP’s operations.

H. FET, Stability, and Legitimate Expectations: Argentina 387 BIT, triggering a six-month cooling off period. In March 2019 Repsol disclosed in its annual report that it was ‘withdrawing all lawsuits’, following the adoption of a new law in 2018 for the promotion of the economy, which covered investment and fiscal stability, and which forgave certain fiscal liabilities, and which appears to have benefitted OCP.321 H. FET, Stability, and Legitimate Expectations: Argentina A number of awards involving an interpretation of the FET standard have been rendered by international tribunals against Argentina following an abortive programme of economic reform that commenced in the 1990s and culminated in a financial crisis in 2001 to 2003.322 The gas and electricity transmission and distribution sectors have figured prominently among the awards made (and cases pending). In this sense, the subject matter of energy investment disputes in Argentina differs from that of the other states considered in this chapter, which have been largely concerned with the exploration and production side of the oil and gas sectors. They have also involved BITs as a basis for claims on a scale not seen anywhere else in Latin America and indeed, not seen anywhere in the world. A central feature of the awards rendered so far is that Argentina provided a series of specific undertakings and promises to the claimants, which it subsequently failed to uphold. In this regard, the tribunals have considered a number of important legal issues that have relevance for the notion of stability of investments, including the scope of the doctrine of necessity in international law, which was invoked by Argentina as a defence against liability for damage to investments arising from its actions (see the discussion of this in chapter 6, paras 6.35–6.43). However, this section will be limited to their contribution to the development of the FET standard, and particularly the elements of stability of the legal framework and legitimate expectations.

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Economic reform Since the fact pattern in many of the cases is the same or very similar, the following is intended to provide a summary of developments relevant to the electricity and gas sectors that sets the scene for the subsequent discussion of FET. In 1991 Argentina enacted the Convertibility Law (Law No 23, 928), ordering a fixed exchange rate and tying the Argentine currency to the US dollar. In 1992 the Argentine government adopted sector- specific laws which set out new legal and regulatory frameworks for the country’s gas and electricity industries.323 The state gas company, Gas del Estado, was broken up into two transportation companies and eight distribution companies, each responsible for a distinct geographical region, and sold them off to the private sector, in a wide-ranging programme

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321 GAR, 4 April 2019, ‘Ecuador pipeline claim withdrawn after tax reform’; Investment Arbitration Reporter, 27 March 2019: ‘Energy firm drops UNCITRAL arbitration claim after changes to tax law.’ 322 For example, CMS Gas Transmission Company v Argentina, Award, ICSID Case No ARB/01/8, IIC 65 (2005), 12 May 2005 (Argentina–US BIT); Enron Corporation and Ponderosa Assets, LP v Argentina, Award, ICSID Case No ARB/01/3; IIC 292 (2007), signed 15 May 2007 despatched 22 May 2007; L&G Energy Corp and Others v Argentina, Decision on Liability, ICSID Case No ARB/02/1, IIC 152 (2006), 3 October 2006; Sempra Energy International v Argentina, Award and partial dissenting opinion, ICSID Case No ARB/02/16, IIC 304 (2007), despatched 28 September 2007; BG Group plc v Argentina, Final Award, Ad Hoc—UNCITRAL Arbitration Rules, IIC 321 (2007), 24 December 2007; National Grid PLC v Argentina, Award, Ad hoc—UNCITRAL Arbitration Rules; Case 1:09-cv-00248-RBW; IIC 361 (2008), 3 November 2008. 323 The Electricity Law comprised Decree 634/91 and Law 24,065; the Gas Law 24,076 of 20 May 1992 was implemented by regulations under Decree No 1738/92 of 18 September 1992. For concise descriptions of the regulatory frameworks in electricity and hydrocarbons, see respectively paras 21 and 29 of El Paso Energy International Co v Argentina, Decision on Jurisdiction, ICSID Case No ARB/03/15; IIC 83 (2006), 27 April 2006; a more extended treatment of the gas transmission and distribution regulatory framework is to be found in BG Group plc v Argentina, at paras 27–36.

388 Chapter 7: Latin America of economic reform. Under the electricity reform law, commercial corporations were established and the electricity transmission and distribution network was transferred to them. The high voltage electricity transmission network was transferred to Transener (Compañia de Transporte de Energia Electrica en Alta Tension SA) in 1992. The other transmission assets were transferred to six regional companies. Two state agencies were established to supervise the privatized sector: ENRE for the regulation of all the electricity sector, and CAMMESA for the regulation of the wholesale market. A new state entity called ENARGAS had responsibility for oversight of the gas industry. Each of these had responsibilities vis-à-vis the respective tariff structures for transmission and distribution. Foreign investors were invited to buy into the new companies in an international bidding process and were assured by promises and guarantees about the overall legal and regulatory framework that would apply to the new industry after privatization. The entry of foreign capital was deemed to be crucial for the success of the overall economic recovery plan; therefore, foreign investors were specifically targeted in the privatization programme. 7.212

Guarantees of stability The guarantees provided to investors for stability of their investment may be divided into three broad groupings. Firstly, there were specific guarantees in the new gas and electricity legislation and the implementing regulations. In the gas transmission and distribution sector there were four specific guarantees made to investors: tariffs would be calculated in US dollars before conversion into pesos; tariffs would be subject to semi-annual adjustments according to the PPI; tariffs were to provide the investor with an income sufficient to cover all the costs and a reasonable rate of return; and the tariff system would not be subject to freezing or price controls without compensation. The licence also included an express commitment that it would not be altered unless the written consent of the licensee was first obtained.324 In the electricity transmission and distribution sector, five guarantees were offered:325 tariff-based remuneration for the transmission service was to be ‘fair and reasonable’, providing the concessionaire with revenue to cover operating costs, taxes, amortization, and a reasonable rate of return; adjustments of tariffs on the basis of a five-year review, and an extraordinary review if tariffs became ‘unfair, unreasonable, unduly discriminatory or preferential’; calculation of remuneration in US dollars; automatic six- month adjustment according to US PPI and US CPI; and expansions of the system to be paid in line with government resolutions and contracts (permitting dollar-based remuneration and adjustments according to US price indices). These guarantees provided a framework for stability of the tariff structure and the role which convertibility to the US dollar and the PPI would play in it. Economic changes in the wider economy could be accommodated within the framework envisaged in the tariff adjustments. For the electricity sector, the stability in the regulatory framework was ‘an absolutely necessary condition . . . to obtain the required long-term financing to improve, upgrade, maintain and expand the electricity transmission infrastructure’.326 A second set of guarantees was provided by the ratification of various treaties relating to international investment obligations, including the ICSID Convention and many BITs, which in the event of conflict would prevail over domestic law. The third set of guarantees was contained in the Convertibility Law itself, adopted at this time. Taken

324 325 326

CMS, at para 235. National Grid, at para 62. Ibid, at para 159.

H. FET, Stability, and Legitimate Expectations: Argentina 389 together, these three sets of guarantees amounted to a powerful combination of incentives to foreign investors, and very large investments were made as a result.327 By the late 1990s, an economic recession began to impact on the gas and electricity sectors. The various responses by successive governments had increasingly damaging effects on the investments made during this period of market opening. The tribunal in CMS v Argentina (the first of many claims to reach an award) calculated that the claimant’s investment had lost 92 per cent of its value.328 The principal electricity transmission entity, Transener, saw its operating income fall in dollar terms to less than one third. Since its debt was dollar denominated, it remained fixed, leading in 2002 to a default by Transener on its debt service obligations.329 From July 1999 there were no PPI adjustments in the tariffs relating to the licensees and the five-year review that was due in 2002 did not take place. Both measures affected the level of tariffs in the gas and electricity distribution sectors and impacted adversely upon investors’ rate of return on their investment. These steps were taken without compensating investors and indeed they were forced to engage in renegotiations or face revocation of their licences. The Emergency Law of January 2002 declared that tariffs would no longer be calculated in US dollars but instead in pesos and that there would no longer by semi- annual adjustments according to the PPI.330 A series of claims were made under the relevant BITs, many concerning the US–Argentina BIT, but several based on the UK–Argentina and France–Argentina BITs.331 A key issue in the subsequent disputes between investors and the Argentine Republic was the extent to which the state was liable for this breakdown in the stability of the legal framework for foreign investment.

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(1) CMS The claimant in CMS v Argentina was an investor that had purchased a minority shareholding in an Argentine company (TGN) which operated a gas transportation network in northern Argentina. Certain measures taken by the government during the crisis had breached the BIT. The tribunal found that Argentina’s actions had violated other standards of protection contained in the relevant BIT but declined to hold that it was liable for expropriation of the investment. Argentina had demonstrated that the list of issues to be considered for reaching a determination on substantial deprivation was not present in the dispute (the claimant retained full ownership and control of its investment despite the destruction of more than 90 327 In the energy sector alone about US$34 billion dollars was invested during the 1990s, with US$22 billion in oil and gas, and US$12 billion in electricity. Among the benefits were: increased supply of electricity; increased oil and gas production; increased proven reserves of oil and gas; a considerable rise in energy exports and an expansion of the natural gas transmission system, which included the construction of additional pipeline infrastructure to support gas exports; El Paso Energy International Company v The Argentine Republic, Decision on Jurisdiction, ICSID Case No ARB/03/15, 22 April 2006, at para 23. 328 CMS Gas Transmission, at para 69. 329 National Grid, at para 64, and generally on government measures that distorted or undermined the guarantees given in the electricity sector, see para 63. 330 Law No 25,561, 6 January 2002: the Public Emergency and Foreign Exchange System Reform Law. It also provided for the renegotiation of private and public agreements to adapt them to the new system of convertibility. 331 For example, L&G Energy Corp and Others v Argentina, Decision on Liability, ICSID Case No ARB/02/1, IIC 152 (2006), 3 October 2006; CMS v Argentina (where the President of the tribunal was controversially also the President of the tribunal in Enron v Argentina); Azurix Corp v Argentina and Siemens v Argentina. However, the latter two cases were unrelated to the financial crisis. For an examination of the wider impact of these events and particularly how they impacted on Argentina’s relations with its neighbours in relation to exports of gas, see Lahitou, J.P. (2008) ‘Argentine Curtailment of Natural Gas Exports’ (University of Dundee dissertation, November 2007), published in OGEL.

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390 Chapter 7: Latin America per cent of its value; the government did not manage the day-to-day operations of TGN). The case supports a view that other arguments are likely to prove a more reliable basis for a claim that one based on a claim that a host government’s action has been ‘tantamount to expropriation’. Claims based on alleged arbitrary and discriminatory treatment had better results but still enjoyed only modest success. Enron was to fail on grounds similar to those in CMS v Argentina. The tribunal’s assessment of the substantive investment law was that it had been stable and consistent and that there were only minor differences that concerned the claim of non-discrimination which was granted in the case of LG&E.

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The later awards that address the FET standard in these disputes show an awareness of a line of development from the CMS case onwards. The result was evident in the LG&E award,332 where the tribunal held that ‘the stability of the legal and business framework in the state party is an essential element in the standard of what is fair and equitable treatment’. Indeed, it considered ‘this interpretation to be an emerging standard of fair and equitable treatment in international law’.333 One of the earliest awards had developed this view and was clear enough about the importance of stability and what it entailed. In CMS the tribunal held that FET is ‘inseparable from stability and predictability’.334 This did not require the legal regime to be frozen at the time of the investment but it certainly did limit the host state’s ability to throw out the investment regime altogether; in this case, the legal regime on which the investment decision had been considered and made had been entirely transformed and altered.335 In citing CME, Metalclad, and TecMed as authorities on this issue, the CMS tribunal also drew attention to its connection with a second element in the FET standard, the notion of legitimate expectations:336 the basic expectations taken into account by the foreign investor in making the investment. The tribunal in LG&E conveniently set out a list of the characteristics of such expectations:337 (i) they are based on the conditions offered by the host state at the time of the investment; (ii) they may not be established unilaterally by one of the parties; (iii) they must exist and be enforceable by law; (iv) in the event of infringement by the host state, a duty to compensate the investor for damages arises except for those caused in the event of a state of necessity; and (v) the investor’s legitimate expectations cannot fail to consider parameters such as business risk or the regular cycles of business.

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The tribunal blended the two sub-elements of stability and legitimate expectations to produce the following definition of the FET standard: it ‘consists of the host state’s consistent and transparent behaviour, free of ambiguity that involves the obligation to grant and maintain

332 The claimants alleged that the value of their interest in several licences had been reduced by more than 90 per cent following the Government’s abrogation of the main guarantees of the tariff system. 333 LG&E, at para 125. The influence of this finding in LG&E is evident in the decision of Duke Energy v Ecuador, where the tribunal held that consistency of interpretation was important even though it was not bound by the decision of previous tribunals (para 339). 334 CMS, at para 276. 335 Ibid, at paras 275, 277. 336 Ibid, at paras 267–268, 278–279. 337 LG&E, at para 130.

H. FET, Stability, and Legitimate Expectations: Argentina 391 a stable and predictable legal framework necessary to fulfil the justified expectations of the foreign investor’.338 The tribunal’s conclusion in LG&E was that Argentina had violated the FET provision in the BIT by creating specific expectations among investors in order to solicit an investment and subsequently abrogating the investment guarantees vis-à-vis public utility licensees, thereby violating the legitimate expectation of the investor that the state would maintain a stable and predictable legal framework.339 Among the specific examples of unfair and inequitable conduct, the tribunal noted that the state had not provided for real renegotiation of public service contracts as was provided for in the Gas Law, but instead had simply imposed a process. This finding was similar to that in a number of other awards against Argentina, although different tribunals have offered various qualifications.340

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(3) Enron and National Grid In Enron,341 the tribunal found a violation of the FET standard because the tariff abrogation violated the investor’s legitimate expectations as well as the stability of the legal framework that was set up by the tariff guarantees. The effect of the BIT was to oblige the host state to provide a stable regulatory framework for foreign investments (as long as there were legitimate expectations that it would do so). However, the nature of that stability was qualified. It did not require that Argentina ensure a ‘freezing’ of all legal or regulatory standards, but it did mean that the framework could not be dispensed with altogether where specific undertakings had been made earlier to a foreign investor. In National Grid, two qualifications were added to the notion of legitimate expectations: the investor should not be shielded from the normal business risk of the investment and the investor’s expectations must have been reasonable and legitimate in the context in which the investment was made.342

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By comparison with the claims under FET, other claims had a more chequered record of success, with claims for indirect expropriation based on the respective BITs being strikingly unsuccessful. In the Enron case, for example, the tribunal held that the property rights of the claimant as an indirect shareholder in the locally incorporated companies were not affected, nor were its rights to manage the day-to-day business. Similarly, in National Grid, the

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338 Ibid, at para 131. 339 Ibid, at paras 132–139. The guarantees given in the gas legislation included dollar-based calculation of tariffs; PPI tariff adjustments; and no price control without indemnification. The tribunal considered that these were specific enough to give rise to international obligations for Argentina vis-à-vis LG&E. 340 For example, Sempra Energy International v Argentine Republic, Award and partial dissenting opinion, ICSID Case No ARB/02/16, IIC 304 (2007), 28 September 2007 but emphasized that ‘[w]‌hat counts is that in the end the stability of the law and the observance of legal obligations are assured, thereby safeguarding the very object and purpose of the protection sought by the treaty’ at para 300; in the context of different BIT provisions on this, the tribunal in BG Group plc v Argentina [BG Group plc v Argentina, Final Award, Ad Hoc—UNCITRAL Arbitration Rules, IIC 321 (2007), 24 December 2007] found that the measures adopted by Argentina fell below the international minimum standard under general principles of international law (paras 291–310); in the National Grid case [National Grid plc v Argentina, Award, Ad hoc—UNCITRAL Arbitration Rules; Case 1:09-cv-00248- RBW; IIC 361 (2008), 3 November 2008], the tribunal also held that the dismantling of the regulatory framework for the electricity sector and its attendant economic uncertainty created a denial of protection and security; this protection was located in the same article of the UK-Argentina BIT as the FET clause, and was not restricted to the protection of the physical character of an investment (paras 187–190). 341 Enron Corporation and Ponderosa Assets, LP v Argentina, Award, ICSID Case No ARB/01/3; IIC 292 (2007), signed 15 May 2007, despatched 22 May 2007. 342 National Grid, at para 175.

392 Chapter 7: Latin America tribunal held that the actions of Argentina had not prevented the claimant from continuing to own its shares, exercise its rights as a shareholder and dispose of its investment by its own decision. Its value was certainly diminished but ‘not to the extent that it could be considered worthless’.343 7.220

In Enron, the tribunal found that there had been a violation of the umbrella clause as well as FET, since the tariff guarantees contained in Argentine domestic law amounted to specific undertakings vis-à-vis the foreign investors. The provision in Article II (2)(c) of the US–Argentina treaty reads: ‘[e]‌ach party shall observe any obligation it may have entered into with regard to investments.’ The tribunal held that the Treaty provision entitled Enron to claim that breaches of contract (including gas licences) and of domestic legislation rose to the level of treaty breaches. Similarly, in LG&E Argentina was held to be liable under the umbrella clause, since its legal obligations to LG&E were very specific, falling within the meaning of Article II(2)(c).344

(4) Sempra 7.221

Most claims against Argentina were based upon a BIT, but in Sempra the claims under the US-Argentina BIT also included one based on a violation of the stabilization guarantees in the Gas Transportation Licence. This was based on a standard or model licence which contained Basic Rules and was approved by Decree 2255/92.345 In clause 18.2, the licensing authority was expressly precluded from amending the Basic Rules of the licence, in whole or in part, without the written consent of the licensee. Clause 9.8 prohibited the government from unilaterally freezing, administering or controlling prices (similar to an inviolability clause), and provided (in a balancing provision) that if are lower than the level that results from the tariff due to controls being imposed, the licensee is entitled to compensation for the difference.346 In the event, the government did breach the stabilization clause because it changed the dollar denominated tariff provided for in the licence and the regulatory regime.

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Strictly speaking, Sempra was not the licensee but rather a shareholder in a company that had invested in the parties that held the licence (a third-tier shareholder). The tribunal was prepared to entertain the claim however, and referenced the umbrella clause of the BIT that stated that Argentina would honour the terms of the investment.347 The licence was held to be part of the dispute even though the claimant was an equity shareholder and not the party holding the licence. This approach contrasted with that of other tribunals,348 and led to an assessment of the licence stability violations by the tribunal.

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Argentina argued that under the severability clause in clause 18.3 of the gas licence, which refers to the event in which a given clause is declared invalid or unenforceable by judicial decision; the remaining clauses would still be enforceable. This implied that the parties were 343 Ibid, at para 154. 344 LG&E, at paras 169–175. 345 Sempra, at para 84. 346 Ibid, at para 170. 347 Ibid, at paras 305–314, at paras 312–313: ‘[T]‌he License is the ultimate expression of a series of complex investment arrangements made with the specific intention of channelling the influx of capital into newly privatized companies . . . Specific obligations undertaken . . . are among the obligations that typically come under the protection of the umbrella clause.’ 348 For example, LG&E v Argentine Republic.

H. FET, Stability, and Legitimate Expectations: Argentina 393 aware that Argentine law could render a clause or clauses invalid at a future date. The tribunal rejected this on the ground that there were reasons for the inclusion of such a provision and they were not to cancel the effect of the stabilization clause.349 Clause 18.2 was clear enough: unilateral modification was prohibited, and an economic balance was established which the entire tariff regime was supposed to uphold. The relationship between stabilization and expropriation was also considered by the tribunal.350 Although the stability clause had indeed been breached, this did not mean, as the claimant tried to argue, that an expropriation had taken place. A direct form of expropriation required a transfer of some essential element of a property right to a different beneficiary (in this case, the state). Here, the economic benefits were transferred from the industry to consumers or to another industrial sector. This was not equivalent to an effect upon a legal element of the property held by the licensee. The terms of the licence had been breached but this did not amount to a taking of property. The conclusion appears to be that stabilization clauses are governed by the general principles that apply to contract: their breach may result in damage but it is to be protected against and eventually compensated under a separate BIT guarantee than that of expropriation.351 The decision in Sempra was subsequently annulled but not because of this analysis of the stabilization clause.

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(5) Total The stabilization clauses in a licence were considered in another case, Total S.A. v Argentina, involving Total, which held an indirect stake in Transportadora de Gas del Norte S.A. (TGN), which was licensed under Argentine law to transmit gas.352 Total also held investments in two major power companies, and part of its claim was that radical alterations had been made to the existing regime for power generation, amounting to a breach of the BOT. For example, there had been a pesification of the spot price, and an alteration of the uniform marginal price mechanism through violation of the uniform rate rule and the introduction of a fixed price cap.353

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The TGN claim Although there was no question about the existence of two stabilization clauses in the Licence, the tribunal held that the investor, Total, could not rely upon the stabilization clauses since it was not a party to the licence agreement.354 What Total had done was to invest in a public utility (TGN) that operated a public service activity regulated by a defined legal regime set out in the concession. The TGN Licence could not be understood as a source of contractual legal obligations ‘of a specific character assumed directly by Argentina towards Total’.355

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349 Sempra, at paras 172–174. 350 Ibid, at paras 278–282. 351 Sempra, at para 281. 352 Total S.A. v Argentina, Decision on Liability, ICSID Case No ARB/04/1, IIC 484 (2010). 353 Ibid, at para 286. 354 Ibid, at paras 99–101; one of the stabilization clauses had the effect of prohibiting the freezing, administration, or control of prices, while the other prevented the amendment of the basic rules of the Licence without the written consent of the Licensee. 355 Ibid, at para 101. The tribunal had this view of a stabilization clause: ‘Stabilization clauses are clauses, which are inserted in state contracts concluded between foreign investors and host states with the intended effect of freezing a specific host State’s legal framework at a certain date, such that the adoption of any changes in the legal regulatory framework of the investment concerned (even by law of general application and without any discriminatory intent by the host State) would be illegal.’

394 Chapter 7: Latin America 7.227

The second argument about stability was based on the Argentina–France BIT. Total argued that it had legitimate expectations about the stability of the legal framework based not only on contractual undertakings but also on the legislation and regulation that was put in place to attract foreign investment. Since the FET standard in Article 3 of the BIT includes the protection of legitimate expectations of the foreign investor, the tribunal was asked to consider whether it had been breached by the unilateral changes of legislation and regulation made by Argentina.

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The tribunal noted the need to weigh up the investor’s need for a stable, predictable and consistent framework of legislation and regulation in order to plan its investments over the long-term against the state’s responsibility to amend its legislation to adapt it to change and ‘the emerging needs and requests’ of its people. Many tribunals had relied upon the explicit mention of the desirability of maintaining a stable framework for investments to attract foreign investment ‘as a basis for finding that the lack of such stability and related predictability, on which the investor had relied, had resulted in a breach of the fair and equitable treatment standard’, noting LG&E, and Enron. However, the France–Argentina BIT does not contain any explicit reference in the preamble or elsewhere to stability (in contrast to the preamble to the US–Argentina BIT). In considering whether a specific assurance had been given by the State, the tribunal set out a test for ‘legitimate expectations’ in the face of legislative or regulatory changes (and in the absence of a contractual, bilateral or similar undertaking which would be binding). This is an interesting test and worth noting as a way of identifying ‘regulatory fairness’ in the conduct of the host state towards an investor.

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An evaluation, the tribunal claimed, had to consider the bilateral relationship between the state and the investor in more than in a narrow, isolated sense. Where the expectation was based on an undertaking, two factors were critical: (1) the form and specific content of the undertaking of stability that the investor invokes and (2) the clarity with which the authorities have expressed their intention to bind themselves for the future (assurances, promises, commitments). The more specific the declaration to the investor is, the more credible the claim that the investor was entitled to rely upon it for the future ‘in a context of reciprocal trust and good faith’.356 An alternative basis for an expectation was possible, the tribunal reasoned, usually in the absence of the above. An invocation of entitlement to stability under FET could rely upon legislation or regulation of a unilateral and general character, not specifically addressed to the investor. Even though such normative and administrative regulation may change in line with the applicable law, it can still provide the basis for a claim to stability given ‘the inherently prospective nature of the regulation at issue aimed at providing a defined framework for future operations’.357 This consideration is appropriate to regulatory regimes that have been set up for long-term investments and operations, and which provide or may provide for contingent rights in case the regulatory framework is changed in unforeseen circumstances or if certain listed events occur. In cases such as these, the tribunal argued that a yardstick could be found by reference to ‘commonly recognized and applied financial and economic principles to be followed for investments of that type’, whether domestic or foreign. The tribunal expressly referred to four examples of capital intensive and long-term investments: the operation of utilities under a licence; natural resources exploration and

356 357

Ibid, at para 121. Ibid, at para 122.

H. FET, Stability, and Legitimate Expectations: Argentina 395 exploitation; project financing, or BOT schemes. Taking these criteria into account, tariff- setting by a state has, the tribunal continued, to be done in such a way that the concessionaire is able to recover its costs, amortize its investments and make a reasonable return over time, as was provided for in the Argentine regime. The considerations applicable with respect to the state’s right to regulate domestic matters in the public interest included (1) the circumstances (context) and (2) reasons for making the change that would impact negatively on a foreign investor’s interest (reasons), and (3) the seriousness of the prejudice caused by the action, compared to a standard of reasonableness and proportionality (appropriateness). Elaborating on the foregoing the tribunal added:

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The context of the evolution of the host economy, the reasonableness of the normative changes challenged and their appropriateness in the light of a criterion of proportionality also have to be taken into account.358

In applying these principles on government promises and undertakings to foreign investors and the freedom that States generally have to amend their laws (especially when there is a fundamental change in circumstances) to the claim, the tribunal found no assurance about stability had been given to Total and none had been sought. The elimination of the calculation of tariffs in US dollars and elimination of dollar adjustments were not a breach of FET. However, the failure to pursue renegotiations after 2002 to re-establish the equilibrium of the tariffs as provided by the Gas Regulatory Framework was a breach of the obligation to grant FET under Article 3 of the BIT.359

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In a separate claim concerning Total’s investments in two major power generation companies, the tribunal also found that the specific pricing rules in the Electricity Law did not amount to an express commitment by Argentina on which Total could base legitimate expectations. However, Argentina’s abandonment of a uniform spot price in the electricity sector had such a dramatic impact upon the legal regime for electricity spot prices that its conduct violated the FET standard in the Argentina–France BIT.360 The new price mechanism was unable to reflect the economic cost of the system, making it impossible for generators to operate with a reasonable margin and to cover their investment costs. The tribunal added that the failure to set prices that remunerated the investment made and allowed a reasonable profit to be gained were particularly egregious in the utility or general interest sectors since they are ‘subject to government regulation (be it light or strict), where operators cannot suspend the service, investments are made long term and exit/divestment is difficult’.361

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358 Ibid, at para 123. The tribunal note favourably the comment by the tribunal in Genin and others v Estonia, Award, 25 June 2001, at para 348 (concerning the revocation of a banking licence to a financial institution: ‘the Tribunal considers it imperative to recall the particular context in which the dispute arise, namely, that of a renascent independent state, coming rapidly to grips with the reality of modern financial, commercial and banking practices and the emergence of state institutions responsible for overseeing and regulating areas of activity perhaps previously unknown. This is the context in which Claimants knowingly chose to invest in an Estonian financial institution, EIB’. 359 Ibid, at para 175. The economic equilibrium mechanism was accompanied by a readjustment mechanism, namely ordinary and extraordinary reviews with benefits not restricted to the participants in the initial privatization (para 168). Their failure to work during the emergency period might be understandable but not so from 2002 onwards when it was generally agreed that the economy had quickly recovered from the crisis. 360 Ibid, at para 346. 361 Ibid, at para 333.

396 Chapter 7: Latin America

(6) Assessment 7.233

In the line of cases discussed above, several tribunals have supported the idea that there is a strong connection between an investor’s legitimate expectations arising from an FET claim and a requirement to provide a stable and predictable legal framework for investors. An influential factor has been the wording of the Preamble of the BITs between the US and Argentina, which expressly refer to ‘stability’. However appropriate this linkage is for deliberations in cases arising from the US–Argentina BIT, some caution is required in generalizing from the clear connections established by tribunals in these cases. Neither the UK or French BITs with Argentina had this feature and the linkage plays a different role in the awards concerning National Grid and Total. In a later case, the tribunal, Mobil v Argentina, expressly distanced itself from this line of cases on the ground that ‘stability and predictability is a major but not the only ingredient of an investment-friendly climate . . .’362 The issue that lies behind this hesitation is the implications of any interpretation of stability in relation to FET for the space left to the government to carry out its responsibilities with respect to regulation.363 I. Conclusions

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The Latin American region has provided a laboratory for an examination of a wide range of investor-state disputes. It is unlikely that the foreign investors attracted to the continent in the 1990s or the governments which did so much to encourage them to bring their capital had any idea of the scale and diversity of disputes that would engulf some of them a decade later. This chapter has been concerned to identify any wider lessons that may be learned about legal stability from the experiences of five of the states in the region that have a particular importance for investment in energy, and which have been in the forefront of disputes with foreign investors in recent years.

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Arbitration plus renegotiation In the face of several determined actions by host states against investments in the oil, gas and electricity sectors, investors have responded in one of three different ways: to initiate arbitration in defence of their rights, to seek renegotiation with the host state, or to combine both. Based on the available evidence, and with the notable exception of Argentina, it appears that in most cases investors consider the latter to be the most attractive option. A prudent investor now has at its disposal a variety of legal protections to defend its interests. Where recourse to international arbitration is available, investors have shown little hesitation in alerting the host state to the possibility that arbitral proceedings may be initiated, and in many cases to proceed further and start the arbitral process. It is very striking, however, how closely this has been linked with the pursuit of

362 Mobil Exploration and Development Argentina Inc. Suc. Argentina and Mobil Argentina Sociedad Anonima v The Argentine Republic, ICSID Case No ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, at para 928. 363 The tribunal in EDF v Argentina side-stepped this issue entirely in considering alleged breaches of the France-Argentina BIT in relation to a Concession Agreement granted under the Provincial Electricity Law. The tribunal noted that some tribunals had found the FET standard ‘to protect investors against instability and predictability of the legal framework’ (noting Sempra, Enron and CMS Gas). ‘Although mindful of these decisions, the Tribunal has made its determination in the present case on an independent finding of Respondent’s breach of the specific commitments embodied in the Currency Clause followed by its failure to restore EDEMSA’s financial equilibrium in a timely fashion’: EDF International S.A., SAUR International S.A. and Leon Participaciones Argentinas S.A. v The Argentine Republic, Award, 11 June 2012, ICSID Case No ARB/03/23, at para 1022.

I. Conclusions 397 negotiations with the host state with an eye to a settlement and preservation of the relationship with the host state. Having access to a range of contract options has assisted the typical investor in its search for a negotiated solution with the host state. It would be an exaggeration to state that an arbitrated outcome is the exception rather than the norm, since the abundance of arbitrations over the past decade for several of these countries shows that investors have considerable familiarity with these options and are willing to initiate them. The mechanisms and the language of international investment law have also become an integral part of the renegotiations, providing crucial leverage to the parties to shape the outcome to their advantage. The variety of legal mechanisms used to defend investors’ interests is quite striking and reflects both the range of tools now available and the diverse circumstances of individual companies. Faced with a government determined to use its legal powers, they offer a lifeline to smaller energy companies in particular. In Latin America, they have included the defence of rights to stabilization held under contracts such as LSAs in the face of tax demands; many treaty-based defences based on the use of FET, umbrella clauses, and expropriation clauses to name the more prominent ones; the use of freezing orders in foreign courts; requests for interim measures in arbitral proceedings in the face of coercive acts by the host state; the use of national legislative protections and courts, where available, and recourse to international arbitration on a scale and in ways that are unprecedented in the history of the international energy industry. Yet, from a commercial point of view, the objectives appear to be very similar to those which encouraged investors to settle with host states in disputes several decades ago: to avoid a breakdown in a long-term relationship with the host state or to seek the maximum compensation prior to exiting the country.

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Stabilization clauses Several awards have been made that contribute to our understanding of stabilization clauses. In DEI Peru, Aguaytia and Sempra, the host states did not try to argue that the stabilization commitments were a violation of their sovereignty, in contrast to some of the better-known cases in the past (see chapter 3). The arguments were not about the principle but rather the practice of a stabilization commitment, even though the tax audit in Peru was launched by a new government with different policies from its predecessors. The DEI Peru case makes it clear that stabilization commitments now include stabilization of interpretation and application of existing laws, and regulations, not only the laws themselves. Clearly, this is a matter of considerable importance for tax stabilization, where changes in interpretation are common. Given the important practical effects that such changes of interpretation and application of rules can have, this is surely a reasonable view. Results from the DEI Peru case were in summary form:

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(i) Interpretation and application of the law is included in a stabilization commitment to freeze that law; (ii) Statements of officials that represent a particular set of guarantees to investors can give rise to action by an investor against the host state if that regime is changed unilaterally; (iii) Reasonableness of interpretation of the stabilized legal framework by officials of the host state is a requirement; (iv) Stabilization clauses can in themselves internationalize the contract. In designing a stability regime, there is no evidence of reluctance by host states to offer investors different kinds of stabilization clause and even to combine freezing and balancing of benefits provisions in the same package. In Peru and in Argentina this mixing of stabilization

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398 Chapter 7: Latin America forms (that may appear to some to be contradictory) was present. Indeed, host states have seemed keen to offer investors a layered approach to stability, based on contract, treaty and municipal law protections. The result may be complex but not necessarily confusing. 7.239

ICSID role Arbitration before ICSID has been highly visible in disputes in this region but is an unreliable guide to investor responses to unilateral measures by a host state. The evidence presented in this chapter demonstrates the existence of an important difference between registration of a dispute with an international tribunal such as ICSID and the completion of a case through the merits stage. The latter appears to be the exception rather than the rule in seeking a solution to a dispute between investor and state. Despite the robust actions taken by Venezuela against existing investors in its oil and gas sector, it is significant that only two companies have pursued disputes through what has been a long and complex route of international arbitration. The rest have focused on the preservation of a business relationship and have sought to negotiate a settlement and, in most cases, have continued to play a role in the country’s resource development. This voluntary approach has been evident in Bolivia and to a lesser extent, in Ecuador as well. Indeed, the denunciation of ICSID by Bolivia and Ecuador may suggest more in common in their strategies than is in fact the case. The latter became involved in very extensive legal proceedings while Bolivia has managed to secure voluntary agreements with many of its investors and limit its exposure to international arbitration, at least in its energy sector. Of the two investors that resisted the Venezuela government’s demands, ConocoPhillips was initially careful to continue its discussions with the state and to stress that the negotiations are being conducted in an amicable manner. In later years, the apparent difficulty in making this strategy work, led to a more robust approach. At the same time, negotiations have been pursued by the parties concerned. In each of these cases, the legal strategy chosen is one that reflected different commercial interests in the host state in the context of the company’s worldwide interests. In ExxonMobil’s case (in Venezuela), as well as several others such as City Oriente, the use of legal measures is perhaps better understood as establishing terms acceptable to the investor for an exit from the country concerned.

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BITs and stability The idea that the substantive legal protections in a BIT might act as a substitute for a stabilization provision in a contract has been shown to be misplaced. The conclusion is that its time has not yet come and appears unlikely ever to do so. The doctrine of FET is nonetheless developing in ways that are highly encouraging for those investors who can produce evidence of legitimate expectations about the long-term stability of the host state’s legal and regulatory framework. Without the hard evidence of a stabilization clause, arbitral tribunals are likely to take a cautious approach to the potential of FET to effect stabilization, and investors may wish to proceed carefully with a doctrine that is still ‘evolving’.

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Argentina has provided a laboratory for the testing of the value of BITs. However, from a practical point of view, the results are far from encouraging. The many published documents of ICSID proceedings have provided a rich source of data for examination of legal principles in international investment law and have done much to contribute to the burgeoning literature on this subject. Indeed, their value to researchers is evident from their appearance in several chapters of this book. However, from the perspective of a foreign investor which made an investment in Argentina in the 1990s, the procedural complexities of many of the awards, the time and expense involved, as well as the difficulty in enforcing an award, and the clear sense that this recourse to law was an effort to extract the maximum from an unavoidable exit strategy gives them the character of a series of warning beacons rather than examples of investment law ‘in action’.

I. Conclusions 399 However detailed the analysis has been in this Chapter, it does not provide evidence of any ‘trend’ in energy investment law in Latin America. It has been focused on only a few states and their experience with hydrocarbons and minerals. Other states—Peru, Colombia, Chile, and Costa Rica—have taken a different approach to foreign investment and have far fewer disputes with investors. The considerable growth of renewable forms of energy and a new energy mix may also lead to changes in approach to energy investment as well as changes in the subject matter of energy disputes.

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8

Russia, Ukraine, and Central Asia Treaty and Contract Stability in the Post-Soviet Space

A. Introduction B. The Pendulum Swings

(1) (2) (3) (4)

Russia Kazakhstan Central Asia and the Caspian Ukraine

C. Providing Legal Stability

(1) The procedural approach (2) The multi-tiered approach

D. Testing Stability Mechanisms

(1) Contract renegotiations: Russia (2) Contract renegotiations: Kazakhstan

8.01 8.13 8.14 8.27 8.37 8.40 8.44 8.49 8.54 8.61 8.62 8.81

E. Stability and Gas Contracting

(1) Transitioning to a market-oriented framework (2) Transit disputes (3) Conflicts resolved

F. Engaging with the Energy Charter Treaty

(1) The early awards (2) The Yukos cases (3) Further use of the ECT

G. Stability and Mining in the Region H. Conclusions

8.95 8.96 8.100 8.107 8.109 8.113 8.120 8.137 8.157 8.170

The circumstances surrounding the decision to invest . . . were certainly not an indication of stability of the legal environment. Therefore, in such a situation, no expectation that the laws would remain unchanged was legitimate.1 Parkerings-Compagniet AS v Lithuania

A. Introduction 8.01

Investor-state energy disputes experienced a sharp, patterned increase in the former communist states of Eastern Europe and Central Asia at roughly the same time as the nationalist movements in Latin America and other parts of the resource-exporting world. Some parallels were present but, when based on a vague notion of ‘resource nationalism’, were superficial, and tended to overlook two deeper features of these regions that indeed make a comparison interesting for the international investment lawyer. The first is the existence of a highly dynamic social and economic context which was both attractive to investors and sought to attract inward investment, and at the same time needed a legal framework to make the two forces come together. The second is the

1 Parkerings-Compagniet AS v Lithuania, Award, ICSID Case No ARB/05/8, IIC 302 (2007), 11 September 2007, para 335.

A. Introduction 401 host states’ inexperience with a body of international investment law that was at the time beginning a period of unprecedented growth and whose embrace offered potential challenges to existing domestic legal cultures and traditions. The presence of these two features in this geographical setting offers an ideal opportunity to examine how the long-term stability typically required by an energy investment can be provided, and, if change occurs as a result of host state measures, how an adjustment in the legal regime can be managed. The above two features permit some comparisons and contrasts but also help to explain how expectations of international investment law and its institutions rose and fell. In each region, investment disputes followed a period of unprecedented foreign investment, much of it in the energy sector. They also followed a period in which large numbers of BITs had been concluded by host governments with the home states of investors located in Europe and North America, and after many contracts had been signed with foreign oil, gas, and electricity companies.2 The public policy shift to robust market liberalization and privatization was to prove fertile ground for disputes and especially energy disputes given the speed with which they had been applied in the energy sector and the broad scale. Similarly, by the early years of the Millennium, the reformist governments of the 1990s had already been succeeded by less investor-friendly regimes, with policies often driven by a sense of grievance against the terms on which deals had been agreed or approved by their predecessors. The pendulum began to swing away from the optimistic prospect of foreign investment. At the same time, investors brought claims against host states in the region to international arbitral tribunals for billions of dollars in damages.3

8.02

There are nonetheless four important differences between the investor–state disputes that emerged in this region and those examined in the Latin American context. First, these societies had very recently rejected a long-held, state-driven model of economic life, dominated by large state corporations, and a highly politicized, instrumentalist concept of law, evident in their internal legal procedures and institutions and in their limited engagement with international economic law and its institutions. Their governments were—especially in the 1990s—engaged in a wide-ranging transition to a market economy and a rule of law that had no parallel in Latin America. In this part of the world, the erstwhile commitment to ‘statist’ economic policies had not been a doctrine held by one-or two-term governments borne to power on a current of resource nationalism or anti-foreigner sentiment, but rather expressed an alternative economic and social model that had been forced on Central European states for more than forty years and, further to the East, had held sway for more than seventy years. For each of the governments in the thirteen new states that succeeded the Soviet Union, the challenges were to provide a basis for a system of contract and property rights, to introduce a regime for the speedy introduction of foreign capital and to facilitate their entry into the world’s principal economic institutions such as the World Trade Organization (WTO) and the World Bank group, including the International Centre for Settlement of Investment Disputes (ICSID). When a reaction to this process set in, it is hardly surprising that it should

8.03

2 In 2008 and the first half of 2009 no fewer than 25 BITs were concluded by these states. The states of South- East Europe and the Commonwealth of Independent States had 613 BITs or 23 per cent of all BITs in existence: UNCTAD, Recent Developments in International Investment Agreements (2008–June 2009), IIA Monitor No 3 (2009) 4. 3 The largest of these so far is the series of claims brought by investors in the Russian company, Yukos, amounting (according to some estimates) to US$100 billion: ‘A Victory for Holders of Yukos’, New York Times, 2 December 2009.

402 Chapter 8: Russia, Ukraine, and Central Asia have been fuelled by this historical context of state preponderance in economic life and realpolitik in legal culture. 8.04

A second difference was that a single state had a pervasive influence on the energy economy of the entire region. The newly established Russian Federation inherited an energy infrastructure of pipelines, electricity networks, nuclear plants, and energy materials such as oil, gas, coal, and uranium, that made it an energy power of the first order; the integrated character of the networks also established strong relations of dependence upon Russia among the countries of Central Europe and the Baltic states, and many of the Central Asian states that had been part of the Soviet Union. No state in Latin America enjoyed a remotely comparable influence among its peers. As Russia moved to establish market-based pricing for its gas and oil supplies to its neighbours, this dependence upon a single supplier was the source of continual, severe economic difficulty for several states. In this context, a commercial party might find that its contract with a state entity (say, a state-owned energy utility in Ukraine) had been frustrated by actions taken by a neighbouring state or its energy producer (say, Russia), affecting access to interrelated gas infrastructure with direct financial consequences for the investor but which raised questions about exactly which state party was liable for the loss and resulting damages. The gas crises between Russia and the Ukraine from 2005 triggered just such a situation; by 2009 there were at least eight investor-state disputes pending before the Stockholm Chamber of Commerce (SCC) which had their roots in these events, and in the next decade many more disputes about transit and supply, characterized by some observers as the ‘gas wars’.4

8.05

In this region the distribution of energy resources, especially fossil fuels, is more unequal than it is among the states of Latin America. Many states have no domestic resources of oil and gas at all: examples would be Armenia, Belarus, and Moldova. Indeed, apart from Russia, Kazakhstan, Turkmenistan, and Azerbaijan, none of the newly independent states had significant domestic quantities of fossil fuels for export as a source of hard currency. Nor were the acute differences confined to ones of energy materials. Geography conferred on some states distinct economic advantages accruing from the transit of energy across their territory, which had formerly crossed a single unified state. Ukraine and to a lesser extent Belarus and Moldova acquired a special role in this respect as host states for oil and gas crossing from Russia to the EU. For them, their principal energy asset was their transit capacity, and in Ukraine’s case also a very significant storage capacity, giving them an important source of revenue and leverage when negotiating gas prices for imports intended for domestic consumption. For others, geography proved a source of disadvantages: Central Asian states such as Uzbekistan and Kyrgyzstan were landlocked and nearer the emerging Chinese market than any traditional ones, forcing them to focus more on domestic electricity market reform and investment in mining when designing their energy and natural resources policies. For the states around the Caspian Sea area, even the long-proven reserves of fossil fuels had to face a myriad of legal and political hurdles if foreign investment was to be introduced, not least because what had formerly been virtually an inland sea of a single state had become a source of territorial disputes among its five littoral states.5 From the point of view

4 For example, Pirani, S. (2018) ‘After the Gazprom-Naftogaz Arbitration: Commerce Still Entangled in Politics’, Oxford Institute of Energy Studies, March (Oxford Energy Insight No 31). 5 For a comprehensive discussion of the legal issues, see Hober, K. (2004) ‘Ownership of the Oil and Gas Resources in the Caspian Sea: Problems and Solutions—International Arbitration and Contractual Clauses’, Stockholm Arbitration Report, 1–40, Arbitration Institute of the Stockholm Chamber of Commerce.

A. Introduction 403 of energy investors in particular, some states were therefore of much greater interest than others. Those which offered the widest range of legal incentives were not necessarily the ones with equally attractive opportunities in their energy and natural resources sectors. The presence of a recognizable, market-oriented legal framework backed by acceptance of treaty obligations could not compensate for poor geology or remoteness from markets, or a legacy of environmental damage, creating the risk of future disenchantment with the new, unfamiliar investment law frameworks put in place on the advice of Western experts. Finally, a unique feature of the region’s transition to a market-oriented set of economies and related rule of law was the existence of a powerful regional block on its doorstep, the EU. The influence of the EU on the development of this region can hardly be exaggerated. Three states from the Soviet bloc became members and ten countries in Central Europe also joined, adapting their domestic laws to those of the EU legal order in the process. In energy terms, the EU influence was felt in three other ways. At the instigation of the EU, much emphasis was given to the relevance for the new states of the Energy Charter Treaty (ECT), a market-oriented Multilateral Investment Treaty (MIT), dedicated to long-term cooperation and investment stability in the energy sector, which the overwhelming majority of states in the region both signed and ratified (with the notable exception of Russia, which in 2009 formally indicated its intention not to ratify). Without the active support of the EU, it is unlikely that the ECT would ever have completed the lengthy negotiations among dozens of states required to become international law. Secondly, the transition to a market-oriented economy occurred at a time when the EU was exploring new ways of deepening its own commitment to a market economy in energy, particularly in electricity and gas. The pro-competition energy laws and policies on among other things, pipeline and grid access, unbundling, and independent network regulation, were taken over by the applicants for membership, but had a wider influence in the region.6 There was a third factor: for those states seeking membership of the EU, the remote prospects of petroleum discoveries in their territories could be offset by significant potential for EU investment across a wide range of domestic industries, new and old, including electricity generation and gas transportation and distribution.

8.06

Given all of these unique features, the region constituted—at least in the early 1990s—a unique geographical space that combined elements of a tabula rasa in terms of modern economic law; the frontier status of being the first new major province for the international oil and gas industry for a generation; a highly-integrated electricity and gas infrastructure and, for the most part, governments that were committed to making a transition from a discredited, state-driven social and economic system to a market-oriented economy characterized by the Rule of Law and integrated into the global economic system. In this very fluid setting, what were the legitimate expectations of foreign investors contemplating the opportunities in the energy and natural resources sector? What precautions would be appropriate in addressing the familiar risks that at a later stage the host state might take unilateral measures to change some or all of the terms of the investment contract?

8.07

The legal culture in the post-communist states was challenging. The Rule of Law as understood in the OECD countries had no basis in the former Soviet Union or the Commonwealth of Independent States (CIS) as its successor became known for a time. The legal culture and institutions for a modern market economy had to develop from a zero base. This left investors

8.08

6 For an overview of these energy market liberalization laws relevant to this time period, see my (2007) Competition in Energy Markets: Law and Regulation in the European Union (2nd edn), Oxford: OUP.

404 Chapter 8: Russia, Ukraine, and Central Asia vulnerable to actions taken by governments that were more or less flagrant departures from any Rule of Law-based model of governance. There were many instances of this that emerged in subsequent years, with respect to say the independence of the judiciary, and administrative practices of the state authorities. The states of Central Europe were in a different situation, however. Even at the earliest stage of the post-communist era, Poland, Hungary and the then Czechoslovakia had a fairly developed legal system and an institutional memory of functioning courts and a functioning bureaucracy. These had been quasi-democracies for some years and quickly developed their business law frameworks along the lines of the Rule of Law. The three Baltic states could be located somewhere between these two groups. 8.09

Since many of the countries concerned had acquired state-hood for the first time, the implantation of a legal framework for inward investment was carried out by means of a wholesale reform establishing investment and resource laws in each state, heavily influenced by Western experts. This meant that investors could count on the existence of a body of general economic law and also sector-specific laws on petroleum, energy, mineral resources, and so on. This supplemented and supported the various kinds of agreements which individual investors made with local investors or state entities. A large number of BITs were concluded with the home states of investors in an attempt at risk mitigation of inward investment. However, a more ambitious multilateral instrument for investment protection was embraced by virtually all states in the region: the ECT.

8.10

More than two decades later, the various forms of legal protection have been put to the test and many of them have been found wanting. Disputes began at a trickle but have become a torrent in some countries. Given the large amounts of capital involved, they have often attracted considerable publicity. In Russia, for example, the initial efforts to establish a Rule of Law over energy developments never really succeeded in putting down roots for foreign investors, in spite of well-intended and determined attempts to do so, and a statist approach has become entrenched. The introduction of sanctions has exacerbated this situation. In several well-publicized cases, foreign investors were forced to negotiate new contractual arrangements in which a share of their interests was transferred to the state or a state entity at a low price. In Kazakhstan, by contrast, the initial, diverse range of legal guarantees of stability to foreign investors were respected for many years but also began to bend under the weight of a series of unilateral state measures to generate higher revenues for the host state. In Central Asia generally, there have been a number of arbitrations involving disgruntled investors in several economic sectors including energy. Some of these disputes have been arbitrated under the ECT.

8.11

The attitude of arbitral tribunals to the risks that investors faced in this region is vividly illustrated in the case of Parkerings, involving a BIT between Norway and Lithuania. The tribunal observed:7 In 1998, at the time of the Agreement, the political environment in Lithuania was characteristic of a country in transition from its past as being part of the Soviet Union to candidate for the European Union membership. Thus, legislative changes, far from being 7 Parkerings-Compagniet AS v Lithuania, Award, ICSID Case No ARB/05/8, IIC 302 (2007), despatched 11 September 2007, para 335; see also Genin v Republic of Estonia, ICSID Case No ARB/99/2 (2001), despatched 25 June 2001. Commenting on the Genin case, K. Hober (2007) notes the weight given by the tribunal to the volatile context of transition in such countries, and asks why an investor should enjoy less protection than in non- transition countries: the intention appears a relativistic one, that ‘the international minimal standard is—or should be—lower in countries in transition and/or in developing countries’: Investment Arbitration in Eastern Europe, 125.

B. The Pendulum Swings 405 unpredictable, were in fact to be regarded as likely. As any businessman would, the Claimant was aware of the risk that changes of laws would probably occur after conclusion of the Agreement. The circumstances surrounding the decision to invest in Lithuania were certainly not an indication of stability of the legal environment. Therefore, in such a situation, no expectation that the laws would remain unchanged was legitimate.

In this chapter the different strategies worked out by investors and host states to provide long-term stability for energy investments will be examined (sections B and C). In this region they cover stabilization by contract, by treaty and domestic law. The major tests of these stability mechanisms in recent years are reviewed, particularly against the background of rising commodity prices in the first decade of the twenty-first century (section D). In doing so, the actions of the host state, which were often driven by disappointment with the results of the framework of economic law introduced in the 1990s, are weighed against the performance of contractual obligations by the investor. Gas contracting has largely a commercial character with only a modest role for foreign investment, but some aspects of this are considered (section E). The very different forms of stability introduced by the ECT are also considered through a review of its emerging jurisprudence (section F). Finally, some consideration is given to the substantive protections given to investors in the mining sector in this region (section G), prior to offering some conclusions (section H).

8.12

B. The Pendulum Swings The initial welcoming of foreign investment in Eastern Europe and Central Asia was often characterized by an ‘irrational exuberance’ among governments and some sections of the population about what economic benefits might follow from integration into the world economy and subjection to its Rule of Law. A reaction set in earliest in the Russian Federation, evident in the difficulties in securing a law on production sharing for its very large hydrocarbons sector and in going beyond signature of the ECT to full ratification by the legislature. In energy investment terms, the new state that had benefited most from the influx of foreign capital, Kazakhstan, was also the most cautious about adopting measures that effectively changed the direction of the investment pendulum. In each case, when such measures were adopted towards energy investments, they were ones that investors had long since found to be typical of political risk on the international investment scene: forced contract negotiations, revision of tax rules, and occasional harassment of investors by the state authorities, using criminal or civil procedures or both. In Central Europe the pattern was quite different, with the entry into the EU of twelve new states in 2003 acting as a brake upon any general retreat from a pro-investment stance by the governments concerned.

8.13

(1) Russia In the early 1990s, the Russian government under President Yeltsin was keen to attract investment into the development of oil and gas fields, particularly those in technically difficult offshore or frontier areas, such as Arctic waters. The prospect of access by foreign energy companies to very large, non-OPEC (Organization of Petroleum Exporting Countries) sources of fossil fuels created a climate of unprecedented interest in investment in Russia. The government adopted two approaches to the award of petroleum agreements: one was

8.14

406 Chapter 8: Russia, Ukraine, and Central Asia based on a law governing the use of the Subsoil adopted in 1992,8 in which a domestic or foreign investor required a licence from the state authorities to explore for, develop or produce petroleum, conferring rights subject to Russian administrative law;9 the other was based on the production sharing concept, which granted contractual rights and obligations governed by civil law, in which the state as the owner acted as a commercial party.10 This idea was well established in the international oil industry and appropriate to large-scale projects but was new to Russia, provoking controversy since it offended nationalist sensitivity about the use of the country’s natural resources. Nonetheless, it was given legal form when the government issued a Presidential Decree on the award of Production Sharing Agreements (PSAs) in 1993, followed two years later by a dedicated law on PSAs.11 8.15

It should also be noted that further legal guarantees of stability were provided by means of the Foreign Investment Law adopted in 1991 and modified in 1993.12 These measures support the view that at that time there was a genuine political will to create attractive conditions for foreign investment.

8.16

The PSA route for foreign investors offered the prospect of exempting them from the uncertainties of the country’s oil and gas tax and licensing regimes, which were still emerging from the Soviet era when very little foreign investment had been permitted (only on a joint venture basis and none on the basis of a systematic legal framework). It offered a much more attractive legal basis for large-scale investment than the Subsoil Law of 1992, which contained no guarantees of fiscal stabilization and, as a creature of administrative law, was more vulnerable to unilateral bureaucratic intervention. The PSA increased predictability for the foreign investor by imposing contractual obligations on the state and making it liable for breach of contract. Three PSAs were signed as a result of the 1993 Decree, covering two areas in and around Sakhalin Island in the Russian Far East and the Kharyaga field in Northern Siberia. The PSA law of December 1995 was designed to provide increased legal clarity and security: it contained stabilization guarantees in Article 17 that are aimed at protecting investors against adverse changes in both federal and regional laws and regulations at a future date (limited in scope with provision for balancing in the event of unilateral changes, with international arbitration permitted).13 Several clauses of the PSA law were nonetheless 8 Russian Federation Law ‘On Subsurface’ No 2395-1 dated 21 February 1992, as amended. 9 The Subsoil Law did not expressly provide for a combined exploration and production term, usually considered a sine qua non for investment in the petroleum sector, but in practice the licensing authorities issued combined licences for up to twenty-five years. Production and combined licences were offered by tender or auction (now usually by auction with the winner being the party that offers the highest one-off payment for the right to produce/develop the resource). 10 Art 124 of the Russian Civil Code. The PSA Law expressly states that the PSA contract is subject to civil law and confers rights and obligations of a civil law character. 11 Decree No 2285 ‘On Issues of Production Sharing Agreements in Subsoil Use’, 24 December 1993; Federal Law No 225-FZ On Production Sharing Agreements, 30 December 1995, as amended 1999 and 2001. 12 Federal Law on Foreign Investments, Law No N 160-FZ, as amended. A new Investment Law entered into force in April 2020 with an option for investors to apply for Investment Agreements, containing stabilization provisions: Federal Law ‘On the Protection and Promotion of Capital Investments and the Development of Investment Activity in the Russian Federation’. Relevant to this is the Federal Law No 57-FZ, ‘On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the National Defence and Security of the Russian Federation’, 7 May 2008. 13 For a detailed assessment of the PSA Law see Hober, K. (1997) The Russian Law on Production Sharing Agreements (East/West Executive Guide: London), 353–374. Article 17(2) contained an exclusion of changes that were introduced by legislation in relation to standards for safe conduct of work, protection of the subsurface, natural environment, and health of the population, as long as the aim of such legislation was to bring those standards (or norms or rules) into line with similar standards that were accepted and generally recognized in international practice.

B. The Pendulum Swings 407 in conflict with the terms of the PSAs that had already been granted for Sakhalin-I and Sakhalin-II. In 1999 this law was amended and ‘grandfathered’ the existing PSAs from the 1995 and 1999 legislation: that is, the provisions of these PSAs were effective even if they contained terms that were inconsistent with the provisions of the PSA law. By this stage, most of the necessary legal conditions had been established for the grant of PSAs, including an additional chapter of the Tax Code and the identification of areas that were suitable for the PSA form of contract.14 At the same time, the sale of existing state-owned oil companies to Russian private investors had created a climate in which domestic private companies could expand their operations. In the event, a significant investment by BP in a joint venture with TNK, a Russian company, put an end to the idea that a PSA was essential for foreign investors in the Russian petroleum industry. This was an investment in an onshore field conducted almost entirely on the basis of a tax and royalty regime. It encouraged other foreign investors to view the legal framework in a more positive light (although in fact it had become less, not more, secure).

8.17

The gas sector was notably absent from the above legal trends. Under the leadership of Viktor Chernomyrdrin, the Unified Gas Transportation System became a part of the assets of a single monolithic entity, called Gazprom; in 1992 a Presidential Decree transformed Gazprom into a joint stock company.15 The Gas Supply Law that was adopted in 1999 took a different and less restrictive approach towards the participation of foreign capital. It enshrined in law the Single Gas Supply System, which is owned by the state entity, Gazprom.16 It was and remains the core of natural gas production, transportation, storage and supply for the whole of Russia, and controls the export infrastructure which is directed at supplying gas to customers in the EU.17 Its strategy at this time was to secure cooperative relations with Central Asian states to secure gas for the Russian market, and manage relations with transit states while increasing the prices they paid for gas supplied by Gazprom. Until January 2006, foreign individuals and companies were not permitted to own more than 20 per cent of Gazprom. This was replaced by the requirement that the state or state companies must own not less than 50 per cent plus one share in Gazprom. For a while it had an open albeit limited approach to the participation of foreign capital in its shares and operations, with the German company, E.On, holding a 3.5 per cent asset stake until 2010.18

8.18

The electricity sector experienced a different and much slower process of reform. Like the gas sector, it was organized around a unified system, known as the Unified Energy Systems (UES), controlled by the state, with Gazprom as the owner of a significant share. Regional electricity utilities and some independent generators also played a role in the system. However, it was not until 2003–2004 that reform reached a stage at which large-scale foreign investment was sought to improve and expand the infrastructure.19 Reform accelerated in

8.19

14 However, some of the required legal changes were either never adopted or did not become operational, so that a unified, comprehensive legal regime for PSAs was never completely put in place. In part this was due to opposition from politicians but also from the increasingly influential domestic oil industry. 15 Presidential Decree of 1992 ‘On the Transformation of the State Gas Concern ‘ Gazprom’ into a Russian Joint Stock Company ‘ Gazprom’ ’. 16 The state owns 50.002 per cent of the shares in Gazprom. 17 Federal Law No 117-FZ ‘On the Export of Gas’, dated 18 July 2006: the owner of the SSGS or its subsidiary (Gazexport) holds the exclusive rights to export gas from the Russian Federation. This Law was amended in December 2013 to partially liberalise the export of LNG by certain companies. 18 For an overview of Gazprom’s history see the study by Henderson J. & Moe, A. (2019). The Globalization of Russian Gas, Cheltenham: Edward Elgar. 19 Federal Law No 35-FZ of 26 March 2003 on the Electricity Industry, amended in 2007; Resolution No 526 of 11 July 2001 on Restructuring the Electricity Industry of the Russian Federation. For a discussion of the reform

408 Chapter 8: Russia, Ukraine, and Central Asia 2008 when UES was dissolved, with the state retaining control over the transmission grid and a number of generating companies established, some of which included foreign investors as part-shareholders. Typical concerns of foreign investors lay in the predictability of the untested legal and regulatory regime. 8.20

The election of Vladimír Putin as President in 2000 ushered in a new approach to foreign investment in the oil and gas industry. Essentially, it was based upon two key assumptions: natural resources must be under state control, and not only ownership; energy policy is inseparable from energy security, and forms part of the country’s national security policy. These core ideas were articulated in a number of documents: notably, the scholarly writings of Putin, and the 2003 Energy Strategy of the Russian Federation.20 Among the many statements in the former that may be cited to illustrate its commitment to the primacy of the state in Russia’s energy sector is the following: Regardless of whose property the natural resources and in particular the mineral resources might be, the state has the right to regulate the process of their development and use.21

The 2003 Energy Strategy was an official policy document adopted in the form of a government decree.22 It placed energy policy firmly within the sphere of security policy, and emphasized the need to counter geopolitical and macro-economic threats, not least in dealing with Russia’s dependence upon transit states for its exports of gas and oil. 8.21

Implementation of this New Energy Policy with the state at its core was essentially carried out by three methods: firstly, the adoption of new legislation to limit foreign participation and give priority to state-controlled oil and gas entities; secondly, the use of state power to force renegotiation of certain (but not all) existing contracts so that the state acquired a controlling interest; thirdly, the nationalization of a major Russian oil company, Yukos, to create a state champion in the oil sector, Rosneft. As a result, the PSA was effectively withdrawn as a basis for future investments.23 With one exception, no PSAs were signed under the legislation of the 1990s after the initial three, although as many as thirty areas have been designated as suitable for PSAs.24 With respect to gas, the New Energy Policy entailed an enhancement of Gazprom’s control over strategic development of the country’s gas supply in East Siberia and the Russian Far East. Under a Law on the Export of Gas, Gazprom and its wholly owned subsidiaries were granted an exclusive right to export gas.25 process see Boute, A. (2009) ‘Improving the Climate for Foreign Investments in the Russian Electricity Production Sector (1): The Role of Investment Protection Law’, OGEL 2: . 20 These have been comprehensively analysed by K. Hober in several publications: see for example Hober, K. (2009), ‘Law and Policy in the Russian Oil and Gas Sector’, J of Energy & Nat Res L 27, 420–444; (2011) ‘Russian Energy Policy and Dispute Settlement’ in Coop, G. (ed), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty, New York: JurisNet LLC, 315–356. 21 Putin, V.V. (2006) ‘Strategic Planning of the Production of Mineral-Natural Bases in the Region under the Development of Market Economy Conditions’ (PhD dissertation, 1997), Uppsala Yearbook of East European Law, translated by K. Hober, at 6. 22 Energy Strategy of the Russian Federation to 2020, Decree 1234–5 of the Russian government, dated 28 August 2003. In 2020 a new strategy was published, looking forward to 2035: (accessed 15 February 2021). 23 There was an initiative by Minprirody to lift restrictions on the creation of new PSAs for continental shelf projects but it came to nothing. 24 The exception was a PSA granted in 2002 for the Kurmangazy oil field on the Caspian maritime border between Russia and Kazakhstan. Its ownership structure was quite different from the others: it was a 50–50 joint venture between Rosneft and KazMunaiGaz, two state-owned entities. 25 Federal Law No 117-FZ ‘On Gas Export’, dated 18 July 2006, Art 3.

B. The Pendulum Swings 409 In practice, the clarity of vision in the New Energy Policy masks sources of uncertainty for foreign investment: conflicts between ministries, an absence of pressures on state companies to invest or reform and a tendency for different energy sectors to pursue their own strategies. Examples of this include the central government’s failed efforts to merge Gazprom and Rosneft (the state entity which holds the residual unprivatized oil interests of the state), and the conflicts over the future of Yukos’ main production unit, Yuganskneftegaz; disagreements between Gazprom and the UES, the monopoly state entity in charge of the electricity network, over Gazprom’s proposed reduction of gas supply for electricity generation and its purchase of power generation units from the restructured UES; more generally, continuing tensions between Gazprom and the central government over matters such as the levels of domestic gas prices and Gazprom’s limited enthusiasm for liberalization or reform. It also plays a role in the absence of any clear moves to change the control of the consortium in the Sakhalin-I PSA.26

8.22

The relevant legislative changes adopted were ones that concerned the legal framework of the subsoil law and the security aspects of oil investments. In 2008 substantial amendments were made to the Subsoil Law.27 They permitted a wide element of administrative discretion in sensitive areas such as revocation of a licence. The grounds on which a licence could be revoked were unclear, such as breach of an ‘essential term’ of the licence. The state may also revoke a licence upon discovery of a field and pay the ex-licensee compensation. However, this is unlikely to adequately compensate the investor for the degree of risk and cost incurred prior to that stage. For deposits classified as being ‘of federal significance’, the foreign investor has to obtain a consent to develop fields of that size. The threshold for such classification as strategic is low: any field with or with more than fifty billion cubic metres of gas or seventy million tons of oil, and any oil and gas resources on the continental shelf. A federal list is to be published of around two thousand strategic deposits, which includes about two hundred oil and gas fields, most of which are in Siberia or the Russian Far East.28

8.23

The scope for foreign investment in the oil and gas sector was further circumscribed by the adoption of a Strategic Investments Law in 2008.29 In general, this law comprises a series of changes to other, existing laws, and is the successor to previous investment laws. This regulated the access of foreign investors to forty-two different sectors of the Russian economy described as strategically important for Russia, and included the geological exploration and/ or extraction of oil and gas and other mineral deposits within subsoil plots of federal significance (described as a Strategic Block under the Subsoil Law). By and large, these Strategic blocks are reserved for Russian owned or controlled entities. Controls were also imposed upon the acquisition of companies defined as Strategic Companies, and required prior approval by the relevant state authority. The rules were defined more strictly with respect to companies in the natural resources sector, and cover indirect as well as direct control over strategic entities. Consent is required for foreign investors to acquire as little as 10 per cent of the shares of a Russian company. It may be noted that the Strategic Investments Law does not actually prevent foreign investment but rather imposes conditions upon the framework

8.24

26 See the discussion by Krysiek, T.F. (2007) ‘Agreements from Another Era: Production Sharing Agreements in Putin’s Russia, 2000–2007’, Oxford Institute for Energy Studies Working Paper 34. 27 Federal Law No 58, ‘On the Introduction of Amendments to Certain Provisions of Legislative Acts of the Russian Federation’. 28 Hober (2009) at 438. 29 Federal Law No 57-FZ, ‘On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the National Defence and Security of the Russian Federation’, 7 May 2008.

410 Chapter 8: Russia, Ukraine, and Central Asia within which investment is permitted.30 Linked to this Law is the State Secrets Law of 2007, which sets out the legal grounds for state secrecy and makes distribution of information that is subject to state secrecy to unauthorized persons a criminal offence.31 This includes information on ‘balance reserves’ of strategic natural resources including oil and gas. Several ministries have the power to supervise the management of information that constitutes state secrets. Together, these laws emphasize the limited scope available to foreign investors: the state is not only the owner of the resources but has the controlling influence over their development. 8.25

At the same time, it became clearer that the Russian Federation had no intention of ratifying the principal source of external legal discipline on its oil and gas sector, the ECT. On 30 July 2009 the then Prime Minister, Vladimir Putin, adopted a Decree (No 1055-r) on the issue of a formal notification of his government’s intention not to become a party to the ECT and its related Protocol on Energy Efficiency. Several days later, the Ministry of Foreign Affairs announced that it had communicated this to Portugal as depositary of the ECT. In effect, it withdrew. The Decree stipulated that this notice is to be made in accordance with part (a) of Article 18 of the Vienna Convention on the Law of Treaties 1969 which provides that once a state signs a treaty it is obliged to refrain from acts that would defeat the object and purpose of that treaty until the state makes clear its intention not to become a party to such a treaty.32 A little earlier, on 20 April 2009 President Medvedev of Russia had announced a proposal for an alternative international energy treaty to the ECT which would cover similar subject matter to that in the ECT but which would have a wider membership and would presumably replace it. Entitled ‘Conceptual Approach to the New Legal Framework for Energy Cooperation (Goals and Principles)’, it was developed in the aftermath of the 2009 gas crisis with the Ukraine which had led to a suspension of most of Russian gas exports to the EU for a period of two weeks. The proposal emphasized the ‘unconditional’ character of state sovereignty over energy and natural resources; the need for a comprehensive agreement on energy transit based on non-discriminatory and cost-justified transit tariffs and incorporating a preference for diplomatic over judicial means of settling transit disputes, but leaving open a recourse to arbitration procedures under UNCITRAL Rules. The document asserts that the ‘existing bilateral arrangements and multilateral legally binding norms governing international energy relations have failed to prevent and resolve conflict situations, which makes it necessary to efficiently improve the legal framework of the world trade in energy resources’.33 This is a clear reference to the ECT’s lack of presence in a number of disputes, such as the transit dispute several months earlier between Russia and the Ukraine (paras 8.100-108). It may also have been a response to the ongoing disputes with Yukos investors (paras 8.120–8.132).

30 Hober (2009) at 439: ‘[t]‌he State is thus in full control.’ 31 Federal Law No 46-FZ, ‘On Amendments to the Criminal Code of the Russian Federation’, dated 9 April 2007. 32 For an interesting discussion of the energy security implications of this development, see van Agt, C. (2009) ‘Tabula Russia: Escape from the Energy Charter Treaty’, Clingendael International Energy Programme Briefing Paper. 33 Paragraph 2; Official text in English, published 21 April 2009. The reference to bilateral ‘legally binding norms’ is ironic. Russia is a capital exporting country and Russian companies increasingly invest abroad where they rely upon the familiar legal guarantees in BITs and dispute settlement by international arbitration. The 2009 Russia–Venezuela BIT, for example, contains an arbitration clause with (at the choice of the investor) three options including ad hoc arbitration under UNCITRAL Rules; a state court in the host state and for the first time in a Venezuelan BIT, the Stockholm Chamber of Commerce. It also includes a compensation provision in the event of expropriation.

B. The Pendulum Swings 411 In recent years it is Russia’s engagement with the international investment regime outside of its domestic space rather than its treatment of foreign investors at home that has attracted most attention.34 Apart from the continuing and growing number of legal proceedings with former Yukos shareholders, discussed below, Russia has had a role as respondent in cases brought by Ukrainian investors following its annexation of the Crimea region, also discussed below, and several cases brought by individual investors against Russia or state entities in international arbitral forums.

8.26

(2) Kazakhstan In the 1990s the new Republic of Kazakhstan introduced several basic laws to attract foreign investors into its nascent petroleum industry: a Foreign Investment Law, a Tax Code, a Petroleum Law, and a Subsoil Law. Although it offered PSAs to foreign investors, these were concluded by special agreement and not only on the basis of a dedicated PSA law, which was not adopted until 2005. These laws offered a varied and extensive range of stability guarantees. Viewed as a whole, the legislative structure constituted a multi-tiered legal regime for stabilizing investments, which may have been unique in the world in terms of its scope and the variety of guarantees it offered to investors. For example, its Foreign Investment Law of 1994 offered a general tax stability guarantee to the investor’s position, covering ten years or the life of the contract.35 Exceptions were made with respect to matters of national security, defence, environmental safety, health protection, and morality. In the 1995 Tax Code it provided tax stability. These guarantees of fiscal stability in the general legislation were supplemented by specific assurances about the way in which the tax rules would be applied, comprising tax instructions and explanatory letters. There were further guarantees in the sector-specific legislation, such as the Petroleum Law and the Subsoil Law.36 Both Article 57 of the Petroleum Law and Article 71 of the Subsoil Law included similar general guarantees for investors against adverse changes in legislation adopted after contracts have been concluded. Once again, there are exceptions covering national security, defence, environmental safety and health protection. Furthermore, there were also protections by Presidential Edict or Governmental Decree which provided tax assurances. Finally, there were stabilization clauses in the petroleum contracts it offered, which were often in the form of PSAs. Behind this favourable domestic legal regime, Kazakhstan made every effort to sign and ratify the ECT and to conclude twenty-one BITs with foreign investors’ home states, including France, Germany, Italy, the Netherlands, the UK, and the US.37

8.27

The wide variety of stabilization measures offered to foreign investors made sense at a time when the strategically important oil and gas industry required very large amounts of capital to become established. Long-term cooperation with large international oil companies was necessary to attract the best technologies, expertise and capital for the development of the

8.28

34 There are exceptions however. A joint venture arrangement set up as long ago as 1992 by a US company, First National Petroleum (FNP), with Tyumenneftegaz to develop an oil field in Siberia, led to a dispute which has been heard by no less than three arbitral tribunals, resulting in an award against the Russian entity in 2018, and enforcement action in the USA: GAR, 15 January 2019: ‘Russian subsidiary targeted in Texas.’ 35 Art 6, Foreign Investment Law. 36 Law on Petroleum No 2350 of 28 June 1996; Law on Subsoil and Subsoil Use No 2828 of 27 January 1996. 37 UNCTAD Investment Policy Hub: Kazakhstan: (accessed 15 February 2021). By early 2021 the number of BITs had grown to fifty-one, although not all were in force.

412 Chapter 8: Russia, Ukraine, and Central Asia country’s petroleum resources, to build export pipeline routes and expand the domestic energy infrastructure. A pro-Western approach to investment also provided a counter to the historical context of Russian political dependence from which the country sought to emerge in the early to mid-1990s. Its lack of domestic capacity in contract negotiation and legislative drafting expertise in modern economic law was remedied by a rapid learning process and a willingness to hire in outside expertise. 8.29

The beginnings of a change may be seen as early as 1997 with the adoption of a long-term development programme ‘Kazakhstan 2030’, which set out various national interests and priorities in the petroleum sector, and a programme for their increasing realization. In 2002 a Decree established a vertically integrated state oil and gas company, Kazmunaigaz (KMG).38 Article 2 of the Decree stated that KMG would protect the state interest by participating in exploration and development via a mandatory state share in such projects. In practice, it appears to have a very close working relationship with the Ministry of Energy.39 This step was reflected in other energy sectors, such as coal, where state enterprises were to be introduced and given preferences.40 In the long term the strategic goal appears to be to substitute these state enterprises for the role currently held by the international oil companies. There had been National Oil Companies (NOCs) before KMG in the oil and gas sector: however, the three companies that preceded it, Kazakhoil, Kaztransoil, and Kaztransgaz, were only established in 1997, and even then only with the limited goal of consolidating and managing assets that had been spread among different state-owned companies which in turn had been inherited from the Soviet era. By 2002 an assertion of sovereignty had become more important to the government and an increased role for the state sector was an expression of this.

8.30

Legislative changes followed in all of the fundamental laws. In 2003 the Foreign Investment Law was replaced by a new, less investor-friendly Investment Law, while the 2004 Tax Code included a new approach to tax stabilization.41 It ended the grant of stability guarantees against changes in tax law to contractors. An exception was made for contracts based on the PSA model. In 2005, the Law on the Subsoil and the Law on Petroleum were both substantially amended and a new law on PSAs introduced which limited PSAs to offshore territory.42 In 2006, a Concessions Law was adopted (for infrastructure related to oil and gas exploration and development operations), and amended again in 2008. Under the PSA Law, Article 4-1 gave KMG the right to acquire a minimum 50 per cent share in consortia that participated in any PSA signed in the country. Under the amended Petroleum Law, the concept of ‘strategic partner’ was introduced, establishing a legal basis for KMG to invite into a consortium in which it has an interest a large, financially capable foreign investor to take up

38 Decree No 811 ‘of the President on Measures for Securing the State Interests in the Petroleum Sector’, 20 February 2002. 39 Makarov, T. (2009) ‘National Oil Company Practice Upstream: A Study of Kazakhstan’s ‘ Unique’ Approach’ (LLM dissertation, University of Dundee CEPMLP). 40 Cutler, R.M. (2008) ‘Kazakhstan announces new energy directions’, Asia Times Online Ltd, January. 41 Law on Introduction of Changes and Amendments to Certain Legislative Acts of the Republic of Kazakhstan Regarding Matters of Taxation, effective from 1 January 2005. 42 Law on Introduction of Changes and Additions to Certain Legislative Acts of the Republic of Kazakhstan Regarding Matters of Subsoil Use and the Conduct of Petroleum Operations in the Republic of Kazakhstan; effective from 8 December 2004; Law on Offshore Production Sharing Agreements in Oil and Gas Operations No 68; effective 15 July 2005. The conditions in the offshore Caspian fields require considerable technical, specialist skills. Existing PSAs were ‘grandfathered’ through Art 33-1 of the PSA Law, which is expressly intended to be a lex specialis that builds on the sector-specific legislation such as the Petroleum Law. For an early review of the PSA Law, see Hines, J. & Shyngyssov, A. (2005) ‘Kazakhstan Enacts PSA Law: Summary Analysis of its Terms’, OGEL 3: .

B. The Pendulum Swings 413 a share of its existing interest without going through a tender process.43 Under the amended Law on Subsoil, the state also acquired a pre-emptive right for the purchase of interests in the joint operating ventures if any of the parties sought to withdraw from the project (see below). Apparently, the origin of this measure was the Chinese expansion into Kazakhstan.44 When the BG Group sought to sell its share in the North Caspian PSA to the China National Offshore Oil Company (CNOOC), other parties in the consortium pre-emptied this step by using their rights to purchase. However, it drew attention to the host state’s lack of any such right. The amendments to the sector-specific legislation45—the Subsoil Law46 and the Petroleum Law—affected the stability guarantees that had been generously given in the previous decade. The policy was reiterated that previously issued subsoil licences (the regime was ended in 1999) are to remain in force until the end of their term including extensions, in accordance with the Kazakh law in force at the time the licence was issued. In principle, this provided additional support for the stability of specific projects and in particular, for each of the three main oil and gas projects: Tenghiz, Karachaganak, and Kashagan. Under Article 73.2 of the Subsoil Law and Article 2.5 of the Petroleum Law, the following set of words were used in identical form: ‘[l]‌icences issued and contracts signed before the coming into effect of this Law, and all acts of state bodies associated with [such licences and contracts] shall retain their effect.’ In the amended Subsoil Law Article 71 and Petroleum Law Article 57, a form of words is used that is almost identical and grants a degree of protection to other contracts (those that entered into force after the adoption of these two Laws): ‘changes or additions to law that worsen the position of a contractor shall not be applicable to contracts signed before introduction of such changes and amendments.’ This is qualified however by the exclusion from the stability guarantee of amendments to Kazakh law in the areas of defence, national security, environmental protection, and health. Tax law changes are also excluded since they are governed by a different set of rules (in the Tax Codes). An important addition to the Subsoil Law is the priority pre-emption right granted to the state in Article 71. This is justified on the basis of national energy security but it undermines the general stability provision.

8.31

The priority right is defined in the Subsoil Law in the following manner:

8.32

For preservation and strengthening of the resource-energy base of the economy of the country, in newly-being-signed and also previously signed subsoil use contracts, the state shall have the priority right before another party of the contract or the participants of a legal entity possessing the subsoil use right, or other persons, for the purchase of a subsoil use right (or its parts) and/or participation interest (shareholding) in a legal person possessing subsoil use right being alienated, on terms not worse than those offered by other buyers.47 43 Amended Petroleum Law Art 1(32). This strategic partner must pay both the full signature bonus and the full costs of exploration unless the JOA is negotiated to provide otherwise: Art 7-1. Evidently, the aim of these provisions is to permit KMG to develop large strategic blocks at a much reduced cost. 44 Makarov (2009) at 23. The parties to the consortium which bought BG’s interest were subsequently required to sell it to KMG by the Ministry of Energy. When CNOOC eventually did enter the offshore sector in 2005 through the Darkhan field, the state exercised both its pre-emptive right and the right to a minimum 50 per cent carried interest by KMG. 45 For a comprehensive overview in English see Hines, J. & Shyngyssov, A. (2005) ‘Kazakhstan Amends its Subsoil Resource Development Regime; Related Changes Still to Come’, OGEL 1: . . 46 The Subsoil Law was amended in 2010 and again in 2017. The Code ‘On Subsoil and Subsoil Use’ 2017 introduced changes to the regulation of the mining industry (except uranium), reinstating a licensing regime, and differentiating it from the regulatory regime governing hydrocarbons. 47 Subsoil Law, Art 71; translation in Hines & Shyngyssov (2005) at 50.

414 Chapter 8: Russia, Ukraine, and Central Asia The above provision is one that appears to fall under the rubric of national security. It is also expressly stated to have retroactive effect, applying to both future and existing contracts irrespective of the general stability provisions in the law. In practice, the national security consideration has been a part of the legislation since 1999, with a carve-out for changes of law relating to national security as well as environmental protection. However, this right would extend such considerations significantly. All investors would have to contend with the possibility that the state might take up a share at any time that a party wants to sell its interest in whole or in part. This right is to be enforced in the context of required advance written permission for all transfers of contract interests by the relevant state body. 8.33

The provisions on dispute settlement in the amended Subsoil and Petroleum Laws were harmonized and linked to the 2003 Investment Law. Essentially, disputes between the contractor and the state (including state entities) regarding performance, amendment, or termination of a contract are to be resolved by negotiation or in accordance with the dispute settlement provisions agreed in the contract. In the event that such negotiations fail, the investor may turn to either the Kazakh courts or international arbitration in accordance with Kazakh investment legislation (which allows many choices of forum). Kazakhstan is a party to the ICSID Convention.

8.34

On environmental standards, changes have been introduced that tighten legislative requirements since the first set of major amendments to the Subsoil and Petroleum laws in 1999. In particular, they have focused on the protection of marine areas, principally the Caspian Sea. Areas of particular interest to the legislator have been the flaring of natural gas, decommissoning obligations, and compensation for subsoil damage. It is also relevant to note the possible use of alleged environmental violations in the context of contract renegotiations (see below). The authorities’ timing has been to require that stricter rules should be adopted as a project enters the development stage. This is also an area in which its authority to introduce new rules has not been constrained by stabilization provisions in previous laws or the terms of existing contracts. An example of how a stricter approach to implementation has taken effect comes from the operation of the Tenghiz project. As a part of the ‘demercaptanization’ process, the project produced tangible amounts of solid sulphur as a by-product of oil production. The solid sulphur in such a remote location has no economic value since the transportation costs exceed its potential price to end-users. Before Chevron’s entry into the project in the early 1990s, the local operator used to store this sulphur in a heap. With Chevron’s entry, the previous practice continued for a while and the heap of sulphur grew, reaching the size of a small hill. Following complaints by local authorities, the state intervened and fined the operator, Tenghiz Chevron (TCO), a substantial amount (reputedly around US$70 million, but probably much less) in 2000. TCO contested the fine through the local courts and was unsuccessful. Subsequently, TCO opened a marketing business for sales of solid sulphur.

8.35

There were further indications of significant legislative changes. Further amendments to the Law on the Subsoil in 2007 allowed the state to terminate production agreements with investors (including PSAs and licences) if the investors’ activities in developing strategic fields were not in line with the economic interests of the country.48 The determination of 48 Arts 45-2 and 45-3 of the Amended Law of 24 October 2007: ‘if the actions of a mining company, while conducting mining operations in deposits/mines that have strategic importance, lead to a considerable change in the economic interests of the Republic of Kazakhstan, posing a threat to national security, the authorized body has the right to demand that conditions of contracts be changed and/or amended to restore the economic interests of the Republic of Kazakhstan.’ Under Art 45-2.2 the list of reasons for termination is expanded and includes the

B. The Pendulum Swings 415 a strategic field was left to the discretion of the government. This measure was interpreted by the European Commission as an indirect reference to the ongoing dispute between the operators of the Kashagan field and the Kazakh state (8.83–8.87), and as potentially in conflict with Kazakhstan’s obligations to investors under the ECT.49 Subsequently, the Law on Subsoil and Subsoil Use was amended in 2010 and again in 2017. The effects included a requirement that all petroleum agreements take the form of concession or tax-royalty agreements, with no right to international arbitration, although existing PSCs remain in effect. Fiscal stabilization was eliminated for most contracts, with the exceptions being ratified by Parliament by a separate law. The legal response by investors to these attempts to revise the terms of existing petroleum contracts in ways that had seemed likely to have adverse effects on investor interests. Apart from disputes that were referred to the Kazakh courts (some earlier and successfully defended by foreign oil companies), two claims were lodged before ICSID concerning oil and gas exploration rights. The first, brought by Liman Caspian Oil, a Dutch subsidiary of a Canadian oil and gas company, Aurado Exploration, was based on the ECT.50 It involved an expropriation claim, arising from the host state’s decision to revoke its petroleum licence. A second claim was made under the US–Kazakhstan BIT by an American citizen, Mr Hourani, who owned 92 per cent of a Kazakh company, Caratube International Oil Company.51 It alleged that Kazakhstan expropriated the company’s rights to explore for hydrocarbons in the Aktobe Oblast region. It included a related claim that the state authorities had harassed the claimant, his family, and his employees (see below section F).

8.36

(3) Central Asia and the Caspian Several other states in Central Asia and the Caspian region attracted foreign investment in their energy sectors although not on the scale of Kazakhstan. They merit some extended analysis but the focus in this chapter lies elsewhere so the following remarks about these energy producing states are brief.

8.37

Azerbaijan was the leader in seeking foreign investment, although its efforts were initially hampered by armed conflict that developed with its neighbours.52 It set up a legal framework for petroleum development that relied heavily upon the use of PSAs and the participation of a state oil company, SOCAR. However, in spite of many attempts to do so, it failed

8.38

following: ‘if within two months of receiving notification the mining company fails to agree to hold talks to change the provisions of the contract in writing or refuses to hold these talks; if within four months of receiving the mining company’s agreement to hold talks, the parties fail to conclude an agreement; or if within six months of achieving a coordinated decision to restore Kazakhstan’s economic interests the parties fail to sign amendments to the contract.’ Most importantly of all, it added the following provision: ‘On the government’s initiative, if the actions of a mining company, while conducting mining operations in deposits/mines that have strategic importance, lead to a considerable change in the economic interests of the Republic of Kazakhstan, posing a threat to national security, the authorized body has the right to unilaterally refuse to fulfil the contract.’ 49 ‘EU Energy Commissioner Expresses Concern over Recent Kazakh Law’, RFE/RL Newsline, 28 August 2007. 50 Liman Caspian Oil B.V. and NCL Dutch Investment B.V. v Republic of Kazakhstan, ICSID Case No ARB/07/ 14, 22 June, 2010 51 Caratube International Oil Company LLP and Mr Devincci Salah Hourani v Republic of Kazakhstan, ICSID Case No ARB/13/13, Award, 27 September 2017. 52 Seck, A., Mirzoyev, S., Nasibov, V. & Mamedova, F. (1995) ‘Azerbaijan: Rediscovering its Oil Potential?’ J En Nat Res L 13, 147–162.

416 Chapter 8: Russia, Ukraine, and Central Asia to introduce a petroleum law and investors relied upon a patchwork of contracts for the legal foundations of their operations. Azerbaijan nonetheless developed a robust petroleum sector with none of the high-profile disputes that have characterized some of its neighbours. It has also developed as a centre for a complex geo-political pipeline network. 8.39

Turkmenistan, by contrast, developed a more formalized legal framework with an administratively issued licence as central to its regime for the allocation of rights.53 Gaps in its legal regime were filled in 2000 with the adoption of detailed administrative rules for oil operations.54 Turkmenistan became involved in a well-known arbitration dispute, the Bridas case, in the 1990s,55 but remained little known to foreign investors, except perhaps for those from neighbouring states. Its relations with former communist states were often fraught with respect to gas trade.56 Its neighbour, Uzbekistan, developed a similar legal regime with a subsoil law but despite considerable efforts to do so it failed to achieve significant foreign investment in its energy sector.57

(4) Ukraine 8.40

From the time it became an independent state, the patterns of energy investment in Ukraine have been very different from those in the other countries considered in this Chapter. Initially, they were far from auspicious and created little risk of a climate of hasty deals being struck with eager foreign investors, leading to a pendulum swing towards disappointment and disputes at a later date. Lacking substantial deposits of hydrocarbons, Ukraine’s major resource was its transit network for the supply of piped gas from the Russian Federation to the countries of Central Europe and the EU. In addition to the extensive pipeline infrastructure it inherited from the Soviet Union, Ukraine also inherited a vast network of gas storage facilities, among the largest in the world. This remained closed to foreign investment. Limited attempts were made to explore for and develop hydrocarbons and a production sharing law was passed in 1999. After twenty years, only four PSAs had been awarded, and several leading international energy companies exited the country following the annexation of the Crimea in 2014, military conflicts in the east of the country, or other reasons.

8.41

Formal commercial relationships for gas trade did not exist before 1991 so these had to be created by the two parties who were largely responsible for gas trade, Ukraine and the Russian Federation. The policy choice was to base them on bilateral relationships between 53 Hines, J.H. & Varanese, J.B. (2001) ‘Turkmenistan’s Oil and Gas Sector: Overview of the Legal Regime for Foreign Investment’, J En Nat Res L 19, 44–63. 54 Hines, J.H. & Marchenko, A.V. (2006) ‘Turkmenistan’s Oil and Gas Sector: Overview of the Legal Regime for Foreign Investment’, J En Nat Res L 24, 495–522. 55 Joint Venture Yashlar, Bridas SAPIC v Turkmenistan, ICC Arbitration Case No 9151/FMS/KGA, interim award, 8 June 1999. The tribunal concluded that the government and the state entities had repudiated the joint venture contract and that damages for contract breach should be based on the loss of the bargain, not fair market value, and reduced damages by US$50 million for failure to mitigate damages. 56 Pirani, S. (2009) ‘Turkmenistan: An Exporter in Transition’, in Pirani, S. (ed) Russian and CIS Gas Markets and their Impact on Europe, Oxford Institute of Energy Studies, 271–315. A more recent analysis by Pirani is contained in ‘Central Asian Gas: Prospects for the 2020s’ (2019), OIES, Working Paper NG155. 57 For an overview of the gas sector, see Zhukov, S. (2009) ‘Uzbekistan: A Domestically Oriented Producer’, in Pirani (ed) Russian and CIS Gas Markets and their Impact on Europe, 355–394; and Pirani (2019), ‘Central Asian Gas : Prospects for the 2020s’, OIES Paper NG 155; a more recent view of the law by Eldor Mannopov and Bobur Shamsiev, emphasizing reform, is in Mannopov, E. & Shamsiev, B. (2019) ‘Uzbekistan’s Oil and Gas Sector: Towards Enhanced Efficiency and Transparency’: .

B. The Pendulum Swings 417 the respective governments and through agreements between their respective state entities. In 1994 a Gas Agreement was concluded between Ukraine and the Russian Federation, setting out the basic framework for gas trade between the two states, covering supply, transit, storage, and other services. The two state gas companies would sign contracts for the commercial and technical aspects of gas transit, export, and storage on an annual basis. Transit and storage fees would be jointly negotiated, with provisions for amendment of prices and fees from time to time (see Section E below). This Agreement was replaced by other long- term contractual arrangements which for a time worked well. They allowed for continued transit and supply of natural gas between two now independent states, with the Russian Federation retaining its supplier role and Ukraine its transit role. The business model that Ukraine adopted to manage this gas network was statist, with policy carried out through state entities and the relevant Ukrainian entity becoming established as a wholly state-owned company, Naftogaz. In this sense, it remained at least initially close to the state-controlled approach to resource management of the former Soviet Union, and left no room for foreign investment. It was only much later that international arbitration of gas disputes became a feature of these arrangements, when considerable difficulties emerged in making it work, and disputes extended to include private and public energy companies from countries west of Ukraine. From this unpromising starting point, for foreign investors at least, Ukraine’s engagement with international investment law has been evident in two quite different areas. The first is through a series of expropriation claims arising from the annexation of the Crimea region by Russia in 2014, and the second is in its approach to foreign investment in renewable energy. The first concerns Ukrainian investors making claims against the Russian Federation under the Ukraine– Russia BIT58 concerning what they allege is the ‘unlawful seizure’ of property in Crimea following Russia’s occupation of the territory.59 The investors are variously state-owned entities, private companies, and individuals. Several claims involve energy assets such as electrical substations and power lines, infrastructure for offshore gas exploration, and petrol stations. The circumstances that give rise to them (and the jurisdictional issue they raise in relation to the BIT) are unusual and still unfolding. The second energy investment issue follows a more familiar pattern.

8.42

To encourage investment in the renewable energy sector, the Government introduced a feed-in tariff for its electricity sector more than a decade ago. By 2019 it found this was level of support was proving too generous to the renewable energy sector and, faced with the need to service mounting debts of the state-owned guaranteed buyer of the electricity generated, it explored ways of modifying the tariff downwards. However, the legislation included a limited stabilization clause under which Ukraine assured RE generators that the FiT rate in place on the date that a facility was commissioned would remain applicable to that facility until 2030. If there was a change providing for different incentives, the clause allowed generators to choose which regime would apply.60 In June 2020 a Memorandum of Understanding

8.43

58 The full name of the BIT is the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments. 59 For example, PJSC Uknafta (Ukraine) v The Russian Federation, PCA Case No 2015-34; Stabil LLC et al (Ukraine) v The Russian Federation, PCA Case No 2015-35. The BIT has been used successfully from the Russian investor side too: a Russian oil and gas producing company, Tatneft, was awarded US$112 million plus interest in 2014 after a UNCITRAL tribunal found that Ukraine had breached the BIT by seizing Tatneft’s investment and its shares in a joint venture which owned the largest oil refinery: PJSC Tatneft v Ukraine, PCA Case No 2008-8. 60 Law of Ukraine ‘On Electric Power Industry’, No 575/97-BP, 16 October 1997 (amended 22 April 2009) Article 17-1 and Law of Ukraine ‘On Alternative Energy Sources’, 2003, Article 9-1: ‘The State shall guarantee that for

418 Chapter 8: Russia, Ukraine, and Central Asia (MOU) was signed between leading industry groups and the Government about proposed reforms to the legal framework for the sector.61 The MOU was implemented as Law No 3658 the following month, including a mandatory reduction in the feed-in tariff for photovoltaic and wind projects. A number of investors in the sector have indicated a willingness to explore international arbitration in the event of losses incurred following this measure, which includes an undertaking that the feed-in tariff rates will not be reduced further.62 C. Providing Legal Stability 8.44

The need for foreign investment in the transitional societies of Eastern Europe was as evident in the 1990s as was the absence of a stable and predictable framework for doing business. The development of legal frameworks for inward investment proceeded on a scale and at a pace that is probably unprecedented in the international energy industry. Almost two decades later, there is evidence that with respect to energy and natural resources investments at least, these legal regimes are less soundly based than they seemed in the 1990s.

8.45

Three broad approaches to the stabilization of energy investments may be discerned. The first is a rejection of the idea that investments made by foreigners in a strategic national asset ought to be accompanied by an enforceable stabilization guarantee. Effectively, this is the view taken by the Russian Federation in recent years. The only evidence of stabilization as generally understood is in the terms of PSAs granted many years ago. The practice of supervising and monitoring petroleum operations, at least with respect to foreign investors’ operations has shown a high degree of state influence and preference for extra-legal solutions to differences of view among the parties. Such a ‘rejectionist’ approach to the grant of contract stabilization is far from unique and is held by a number of other petroleum producing states around the world. The only significant feature of the view held by the Russian Federation is that it is one that has emerged from an initial setting in which the grant of such guarantees in law was considered necessary and given to foreign investors, albeit on a very limited scale.

8.46

The second approach might be described as contract-focused but legislatively based. It places the central emphasis upon the procedure by which stabilization of contract has been granted. Although adopted by Kazakhstan, it is best exemplified by Azerbaijan. It involves the use of Parliament to grant a PSA, drafted as a contract between private parties, the same binding legal force as a law of the country but with a term valid for the entire duration of the contract. Other forms of stabilization may be granted by the state but the principal guarantee to the foreign investor under this ‘procedural’ approach is the adoption, approval, and authorization of the legislature. The origin of this approach is evidently the conditions of extreme legal uncertainty for investors in the earliest days of the new Republic. The aim was ‘to

economic entities producing electricity from alternative energy sources at commissioned electricity facilities, the procedure for stimulating the generation of electricity from alternative energy sources established in accordance with the provisions of this Article on the date of commissioning of the facilities . . . shall apply. In the event of legislative changes related to the procedure for stimulating the generation of electricity from alternative energy sources, businesses may choose a new procedure for stimulation.’ 61 IAR, 17 June 2020: ‘CIS Round-up: An update on arbitration cases against Armenia, Georgia, Kyrgyzstan, Turkmenistan, Ukraine, and Uzbekistan.’ 62 Lexology, 11 August 2020: ‘Ukraine introduces long-awaited changes to incentives for renewable energy’.

C. Providing Legal Stability 419 cover all eventualities in an uncertain legal climate’.63 The question arises of how appropriate or realistic it is to assume that such contracts with foreign investors should be unaffected by the development of a more stable legal climate, involving, say, the introduction of new ‘basic’ laws such as a Constitution or a Petroleum Law or a Tax Code. The third approach is a multi-tiered approach to stabilization, also evident in some Latin American jurisdictions. While the combined use of domestic legislation, contract law, and international treaty law is a common feature of stability in the energy sector of many states, the approach adopted by Kazakhstan stands out by virtue of the range of guarantees given in diverse legal instruments. In a sense, it is the paradigm case of this investor-friendly approach. However, in moving away from such a variant of the multi-tiered approach, both investor and host state are likely to encounter some difficulties.

8.47

In the paragraphs below the latter two approaches will be considered with particular reference to the Kazakh and Azeri experiences. The first approach—described as ‘rejectionist’—is clear enough and does not require further consideration.

8.48

(1) The procedural approach The effect of passing a PSA through the legislative process may be said to have the effect that it becomes a law, or that it has the same force as a law of the state concerned. In a perceptive analysis of the procedure adopted for the first Azeri PSA, Alum Bati64 notes some of the difficulties involved in either case. Of the seventeen PSAs adopted so far, the procedural approach to stabilization has been the one favoured by successive governments. Yet, at the time the first PSA was given this procedural ‘blessing’, there was no Constitution in the country and no Civil Code. Even as this wider framework was put in place, subsequent PSAs made no mention of it and retained the same approach as the first PSA. The Implementing Law for that PSA states that it becomes a law ‘after entry into force of this law’ and will ‘take precedence over the whole or any part of any law, decree or administrative order not complying with or contradicting their provisions’.65 Provisions are included, however, which would be unsurprising in a standard petroleum contract but which have a highly unusual character in a law. The text of the PSA states, for example, that any amendment, modification or repeal of the PSA may only be carried out with the written consent of the parties. Yet, the constitutional basis for allowing private parties to amend a law in this way is surely non-existent. The provision on Applicable Law would also be unsurprising in a PSA but is highly unusual in a law. The agreement: shall be governed and interpreted in accordance with principles of law in common to the law of the Azerbaijan Republic and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada . . . This agreement shall also be subject to the international legal principle of pacta sunt servanda [agreements must be observed].66 63 Bati, A. (2003) ‘The Legal Status of Production Sharing Agreements in Azerbaijan’, J of Nat Res L 21, 153–167 at 159. 64 Ibid. 65 Agreement on Joint Development and Production Sharing for the Azeri and Chirug Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea, 20 September 1994 (hereinafter ‘Agreement’). It is available at . The Agreement was concluded between SOCAR and a number of foreign oil companies. 66 Agreement, Art 23.1.

8.49

420 Chapter 8: Russia, Ukraine, and Central Asia 8.50

Other examples may be referred to which emphasize that the treatment of the PSA as a ‘law’ can lead to infelicities in the text, and even absurdities.67 The provision on stabilization itself reads oddly when it is presented as a provision in a law of general application. It is a hybrid provision that prohibits change in the rights and interest accruing to the contractor without its prior consent; but if changes are made by the government which contravene the contract provisions, an adjustment will automatically be made to the terms to re-establish economic equilibrium and the NOC will indemnify the contractor. A final comment is that for many years the PSA text—unlike that of a law—was never published.68

8.51

It may be argued however that the PSA, while not being a law stricto sensu, is nevertheless adopted in this manner to give it the force of a binding law of the host state. This is a much stronger argument but in the Azeri case it suffers from a statement in the PSA that the agreement and the related guarantee ‘shall become laws after the entry into force of this law’. The claim is that this is a law, and in the Azeri context this practice is repeated in subsequent PSAs. The conclusion may be that this raises questions about the enforceability of the PSA as a law. However, outside of the Azeri context it is not difficult to imagine that a more cautious drafter might be able to identify language that avoids this particular issue. In the Kazakh setting, by contrast, the Temir PSA is classified as a normative and legislative act in addition to its contract status. This is confirmed by a Resolution of the Cabinet of Ministers,69 which approved the PSA and required ‘ministries, agencies and companies of the Republic to help the Ministry of Energy and Fuel Resources of the RK to comply with provisions of the PSA during its whole validity period’.70

8.52

A final consideration about the procedural approach is whether it grants the PSA a status equivalent to that of a treaty concluded by the host state. The essential problem with this is that the Implementing Law describes the PSA as a law and not a treaty. Even if it were possible for a treaty to be concluded between a group of private companies and several state bodies, the lack of publication, the governing law and amendment provisions all serve to undermine the credibility of this interpretation of the effects of this procedure.

8.53

Although this approach is also evident in Kazakhstan, the Kazakh approach to stabilization eschews dependence on the procedural approach and instead adopts many different kinds of stabilization in a richer, multi-tiered approach.

(2) The multi-tiered approach 8.54

In spite of the recent trend (paras 8.27–8.34) towards a more restrictive definition of stability provisions in Kazakhstan, the legal regime contains a wide range of mechanisms. The various kinds of stability may be listed as follows: (i) Stabilization provisions in the PSAs, some of which also benefit from the procedural form of stability noted above;

67 Bati’s analysis identifies a number of such provisions: Bati (2003) at 157–158. 68 In fact, several are now available at . 69 Resolution ‘On Establishment of the Contract in Cooperation in Exploration and Development of Hydrocarbon Fields in Aktobe Oblast of the Republic of Kazakhstan under Terms of Production Sharing Concluded with Elf Neftegas’ dated 10 March 1992. 70 Appendix 7.

C. Providing Legal Stability 421 (ii) Legislation: the stability guarantees are found in the Civil Code,71 the Investment Law,72 the Foreign Investments Law 1994,73 Law on the Subsoil,74 Petroleum Law,75 the Tax Code,76 but also in Presidential Edicts and Government Decrees;77 (iii) Court decisions: on many occasions the Kazakh courts have made decisions which confirm the effectiveness of the stability regime (mainly the Court of Astana City); (iv) Letters from state bodies such as the Ministry of Finance, and various committees of the Ministry of State Revenues;78 (v) International treaties, including the ECT and many BITs. Three forms of stabilization of the domestic legal framework were particularly important to oil and gas investors: they involved the municipal law and two kinds of contracts called subsoil user contracts and PSAs. The first form of stabilization was through the municipal law. In the successor to the Foreign Investment Law of 1994, the Law on Investments 2003, the government provided a guarantee for the stability of those contracts concluded between investors and state authorities, except in cases where amendments were made by the agreement of the parties. The stability was partial since exceptions were made for amendments to laws which regulate excise goods, for national and ecological safety, and for healthcare and morality. In two other municipal laws there were protections provided to investors. The Subsoil Law and the Petroleum Law both provided that a subsoil user had protection against adverse changes in legislation.79 Any amendments to the legislation that had a negative impact on the position of subsoil users were not applicable to subsoil user contracts signed prior to such amendments. Again, the stability has specific ‘carve-outs’: national defence, environmental safety, and health protection.

8.55

A different form of stabilization was provided through the Tax Code, which governs the tax provisions of subsoil use contracts. There were several versions of this, with provisions changing from 1995 to 2001. All of the Tax Codes of 1995, 2001, and 2004 provided for some level of tax stability.80 A procedural requirement that was imposed on subsoil user contracts from

8.56

71 Art 383: if after the conclusion of a contract, legislation establishes new obligations for the parties different to those in the contract, the terms of the concluded contract are to remain in force. 72 Art 4: stability of contract between investors and state bodies is guaranteed except when the parties agree to changes to the contract. 73 This Law was replaced by the Investment Law 2003: under Item 1 of Art 6, if there is a worsening of the investor’s situation due to amendments in legislation, the foreign investments under long-term contracts with state bodies are to remain subject to the legislation that was effective on the date they were made until expiry of the contract. 74 Art 71: any legislative amendments that worsen the situation of the subsoil user are not to apply to contracts concluded before the introduction of these amendments. 75 Art 57: amendments to the legislation which worsen the status of the subsoil user are not to apply to contracts concluded before the introduction of those amendments. 76 Art 282: the tax regime in subsoil contracts before 1 January 2004 is to be maintained for the whole period of validity of the contract and may be amended following changes in the tax legislation with the agreement of the parties. 77 A number of the early, large oil and gas investments such as TCO, Karachaganak, and OKIOC were approved by such measures, but this practice was effectively discontinued soon after. 78 These are particularly relevant to tax stability: they may comprise instructions or rules but also explanatory tax letters. 79 Law of the Republic of Kazakhstan, ‘On Subsoil and Subsoil Usage’, January 1996 (the Subsoil Law) and Law of the Republic of Kazakhstan, ‘On Petroleum’, June 1995 (the Petroleum Law), Arts 71 and 57 respectively. 80 For a number of critical and apparently well-informed assessments of changes in the stability regime in Kazakhstan, the following articles are notable: Shyngyssov, A. (2004) ‘Tax Stability and Assurances for Petroleum Operations’, Oil & Gas of Kazakhstan 2, 60–67; Hines, J. & Shyngyssov, A. (2005) ‘Kazakhstan Amends its Subsoil Resource Development Legal Regime: Related Changes Still to Come’, OGEL 1: ; Hines, J. & Shyngyssov, A. (2005) ‘Kazakhstan Enacts PSA Law: Summary Analysis of its Terms’, OGEL 3: .

422 Chapter 8: Russia, Ukraine, and Central Asia 1 January 2005 was that the contracts had to undergo an obligatory tax expert evaluation before signature. This applied to amendments and additions to existing contracts as well. The tax regime that results from the review is one that is included in the final text of the contract. The stability in the contract that results from this is fixed in the contract and has to be consistent with the tax legislation following a review of the contracts carried out before they are signed. The tax regime for PSAs and concession agreements is different, being divided into Model 1 and Model 2 contracts. For the former, they are stabilized from changes in Kazakh legislation. For the latter, taxes and obligatory payments are calculated and remitted to the budget in accordance with the tax legislation in effect on the date the relevant tax liabilities arise. The key date for this to have effect was 1 January 2004 but for contracts signed before that date, they were grandfathered into the new regime. 8.57

In the amended Tax Code the tax regime was maintained for the entire period that the contract is valid for any subsoil use contracts between the government or state authority and a subsoil user provided that the contracts had duly passed the mandatory tax review. Other provisions established in the Tax Code Article 285.1 included the following: where changes in the tax legislation occur, the taxation conditions established in the PSAs may be amended if there is mutual agreement by the parties; where changes in the tax legislation result in benefits to subsoil users, the taxation conditions established in PSAs are to be amended to restore the original economic interests of the host state.

8.58

There has been some debate about the interpretation of the above two conditions. The first one appears to constitute the main rule (renegotiation of the taxation conditions of a given PSA will only take place with the voluntary consent of both parties), while the second rule simply states the desired aim of the voluntary renegotiation.

8.59

A further provision on contract stability is contained in Article 285.2 of the Tax Code. This provision suggests that if the host state repeals any tax or levy envisaged in the PSA, the subsoil user shall continue to pay the said tax or levy until such time as the tax provisions of the PSA contract are renegotiated. A problem with the above arrangements under the Tax Code is that the issue of contract stability is dealt with in several different provisions with some inconsistency.

8.60

There is one problem that clearly emerges from this approach to stabilization. While the intent of any stability provision is evidently to maintain a particular bargain between the state entity and the investor over time, the legal system must inevitably respond to demands for change and will be modified over time. This is evident from the many amendments that have been made to the Kazakh laws. Indeed, the picture is one of increasing complexity. There are laws that have an overlapping but distinct role in the Kazakh legal regime (petroleum law, subsoil law, investment law, Civil Code, and Tax Code), as well as bilateral and multilateral treaty provisions, project-specific presidential decrees and government decrees, and also contract stabilization provisions. Moreover, special rules and guidance notes have been introduced to apply to tax stabilization. As a result of their adoption at different points of time, important distinctions may be drawn between the stability offered to investors, such as between pre-1996 contracts (prior to the adoption of the Subsoil Law and the Petroleum Law), and the contracts signed between 1996 and the first wave of major Subsoil Law and Petroleum Law amendments in 1999. It may even be argued that several different and distinct types of stability regimes are evident between these and other periods. For example, further distinctions may be drawn between those contracts signed between 2000 and 2004 involving a number of smaller projects and those signed from January 2005 onwards. This

D. Testing Stability Mechanisms 423 complexity means that, in the event of a dispute, the analysis of which stabilization mechanisms are applicable to a particular investment is a challenging task. D. Testing Stability Mechanisms The value of stability mechanisms has been tested on several occasions already, when unilateral state measures have been introduced or threatened by the state authorities in an effort to persuade foreign investors to reconsider the terms of existing contracts and transfer benefits to the host state. An interesting feature of the contract renegotiations examined below is the absence of any recourse to proceedings before an international arbitral tribunal. This theme of resistance by the parties to the utilization of an external source of dispute settlement is also evident in the transit disputes examined in the final part of this section (paras 8.100–8.108).

8.61

(1) Contract renegotiations: Russia The Russian state’s approach to the implementation of its New Energy Policy included the use of state power to compel the parties to certain existing petroleum contracts to surrender a controlling interest to its preferred state entity. The entity was either Gazprom, where a gas producing or transmission interest was involved under or arising out of the contract, or Rosneft, where the asset under the contract was oil-related. The preferred means to encourage the parties to renegotiate were alleged failures to perform contractual or licence obligations or allegations of environmental abuses. In only one instance where foreign investors were targeted for such pressure by state bodies did it lead to the initiation of arbitral proceedings (Sakhalin-1), and the two sets of proceedings were settled before any award was issued. It is also notable that the PSA for Sakhalin-I was not involved in such coercive renegotiations, to some extent because of the presence of Rosneft and apparently due to an inability to agree on how a Russian state presence could be further developed.81

8.62

Three PSA contracts were concluded in the 1990s at a time when oil prices were low, but for many in Russia they were never deemed to be fair or appropriate to the Russian setting, in spite of the participation of Russian shareholders in two of the three PSA consortia. In spite of its origins in Indonesia, there was a widespread perception in Russia that the PSA was a ‘colonial agreement’, a view of the contract form that undermined its legitimacy. The PSAs came under pressure when oil prices rose significantly. The three contracts governed the Sakhalin-I and Sakhalin-II projects on and around the island of Sakhalin in East Siberia and the remote Kharyaga oilfield in the Northern Siberian region of Nenets Autonomous Okrug (although on-land, its remoteness made it highly analogous to an offshore project). With one exception, no other PSAs were introduced in spite of the adoption of the 1995 law by the Duma (Parliament) specifically designed to encourage their use (after a very lengthy debate), and in spite of their evident success as a contract form for petroleum production in many parts of the world. Instead, the grant of a PSA was to be restricted to a very small number of exceptional cases, such as a situation when no bidder could be found at an auction. As oil prices continued to rise in 2005, criticism of the benefits arising from the existing PSA

8.63

81 Krysiek, T.F. (2007) ‘Agreements from Another Era: Production Sharing Agreements in Putin’s Russia, 2000– 2007’, Oxford Institute for Energy Studies Working Paper 34, 16–18.

424 Chapter 8: Russia, Ukraine, and Central Asia projects increased: the Russian Academy of Natural Sciences produced a report in which they claimed that the existing PSAs had cost the state around US$11–12 billion and had led to conflict among PSA participants.82 Other sources noted that by the end of 2005 foreign direct investment in Russia through the vehicles of the first three PSAs had exceeded US$16 billion,83 amounting to the bulk of FDI in Russian oil projects. There were three PSA projects that constituted potential targets for state intervention.

8.64

8.65

(a) Sakhalin-I

The PSA entered into force in June 1996 and covered the development of the Chavyo, Odoptu, and Arkutun-Dagi fields, with an estimated investment of about US$12.8 billion. Production commenced in October 2005. The Chavyo field produces oil while gas production amounts to seven million cubic metres a day. A large part of this is used to supply regional demand while the oil is exported via a port in Khabarovsk Krai. The operator of Sakhalin-I is Exxon Neftegas, which has a 30 per cent share. The other parties are a Japanese consortium, the Sakhalin Oil and Gas Development Company (30 per cent), two subsidiaries of the state company, Rosneft (20 per cent) and the ONGC Videsh of India (20 per cent). The strategic goal of Gazprom in relation to this development appears to be to purchase the gas from Sakhalin-I for export to China or South Korea, and to buy the pipeline from Rosneft, which is used to transport gas from Sakhalin to the mainland. If it were able to purchase from Rosneft the pipeline from Komsomolsk-na-Amure to Khabarovsk, this could then be extended to Vladivostok. In sharp contrast to the Sakhalin-II project, Sakhalin-I has so far proceeded according to schedule and within its budget calculations (in spite of inflationary pressures and very difficult operating conditions). Factors such as the presence of a major state participant, Rosneft, and the revenue stream to the government from the project, probably help to explain why the element of intervention by the state has been so modest relative to other foreign investments in Russia’s petroleum sector. Nonetheless, it has included measures that have delayed the project by several months, refused ExxonMobil’s request for an extension of the PSA and the imposition of a requirement that a new marketing strategy for Sakhalin-I gas be adopted.84 As the project developed further, the relationships between the parties became fractious. In 2015 Exxon Neftegaz filed a claim with the SCC against the Russian Government, alleging it had overpaid taxes for the Sakhalin-1 project to the amount of around US$600 million.85 A tribunal was appointed, but arbitral proceedings were concluded with a settlement in September 2017. A different kind of dispute arose between Exxon and Rosneft over the migration of oil from Sakhalin-1 to a neighbouring field held by Rosneft under a separate licence, which began development in 2014. Rosneft filed a lawsuit against Exxon and its consortium partners in 2018 in a commercial court in Sakhalin. It argued that the consortium had benefited from ‘unjust enrichment’ from mid-2015 by extracting crude oil that had migrated from the neighbouring block under development by Rosneft.86 It claimed 82 ‘Russia: State Dislike of PSAs Will Harm Oil Sector’, Oxford Analytica, 27 June 2006. 83 Webb, J.C. (2006) ‘Russia’s Western-Led PSAs Overcome the Odds: A Second PSA Wave led by Russian Companies on the Horizon?’, CERA Insight, 27 March. 84 Kyrsiek (2007) at 15. In January 2010 the government rejected further investment of US$3.5 billion proposed by Exxon Mobil; under the PSA this would delay further the government receiving its share of revenues: ‘Exxon Caught in Déjà vu Dispute’, The Moscow Times, 22 January 2010. 85 GAR, 6 August 2017: ‘Exxon and Rosneft in billion-dollar dispute over oil migration.’ 86 Ibid. There had been a preliminary agreement on the volumes of hydrocarbons flows across the blocks in 2017, but it expired in April 2018 and that triggered the ICC claim by Exxon Neftegaz, suspended when the agreement was extended.

D. Testing Stability Mechanisms 425 US$1.4 billion. In turn, Exxon resumed an ICC claim against Rosneft, but the parties agreed on a settlement of all claims a few months later, in which Rosneft was reported to have received US$230 million from the consortium.87 In the background, the extension of sanctions against Russia by the US and the EU led Exxon to withdraw from a number of cooperative ventures with Rosneft in 2018.88

(b) Sakhalin-II

The largest of the three PSAs was awarded in June 1994 to cover Sakhalin-II, and oil production commenced in 1999. The operator of the project, Sakhalin Energy Investment Company (SEIC), has constructed the world’s largest Liquefied Natural Gas (LNG) liquefaction plant in southern Sakhalin. The principal shareholder is Shell Sakhalin Holding (55 per cent), with Mitsui and Mitsubishi of Japan each taking a share of 25 and 20 per cent respectively. In September 2006 the Ministry of Natural Resources (Minprirody) brought Phase 2 of the project to a partial halt by revoking the expert assessment of the project’s environmental impact. It claimed that the environmental damage caused by the consortium was in excess of US$50 billion.89 It demanded that implementation of the project be suspended and rejected further talks with SEIC representatives until a new comprehensive study of environmental risks was carried out and its conclusions presented. There appeared to be some substance in the criticisms made by Minprirody. The project had failed to meet important environmental standards. Indeed, in 2005 the European Bank for Reconstruction and Development (EBRD) declined a loan application from SEIC since it had failed to provide a satisfactory Environmental Impact Assessment. There were frequent reports in the Russian media of environmental degradation on the project site and around the pipelines that connect it to the terminal in the south of Sakhalin Island. For example: fish and crabs were reported to be dying en masse off Sakhalin’s eastern coast; rivers essential for the spawning of salmon were estimated to have become shallower following the dumping of clay and sand by pipeline builders, and pipeline glades of unauthorized width cut across Sakhalin forests were shown to be under construction.90

8.66

The consortium faced criticism from international environmental non-governmental organizations long before Minprirody had made its objections. These had forced SEIC to increase spending in order to reduce the project’s negative environmental impact. Indeed, SEIC had made a serious underestimate of the scale of administrative and environmental problems it would have to confront when it conducted its feasibility study. Costs mounted rapidly once the project began and in spite of high oil prices, costs doubled from US$10 billion to US$20– 22 billion. Under the term of the PSA, this would have pushed the time horizon when the Russian government could receive its share of revenue beyond 2010.

8.67

87 GAR, 5 October 2018: ‘Exxon pays to settle oil migration dispute with Rosneft.’ 88 ExxonMobil, ‘ExxonMobil in Russia’ (accessed 23 July 2021). 89 ‘Russia: State will seek to revise Sakhalin-2 agreement’, Oxford Analytica, 6 October 2006; at roughly the same time, Minprirody threatened to revoke 19 of the 406 licences held by Lukoil, a company that is 20 per cent owned by the US company, ConocoPhillips: Russia Threatening to Revoke Lukoil Licences’, New York Times, 17 October 2006. Lukoil was responsible for the largest oil spill in recent Russian history in 1994 when pipeline corrosion led to leakage of one million barrels of crude oil in the Komi region. 90 For a critical view of the project at the time, see James Leaton’s testimony before the High Court (England and Wales) at . For the consortium point of view, see (accessed 15 February 2021).

426 Chapter 8: Russia, Ukraine, and Central Asia 8.68

8.69

8.70

There is at least a strong presumption that there were non-environmental reasons for the Russian government, through Minprirody, to seek a renegotiation of the PSA with SEIC. Each of the three PSAs signed in the 1990s was unsatisfactory to the government. During that period, oil prices were as much as five times lower than they were in 2006 and the consolidation of oil and gas projects in the hands of the state was not then a matter under (official) discussion. By 2006, the government looked out on a different energy landscape. Events elsewhere in the world appeared to offer an opportunity. For example, the apparent ease with which President Morales of Bolivia had achieved the agreement of international oil and gas companies to a rapid and full nationalization of natural resources could be viewed as encouragement to the Russian authorities to take a strong line against foreign investors. A similar sense of grievance developed when it appeared that the PSA had proved unsuccessful in generating returns to the government from engaging investors in the Russian natural resources sector. However, there were also strong strategic reasons for the Russian state’s interest in the Sakhalin-II project. Gazprom was seeking to become involved as part of its ambition to represent the Russian state in all of the existing PSAs. The gas reserves at Sakhalin are viewed by Gazprom as part of its overall gas policy for the Eastern Siberia and Far East region.91 In this case, participation could allow it to export the state gas share in the form of LNG. In July 2005 Gazprom and Shell signed a memorandum of understanding in which they envisaged a transfer to Gazprom of a share in SEIC of 25 per cent plus one share which would have amounted to a blocking share in return for a share of 50 per cent in a joint venture for Zapolyarnoye-Neokom. In a further amendment, Gazprom bought a controlling stake in SEIC in December 2006.

(c) Kharyaga PSA

This PSA was signed in December 1995 but did not enter into force until January 1999. It is operated by a subsidiary of the French company, Total, which has a 50 per cent share. It has attracted more criticism than the other two but Total has delivered substantial revenues into the Russian budget, covering all payments due under the PSA. In 2005 Total requested the Stockholm Chamber of Commerce Arbitration Institute to terminate proceedings it had brought against Russia concerning a dispute over Total’s project cost estimates for 2001 and 2002.92 This followed a settlement of the matter between the parties. The principal criticism directed at the PSAs has been the operators’ rising cost estimates. Specifically, the Russian state’s share of profit oil is deemed to be too small under any production or price scenario. Most of the state share of the revenue will not begin to accrue until the stage of full cost recovery has been reached and hence their resistance to consortia proposals to revise upwards the cost estimates (and so postpone yet further the commencement of profit production) (see chapter 2, paras 2.102–2.110). Some non-Russian critics have provided support for Russian perceptions that the PSA terms were unfavourable, although these seem to have focused largely upon the Sakhalin-II PSA.93 The essential criticisms were that 91 See the discussion in chapter 7 of Energy Charter Secretariat (2008) Fostering LNG Trade: The Role of the Energy Charter, Brussels: ECS, 122–123,. 92 A favoured venue for the settlement of disputes involving Central and Eastern European countries has been the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). Even in the Soviet era, the SCC was their first choice for East-West trade disputes; it has continued to find favour with post-communist states after the end of that period. It was a favoured venue for several of the early cases on the ECT. By contrast, ICSID is notably less popular among East European states. 93 Rutledge, I. (2004) ‘The Sakhalin II PSA—A Production “Non-Sharing” Agreement: Analysis of Revenue Distribution (a Report)’, Sheffield Energy & Resources Information. Much cited by critics at the time but not necessarily a critic itself of the PSA regime was the Harvard Business Review article by Abdelal, R. ‘Journey to

D. Testing Stability Mechanisms 427 the burden of risk is allocated so that most of it falls upon the Russian state. Exploration risk was not present since the fields had already been discovered by Russian companies. The risks arising from construction overspend and changes in the oil price were also shifted to the state side. In the Sakhalin-II PSA, the state only begins to receive its share of extracted oil revenues once the SEIC has recovered its costs and also a 17.5 per cent real rate of return. At that stage the state receives 10 per cent of the revenues for two years and then 50 per cent once SEIC has attained a 24 per cent real rate of return. It is only at that stage that the state obtains a long term share of 70 per cent. There are other criticisms that were made: the economic impact of a cost overrun takes effect as a loss of income to the state, not SEIC profits; it may even be in the investor’s interest to make investments for the sole purpose of reducing payments to the host state; no exhaustive list of costs is provided that might be deemed recoverable; no annual cost caps are previewed; and, most of all, the contract duration could be extended at the contractor’s request beyond the twenty-five year initial phase for successive five-year periods. Monitoring of the PSA contractors has increased as a result of these perceptions of weaknesses in contract design. There are some difficulties with these criticisms, however. Comparisons with the terms of ‘standard’ PSAs are not necessarily helpful. The form of contract stabilization sought in this PSA (see chapter 8, paras 8.62–8.63) is customized to apply to a large-scale, high-value investment in a country that has just emerged from a non-capitalist form of social and economic organization. In other states such large-scale investments have also required extensive stabilization provisions to be effective (see, for example, the guarantees given by the government of Nigeria for an LNG project in the early 1990s and more recently, Israel to secure funding for the development of a major gas field: see c hapter 3).

8.71

In any of the Sakhalin projects, the extra-legal conditions that the companies have to work with are highly complex, however. Moreover, the negotiating strategy of the foreign oil companies has been to ensure that for such large-scale investments in challenging areas, they receive recovery of their costs before the state receives most of the payments it is due. They also sought to ensure that the tax terms were stabilized throughout the life of the project. Without this element of fiscal stabilization it is unlikely that such a large project would have been financed.

8.72

Another focus of criticism was the low level of orders placed with Russian suppliers of equipment. The PSA requires a level of around 70 per cent to subcontractors but the actual level is nearer to 50 per cent. To some extent this reflects the unsuitability of Russian equipment to the conditions of the offshore area. Through the PSA-driven projects, the first concrete gravity-base structures for offshore platforms were built (Sakhalin-II) and the largest land- based drilling rig in the world constructed in Sakhalin-I to drill some of the world’s longest horizontal wells to points far offshore.

8.73

The controversy surrounding the Sakhalin-II PSA ended abruptly in 2006 with the acquisition by Gazprom of a controlling share in SEIC for a price of US$7.45 billion, giving it 50 per cent plus one share in an asset that was at this stage estimated to cost US$22 billion (from

8.74

Sakhalin: Royal Dutch/Shell in Russia’, Harvard Business Review, 24 March 2004. However, a more balanced critical view is presented by Johnston, D. (2008) ‘Russia: Tough Investment Environment’, Petroleum Accounting and Management Journal 27(1).

428 Chapter 8: Russia, Ukraine, and Central Asia US$12 billion the previous year).94 The details of the agreement are confidential but it included a waiver of US$3.6 billion on the recovery of costs in the second phase of the project by the shareholders in SEIC. As part of the agreement, Shell was able to obtain a contract with Gazprom on Areas of Mutual Interest, giving SEI shareholders a right of first refusal in respect of equity participation with Gazprom in projects in areas that may be licensed around Sakhalin. Essentially, the relationship between the parties had deteriorated and the result was similar to a takeover by Gazprom. 8.75

In a separate incident, Minprirody also threatened the Russian company, partly owned by BP, called TNK-BP, over its licence to develop the ‘giant’ Kovykta gas field in East Siberia. The field is located far from European markets and from the Pacific coast, but is reputed to contain about two trillion cubic metres of natural gas.95 Within the region, demand is not strong enough to justify the billion-dollar cost of development. However, the gas could be commercial if exported to China and then to South Korea. A major complaint of the state authorities was that TNK-BP had failed to comply with production obligations. This opened up the possibility of revocation of the company’s licence. In February 2006 Minprirody accused the company of underproduction at the Kovykta field and gave the company three months to rectify the alleged violations at the field or face a revocation. Under the terms of the original licence, the field was scheduled to produce nine billion cubic metres by 2006 but its production was restricted by the needs of the Irkutsk region of not more than 2.5 million bcm in 2006. The argument made by TNK-BP was that the Russian government’s request to produce more gas from the field could not be met because the Irkutsk region did not require so much gas while the firm’s plan to construct a pipeline to China was prohibited by the government. The state’s goal appears to have been to cede a leadership role in the Kovykta field to Gazprom on favourable terms.

8.76

In June 2007 an agreement was reached with Gazprom to pay between US$700 and US$900 million for TNK-BP’s 62.9 per cent share in RUSIA Petroleum, the licence holder, and its 50 per cent stake in the East Siberia Gas Company (responsible for construction of the regional gas network).96 Like Shell in Sakhalin-II, BP had settled for a small share of a potentially large project rather than to pursue confrontation with the state and perhaps have no share at all. A key difference between this instance of takeover by a state entity and the events surrounding Gazprom’s takeover of the Sakhalin-II project is that the latter project was 80 per cent complete when Gazprom purchased majority control. The Kovykta field was in the very early stages of development. Initial investment amounted to around US$500 million by TNK-BP. It is therefore very difficult to assess its present value. Another contrast is that Sakhalin-II is an LNG project, requiring very large levels of investment and more importantly an ability to apply complex technologies; Kovykta is a potentially large gas field that Gazprom could in principle develop itself without foreign assistance.

8.77

A further case of environmental standards being used to undermine the interest of a foreign investor in Russia was provided by the case of Imperial Energy, a much smaller foreign oil company. In April 2007 Minprirody stated that it would seek the revocation of the Company’s licences, on the ground that it had found violations at all of Imperial’s fields, including Maiskoye, the only one producing oil, and would forward his findings to Rosnedra,

94 95 96

‘Gazprom gets controlling stake in Sakhalin 2’, Gas Matters, December 2006, 27–28. Hober (2009) at 441. ‘Russia: Kovykta deal strengthens Gazprom monopoly’, Oxford Analytica, 27 June 2007.

D. Testing Stability Mechanisms 429 the Russian subsoil agency with responsibility for deciding whether licences should be revoked.97 Confusingly, the company had apparently just received a formal written Act of Confirmation from the Minprirody which stated that it had met or exceeded all of its licence obligations and commitments. Minprirody disputed the reserves figures that had been submitted to the state which differed radically, it claimed, from those submitted to the investors in the company. Minprirody alleged that the auditor of the company, the US-based firm of DeGolyer and McNaughton, had signed off on data which the company had presented to it without checking whether the data was correct. In a slightly Catch-22 vein, the state body alleged that the auditor could not have checked the data because under Russian law foreign companies are forbidden from accessing geological information (it is classified as a state secret). Imperial argued that its recent reserve report was produced in accordance with the normal international standards that are required by a reputable auditor. There are a number of conclusions that may be drawn from these contract renegotiations. Firstly, the negotiations were initiated by the Russian government with the clear aim of forcing the parties to accept a controlling state share in their consortia. Secondly, the state used its powers over licence revocation and environmental management to force the investors to the negotiating table and to keep them there until a deal was struck that it found acceptable. Thirdly, it acquired these controlling shares on very favourable terms. Finally, neither the stabilization provisions in the PSAs or any relevant treaty-based mechanisms were activated (but were no doubt considered) by the foreign investors, in spite of the fact that two of the PSAs were operated by companies that were among the largest IOCs in the world.

8.78

The use of environmental rules and standards in this renegotiation process was very evident and requires some comment. As has been noted several times in this study, it is common for such rule-making and standard-setting to be excluded from the scope of a stabilization clause. In these projects, governed as they are by PSAs, the claim that environmental standards were not being met proved to be a trigger for the introduction of new demands by the state. It suggests that a prudent investor would be advised to limit exposure to environmental risk as much as possible. In the Soviet and immediate post-Soviet era, the environmental rules were set so high that even a prudent operator ran the risk of breaching them. They created the risk of arbitrariness and unfair discrimination in their enforcement, since a breach of these rules and standards would be inevitable if they were properly applied. State entities had a lever to use to pressurize foreign investors at some future date, not least with the threat of ‘exposure’ for non-compliance with the threat of global reputation risk. This may reflect a distinct approach to the rules of law which have been adopted and are on the statute books. In the Soviet era such rules were often ignored and compliance was negligible. In the post- Soviet era an investor is clearly given an incentive to seek a form of stabilization by contract that would ‘freeze’ or otherwise stabilize environmental standards over time, protecting the investor from arbitrary intervention. However, this may not be available. In Azerbaijan, the AIOC responded to this environmental risk by including in its contractual arrangements a requirement that their operations should comply with the international environmental operating standards that are applicable in the North Sea and the Gulf of Mexico. In addition, a baseline environmental survey was to be carried out before operations commenced so that the AIOC would not be held responsible for environmental damage arising from earlier state oil operations. Some states would be reluctant to see an import of rules from

8.79

97

‘Imperial runs foul of Russian watchdog’, Financial Times, 19 April 2007.

430 Chapter 8: Russia, Ukraine, and Central Asia other jurisdictions, but it is a pragmatic way of addressing the risk while complying with the environmental standards that any reputable IOC would consider normal in its operations. 8.80

In a sense, the Russian experience illustrates in a rather extreme way the limits of purely legal protections for the investor and the diverse range of levers which a state has at its disposal to persuade the investor to renegotiate and to make significant concessions. It is a context in which ‘stability’ needs to be used in a rather different and much weaker sense than that applicable in many other settings in which investments are made in the international oil and gas industry. From the foregoing, there is no hard evidence that the experience of foreign investment in other energy sectors such as electricity will follow the same pattern, but the risk that legal instruments will be used to promote an interventionist policy after an investment has been made must be deemed high.

(2) Contract renegotiations: Kazakhstan 8.81

Following the changes in legislation from 2003 onwards (see 8.30–8.36), there have been a growing number of disputes between the state authorities and foreign investors about the conduct of their operations. Authorities agree that the momentum for government review began earlier and mirrored the rising oil price.98 However, there is clearly an influence on this pattern of state behaviour from the Russian approach towards foreign investors in the oil and gas sector. In particular, the use of coercive renegotiations against investors alongside the adoption of restrictive legislative changes, and the use of environmental law by the state to impose pressure on investors while renegotiations are ongoing were instruments already tested in the Russian setting—with results in terms of increased state revenues that some other states might deem to be evidence of success. However, there are major differences between the two states in their approaches to foreign investment in energy over the past two decades. Above all, there is a difference in their approach to the Rule of Law. In Kazakhstan’s case, it has striven to develop a domestic legal regime that offers investors a wide range of assurances, guarantees, and stability mechanisms, which in its diversity is probably unique in the international oil and gas industry. It has also shown a willingness to subject itself to the external discipline of international investment law in a way that demonstrates a remarkable degree of confidence for a young state. Russia chose—from an early stage—to proceed differently and utilized mechanisms towards foreign investors that often had an extra-legal character, with the effect of limiting the number of foreign investors to only the very largest energy companies. The Kazakh approach to foreign investment probably reflected (at least initially) a more modest inheritance of skills and expertise from the Soviet era. However, a consequence of this approach is that in advancing a ‘statist’ agenda it may face a growing number of legal challenges before a potentially wide range of legal fora, as the examples below demonstrate.

8.82

Kazakhstan provides a different setting for the state’s use of contract renegotiations as a policy instrument. In principle, the investor can more easily argue that it has a legitimate expectation that the legal and regulatory framework would remain stable. The procedures adopted during the renegotiations may also be easier to challenge given the large number of legal frames of reference that have been put in place during the first decade of investment. 98 Yenikeyeff, S. (2009) ‘Kazakhstan’s Gas Sector’, in Pirani (ed) Russian and CIS Gas Markets and their Impact on Europe, 316–354 at 319; Ostrowski, W. (2010) Politics and Oil in Kazakhstan, Oxford: Routledge, 140.

D. Testing Stability Mechanisms 431 This justifies a review of the two renegotiations to date about which there is some public knowledge.

(a) Kashagan

In 2007 the Kazakh state authorities threatened to revoke the licence held by a foreign consortium for a very large offshore oil field at Kashagan in the north Caspian Sea, alleging environmental violations which had among other things led to the death of large numbers of rare seals.99 Led by the Italian company, Agip (a subsidiary of ENI), the consortium included Shell, ExxonMobil, ConocoPhillips, Total, Inpex (Japan), and KazMunaiGaz (KMG), the Kazakh NOC. The field was declared commercial in 2002. There are clear parallels between the Kazakh state’s actions with respect to this investment and the Russian government’s actions vis-à-vis Sakhalin-II (see 8.62–8.64). Like Sakhalin-II, Kashagan presented very significant technical challenges and required large investments if the target levels of production were to be achieved. In one commentator’s words, the project ‘had all the trappings of an engineering nightmare’.100 Indeed, the challenges contributed to British Gas’ decision to sell its interest in the project to two Chinese companies in 2003.101 This generated the first known major dispute between the foreign investors and the state over the Kashagan field.102 The circumstances too exhibited similarities with the Russian experience. The Kashagan project had been characterized by delays in production, resulting in a projected start-up in the second half of 2010 instead of 2005. In another resemblance to the circumstances that gave rise to the Sakhalin-II dispute, there had been increased project costs rising from a total of US$57 billion to US$136 billion. Under the PSA arrangements, the consortium’s costs were to be reimbursed from future production. Payments were only to be made to the state once project costs had been recovered. In the first phase of the project, costs had risen to US$19 billion which was almost double the original estimates. The participation of KMG, however, did ensure that the state would receive some revenue from the first produced oil even if this was limited since it derived from a minority share. As ‘lost’ state revenue increased, following upon the project delays and increased costs, demands were made by the government for compensation, amid allegations of gold-plating behaviour by the consortium and threats to remove Agip from its role as project operator.

8.83

However, for some time the government had been seeking to expand its control over the oil and gas sector, and the set of circumstances surrounding the Kashagan project presented an opportunity to increase its control over an important source of future oil and gas production. After Agip informed the government on 29 June 2007 that production would not commence until late 2010 and that the cost of the first phase amounted to US$19 billion, the government intimated by letter that it did not accept this new plan and budget for the project and that a

8.84

99 ‘Kazakhstan in threat over ENT oil licence’, Financial Times, 21 August 2007. The development of the project infrastructure has involved a number of private banks, as well as the EBRD and JBIC. 100 Ostrowski (2010) at 144. 101 Ibid. He notes that British Gas also had a high exposure to Kazakhstan in its overall portfolio. 102 This is discussed by Ostrowski (2010) at 144–147. The sale was blocked by other members of the consortium, who had a right to pre-empt the transaction and purchase it for themselves. Their opposition was linked to preferences over pipeline routes for the gas. This triggered the intervention of the state, which in 2004, impounded an oil rig belonging to the consortium for alleged non-payment of customs duties; imposed a fine of US$1.7 million for breach of customs regulations; accused British Gas of helping to ‘smuggle’ up to US$2.7 billion worth of gas condensate to Russia from the Karachaganak field, leading to claims by the Kazakh Agency for Combating Economic and Corruption Crime that the damage inflicted upon the state was US$5.4 million; a law approved by the Parliament to give the state priority in buying stakes in energy projects that were made available for purchase; charges were also made against British Gas for unpaid taxes between 2000 and 2003. The dispute was settled in May 2005 with KMG taking a half share of the stake.

432 Chapter 8: Russia, Ukraine, and Central Asia ‘discussion’ of the contract terms was required.103 It argued that these delays amounted to a change to the terms of the 1997 PSA and that this allowed the state to receive more favourable terms, including an increase in its share of profit oil from 10 to 40 per cent. Negotiations began at the end of August and a term of sixty days was unilaterally set by the state for the conclusion of the discussions. 8.85

From an analysis of the published reports at the time, it appears that the state authorities adopted four principal tactics to influence the conduct of these negotiations on the terms of the Kashagan contract. Firstly, one week before negotiations opened between the consortium and the state authorities, the Ministry of Environment threatened to revoke the licence for Kashagan on the grounds that pollution related to the operations may have caused the death of large numbers of rare seals in early 2007 in the north Caspian Sea. Secondly, on the day that negotiations opened, the government ordered a three-month halt to operations at the oilfield on the ground that the consortium had failed to comply with environmental rules.104 In a separate move, on the same day, the Ministry of Finance announced that it would launch a criminal investigation into alleged customs tax evasion by subcontractors working for Agip. The Ministry stated that ‘preliminary losses to the Kazakh budget resulting from the unlawful actions by affiliates of the consortium amount to over US$2.5 million’.105 Customs duties were one of the very few exceptions to stabilization in the range of guarantees that had been provided to investors in the past. Moreover, KMG’s involvement in the operations meant that it also had leverage over the other members of the consortia. Under the operating procedures, management required authorization for contracts of longer than twelve months’ duration. KMG’s approval was withheld for several months, causing delay in the hiring of sub-contractors and other operational matters. To this list of official threats, forced stoppage of investor’s operations and launching of criminal proceedings at the commencement of negotiations, was added a final measure: one month into the negotiations, the Kazakh Parliament adopted a set of amendments to the Law on the Subsoil which would allow the government to unilaterally break any future contracts with foreign investors (see 8.30–8.33). However, the new provisions appeared to have potentially retroactive effect, which would bring the Kashagan project (and others which were subject to existing petroleum agreements) within its scope. It is difficult not to conclude that such characteristics of the negotiating process were sufficient to qualify them as ‘coercive’ in character.106

8.86

The agreement that emerged from the negotiations marked a considerable success for the host state, and had the effect of doubling the KMG stake to 16.81 per cent.107 Agip lost the role of operator and instead, a new operator entity was established: the North Caspian Operating

103 At the same time, the government appointed a new Minister for Energy, Mr S. Mynbayev, arguably to ensure that these negotiations achieved the desired results. Production from this field has been estimated at 30 billion barrels and is important to the achievement of the state’s strategic aim of tripling production and becoming one of the world’s major exporting nations. 104 ‘Kazakhstan: Regime stability is at stake in Kashagan’, Oxford Analytica, 1 October 2007. Changes in interpretation or application that have the force of law were covered by the stabilization clause (which provided for restoration of the overall economic benefit to the contractor), but changes concerning environmental protection were expressly excluded: section 40.2, Agip/BP/Etal PSC dated 18 November 1997. 105 ‘Kazakhstan halts work at Kashagan field’, Financial Times, 27 August 2007. 106 ‘The threat of cancellation of the right to do business might well be considered coercion . . . Such coercion may be found, even were a “clean” waiver of rights is signed’: D. Vagts, ‘Coercion and Foreign Investment Re- Arrangements, cited in CME (2001) Partial Award at 517, and TecMed (2003) Award at 163 n 207; Vagts, D. (1978) ‘Coercion and Foreign Investment Rearrangements’, AJIL 72, 17 et seq. 107 Kashagan Project: (accessed 15 February 2021).

D. Testing Stability Mechanisms 433 Company, which was designed to pave the way for the assumption of the operator’s role by KMG at a future date. A fine of US$4 billion payable by the consortium was reputed to be included in the settlement package.108 At the same time, the state was saved the embarrassment and the complication of an international arbitration when the parties to the consortium elected not to pursue their legal rights under either contract or treaty or both. This is despite the fact that Kazakhstan ratified the ECT, has concluded a variety of BITs and has offered investors a diverse, perhaps unique, range of stabilization guarantees, on which these investors no doubt relied when making their initial decision to invest in Kazakhstan. Renegotiation The use of environmental rules to support a case for greater host state involvement in existing operations managed by foreign investors was not confined to the Kashagan renegotiation. Given the state’s wider strategic goals, the possibility of using its various legal enforcement powers in the style of Kashagan to gain leverage over other projects seemed far from improbable.

(b) Karachaganak

8.87

A different kind of dispute commenced in 2009 with the Government’s imposition of a duty on the export of oil from Kazakhstan. It led to contract renegotiations between the foreign investors granted rights over the Karachaganak field and the Government at the latter’s instigation. Karachaganak is one of the world’s largest gas condensate fields, and is located in the west of the country, north of the Caspian Sea. Its reserves are extracted by injecting gas to stimulate liquid output. The liquids are then exported through the Caspian Pipeline Consortium (CPC) route to the Russian port of Novorossiysk. The negotiations resulted in changes being made to several of the contract terms in favour of the host state.

8.88

As oil prices reached a peak in May 2008 the Kazakh Government introduced a special duty to capture a share of the benefits of the higher oil price at the time. Subsequently, the oil price fell from US$147.27 a barrel in July 2008 by more than US$100, so the duty was reduced to zero in January 2009,109 and then reintroduced in August 2010 at US$20 to rise to US$40 by January 2011. In the event, the consortium responsible for the Karachaganak field was deemed by the Government not to be exempt in spite of contract provisions that expressly excluded measures of this kind. This was also the only major project without participation of the Kazakh national oil company, KMG. These large international oil companies, comprising BG Group plc, Eni SpA, Chevron Corporation, and OAO Lukoil, initiated arbitration proceedings to recover around US$700 million in export duties paid to the Government. Known as the Karachaganak Petroleum Operating B.V. (KPO), they initiated two arbitrations before the Stockholm Chamber of Commerce in 2009.110 In the first, the KPO sought reimbursement of US$1.4 billion in oil export customs duty payments. In the second, KPO sought recovery of certain costs incurred during the operation of the oil field. However, no tribunals were formed and proceedings were suspended in both cases as settlement talks continued.

8.89

The Karachaganak Final Production Sharing Agreement (FPSA) contained a tax stability clause which in principle insulated the long-term project it applied to from the effects of this kind of fiscal measure. The stabilization clause reads:

8.90

108 109 110

‘Kazakhstan court ruling fuels gas row’, Financial Times, 19 March 2008. Bloomberg.com, 18 September 2009. GAR, 16 December 2011: ‘Kazakhstan settles billion-dollar oil claims.’

434 Chapter 8: Russia, Ukraine, and Central Asia (a) . . . Stability of Tax Regime. The tax regime provided by Article XIX is stable for the entire effective period of this Agreement pursuant to the provisions of Article 94-3 of the Tax Code existing at the date hereof. Taking into account that the Tax Regime was established by Tax Legislation of the Republic existing as of October 1, 1997, the authorized bodies of the Republic are liable to inform Contractor in writing concerning any amendments and additions of the Tax Legislation or other legal acts regulating payments of taxes and fees prior to the date hereof. In the case of absence of such notifications, provisions of those amendments and additions from October 1, 1997 till the date hereof shall not apply to Contractor and each Contracting Company. 8.91

Although a settlement was reached in 2011, the period between the launch of arbitral proceedings and the settlement is interesting because of the parallels between the negotiations here and those described in the preceding section and also those in Ecuador and Venezuela (discussed in chapter 7). Reports in the media noted the use of four familiar tactics by the Government to create a favourable context for its negotiations with the investor: filing substantial tax claims against KPO; imposition of environmental fines, accusations of criminal conduct, such as making illegal gains, and claims of breaches of labour laws.111 The fines were reportedly in the region of US$ 3.7 billion.112 The Kazakh President was reported to have told the Cabinet that the immunity from taxation enjoyed by the holders of PSAs was a subject that needed to be revisited.113 The Minister for Energy and Natural Resources made a statement to Parliament in which he stated that the only way in which an exemption from domestic taxation could be removed was to nullify the existing contract.114 In addition, the chair of the tax committee at the Ministry of Finance claimed that the legality of the PSAs was doubtful, and an investigation into their legality commenced.115 By October 2010 details of any planned tax changes had not been announced however. Essentially, these tactics were used to force a change in the terms of the forty-year PSA (and the other two PSAs for the largest hydrocarbons fields) which had been signed by the parties and the Government in 1997, despite the existence of a stabilization clause that was designed to prevent this. On the Government side, the goals seem to have been first to increase the amount of tax paid by the investor, and second to force the investor to give a percentage share of KPO to the Government.

8.92

In December 2011, a settlement of all the existing disputes was announced, which was to transfer a 10 per cent share in KPO to the state entity, KazMunaiGas (KMG)116. This will be released on a pro rata basis by each of the consortium members. The consortium agreed to lend KMG the sum of US$1 billion to acquire a 5 per cent stake which would be repaid from revenues generated over three years from its share of oil and gas sales. The remaining 5 per 111 IHS Markit, 19 May 2011: Kazakhstan threatens to freeze Karachaganak project over Lingering Dispute, at (accessed 26 August 2020); GAR, 16 December 2011: ‘Kazakhstan settles billion-dollar oil claims’; Sarsenbayev, K. (2011) ‘Kazakhstan Petroleum Industry 2008-2010: Trends of Resource Nationalism Policy’, JWEL&B 4, 369–379, at 376–377. An idea about the tone of negotiations from the government side can be gained from the US diplomatic cables available at Wikileaks, in which the KMG vice president discusses a US$3 billion counterclaim filed by Kazakhstan in the customs duty payments case: . 112 Sarsenbayev (2011) at 379. 113 Forbes.com/Oxford Analytica, 3 October 2010, ‘Kazakhstan’s Tax Squeeze.’ 114 Ibid. 115 Economist Intelligence Unit, Risk Briefing, 1 December 2010, ‘Kazakhstan risk: Tax policy risk.’ 116 Eni.com, Press Release, 14 December 2011.

E. Stability and Gas Contracting 435 cent stake would be paid for by KMG with US$1.5 billion. For its part, Kazakhstan was required to allocate up to two million metric tons a year of preferential capacity rights in the CPC for transportation of liquids produced by the Karachaganak field until the end of the contract in 2037. In a separate non-cash transaction, Kazakhstan agreed to settle the cost recovery and related claims it had brought against KPO as a counterclaim in exchange for the second 5 per cent share in the field. KPO was to pay US$1 billion in taxes on the deal.117 A further renegotiation was initiated by the Government in 2016 prior to launching a claim for US$1.6 billion against the KPO under the terms of the FPSA. This centred on an index in the FPSA for the Karachaganak project which determines the share of profit among the consortium members including the government entity, KMG: the ‘fairness’ or ‘objectivity’ index.118 Essentially, the KPO claimed it was eligible for recovery of certain costs before sharing revenue with the Kazakh party. In 2018 the parties signed an Agreement on Principles, which set out the basic conditions for a settlement. Under this Agreement, there were three main elements to implement.119 First, Kazakhstan would receive compensation of US$1.1 billion. Second, the FPSA itself would be modified to include terms more favourable to Kazakhstan (in the production sharing mechanism), resulting in payment of additional revenues from the project of about US$415 million by 2037, assuming a price of oil at US$80 a barrel (Brent crude oil). Third, the KPO was to provide Kazakhstan with a long-term loan for ten years for infrastructure construction to an amount of US$1 billion or would repay the equivalent value of the loan in the event that Kazakhstan refuses it to about US$200 million. As a supplement to these elements, the KPO accepted obligations to make various investments to develop the Karachaganak project until 2037, amounting to between US$5 billion and US$23.5 billion. Finally, the KPO agreed to supply oil and gas to local refineries on commercial terms and to develop a gas chemical complex in the west of the country.

8.93

The negotiations took around three years and once the Principles were announced, there was much talk by the parties about the strategic partnership and the amicable settlement of the disputes.120 Subsequently, after a year of negotiations on the detail, the KPO offer to settle the dispute was rejected by the Government as insufficient, on the ground that new circumstances had been uncovered.121 It was not until December 2020 that a ‘completion agreement’ was concluded by the parties, with Kazakhstan receiving US$600 million in additional profits and a commitment by KPO to invest around US$1 billion in the project to maintain production levels.122

8.94

E. Stability and Gas Contracting A series of disputes emerged about the sale and transit of natural gas from Russia to the West from about 2005 onwards. Commercial relationships established among recently independent states proved unable to withstand various pressures, largely political in origin,

117 ‘Oil group secures Kazakh agreement’, Financial Times, 14 December 2011. 118 GAR, 4 October 2018: ‘Kazakhstan to receive billion dollars in settlement.’ 119 Egemen Kazakhstan (Kazakh media site), 2 October 2018: ‘Agreement signed on further development of Karachaganak project’; ‘Kazakhstan wins big in Karachaganak energy settlement’, Caspian News, 3 October 2018. 120 GAR, 4 October 2018: ‘Kazakhstan to receive billion dollars in settlement.’ 121 ‘Kazakhstan says $1.1 billion Karachaganak settlement offer insufficient’, Reuters Business News, 26 November 2019. 122 GAR, 15 December 2020: ‘Consortium settles Kazakh oil field dispute.’

8.95

436 Chapter 8: Russia, Ukraine, and Central Asia and had to be renegotiated, but not before considerable disruption among states dependent on natural gas imports. In these conflicts two strands were evident: the first concerned the transit of Russian natural gas westwards to the European consumer, an issue that had concerned the drafters of the ECT;123 the second concerned the sale of natural gas from Russia to European consumers, based on long-term contracts with price revisions, linked to a volatile oil price. The impacts on the energy investment climate in this region were indirect but pervasive; a brief overview of the events and the issues therefore seems appropriate.

(1) Transitioning to a market-oriented framework 8.96

The commercial arrangements for gas trade were governed by a series of bilateral agreements between the respective governments and inter-company agreements. The former set the policy framework, guarantees, and approval of terms, including price and quantity of gas supplies as well as transit fees, while the latter set out the other commercial terms of supply. Between 1994 and 2002 a Gas Agreement governed the relationship between the gas companies of Ukraine and Russia, requiring the two companies to sign contracts for the commercial and technical aspects of gas transit, export, and storage on an annual basis, with transit and storage fees for gas to be transited subject to joint negotiations.

8.97

For many years the long-term contracts covering sale and purchase, transport, and transit were adapted with relative ease when necessary by the use of negotiations among the parties themselves or resolved by recourse to arbitration mechanisms.124 Revision and adjustment were common and only very occasionally led to controversy. However, the spill-over effects of gas disputes among former communist states to neighbouring states in Europe became evident from 2005 onwards, coupled with wider impacts of market reform, changing demand for gas and price linkages to oil, all led to dramatic contractual upheavals for gas supply and transit, and ultimately for the production of gas from some of these states.

8.98

Disputes between Russia and the Ukraine from late 2005 onwards have underlined the strategic importance of large quantities of Russian gas exports that have to cross the territory of other states to reach their markets in the EU. This fact has been the source of considerable state-to-state friction between Russia and countries that were formerly part of the Soviet Union, with both gas and oil supply and transit used as leverage in disputes between Russia and its neighbours. In particular, much attention has been devoted to the interruptions to gas supplies from Russia to the European Union in January 2006125 and again, but more seriously, in January to March 2009.126 From an investment point of view, two features of this situation are notable. Firstly, the companies responsible for both supply and transit in Eastern Europe are normally state-owned and/or state-controlled. Many of the contracts for supply and transit are negotiated, and in the event of disputes are managed, at the highest 123 For an analysis of the ECT provisions in relation to the transit issues between Ukraine and the Russian Federation, see Cameron, P.D. (2011) ‘The Energy Charter Treaty and East-West Transit’, in Coop (ed), Energy Dispute Resolution, 297–313. 124 For an overview of the gas sector in all of the CIS countries, see the essays in Pirani (2009). 125 For an account of this, see Stern, J. (2006) The Russian-Ukrainian Gas Crisis of January 2006, Oxford Institute of Energy Studies. 126 The events are examined in some detail by Pirani, S., Stern, J. & Yafimava, K. (2009), The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment, Oxford: Oxford Institute for Energy Studies; and Pirani, S. (2009), ‘The Russo-Ukrainian Gas Dispute’, Russian Analytical Digest, 53, 20 January, 2–5. The authors emphasize that the crises were the results of long-term processes rather than unexpected, one-off events.

E. Stability and Gas Contracting 437 political level in the states concerned: the signature of key contract documents by prime ministers and presidents is often required. Normal practice is to provide that in the event of a dispute arbitration will be held at the Stockholm Chamber of Commerce (SCC) Arbitration Institute and governed by Swedish law. Indeed, other contracts between Gazprom and buyers of gas in Central Europe (for example, Poland) follow the same pattern. Stabilization has therefore been attempted through the use of inter-governmental agreements on which contracts between state gas companies are based. There has been little need for stabilization in the usual sense, and arm’s length arbitration mechanisms are available but are often avoided in preference to the use of diplomacy, allowing other, unrelated issues to be brought into the bargaining. Secondly, private investors that contract with such state suppliers of gas—and there are many such investors based in the EU that contract for gas to sell in its increasingly liberalized energy markets—will find themselves quickly entering a highly politicized arena. For example, the gas that is subject to these contracts is produced and consumed in a wide range of states, including Turkmenistan and Azerbaijan as sources of gas supply, and the EU states as consumers of gas. Neither of these features, however, is likely to deter investors from bringing disputes with host states to international arbitration, and a pattern of such actions began to emerge in 2009.127 International arbitrations developed in several ‘waves’, only some of which had their roots in geopolitical factors. The companies drawn into these disputes were usually large and often state controlled, although private companies from within the EU were also claimants in the international arbitrations. The sums involved were extremely large, and the political frictions evident. However, many of the arbitrations concerned price revisions or transit fee arrangements, and so fell into a subset of energy disputes, concerned with the rules and doctrine about contract performance that are familiar in commercial contract disputes, and less evidently linked to investment issues, even though some of the claims were treaty based.

8.99

(2) Transit disputes The vulnerability of Russian gas supplies to the transit monopoly of Ukraine in the delivery of natural gas to the EU is considerable.128 About 80 per cent of the gas which Russia exports to the EU is carried by pipeline across the Ukraine, Belarus and Moldova, while the rest travels northwards to Finland and by the Blue Stream pipeline southwards to Turkey. Of this 80 per cent, as much as 70 per cent of the gas transits the Ukraine alone. The main vehicles for the states’ interest in the gas industry are Gazprom (Russia) and Naftogaz (Ukraine). Given the volumes of gas that transit across its territory and the crucial role that gas plays for 127 An example is the Italian company, Italia Ukraina Gas S.p.A (IUGAS) which entered into a Natural Gas Supply Agreement from 2004 to 2013 with the national gas company of Ukraine, Naftogaz. The gas was to be imported from Kazakhstan and Turkmenistan. Escalating political tensions between Russia and Ukraine led to a decision by Gazprom to reduce natural gas shipments from Central Asia to Ukraine and instead Naftogaz agreed to receive supplies from one of Gazprom’s subsidiary companies. However, the supply agreement prohibited resale of the natural gas delivered to Naftogaz. To conserve domestic gas reserves, the Ukrainian government decided to limit the export of Ukrainian natural gas through the imposition of a gas export licence requirement. In response, Naftogaz ceased to supply IUGAS under the contract, leading it to file for arbitration seeking enforcement of the delivery commitments, payment of contractually agreed penalties and damages for contractual breach. The tribunal upheld the first two claims but not the third: Italia Ukrainia Gas S.p.A v Naftogaz, SCC Arbitration V 007/ 2008. 128 Pirani, S. (2009) ‘Ukraine: A Gas Dependent State’, in Pirani, Russian and CIS Gas Markets and their Impact on Europe, 93–132.

8.100

438 Chapter 8: Russia, Ukraine, and Central Asia the supplier and the consumers, the transit role of the Ukraine makes it ‘the most important transit country in the world’.129 Transit disputes between the Russian Federation and the Ukraine and their respective state entities have triggered a number of disputes between the respective state companies, and between these companies and gas purchasers in third states, especially in the EU. Some of these have been directed to the SCC Arbitration Institute. 8.101

The potential for disruption of energy trade is considerable. Three incidents involving a cut- off of gas and oil supplies occurred between 2006 and 2009. The first was a cut-off of supplies of gas from Russia to the Ukraine on 1 January 2006 following a stalemate in negotiations on gas prices and transit tariffs (the ‘first gas crisis’). The goal was to reduce the flow of gas into the pipelines that transited the Ukraine by the amount that would otherwise have been for Ukrainian use. The residual amounts remained at the level that Russia had contracted to supply its non-Ukrainian customers in Europe. However, the effects of this measure were felt immediately on European consumers. The reduction in gas deliveries appears to have been the result of Ukrainian companies taking some of the gas from the transit pipelines. However, this dispute lasted only four days, and on 4 January Gazprom and Naftogaz announced that a five-year contract had been signed between them.130 The second incident affected Belarus and involved a cut-off of supplies of oil, with no wider effects on deliveries of oil to European customers. The third incident again involved the supply of gas through the Ukraine. A failure in negotiations between Russia and Ukraine on a price for Russian gas supply to Ukraine and a tariff for the transit of Russian gas to Europe before previous agreements expired led to a cut-off by Gazprom of gas supplies to the Ukraine on 7 January 2009 (the ‘second gas crisis’). This was a much longer interruption than the first, and led to a sharp reduction in exports to no less than sixteen Member States of the EU and Moldova, followed by a complete cut-off for three weeks during a very cold winter.

8.102

The first gas crisis of 2005–2006 was settled by an agreement between Gazprom and Naftohaz on 4 January 2006. The essential elements in the Agreement were that the transit of Russian gas through Ukraine was to be ensured by the parties by means of a payment for transit at a rate of US$1.60 per 1000 cubic metre per 100 km until 1 January 2011. An intermediary company—RusUkrEnergo, registered in Switzerland—was to be used to manage supplies of Russian natural gas to the Ukraine which were not to be delivered by Gazprom. A 50–50 joint venture was set up to sell the gas that came from Russia on the Ukrainian domestic market. The authorized capital was to be formed by paying money and bringing in other assets. The gas that was to be purchased from Russia would originate from Turkmenistan, Uzbekistan and Kazakhstan as well as Russia: in other words, it would be a combination of Russian gas and much cheaper Asian gas. Details of the selling price of gas were as follows: 34 billion cubic metres of gas to be sold at US$95 per 1000 cubic metres which covered the first six months of 2006 for subsequent sale to the Ukrainian domestic market without the right to re-export it. From 2007 this was to increase to 58 billion cubic metres to be sold to the JV for subsequent sale to the domestic market on the same terms, plus 15 billion cubic metres of gas for export under a joint programme with the Gazprom export subsidiary, Gazeksport. The rate of payment for transit and the price of natural gas set in the agreement were only able to be changed with the mutual consent of both sides. 129 Energy Charter Treaty Secretariat, Gas Transit Tariffs (2006) 60. A similar assessment is found in a comprehensive report by the International Energy Agency at the time: ‘Ukraine: Energy Policy Review 2006’ (2006). 130 A request was sent to the SCC Arbitration Institute to register a dispute but before any further steps could be initiated, the parties had resolved the dispute.

E. Stability and Gas Contracting 439 In the event, the actual impact of the first gas crisis on supplies was minimal. Indeed, the crisis could be seen—in contrast to the view presented in much of the Western media at the time—as illustrating the bargaining power which Ukraine had (through its near-monopoly of gas transit into Europe) and its willingness to exercise it: during the dispute Ukraine simply withdrew gas from the system that was destined for the EU. In this context, it is relevant to note the history of the exercise of its bargaining power by Ukraine and the long-term efforts by Gazprom to put its relations with former CIS partners on a commercial basis.131 Features of this relationship included: large-scale deliveries of gas were made to Ukraine at prices that may not have covered even the costs of delivery; debts had accumulated by Ukraine to Russia, linked to domestic non-payment; gas had been unilaterally appropriated by Ukraine from the transit system, and efforts by Russia to exchange equity in the transit network and storage facilities for gas debts were rejected over the years leading up to the first gas crisis. Both Russia and Ukraine had been attempting to integrate their economies into the wider European and global markets, in which the raising of prices for gas imports has been a part. World prices had also been steadily increasing from 2002 onwards, increasing the differences between gas prices in Ukraine (and other CIS countries) and the international prices for gas. The trend was nevertheless one of a deliberate step-by-step transition to market-based prices for gas. In this context, the common perception of the first gas crisis as being politically motivated due to the ‘Orange Revolution of 2005’ misses an important underlying economic theme: the effects of the countries’ long-term transitions from planned economies and from a unified to a pluralistic group of states. To a large extent, this was a commercial conflict that was caused by Naftogaz’s persistent failure to pay for subsidized Russian gas deliveries, and the wish of both parties to switch from old Soviet-style barter deals to a relationship that was both market-oriented (including the payment of market prices) and transparent.

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Following the second gas crisis in January 2009, a supply contract was signed by Gazprom and Naftogaz which contained pricing provisions that would be difficult for Naftogaz to implement. The monthly payments required by Clauses 4 and 5 of the contract were very high. This raised the possibility of a repetition of the previous interruptions of gas supply and further disputes, not only state-to-state ones, given the continuing difficulties in the Ukrainian economy. Another factor that could give rise to disputes was the legal claims transferred to RosUkrenergo,132 in which storage gas is involved. Again, further evidence was provided that this was predominantly a commercial dispute, albeit one with distinct political undertones.

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Perhaps a surprising feature of these gas crises is the apparent reluctance of the states or their companies to have recourse to international arbitration or even conciliation mechanisms. Ukraine did refer to the possibility of commercial dispute resolution before the SCC in 2005 but this was never proceeded with. The ECT, which provides for non-interruption and non-reduction of transit flows in the event of a dispute (Article 7), and has engaged with transit issues since its inception, notably in the Parties’ discussions of a draft supplementary Protocol on transit,133 was not favoured by either of the parties. Although Russia has never ratified the ECT, Ukraine has. The Energy Charter Secretariat demonstrated a willingness

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131 For the background to this, see Stern, J. (2005) ‘The Future of Russian Gas and Gazprom’, especially 66–108, Oxford Institute for Energy Studies, OUP: Oxford; and Pirani, S. (2007) ‘Ukraine’s Gas Sector’, 1–27, Paper from Oxford Institute for Energy Studies. 132 See Hober (2009) at 442. 133 See the discussion in Konoplyanik, A. (2005) ‘Russian Gas to Europe: From Long-Term Contracts, On- Border Trade and Destination Clauses to . . . ?’, J En Nat Res L, 282–307 at 300–302.

440 Chapter 8: Russia, Ukraine, and Central Asia to provide an independent conciliator,134 but neither of the main state parties showed an interest in accepting this option, preferring diplomatic channels. The events were rather subject to an ‘extreme politicization’.135 8.106

It would be wrong to conclude that arbitration has been absent in the period since these events. Apart from cases pending before the SCC, there have been other proceedings that have arisen from the conflicts over transit and supply of gas, albeit ones not necessarily involving Ukraine. For example, in January 2021 Gazprom settled a dispute with a Bulgarian gas company, Overgas, which had led to an award for US$105 million at the ICC and litigation at the Commercial Court in London.136 The origin of the dispute was a long-term contract for gas supply made in 1997 but under which gas ceased to flow in 2015 due to alleged non-payment of debt by Overgas. The claims were dismissed and a counterclaim from Gazprom’s subsidiary was upheld in December 2018. Disputes such as this with the supplier, Gazprom, have a long history, albeit with diverse parties as claimants or respondents. An early example is a series of four arbitrations against Moldova’s principal gas company, in which Gazprom is the majority shareholder. In 2008 a panel ruled that MoldovaGaz had to pay Gazprom US$42 million for gas supplied in 2006. The panel was governed by the rules of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in Moscow (ICAC).137 One gas contract, signed by the two parties in 2005, has given rise to four separate claims, all being held at ICAC. Gazprom claims that US$1.5 billion is owed under this contract but the respondent argues that most of the gas never reached Moldova. The latter claims that 80 per cent was intercepted in transit and consumed in Transdnistria, a breakaway republic located near the border with the Ukraine. It therefore seeks to pay only 20 per cent of the debt. A Transdnistrian oil company, TiraspoltransGaz, is alleged to be responsible for the unauthorized extraction and re-sale of Russian transit gas. Moldova is a signatory to the NY Convention. To pay the debts, a sequestration of MoldovaGaz assets was tabled as a possibility, including in addition, three power plants.138 This takeover of assets in transit states as a way of resolving future conflicts about transit has been part of Gazprom’s strategy over a number of years. It is one that has been persistently rejected by Ukraine, however.

134 Energy Charter Secretariat, ‘Statement of the Secretary General on the recent developments in the Russia-Ukraine gas dispute’, 9 January 2009, and again in a press release on 14 January 2009: ‘Russia- Ukraine gas dispute: Secretary General appeals for conciliation efforts’. The services of Mr George Verberg, former president of the International Gas Union and former head of the Dutch gas company, Gasunie, were offered. 135 Belyi, A. & Klaus, U. (2007) ‘Russia’s Gas Exports and Transit Dispute Resolution under the ECT: Missed Opportunities for Gazprom or False Hopes in Europe?’, J En Nat Res L, 205–224 at 206. Two legal developments should be noted, however. In December 2009 Ukraine and Moldova acceded to the EU Energy Community, a treaty with a dispute settlement mechanism which allows private parties to register claims against states parties in the event of non-compliance: EU Press Release 18/09/1974 18.12.09; Gazprom withdrew its claim against Ukraine before the SCC and noted that the irregularities in gas shipments in January 2009 were force majeure: Kyiv Post, 31 December 2009. 136 GAR, 3 February 2021: ‘Bulgarian gas supply dispute settles.’ In general, the transit disputes were treaty- based and the sales ones commercial. 137 For an authoritative overview of these permanent arbitration courts in Russia which have competence over matters arising from international commercial arbitration, see Yoshida, I. (2009), ‘History of International Commercial Arbitration and its Related System in Russia’, Arbitration International 25, 365–402. 138 GAR, 30 July 2008: ‘Gazprom has won the first of four separate arbitrations against Moldova’s main gas company’; this contrasts with the approach of Ukraine: ‘Ukraine determined to keep state-ownership of gas transport system’, Gas Matters Today, 15 January 2010.

F. Engaging with the Energy Charter Treaty 441

(3) Conflicts resolved Two major long-term supply and transit contracts were signed in January 2009 with the aim of stabilizing the delivery of gas from Russia to Ukraine and westwards. This ‘marked a step towards the commercialization of the Russia-Ukraine gas relationship’,139 concluded for the first time only by the companies with no underlying intergovernmental agreement. They also eliminated the use of opaque privately owned intermediary companies.

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After repeated demands for a renegotiation from the Ukrainian side, Naftogaz filed an arbitration at the SCC in 2014, following cancellation by Gazprom of discounts previously granted on gas exports to Ukraine, thereby increasing the price paid by Ukraine by almost double the previous amount. Separately, Gazprom filed its own SCC claim over gas deliveries that had not been paid for. Subsequently, a second claim was brought by Naftogaz based on the transit agreement, requesting US$15 billion in payment plus interest for Gazprom’s alleged failure to transport sufficient volumes of gas and for underpayment of transit fees. The cases were heard by the same tribunal.140 The disputes involved claims and counterclaims to a value of around US $125 billion.141 Awards were made in 2017 and 2018 on the supply and transit arrangements respectively, with both sides claiming to have achieved a successful outcome.142 Settlements were agreed between the parties in December 2019, along with a set of contracts to continue the transit of Russian gas through Ukraine until 2024. Under the terms of the settlement, Naftogaz agreed to lift all attachments against Gazprom’s assets. The parties also agreed to waive further claims against each other and to discontinue a further SCC proceeding in which Naftogaz was seeking a US$12 billion revision to transit tariffs.143

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F. Engaging with the Energy Charter Treaty At the time it was drafted, the ECT was an instrument justified almost entirely by the need for investment into the fifteen countries that had emerged from the former Soviet Union and a smaller number of countries in Central Europe which had abandoned a centrally planned economic model. The economic sector that seemed most likely to attract investment and deliver economic growth was energy. For the first decade and a half, the energy disputes under the ECT were ones concerning investors in this broad group of countries, from Russia and Kazakhstan to Ukraine and Moldova. At that time, the modest number of cases and the location of the respondent states appeared to register evidence that the ECT had begun to achieve the objectives set by its drafters.

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With the ECT’s explicit reference to stability among the conditions its contracting parties were required to encourage and create, it seems appropriate to consider what kind of stability the ECT has offered to investors in this region with respect to the legal and regulatory framework. An assessment of its impact needs to distinguish the political objectives of the ECT from those linked to investments by foreign companies. With respect to the first,

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139 Pirani, S. (2018) ‘After the Gazprom-Naftogaz Arbitration’, Oxford Institute for Energy Studies, March, 2. 140 Arbitration V 2014/080: National Joint Stock Company ‘Naftogaz of Ukraine’/JSC GAZPROM. 141 GAR, 3 January 2020: ‘Gazprom settles Ukrainian disputes with new transit deal.’ 142 GAR, 5 March 2018: ‘Gazprom reignites gas wars with Naftogaz in wake of award.’ Pirani (2018) provides a detailed account of the awards. 143 GAR, 3 January 2020, ‘Gazprom settles Ukrainian disputes with new transit deal.’.

442 Chapter 8: Russia, Ukraine, and Central Asia the ECT has proved strikingly ineffective, even irrelevant, in easing the significant gas and oil transit disputes which have marred relations between Russia and Ukraine and between each of these and neighbouring states dependent on them for gas supply. The absence of a formal ratification of the ECT by Russia has distorted and limited its scope and, more importantly, its authority in the region. Indeed, the formal Russian withdrawal from the ECT in 2009 merely recognized a de facto situation that had prevailed for almost a decade. Yet, with respect to the second aim, the ECT has been successfully utilized as the legal basis for a growing number of claims brought by investors against Contracting Parties under Article 26. The first award under the ECT was issued in 2003. Many of the first generation of cases (before the growth of cases against EU Member States and indeed the EU itself) involved respondents from what might be described as the ECT’s ‘target region’.144 The subject matter of these cases concerned a wide range of energy sources and issues, including electricity sale agreements, gas delivery agreements and oil refinery investments. 8.111

These ECT cases involved three very different kinds of venue, with the Stockholm Chamber of Commerce a popular choice initially. The options follow from the approach adopted in Article 26 which gives investors a choice between different arbitration systems as well as a possibility of recourse before local courts. The provision does not contain an automatic fork-in-the-road, which would make the choice between local courts and international arbitration an irrevocable one. Instead, the ECT expressly allows investors to resubmit to an international tribunal ‘a dispute which the investor has previously submitted’ to ‘the courts or administrative tribunals’ of the host state, under Article 26(2) and (3). In principle, investors are entitled to resubmit before an arbitral tribunal a dispute relating to obligations arising under Part III ECT that has already been submitted to local courts. Although states may opt out of this provision, they are to be listed in Annex 1D of the ECT, providing investors with some transparency. If the investor elects for international arbitration, the choice available is wide. It can be an ICSID arbitration (under the Additional Facility or not) or an ad hoc arbitration under UNCITRAL rules or arbitration under the rules of the Arbitration Institute of the SCC. In the view of one commentator, this wide choice ‘reflects the policy of the ECT to favour investors, by giving them generalized access to international arbitration’.145

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The meaning of the ‘provisional application’ of the ECT has triggered a robust debate, largely due to the refusal of five states to move from signature to ratification. These are Australia, Belarus, Iceland, Norway, the and the Russian Federation (see chapter 5). Three of these are important producers of hydrocarbons. This may shield these states from actions by at least some investors. In Russia’s case, ratification was proposed to the Russian Parliament in 1996 144 In its first decade the list is a respectable length for a new treaty: AES Summit Generation Ltd v Hungary, ICSID Case No ARB/01/04; Nykomb Synergetics Technology Holding AB v Latvia, SCC Case No 118/2001; Plama Consortium Ltd v Bulgaria, ICSID Case No ARB/03/24; Petrobart Ltd v Kyrgyzstan, SCC Case No 126/2003; Alstom Power Italia SpA, Alstom SpA v Mongolia, ICSID Case No ARB/04/10; Group Menatep: Hulley Enterprises Ltd; Yukos Universal Ltd; Veteran Petroleum Trust v Russian Federation (three cases involving Group Menatep and its affiliates/subsidiaries) PCA Case Nos. AA 226, 227 and 228; Ioannis Kardassopoulos v Georgia, ICSID Case No ARB/ 05/18; Limited Liability Company Amto v Ukraine, SCC Case No 080/2005; Hrvatska Elektropriveda v Republic of Slovenia, ICSID Case No ARB/05/24; Azpetrol International Holdings BV, Azpetrol Group BV, and Azpetrol Oil Services Group BV v Republic of Azerbaijan, ICSID Case No ARB/06/15; Barmek Holdings AS v Republic of Azerbaijan, Case No ARB/06/16; Liman Caspian Oil BV and NCL Dutch Investment BV v Republic of Kazakhstan, ICSID Case No ARB/07/14; Electrabel SA v Republic of Hungary, ICSID Case No ARB/07/19; AES Summit Generation Limited and AES-Tisza Eromu Kft v Republic of Hungary, ICSID Case No ARB/07/22; Mohammad Ammar Al-Bahloul v Tajikistan, SCC Case No V (064/2008); Mercuria Energy Group v Republic of Poland, SCC Arbitration Institute. The Energy Charter Secretariat maintains a list on its website: (accessed 15 February 2021). 145 Pinsolle, P. (2007) ‘The Dispute Resolution Provisions of the Energy Charter Treaty’, Int ALR 10(3), 82–91.

F. Engaging with the Energy Charter Treaty 443 and hearings began in 1998 but ratification was postponed indefinitely. This situation has not precluded those investors in the Russian oil company, Yukos, from commencing action under the ECT, bringing no fewer than three cases against the Russian Federation. It may be noted that the idea of ‘provisional application’ is not new, and has been recognized in the 1969 Vienna Convention on the Law of Treaties. If a state does not opt out of provisional application on the ground that it would be inconsistent with its constitution, laws or regulations, and does not make a declaration to that effect, the state concerned is bound by the ECT from the date of its signature.146 In Russia’s case, it did not register a declaration of non-application on signature, but it did give notice of its intention to terminate provisional application in August 2009.

(1) The early awards The early published awards generated considerable comment on issues such as provisional ratification, the meaning of investment, environmental protection, and the application of the FET standard.147 Some of these issues are briefly considered in the paragraphs below.

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In the Nykomb case,148 the SCC tribunal had to consider a claim by an investor arising out of a contract entered into by Windau, a company which Nykomb controlled and Latvenergo, the Latvian electricity utility. It obliged Windau to pay a preferential double tariff for the first eight years of generation from a plant built by Nykomb pursuant to the contract. When Latvenergo failed to pay the agreed tariff, Nykomb argued that this failure constituted a breach of Article 10(1) ECT and was attributable to the state. Among other things, it alleged that this constituted a regulatory taking with effect equivalent to expropriation, breach of the minimum standard of treatment under international law and impairment by reasonable or discriminatory measures. The expropriation claim was rejected, but the tribunal found that Latvia had breached its obligation under Article 10(1) ECT not to discriminate by offering double tariffs to other companies and had failed to provide evidence why those companies had been treated differently.149

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In the Petrobart case,150 the claim involved a contract between Petrobart, a company registered in Gibraltar, and a Kyrgyz state-owned company, Kyrgyzgazmunaizat (KGM), for the sale of gas condensate to the latter. KGM failed to comply with its payment obligations and, when Petrobart commenced proceedings against KGM in the domestic courts, the state then transferred Petrobart’s assets (but not its liabilities) to two newly established companies, leaving KMG to declare bankruptcy so that enforcement of a judgment by the domestic court in its favour was no longer possible. The tribunal held that the state had failed to respect Petrobart’s rights arising from the investment agreement, and was in breach of Article 10(1). The state had failed to provide FET to Petrobart. It had also failed to provide it with effective domestic avenues for the enforcement of its rights. The tribunal also considered the issue of

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146 The states listed in Annexe PA are the Czech Republic, Germany, Hungary, Lithuania, Poland, and Slovakia. 147 As is evident from the stimulating essays by distinguished legal practitioners and academics in the volumes: Ribeiro, C. (ed) (2006) Investment Arbitration and the Energy Charter Treaty, New York: JurisNet, and Coop, G. & Ribeiro, C. (eds) (2008) Investment Protection and the Energy Charter Treaty, New York: JurisNet. 148 Nykomb Synergetics Technology Holding AB v Latvia, SCC Arbitration Institute (award rendered on 16 December 2003). 149 Nykomb, section 4.3.2(a). 150 Petrobart Ltd v Kyrgyzstan, SCC Arbitration Institute (award rendered on 29 March 2005).

444 Chapter 8: Russia, Ukraine, and Central Asia provisional application. It decided that provisional application continued in Gibraltar even though the UK had not expressly included Gibraltar in the list of territories covered when it ratified the ECT. The tribunal also decided that investors from a state which applies the ECT provisionally are entitled to bring a claim under the ECT against another contracting party. 8.116

As in a number of ECT cases then and since, there were questions in Petrobart about the nature of the investment at issue and whether it could properly be classified as such. It was not a traditional investment relationship since it centred on a sales contract agreed between Petrobart and KGM, a state-owned joint-stock company, which provided energy to Kyrgyz consumers.

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In the Plama case,151 the tribunal considered a claim from Plama, a Cypriot company, that Bulgaria had interfered with the operation of an oil refinery in which Plama had purchased an equity interest. This interference was alleged to be inconsistent with Bulgaria’s obligations under the ECT. However, the tribunal accepted Bulgaria’s allegation that Plama was guilty of misrepresentation, and noted that the preamble of the ECT declared that the ‘fundamental aim of the Energy Charter Treaty is to strengthen the rule of law on energy issues’. Substantive protections in the ECT could not apply to investments that were made contrary to law.152 Plama’s conduct was found to be contrary to the principle of good faith which includes an obligation on the investor to provide relevant and material information to the host state insofar as it concerns both the investor and the investment, particularly when this is related to the grant by the host state of approval for the investment.153 The tribunal also found that provisional application of the ECT constitutes no obstacle to an investor having the benefits of the ECT, unless the host state has expressly opted out. It stated: Article 45(1) ECT provides that each signatory agrees to apply the treaty provisionally pending its entry into force for such signatory; and in accordance with Article 25 of the Vienna Convention, it follows that Article 26 ECT provisionally applied from the date of a [S]‌tate’s signature, unless that [S]tate declared itself exempt from provisional application under Article 45(2)(a) ECT.154

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In a case concerning the bankruptcy of a nuclear power plant in Ukraine, a Latvian-registered company, Amto, attempted to recover amounts owed to its subsidiary by ZAES, the largest nuclear power plant in Ukraine.155 Despite success in the domestic courts, execution of the judgments was stayed due to bankruptcy proceedings against its parent, owned by the state. Amto argued unsuccessfully that there had been a denial of justice in the courts’ handling of the proceedings or that there had been circumstances that cumulatively led to a denial of justice in violation of Article 10(1) ECT. In other words, the Ukrainian courts were alleged not to have functioned properly. Under Article 10(12) ‘each contracting party has to ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights’ of investors. This was the first ECT case won by a respondent state. It also had an unusual element in it: the claimant was ultimately owned by Russian citizens and so the case could have raised the issue of provisional ratification but it did not. The tribunal concluded that the claimant was established in Latvia. 151 Plama Consortium Ltd v Bulgaria, ICSID Case No ARB/03/24, 19 August 2003 (proceedings closed in June 2008). 152 Ibid, at para 139. 153 Ibid, at para 144. 154 Ibid, at para 140. 155 Amto v Ukraine, SCC Arbitration Institute, November 2005 (award rendered on 26 March 2008).

F. Engaging with the Energy Charter Treaty 445 An important ruling was made by the ICSID tribunal in the Kardassopoulos case, which was brought against Georgia.156 It was the first ruling on the question of provisional ratification and what it means. Mr Kardassopoulos alleged that Georgia had violated the terms of the ECT and the Greece–Georgia BIT when it issued a decree that expropriated a concession granted earlier for the reconstruction of energy pipelines and infrastructure. Georgia objected to the ICSID tribunal’s jurisdiction over the claim; it argued that the incidents in dispute had occurred before the two treaties had entered into force, as well as raising doubts about the nature of the ownership of the investment by the claimant. The tribunal found that the provisional application of the ECT by Georgia at the time when the alleged events occurred amounted to full-fledged application of the ECT. The tribunal would therefore interpret Article 45(1) so that ‘each signatory state is obliged, even before the ECT has formally entered into force, to apply the whole ECT as if it had already done so’.157 The ruling was the first known ruling on the question of what provisional application means and, while not setting a binding precedent for tribunals that faced this issue, it had implications for the Yukos cases considered below issue that it did not address is whether this interpretation applied where ratification was not anticipated in future and whether there are temporal limits on the provisional ratification of the ECT.158

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(2) The Yukos cases Without a doubt the best known investment treaty case or series of cases under the ECT concerns those claims arising from the bankruptcy and sale of a Russian, privately owned oil and gas company, Yukos, in 2004, following extensive tax disputes with the Russian Federation authorities. This triggered three arbitrations by Yukos majority shareholders against the Russian Federation under the ECT (and some arbitrations with a different legal basis), seeking around US$114 billion for expropriation of their investments. On 18 July 2014 an international tribunal seated at The Hague under the auspices of the Permanent Court of Arbitration (PCA) held that the Russian Federation had indirectly expropriated the claimants’ investments in breach of Article 13(1) ECT. The acts were held to be unsupported by a clear public interest, to be discriminatory against Yukos, to be not carried out under due process of law and not compensated. Compensation had therefore to be paid to the three claimants for the losses suffered. The tribunal did however find that Yukos’ overall conduct was of a doubtful character and so reduced by 25 per cent the loss suffered by the claimants on account of contributory fault on their part. The award of damages to the claimants was nevertheless in excess of US$50 billion and as such it was the largest ever made in an investment arbitration at the time. That award was set aside soon after by a district court at the seat of arbitration and the tribunal’s reasoning much criticized.159 In 2020, the award was 156 Ioannis Kardassopoulos v Georgia, ICSID Case No ARB/05/18, 3.10.05. 157 Ibid, para 211. 158 On these issues, see the reflections of Nappert, S. (2008) ‘Russia and the Energy Charter Treaty: The Unplumbed Depths of Provisional Application’, GAR (monthly), April. 159 Hague District Court, Judgment of 20 April 2016, C/09/477160/HA ZA 15-1; C/09/477162/HA ZA 15-2; C/ 09/481619/HA ZA 15-112. The judgment set aside six awards (three interim awards and three final awards). There were other challenges such as those made against RosInvestCo UK Ltd and Renta 4 and others. In the former, the award (SCC Case No V079/2005) was set aside and annulled by the Judgment of the Svea Court of Appeal on 5 September 2013 (Case No T 10060-10) as a court of last instance. In the latter, the request to set aside the Renta 4 award was rejected by a Judgment of the Stockholm District Court on 11 September 2014 (Case No T 15045-09) as a court of last instance. The Dutch Court of Appeal in the Hague overturned this decision on 18 February 2020, reinstating the original arbitration award. An appeal against this decision is pending.

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446 Chapter 8: Russia, Ukraine, and Central Asia reinstated by a higher court at the seat, and an appeal against that ruling is pending. In the meantime, since the set aside had no implications for the enforcement of the original award, proceedings to enforce it have continued for several years (see c hapter 11). A further series of investment claims, smaller in the amounts sought but still in excess of a billion dollars, have been registered by former shareholders in Yukos. 8.121

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So large is the volume of commentary on and analysis of the Yukos saga of claims, interim awards, final awards, set asides and attempts at enforcement, that the following paragraphs attempt no more than an overview to complete this section’s review of the ECT’s operation in the post-Soviet region.160 Its scope is deliberately limited.

(a) Overview

Yukos was served with very large tax claims by the Russian state in 2003 and, following unsuccessful attempts to defend itself against the claims in the Russian courts, it was forced into bankruptcy and its assets were auctioned off at about half their market value by the Russian state in 2004.161 Its CEO, Mikhail Khodorkovsky, was tried and imprisoned for an eight-year term. Several other senior executives were subject to coercive measures, including arrest and imprisonment. This series of events has generated what might be called two waves of claims, distinguished by the time periods in which they were submitted. In the first wave, between 2004 and 2006, there were three principal sets of claims against the Russian state by Yukos shareholders, especially by its main investor, Group Menatep. First of all, there was a claim about the tax issues which was brought before the European Court of Human Rights (ECHR) in April 2004 based on Article 6 (right to a fair trial) and Article 1 of Protocol No 1 to the Convention (protection of property).162 Secondly, there was a claim for bankruptcy protection under Chapter 11 of the US Bankruptcy Code, which failed to bring substantial relief for Yukos.163 Following the Russian government’s disposal of its main assets by auction, this action was terminated in March 2005. The third class of legal claim comprised those claims for financial compensation for Yukos investors under international investment law. In 2005 two subsidiaries of Group Menatep, Hulley Enterprises Limited, and Yukos Universal Limited, requested that arbitration should commence under UNCITRAL Rules in accordance with Article 26(4)(b) of the ECT. Two further claims were brought under the ECT, while another two were brought under the UK–Russian Federation BIT. There were therefore three parallel claims under the ECT against the Russian Federation by the Menatep Group. The

160 A comprehensive review and analysis of the Yukos awards, origin and context is contained in a paper by Sophie Nappert and Yulia Selivanova: Nappert, S. & Selivanova, Y. (2015) ‘Russia’s Policy on International Investment Agreements: Reflections after the Yukos Awards, in Gaitis, J. (ed) The Leading Practitioner’s Guide to International Oil & Gas Arbitration, New York: Juris, 425–504. Further references are made in the notes to this section and in c hapter 11 on damages and enforcement aspects. 161 The initial offer for shares in Yuganskneftegaz which was entirely owned by Yukos and which managed about 60 per cent of the Yukos group was US$8.65 billion: see Yukos’ Original Complaint for Injunctive Relief, In re Yukos Oil Co, 321 BR 396 (Bankr. SD Tex 2005) (No 04-47742) (filed 14 December 2004) at 12, cited in Winkler, M.M. (2006) ‘Arbitration Without Privity and Russian Oil: the Yukos Case Before the Houston Court’, 4 OGEL note 8. For a review of the tax claims made against Yukos, see Clateman, P. (2005), Yukos Part VI: Tax Claims Revisited’, 3 OGEL, October; and Klaus, U. (2005), ‘The Gate to Arbitration: The Yukos Case and the Provisional Application of the Energy Charter Treaty to the Russian Federation’, in TDM 2(3). 162 This led to a decision against the Russian Federation on 20 September 2011, confirmed by a decision in 2014. 163 For interesting reviews of the Russian law and public international law issues see the Expert Reports published in OGEL: respectively Peter B. Maggs in re Yukos Oil Company, Case No 04-47742-H3-11 (Russian law) 3 OGEL (March 2005) and Professor A.V. Lowe (public international law) 3 OGEL (June 2005).

F. Engaging with the Energy Charter Treaty 447 cases were complex and in terms of the claims submitted, exceptionally large.164 A second wave of claims began in 2013, driven by former management of Yukos rather than former shareholders in the Company, comprising claims by three entities: Financial Performance Holdings BV, Yukos Capital S.a.R.L. and Luxtona Ltd.165 The first of these was withdrawn by the claimant, while the second succeeded in meeting the jurisdictional threshold when a majority tribunal upheld jurisdiction, basing its decision on its reading of the ECT’s mechanism for provisional application in January 2017. In the third case, an interim award in 2017 dismissed Russia’s objections to provisional application of the ECT and denial of benefits, but deferred to the merits stage an objection about the status of Luxtona’s investment in Russia. The first wave With respect to the ECT cases initiated by the majority shareholders in Yukos, an arbitration commenced in November 2008 in The Hague,166 before an ad hoc tribunal, with claimant GML Limited (the Gibraltar-based vehicle of what was formerly known as Menatep, Hulley Enterprises Limited, Yukos Universal Limited, and Veteran Petroleum Limited, the Yukos pension fund), seeking damages of between US$50 billion and US$100 billion from the Russian state.167 GML claimed that the Russian state had expropriated its investments through a series of unilateral measures including tax claims, which led to Yukos’ bankruptcy in 2006 and dissolution in 2007. This series of actions was allegedly designed to seize control of Yukos and remove Khodorkovsky as a political opponent. Russia contended that it was not bound by the ECT since it had not ratified it. Russia’s withdrawal from the ECT in 2009 had no effect upon the proceedings although the matter was considered by the PCA. The claimants observed that Article 45(3) ECT, which governs the termination of provisional application status, provides that in the event of such termination, the investment protections in Part III shall remain in force for a further period of twenty years with respect to investments made by nationals of ECT signatory states during the period of provisional application.

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On 30 November 2009, the tribunal delivered an interim ruling on jurisdiction, allowing the claimants to proceed to the merits phase. The argument based on the ECT provision in Article 45(1) that a signatory could not be bound by all of the ECT’s provisions if any or all of such provisions were inconsistent with the state’s constitution, laws or regulations, was not found to apply to Russia. Similarly, it appears that the tribunal did not accept Russia’s assertions that the claimants were in effect Russian entities and not covered investors. Rather, the shareholders were treated as foreign investors entitled to protection under the ECT. These issues were to return again and again in the proceedings.

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At this time there were no fewer than five cases pending against the Russian Federation on behalf of former shareholders in Yukos. However, only the above cases were being brought under the ECT. Other cases were being brought by Yukos shareholders under UK and Spanish BITs as a way of achieving the same objective as GML sought to achieve under the ECT. For example, a group of four Spanish investment funds based their claims against the

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164 The claims under the ECT before the PCA leading to the awards handed down on 18 July 2014 were threefold: Hulley Enterprises Limited (Cyprus) v The Russian Federation, UNCITRAL, PCA Case No AA 226; Yukos Universal Limited (Isle of Man) v The Russian Federation, UNCITRAL, PCA Case No AA 227; Veteran Petroleum Limited (Cyprus) v The Russian Federation, UNCITRAL, PCA Case No AA 228; Final Awards, 18 July 2014. 165 In contrast to the ECT cases heard at the PCA, the seat of arbitration for these three claims is not The Hague in The Netherlands but rather, respectively, London, Geneva and Toronto. 166 ‘Yukos case begins in The Hague’, Global Arbitration Investor, 19 November 2008. 167 The amount varied according to the oil price.

448 Chapter 8: Russia, Ukraine, and Central Asia Russian Federation on the Spain–Russian Federation BIT.168 In their claim of losses arising from the Russian government’s treatment of Yukos, they alleged expropriation without adequate compensation. The Spain–Russia BIT contains an investor-state dispute settlement clause which limits arbitration to disputes related to the quantity or method of payment of the compensation due in the event of expropriation. The Russian Federation argued that this did not grant the tribunal jurisdiction to decide whether an expropriation had occurred. In April 2009 an SCC tribunal found that the claimants could continue their expropriation claims but dismissed other claims under the FET and MFN clauses.169 Other tribunals have taken a different view of this narrow consent-to-arbitration clause. 8.127

A month earlier a ruling had been made by the ECHR in favour of the former Yukos shareholders although not published until after the Hague award.170 The application was based on Article 41 (just satisfaction) of the ECHR. The Russian Federation was ordered to pay a sum of US$2.5 billion to all of Yukos’ former shareholders. The tribunal found that there was insufficient proof about damages suffered as a result of the loss of the right to a fair trial, but the Russian Federation had to compensate the former shareholders for unfair tax penalties and the disproportionate character of the enforcement proceedings against Yukos.

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Several issues arose in the ECT Yukos cases which merit brief comment since they highlight nuances with respect to the treaty text that are likely to continue to provoke controversy in the future.

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(b) Provisional ratification

The central jurisdictional objection to the Yukos cases concerns whether Russia was ever subject to provisional ratification of the ECT. It is one that has been discussed above and in chapter 5, but merits a summary here, given its importance. According to Article 45(1) of the ECT, a state may ratify the ECT provisionally, and a state may opt-out from this if it is unwilling to apply the ECT provisionally in Article 45(1), which states: (1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory . . . to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.

In Article 45(2)(a), it is further stated that: (2) a) Notwithstanding paragraph (1) any signatory may, when signing, deliver . . . a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by return notification to the Depository.

168 The European Court of Human Rights ruled on the admissibility of several claims brought by Yukos shareholders on 29 January 2009 (due process violations but not expropriation): see 2 Investment Arbitration Reporter, No 5, 17 March 2009. In another case, a tribunal reached an award in 2008 in favour of a subsidiary of GML, called Moravel Investments. It was awarded compensation of US$850 million which represented the unpaid balance of a loan it had made to Yukos. Another claim, from RosInvestCo UK Ltd, was based on the UK-Russian Federation BIT against the Russian Federation. However, the claimant also argued that the broad dispute settlement provisions of the Denmark-Russian Federation BIT should also apply to the expropriation claim by virtue of the MFN clause, an argument which the tribunal accepted: RosInvest Co Ltd v Russian Federation, SCC Case No V (079/ 2005), Decision on Jurisdiction of October 2007. 169 GAR, 8 April 2009: ‘Tribunal to hear expropriation claims against Russia.’ 170 OAO Neftyanaya Kompaniya Yukos v Russia, Case No 14902/04.

F. Engaging with the Energy Charter Treaty 449 The effect of the above was that provisional application of the ECT took effect for all signatory states after December 1994 up to the ECT’s entry into force in April 1998. There were two qualifications to this however: the first, rather obvious one was the declaration of non- application in Article 45(2) above, whereby if a state expressly declared that it was unable to apply the ECT provisionally within a specific time period, it was exempted from this provision: among the states that entered such a declaration were Norway, an important oil and gas producer, and Australia, an important exporter of coal and other natural resources.171 No such declaration was entered by the Russian Federation within the requisite time period. After 1998 provisional application of the ECT was restricted to signatory states that had signed but not yet ratified the ECT and which had not submitted a declaration under Article 45(2). The Russian Federation fell into this category.

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The second qualification arose from the phrasing in Article 45(1). This concerned the dependence upon national law. In Russia’s case it raised a question about the extent to which the Duma (the Parliament) had rejected ratification of the ECT.

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A principal argument made by the Russian Federation is that the phrase ‘to the extent that’ in Article 45(1) means that each provision of the ECT should be separately examined for its compliance with Russian law, and that Russia was only required to provisionally apply those parts of the ECT that were ‘not inconsistent’ with Russian law. In the set aside judgment of 2016 the court found that the wording of Article 45 requires the first, sometimes called ‘piecemeal’ approach to the ECT’s application in Russia. This was not the approach taken by the tribunal in the 2014 award. It led the court to conclude that the option of arbitration under Article 26 ECT for investment disputes is contrary to written Russian law. There had to be a legal provision for subjecting the Russian state to arbitration in such disputes which required the approval of the Russian parliament. That did not exist since the Russian legislature had not ratified the ECT. This meant that the arbitral clause of Article 26 ECT did not apply through the provisional application of the ECT, and the arbitrators lacked jurisdiction to hear the case.

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By contrast, the tribunal in the Luxtona case, one of the more recent ‘second wave’ cases, turned to Article 45(3), and argued that this only made sense if a state were to provisionally apply all of the ECT, since the obligation to continue to offer protection to investors implied that it was already part of the provisional application (the ‘all or nothing’ approach). Even if the ‘piecemeal’ approach were correct, the tribunal found that Russia had not shown that provisional application of the ECT, including its arbitration provisions, was inconsistent with Russian law and so upheld jurisdiction.172

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(c) Taxation and other issues

In the set aside judgment the court did not address three arguments made by Russia: the tax carve-out should have excluded the tribunal’s jurisdiction; the Yukos investments were not genuine foreign investments that could give rise to ECT claims and key parts of the original awards were written by the tribunal secretary. The first of these has provoked considerable comment in relation to the ECT text. The Russian Federation argument was that Article 21 171 Other states were Bulgaria, Cyprus, Hungary, Iceland, Japan, Liechtenstein, Malta, Poland, Switzerland, and Turkmenistan. 172 IAR, Jarrod Hepburn, 4 January 2018: ‘Interim Award in Luxtona v Russia arbitration comes to light offering new reasoning on provisional application of Energy Charter Treaty and Russia’s attempted denial of benefits to this Yukos shareholder.’

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450 Chapter 8: Russia, Ukraine, and Central Asia ECT ‘carved out’ taxation measures from the ECT’s scope, but that Article 21(5) provided an exception to this rule and allowed tribunals to consider tax issues as long as they first sought the advice of the relevant tax authorities. The tribunal in the 2014 awards had declined to do this on the ground that it would have been ‘an exercise in futility’ (that is, the result would have been clear from the start). By contrast, the claimants argued that Article 21(5) ECT expressly provides that a tax-related expropriation falls within the scope of protection of the ECT. Reaction to the analysis of Article 21 ECT by the tribunal has produced interesting comment, such as that in a report by the Energy Charter Secretariat itself. It concluded that the text is so difficult to interpret that contracting parties ‘might consider taking steps towards clarifying and, perhaps, simplifying Article 21’.173 Some comment has been forthright, especially with respect to the argument based on ‘futility’ about the mandatory referral mechanism,174 while others more favourable, noting the potential influence of its finding that an abusive tax is not a tax, as well as a number of related principles that may be drawn from that finding.175 8.135

The Yukos tribunal’s approach to damages and calculations thereof in the 2014 awards attracted very extensive comment and criticism. It is discussed in c hapter 11.

(3) Further use of the ECT 8.136

A decade after its ratification it had become clear that the ECT was established as an attractive treaty option for investors in their disputes with states parties to it. Since that time the dramatic, and unexpected western reorientation among respondent states in ECT cases has made the ECT more like an international energy treaty than its drafters could have expected. Nonetheless, this shift in usage should not detract from its continuing relevance for states and their investors in the post-Soviet region. Perhaps less visibly, there has also been a similar, albeit smaller-scale, reorientation among the geographically smaller countries in south-eastern Europe, as new states emerged from a fragmented Yugoslavian Federation or, like Albania, changed their political and economic direction towards a market economy. In terms of impact on ECT usage, an illustration is the claim filed in 2009 by an Austrian energy supplier, EVN, against Macedonia at ICSID over an alleged expropriation of its assets, discriminatory and unfair treatment by state authorities and unjust court proceedings.176

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Any positive assessment of the ECT, however, has to be qualified by its one significant failure. Despite years of efforts to persuade the Russian Federation to ratify the ECT, it was rejected by the Russian government in July 2009 (see para 8.24). This came at a time when the various Yukos cases brought under the ECT were nearing conclusion at the PCA in The Hague. For

173 Ugur Ozgur, ‘Taxation of Foreign Investments under International Law: Article 21 of the Energy Charter Treaty in Context’ (2015), Energy Charter Secretariat, Brussels. An overview of the issues concerning Article 21 is provided by Sebastian Green Martinez in Green Martinez, S. (2019) ‘Taxation Measures under the Energy Charter Treaty after the Yukos Awards: Articles 21(1) and 21(5) Revisited’, ICSID Review 34(1), 1–22. 174 Nappert, S. (2015) ‘Square Pegs and Round Holes: The Taxation Provision of the Energy Charter Treaty and the Yukos Awards, The Paris Journal of International Arbitration 4, 22. 175 Teitelbaum, R. (2015) ‘What’s Tax Got to Do with it? The Yukos Tribunal’s Approach to Motive and Treaty Interpretation’, OGEL13 (August), 38. 176 EVN AG v Macedonia, Former Yugoslav Republic of (ICSID Case No ARB/09/10). The claim is also based upon the Austria-Macedonia BIT. The dispute has its origins in a lawsuit filed by ELEM, the state-owned power company, against EVN’s local subsidiary at a court in Macedonia. ELEM demanded payment of debts which EVN claims pre-date its ownership of a local electricity company, which it acquired on privatization in 2006.

F. Engaging with the Energy Charter Treaty 451 investors, there was some consolation in the knowledge that any disputes arising from investments made before this date when provisional ratification applied would be unaffected by this measure. In principle, the ECT has not therefore ceased to play a role in investment in the Russian Federation. Given the continuing importance of Russia in the post-Soviet region, and the key role it played in the original concept of the ECT, this was a defeat of that initial concept, even if an expected one. Key countries in the region have become respondents in cases based on alleged breaches of the ECT. In the paragraphs two cases are discussed which address the theme of managing change in long-term contracts in the electricity and the hydrocarbons sectors. However, this is only a selection: there are many other disputes brought under the ECT that address other, important issues in international investment law, that originate from this region.177

(a) Kazakhstan

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The effects of stabilization guarantees in legislation was one of the issues examined by an ICSID tribunal in connection with claims brought by a US energy company, AES, and its subsidiary, TAU Power B.V., against Kazakhstan. The claims were based on domestic Kazakh legislation and also under the BIT and the ECT. At issue were Kazakhstan’s changes to its competition legislation and its application to the claimants’ investments, and the capping of the tariff that governed the sale of electricity generated by the claimants through their investments. The Government revised the Electricity Law in 2009 subjecting the sale of electricity by power generators to a specific capped tariff. The amendment also introduced a ‘tariff in exchange for investment scheme’, under which power generating companies were required to reinvest their profits into the generators, making it impossible for them to realize, distribute and repatriate their profits.

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Among the issues facing the tribunal two are particularly relevant here. It had to make an assessment of claims for protection of an investment not only based on the stabilization provision in an investment law that had been repealed, but it had to determine whether the Kazakh actions undermined the claimants’ legitimate expectations and to what extent this may give rise to a treaty claim under the Netherlands-Kazakh BIT and the ECT. In the event, the tribunal held that the stabilization clause in the domestic law did apply to the claimants’ investments and also held that Kazakhstan’s capping of the applicable tariffs to the sale of electricity was in breach of the FET standard in the ECT and in the BIT. However, the claimants were unsuccessful in obtaining an award of damages for any of their claims.

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The claimants had made investments in the electricity sector in the early 1990s under legislation that contained a stabilization guarantee but was subsequently replaced. The Foreign

8.141

177 For example: Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Trading Ltd. v Kazakhstan, SCC Case No V 116/2010, Award, 19 December 2013 (Moldovan investors win case against seizure of oil and gas operations; Kazakhstan held to be in breach of ECT obligation in Art 10(1) to treat investors fairly and equitably: ‘Respondent’s measures . . . constituted a string of measures of coordinated harassment by various institutions’: para 1095); Federal Elektrik Yatirim ve Ticaret A.S. and others v Republic of Uzbekistan, ICSID Case No ARB/ 13/9 (Uzbekistan liable in one of several claims brought by Turkish electrical services company over investment in domestic gas market and alleged denial of justice; other claims dismissed; settled, 18 May 2020); Liman Caspian Oil B.V. and NCL Dutch Investment B.V. v Republic of Kazakhstan, ICSID Case No ARB/07/14, 22 June, 2010 (tribunal held there was no denial of justice; excerpts from Award available only); Littop Enterprises, Bridgemont Ventures, and Bordo Management v Ukraine, SCC (2020) (tribunal rules that corporate governance provisions allowing claimants to exercise control over the country’s largest oil and gas producer, Ukrnafta, were unlawful).

452 Chapter 8: Russia, Ukraine, and Central Asia Investment Law 1994, applicable at the time of investment, contained a stabilization guarantee in Article 6.178 It stated: Guarantees against Change in Legislation and the Political Situation 1. Should a foreign investor’s position be adversely affected as the result of change in legislation and/or the enactment and/or amendment of the terms and conditions of international treaties, the legislation which was in effect at the moment of the investment was made shall apply to foreign investments for a period of 10 years, and with respect to investments made under long-term contracts (more than 10 years) with authorized state agencies, until the expiration of the term of the contract unless the contract stipulates otherwise. 2. [ . . . ] 3. These requirements shall not apply to changes in the legislation of the Republic of Kazakhstan in the area of ensuring defence potential, national security, ecological safety and public health and morals. If a change in legislation adversely affects the position of a foreign investor in these areas, the foreign investor must be paid immediate adequate and effective compensation in the currency of the investment or in the foreign currency established by the foreign investor’s agreement with the Republic of Kazakhstan. 4. The state shall retain property obligations to investors under any circumstances, including war or change of government or state system, subject to the decisions of international arbitration.179 8.142

In its award, the tribunal declared that it was ‘of the opinion that the Stabilization Clause plays an important role’ in the proceedings.180 It provided the legal basis, for instance, for the treaty claims including a breach of the ECT according to the operation of its umbrella clause. It provided the factual basis for the claimants’ claim of a breach of the FET standard in connection with alleged legitimate expectations. The character and the scope of the above Article was therefore subject to detailed analysis by the tribunal.

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In its view, there was no question that the Stabilization Clause was applicable, nor that Kazakhstan had bound itself by making a commitment, potentially for the duration of a contract. At the time the claimants made their investment the Foreign Investment Law 1994 was in force and so they were entitled to expect that the protection it afforded would be granted to them: ‘such protection could not simply be revoked unilaterally without due regard to Claimants’ expectations as raised under such law.’181 178 The AES Corporation and TAU Power B.V. v Republic of Kazakhstan, ICSID Case No ARB/10/16, Award, 1 November 2013, para 161. The Foreign Investment Law 1994 and its Article 6 also figured in the Caratube case, concerning an unlawful expropriation of oil contract rights: Caratube International Oil Company LLP and Mr Devincci Salah Hourani v Republic of Kazakhstan, ICSID Case No ARB/13/13, Award, 27 September 2017. Protection of his share of the investment was not given to one of the claimants, Mr Hourani, because he was not a party to the contract prior to the repeal of the Foreign Investment Law: he had no accrued rights (para 684). Separately, the award notes that the investor ‘contractualized’ the stabilization of Article 6 in its contract, Clause 28.4, which incorporates the substantive protections of the Foreign Investment Law. This was allegedly done at the request of the then Kazakh Vice-Minister of Justice (para 537). Additionally, the contract drafters included stabilization clauses at Clause 28.1 and 28.2 of the contract respectively: ‘ [t]‌he provisions of the Contract shall remain unchanged during the Validity Term of this Contract’ and ‘ Changes and additions of the legislation of the Republic of Kazakhstan that deteriorate the position of the Contract, made after the conclusion of the Contract shall not apply to the Contract’ (para 627). 179 The same provision is given a slightly different translation in Rumeli which also considers the Foreign Investment Law 1994, but with reference to the telecommunications sector: Rumeli Telekom A.S. and others v Republic of Kazakhstan, ICSID Case No ARB/05/16, Award, 29 July 2008, para 333. 180 The AES Corporation and TAU Power B.V. v Republic of Kazakhstan (2013), at para 246. 181 Ibid, at para 253.

F. Engaging with the Energy Charter Treaty 453 Was the scope of stabilization it offered the investor breached by the changes in law implemented by Kazakhstan, specifically through its competition law? The tribunal identified three factors limiting the scope of the Stabilization Clause in Article 6. Firstly, it was limited to those changes in law that ‘adversely affect’ the investor’s rights (Article 6(1)). Secondly, it applied only a limited protection to those changes in Kazakh law in ‘the area of ensuring defence potential, national security, ecological safety and public health and morals’. These are carved out from the scope so that the investor’s protection is limited and may only benefit from compensation for the adverse effects. Thirdly, the Stabilization Clause is limited in time according to the duration of the investment involved: from a minimal period of ten years to the duration of the contract,182 in cases where the contract has a long term character.183

8.144

The tribunal also noted that a further duty of stabilization may arise out of the FET standard. Article 10(1) ECT (and the BIT in this case) includes certain guarantees of stability and transparency of the applicable legal framework. However, in that case, ‘ “stabilization” simply means that changes in law may not be of such nature to compromise the basic transparency, stability or predictability of the existing legal framework’.184

8.145

Ultimately, the key test for the tribunal was whether the Kazakh laws had adversely affected the claimants’ position as an investor and it held that they did not. Two sets of laws came into play here: the 1995 Electricity Law and the various versions of the competition law. Under the 1995 Electricity Law all electricity generating companies were classified as ‘natural monopolies’, subject to tariffs set by the state regulatory body on a ‘cost plus’ basis in accordance with the Foreign Investment Law. The competition law at that time was not applicable to the claimants’ investment at the time. Subsequently, a Natural Monopolies Law was adopted in 1998, ending the electricity generating sector’s status as a ‘natural monopoly’, and making it subject to the competition law. For the tribunal the relevant legal basis—the baseline—for the calculation of adverse effects on its investment, was ‘primarily the 1995 Electricity Law . . . (since) . . . the key issue which constitutes the core of Claimants’ claims, i.e., the prices which electricity generators were entitled to charge, was strictly regulated by the 1995 Electricity Law’. Under this Law, all generating companies were classified as ‘natural monopolies’ under Kazakh law and therefore subject to regulated tariffs set by the regulatory agency.

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Given this starting point, the tribunal identified an issue in application of the Stabilization Clause. The claimants were not arguing that the adverse effect arose from a change in this Electricity Law but rather arose from changes in the competition law through a series of legislative acts commencing from 1998. Such changes had a general purpose, to develop competition in the electricity market, and ‘it was clear from the very beginning of the investment that Kazakhstan would be reforming its competition law’.185 The tribunal held that the claimants had failed to establish that the promulgation of changes, such as subjection of the

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182 The duration could be very long, such as in the Caratube case where the duration of the contact at issue contained an exploration phase with a right to an automatic extension if certain conditions were fulfilled, amounting to thirty-two years: Caratube International Oil Company LLP and Mr Devincci Salah Hourani v Republic of Kazakhstan, ICSID Case No ARB/13/13, Award, 27 September 2017, at para 264. 183 ‘In summary, the key element of Article 6 is the effect of changes of law and its purpose is to provide stabilization only where changes in law would “adversely affect” the investor’s situation. The nature of such stabilization is however different depending on the area of the concerned law varying from a ‘freezing’ effect to a duty to compensate Claimants for the adverse effects’: The AES Corporation and TAU Power B.V. v Republic of Kazakhstan (2013) at para 255. 184 Ibid, at para 258. 185 Ibid, at para 279.

454 Chapter 8: Russia, Ukraine, and Central Asia claimants’ activities to the competition law, had led to ‘adverse effects’ in relation to the above starting point and standard.186 In addition, some of the changes were beneficial to the claimants such as the privatization of the electricity sector and the establishment of a competitive market in electricity generation and trading. The tribunal also noted that the changes made to the Kazakh competition law ‘are not of an extraordinary nature and similar principles exist in other countries. They follow a common approach to the regulation of markets in the general public interest.’187 The amendment of specific elements in the competition law was not in itself sufficient to establish an ‘adverse effect’ under Article 6 and so was insufficient to trigger the protection of the stabilization clause. 8.148

8.149

8.150

Similarly, there was no breach of ‘stability’ under the FET standard under Article 10(1) ECT and the relevant BIT: the FET standard did not provide Claimants with a right to be stabilized in their previous position so as to be exempt from changes in Kazakh competition legislation.188 The tribunal added that the nature of the changes were not of a character that would breach the FET standard in Article 10(1) ECT or the BIT:189 the frequency of the changes was reasonable in the light of the evolution of the Kazakh economy, and its growing needs for energy, and they were limited to specific elements while leaving the general principles and approach of the competition legislation intact throughout this period. For an economy that was moving from a state monopoly regime to a more liberal competition system, regular adjustments to the competition legislation seemed, to the tribunal, to be necessary. So, there was no element, it held, that indicated that the changes made lacked transparency, stability, or predictability under the FET standard.

(b) Ukraine

From 2011 onwards, Ukraine increased the rental fees payable on hydrocarbons production, with a temporary revision in 2014 that increased the fees from 28 to 55 per cent until January 2016. The purpose of this tax increase was to assist the Government in coping with a national security crisis arising in the Crimea and Eastern Ukraine. The Ukrainian Central Bank blocked the capital flows out of the country in an attempt to stabilize the national currency. In late 2014 the Government adopted Resolution 647, which prevented several dozen Ukrainian entities from purchasing gas from any supplier except the state-owned Naftogaz. Subsequently, this Resolution was challenged successfully and found invalid. It was set aside by the Ukrainian courts. An investor, JKX Oil and Gas, and its affiliates, a wholly owned Ukrainian company, Poltava Petroleum Company (PPC), held by a Dutch affiliate of JKX, launched three treaty-based claims: an UNCITRAL claim filed by the UK parent company under the UK-Ukraine BIT; an ICSID claim filed under the Ukraine–Netherlands BIT by the Dutch and Ukrainian affiliates of JKX; and an ECT claim by JKX and two affiliates before the Stockholm Chamber of Commerce.190 The claims were consolidated, with the ICSID and the ECT cases discontinued in 2015, and the PCA administering the proceedings, governed by UNCITRAL rules. 186 Ibid, at para 276. 187 Ibid, at para 277. The tribunal makes an interesting observation on the scope of a legitimate expectation in relation to the regulatory framework of a host state: ‘Investments are made in the context of the general regulatory framework of the host State, and it would require the very clearest of commitments on the part of the State to refrain from adjusting that regulatory framework in some specified manner to give rise to any expectation that an investment would be insulated from the effects of normal legal and regulatory evolution’ (at para 289). 188 Ibid, at para 279. 189 Ibid, at para 317. 190 JKX Press Release, 16 February 2015, International Arbitration Proceedings.

F. Engaging with the Energy Charter Treaty 455 The claimants argued that breaches of the UK–Ukraine BIT occurred with the imposition of the rental fee, the August 2014 revision, the capital control measures and the adoption of Resolution 647. In the consolidated case, JKX sought reimbursements of more than US$180 million paid on gas and oil production since 2011, and compensation for the measures requiring private companies to buy gas exclusively from the state and restricting transactions in foreign cash and repatriation of dividends.191 Before the ECT claim was discontinued, it played a role in a relatively unusual measure initiated by the claimant in early 2015. In support of the ECT claim, JKX requested the SCC to appoint an Emergency Arbitrator under its Arbitration Rules and to take interim measures before a tribunal was formed.192 This request was met and on 14 January 2015 the emergency arbitrator, the late Rudolf Dolzer, instructed Ukraine ‘. . . to refrain from imposing royalties on the production of gas by JKX’s Ukrainian subsidiary in excess of the rate of 28 per cent (as opposed to the 55 per cent rate that is currently applicable under Ukrainian law’.193 This Emergency Award is binding on Ukraine under international law, and may be recognized and enforced by the Ukrainian courts. It was not complied with however: a Kiev district court did agree to enforce it, but its decision was appealed by Ukraine and the effects of the decision suspended. In July 2015, the UNCITRAL tribunal in the consolidated case issued an award for interim measures that essentially renewed the instruction given by the emergency arbitrator to Ukraine several months earlier. It also required that Ukraine should not seize the affiliate’s assets to cover the excess rental fees. A second award on interim measures followed that ordered Ukraine and its National Bank to allow the affiliate to transfer dividends held by it to the affiliate in US dollars.194

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The emergency arbitrator facility is included in the SCC Arbitration Rules but not in ICSID or UNCITRAL. Under Article 26(4) ECT, an investor may opt for the SCC Arbitration Rules. In 2010 these Rules were modified to allow for emergency arbitration, a procedure that has its origins in commercial arbitration, offering a swifter form of interim relief to the aggrieved party. Its design is oriented to the needs of private commercial parties, with orders to be issued within only five days of an emergency arbitrator being instructed to respond to a request for interim relief. Under the Arbitration Rules, it is available to any investor bringing a claim under a treaty such as the ECT that refers to SCC arbitration.195

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The use of emergency arbitration in this instance raises at least three issues about its role in investment treaty procedure. Firstly, the request for emergency arbitration was filed prior to

8.153

191 The award has not been published but an account of its contents is provided in IAR on which the following paragraphs draw: IAR, 29 June, 2020, ‘Revealed: Tribunal in JKX v Ukraine awarded nearly 12 million USD for arbitrary measures and breach of free transfer clause; Ukraine’s necessity defence was rejected’. 192 Article 4 of the Rules includes the following: ‘The Board shall seek to appoint an Emergency Arbitrator within 24 hours of receipt of the application for the appointment of an Emergency Arbitrator . . . An Emergency Arbitrator may not act as an arbitrator in any future arbitration relating to the dispute, unless otherwise agreed by the parties’: . Between 2010 and 2019 the SCC had 43 applications for emergency arbitrators, ten of which were for investment treaty cases (24 per cent): (accessed 1 September 2020). 193 IAR, 29 June 2015: ‘Investor takes emergency arbitrator award under Energy Charter Treaty to a Ukraine court and obtains enforcement of tax-freeze holdings.’ 194 IAR, 29 June 2020: ‘A third award on interim measures was issued in May 2016 ordering Ukraine to comply with the first award on interim measures.’ 195 Evidence of its usage in investment treaty cases is not abundant. An example under the SCC Arbitration Rules is the Emergency Decision on Interim Measures (No EA (2014/053)) made on 29 April 2014 in the case of TSK Invest LLC v The Republic of Moldova (the emergency arbitrator was Kaj Hober). This is different from the non-monetary injunctive relief sought from tribunals as an interim or a final measure and evident in investment treaty cases such as Chevron and Texaco v Ecuador and in Philip Morris v Uruguay.

456 Chapter 8: Russia, Ukraine, and Central Asia the expiry of a ninety-day amicable settlement period following the request for arbitration under the ECT, to some extent undermining the purpose of that requirement in the treaty. Secondly, it gave Ukraine less than a week to respond. It is extremely unlikely that more than a very small minority of states would have the institutional capacity to organize a response within this short period, putting them at a disadvantage. It may have only just been notified of the dispute and may well have no external counsel available or even in-house capacity at such short notice. In this case, Ukraine was barely emerging from a series of domestic crises that were likely to impose strains upon the state’s capacity to respond. This leads directly into a third, general issue: how suitable is a procedural instrument designed to respond to the commercial needs of private parties for an investment dispute in which one of the parties has the complex structure of a sovereign state? 8.154

In the event, the government of Ukraine did not present a defence during the period stipulated by the arbitrator. The claimant was granted interim relief by the tribunal in the consolidated case in the form of an ‘award’, not an order. It did however produce objections to the domestic enforcement request.196 These included an objection that the three month cooling off period under the ECT had not been complied with prior to the claimant’s recourse to emergency arbitration; Ukraine had not been given due notice of the appointment of the arbitrator and the emergency relief process and so could not present its case; at the time Ukraine ratified the ECT (1998), the rules did not contemplate emergency arbitration; and the award is in breach of ‘public policy’ since it infringes the state’s authority to raise taxes and poses a threat of ‘material deterioration of the state’s economy’.

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The Kiev court of first instance held that the award was eligible for enforcement under the New York Convention, and dismissed the argument that the ECT’s requirement for a ninety- day cooling off period was a barrier to recourse to emergency arbitration until the expiry of that period.197 Ukraine had been formally notified of the process by the emergency arbitrator, but the court did not consider whether ‘proper notice’ meant more than the very short time period to respond. In its opinion, Ukraine had sufficient time to respond to the application for emergency arbitration. The court also rejected the arguments that Ukraine had not consented to the emergency arbitration process and that the award violated public policy, since the only interests threatened by the application were those of the applicants (JKX and its affiliates), who faced damage unless granted interim relief. This rather misses the point raised by Ukraine about its right to levy taxes. Most BITs include a high threshold for admission of claims about taxation unless expropriation is involved or a similarly grievous harm for the investor.

8.156

In 2017 the tribunal issued its award, refusing to grant the US$250 million in damages sought by JKX across the three consolidated arbitrations, denying that the licence agreement with Ukraine from 1994 had frozen all production taxes for its local subsidiary at the level payable in that year.198 The tribunal found the stabilizing mechanism in the licence agreement had a renegotiation character which allowed the parties the prospect of achieving a similar economic balance (see chapter 3) in the event of tax increases occurring. The affiliate of JKX had not requested negotiations so this provision never became operative.199 However, 196 IAR, 29 June, 2015: ‘Investor takes emergency arbitrator award under Energy Charter Treaty to a Ukraine court and obtains enforcement of tax-freeze holdings.’ 197 Ibid. 198 GAR, 21 March 2017: ‘Ukraine asks to set aside JKX award.’ 199 GAR, 7 February 2017: ‘Ukraine gas claim ends with 5% win for London-listed company.’ The state of necessity defence was offered by Ukraine on the ground that it faced a national security crisis in 2014: this was

G. Stability and Mining in the Region 457 it did accept the claim relating to the rules requiring private companies to buy gas only from state-owned suppliers and imposing restrictions on the transfer of dividends abroad. The final award was for US$11.8 million, only 4.8 per cent of the damages sought. Subsequently, the award was enforced by the Kiev Court of Appeal, except in relation to the repatriation of dividends by the National Bank of Ukraine, arguing that it could not enforce that obligation since the Bank was not a party to the arbitration agreement.200 G. Stability and Mining in the Region Given the similarities between mining contracts and certain kinds of energy contracts, and the prevalence of mining disputes in the post-Soviet space, it seems appropriate to consider briefly some of the investment cases that have arisen. A few of them have involved a familiar tension between the long-term character of the investment and legal guarantees of stability, brought about by challenges to the benefits by state measures taken after the investment has been made.201

8.157

The context of most Central Asian countries where these examples come from is a familiar one. With political independence still a matter of living memory, their evolving economic context has been a highly dynamic one, so the risks of additional taxation imposed on investments and early termination of contract rights have been high. An early example of the difficulties that investors had in preserving a long term relationship in the face of state measures to increase revenue share from projects202 was evident in the Paushok case against the Government of Mongolia.203 The investor, Sergei Paushok, owned two companies, CJSC Golden East Company and CJSC Vostokneftegaz Company, which had invested in the Mongolian gold mining industry. The Mongolian Government introduced a windfall profits tax through legislation, directed at two minerals in particular, copper and gold. Mr Paushok challenged the tax measure under the Russia-Mongolia BIT.

8.158

The claimants argued that the measure violated their legitimate expectations. To be successful, they did not need to have a stability agreement in place, although one of the companies, Vostokneftegaz, had obtained one to cover certain taxes. The absence of a stability agreement for the other investments was significant for the tribunal.

8.159

rejected by the tribunal in relation to the maintenance of capital controls after March 2015, and to the adoption of Resolution 647, which was an arbitrary administrative act, found by Ukrainian courts to have breached the required procedure for its entry into force and therefore not necessary for the purposes of defence. 200 GAR, 29 July 2019: ‘Treaty award enforced against Ukraine on home turf.’ The Kiev Court has been active in enforcing other awards: for example, Moston Properties Limited v Public Joint Stock Company ‘Ukrgasvydobuvannya’, LCIA Arbitration No 153184 (award in favour of UK-registered supplier of equipment and services against subsidiary of Naftogaz for non-payment of part of purchase price) . 201 Useful overviews of international mining arbitrations can be found in Burnett, H.G. & Bret, L.-A. (2017) Arbitration of International Mining Disputes: Law and Practice, Oxford: OUP; and the various contributions in Fry, J. & Bret, L.-A. (eds) (2019) The Guide to Mining Arbitrations, London: Law Business Research. 202 There have been other examples of mining disputes in other Central Asian countries. In Kyrgyzstan, for instance: Centerra Gold Inc., et al v Kyrgyzstan (UNCITRAL, settled 2019; harm caused to investment by environmental claim from several state agencies), and Stans Energy Corp. and Kutisay Mining LLC v The Kyrgyz Republic, UNCITRAL, PCA Case No 2015-32 (respondent liable for expropriating investor’s mining rights; sunk costs only awarded, 2019). 203 Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011.

458 Chapter 8: Russia, Ukraine, and Central Asia 8.160

Taking a contextual approach, they noted that ‘foreign investors are acutely aware that significant modification of taxation levels represents a serious risk, especially when investing in a country at an early stage of economic and institutional development’.204 A typical response to this by an investor would be to seek guarantees such as a stability agreement that would limit or even prohibit the possibility of tax increases. In this instance, the absence of a stability agreement in favour of Golden East Company suggested to the tribunal that the claimants had ‘not succeeded in establishing that they had legitimate expectations that they would not be exposed to significant tax increases in the future’205.

8.161

Among the arguments made in support of the claim that legitimate expectations had been breached, was that the windfall profits tax had altered the predictability of the business and legal framework because it imposed an excessive burden on investors. Although the tribunal recognized that the impact on the industry as a whole and the Golden East Company in particular was negative and ‘severe’, this did not mean that the enactment of such legislation was contrary to the BIT. It stated that ‘[a]‌n investor, without an agreement which limits or prohibits the possibility of tax increases, should not be surprised to be hit with tax increases in subsequent years and such an event could not be considered as “unpredictable” ’.206 An international tribunal could not conclude that a particular tax measure alters the predictability of the business and legal framework of a country, unless the claimant provides a clear demonstration that such an increase in taxation amounts to a breach of an international obligation of the host state. The claimants had not done so here.

8.162

In the neighbouring state of Uzbekistan, two mining projects were initiated by Oxus Gold, which claimed it had an unconditional right to develop one of the two projects (Khandiza) in the form of a concession agreement, and that these rights had been expropriated by Uzbekistan.207 The tribunal found that the relevant granting instruments did not grant Oxus unconditional rights but rather envisaged a further process through which the final form of cooperation with the state (by concession or production sharing) would be agreed on. Oxus only enjoyed a right to enter into good faith negotiations with Uzbekistan over the project. Similarly, the claims with respect to the second project, Amantaytau Goldfields (AGF), largely based on expropriation, were rejected by the tribunal. The interest in the case, however, lies in the tribunal’s acceptance of the claim based on the stabilization clause and in its discussion of stabilization in different forms and their significance.

8.163

A number of tax exemptions and stabilizations were granted to the AGF joint venture in which Oxus had a 50 per cent share. For example, a Decree protected it against revocation of tax privileges. Clause 7 of Decree No 477 of 22 September 1994, ‘On the creation of the Joint Venture ‘Amantaytau Goldfields’, and measures to ensure its effective functioning’, stated:208 7. In the event of changes during the next ten years in the tax law of the Republic of Uzbekistan which adversely affect the activities of the Joint Venture, to provide the application of legal and other normative acts valid at the time of signing of the statute documentation for the Joint Venture.

204

Ibid, at para 302.

206

Ibid, at para 305. Oxus Gold v Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015. Ibid, at para 823.

205 Ibid. 207 208

G. Stability and Mining in the Region 459 It was to be valid for ten years from the date of signature of the ‘statute documentation’: that is, from 24 November 1993 to 24 November 2003. The privileges were granted to the joint venture and the tax stabilization clause was only to be applicable if the changes in tax ‘adversely affect the activities of the Joint Venture’. The guarantees of tax stability were several however. A later Decree No 127-20 of 30 March 1996 provided that the tax privileges granted to AGF would ‘be valid for the whole mine life period of the joint venture if any concrete timing is not established’.

8.164

A law provided further protection. The Law on Foreign Investment of 30 April 1998 included the following stabilization clause:209

8.165

If the subsequent legislation of the Republic of Uzbekistan makes worse investment conditions, than legislation current on the date of investment is applied to foreign investments within ten years of the date of investment. The foreign investor has the right at his own discretion to apply those provisions of a new legislation which make better conditions of his investment. Worsening conditions of investments refer to changes and amendments to the legislation current on the date of investment or adoption of the new legal acts, providing:—increase in the rate of tax on incomes, received as dividends, paid to the foreign investor . . .210

The duration of this clause was ‘ten years of the date of investment’: from the establishment of AGF in 1994 to 2004. Two further Decrees added to these guarantees. Decree No 266 of 11 July 2000 had the effect of renewing the ten year stabilization clause of the earlier Decree No 477 so that it would last until 10 July 2010. Decree No 76 of 10 August 2001 confirmed the validity of the stabilization clause as follows: ‘In the event of adverse changes in the tax regime of the Republic of Uzbekistan, which worsen conditions of JV’s functioning, the legal acts valid as at 1 July 2000, including this Regulation, shall remain in force until 1 July 2010.’

8.166

The tribunal commented on the legal significance of the various forms of stabilization at work here. When stabilization is enshrined in a law or a general regulation, the investor is not given a vested right ‘as the State can always modify its laws and general regulations’. This is not the case when the stabilization clause is included in a contract or a regulation that is ‘specifically directed at the investor, as in the present case, where the different Decrees all concerned expressly Amantaytau Goldfields Joint Venture’.

8.167

The three types of relevant tax privileges given to the investor under these Decrees (exemptions from specific taxes, a specific stabilization clause, and a zero-rated treatment for VAT) were revoked by two Decrees in 2006, and for VAT, through changes in the Uzbek Tax Code in 2009 and 2011.

8.168

In its analysis of the revocations in relation to a breach of the protection standards in the BIT, the tribunal’s starting point was the premise that ‘whereas a State may modify its tax regime, it must honour stabilization clauses and the specific privileges that it grants to investors’.211 The various tax privileges were relied upon by the investor when making its calculations about its investment in the AGF project. None of the Decrees ‘expressly provided

8.169

209 Ibid. 210 Ibid. 211

Ibid, at para 824.

460 Chapter 8: Russia, Ukraine, and Central Asia that such privileges could be revoked in case of non-compliance with legal or contractual requirements’.212 Uzbekistan was therefore held liable for a breach of the BIT’s substantive protections as a result of its changes in the tax regime implemented in 2006 and 2009. The stabilization clauses were upheld. H. Conclusions 8.170

This chapter has focused upon the creation and operation of legal mechanisms for the long- term stability typically required by energy investments in the context of the post-Soviet transition to market-oriented economies. In the earliest days, robust efforts were made by the governments of newly independent states to attract foreign investment by making commitments in domestic law, contract and international treaty, and sometimes combining these by enacting a law containing a contract with provision for international arbitration. In little more than a decade, the investment risk had declined, and the terms on which initial investments were made seemed to some governments overly generous, especially at a time of rising commodity prices. Their response to that perception of changed circumstances has been examined, particularly in the renegotiations analysed in section D.

8.171

The terms applicable to the largest hydrocarbons projects were subject to renegotiation in conditions that some would describe as ‘forced’. However, it is perhaps equally striking that there was no overt attempt at expropriation or challenge to contract stabilization clauses. The legal arsenal available to foreign investors, even small and medium sized companies, appears to have been well understood by the governments and the risks too that claims for compensation might be viewed favourably by international tribunals. So too was the partnership relationship they had entered into with these large international investors, and the benefits it offered over the long term. There is also the fact that the governments of the Russian Federation and Kazakhstan had, in the intervening years, been able to evolve energy policies that reflected broad economic policies appropriate to their respective countries and the path they wanted their countries to take. A realignment of energy investment policy to reflect this ‘state capitalist’ approach made contract renegotiation inevitable given the importance of these energy projects in the overall economy.

8.172

Two striking features of the renegotiations examined here (such as Sakhalin-II, Kashagan, and Kovykta) are, first, the minimal role of formal arbitration between the parties and instead the preference for the use of political or unofficial channels to resolve disputes. This is all the more surprising since the energy companies concerned were among the largest in the world, and the contracts at issue contained stabilization clauses. However, in a number of cases, claims were indeed registered and appear to have played a role in the subsequent negotiations (as in Latin America). Second, recent developments suggest that the renegotiations are not a one-off process for the parties, but rather are likely to re-commence at intervals, creating a climate of doing business that is very different from that implied by the parties’ agreement on a stabilization provision at the time the investment is made.

8.173

The role of the ECT in the region has been overshadowed by the damages award that resulted from the PCA hearing in The Hague in 2014, and by the Russian Federation’s withdrawal from the ECT process. Yet, as section F shows, the ECT has been used by a wide variety

212

Ibid, at para 825.

H. Conclusions 461 of investors relating to diverse kinds of energy investments in this region. To that extent, it is fulfilling one of the main goals set at its initiation: to provide covered investors with guarantees of stability of the legal and regulatory framework applicable to their investments. Further, the Yukos cases have, as this section shows, a relevance beyond the large amounts sought and awarded and the calculation of quantum, from the interpretation of Article 21 on taxation measures to the meaning of provisional application. The debate on that award has contributed to an appreciation of the nuances in the ECT text on a number of issues, not least Article 21 itself. As an assessment of its relevance to this region, it may be said that while the ECT has failed to include the Russian Federation in its embrace, it has proved successful in providing a legal basis for a growing number and diversity of claims from the rest of the post-Soviet space. There is abundant evidence in this chapter of continuing volatility in the energy investment climate in the region (contract renegotiations, disruption in the cross-border gas business, and many individual disputes). A new dimension to this is formed by the actions taken with respect to renewables by Ukraine. The volatility in law and policy in that instance, however, is not unique to this region, and echoes experience elsewhere in Europe. However, in terms of how changes arising from state measures are managed by investors and states themselves, two features are notable: the first is how frequent the state elects to initiate informal discussions and even negotiations; the second is the extent to which the legal infrastructure of international investment law has become embedded in states that acquired sovereignty barely three decades ago. The need for legal stability in long-term, capital intensive energy (and mining) projects is widely recognized by governments and provided through contract, domestic law and treaty, whether in the form of a BIT or adherence to the ECT. The different approaches to stabilization in the Central Asian setting highlight the efforts a state may go to in order to provide investors with the security investors seek prior to making very large investments. Although both the procedural and multi-tiered approaches have their limitations, they do seem to provide investors with a stronger bargaining position in the event of future proposed changes by the host state.

8.174

Adaptation of that requirement for long-term stability to a context of diminished risk has led to adjustments in several of the legal regimes, as demonstrated in this chapter. This has also been accompanied in several cases by a streamlining of national energy laws in line with greater experience and clarification of domestic policy goals. There is no evidence that such developments suggest a lack of appetite for partnerships with foreign investors in a strategic sector, but rather greater expectations of what such partnerships can deliver for the host state and more sophistication about how that can be achieved by negotiation and by law.

8.175

9

Africa: Treaty and Contract Stability

A. Introduction

9.01 9.10

(1) Legal responses (2) Africa and BITs: South African ‘Rejectionism’ (3) Taxation measures

9.19 9.27

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria (1) Algeria (2) Egypt (3) Nigeria

9.35 9.37 9.70 9.99

(4) Disputes

9.132

C. Energy Investment, Phase 2: New Approaches to Stabilization

9.173 9.174 9.213 9.230 9.258 D. Other Patterns of Investment Dispute 9.270 E. Conclusions 9.275

(1) (2) (3) (4)

Uganda Ghana Tanzania Mozambique

Changing economic contexts and changing political perceptions condition legal answers. Rosalyn Higgins1

A. Introduction 9.01

There is no other continent in the world in which the connection between energy investment and socio-economic development is as important and as sensitive as it is in Africa. In many of its regions, the relative lack of infrastructure and lack of access to electricity for as many as 600 million of its citizens make the prospect of large-scale foreign investment a very compelling one for governments.2 Without new sources of capital, an accelerated pace of social and economic development is highly improbable for most states. For foreign investors, however, the principal attraction of long-term investments in Africa has been one that is only incidentally related to development goals: to secure raw materials for export and processing, especially commodities such as oil, gas, and minerals like cobalt, copper, and lithium. Indeed, a defining feature of much foreign investment in Africa from colonial days onwards has been its linkage to the export of commodities rather than to manufacturing or infrastructure investment. This pattern is open to challenge as having done little for the overall development of the countries concerned, and indeed may have even hindered economic and social progress in some cases. Governments have therefore a key role to play not only in attracting 1 Higgins, R. (1999) ‘Natural Resources in the Case Law of the International Court’ in Boyle, A. & Freestone, D. (eds) International Law and Sustainable Development, Oxford: OUP. 2 IEA Africa Energy Outlook 2019, November 2019. The number of persons lacking access to clean cooking is higher at 900 million.

A. Introduction 463 investment but in linking the investment flows to the achievement of development goals. The success of modern energy related investment will tend to be judged by a development yardstick. This context gives Africa a unique character as a case study of long-term legal stability for energy investments, the subject of this chapter. The narrative is quite different from the cyclical one so common in Latin America or the post-empire experience of the former communist states of East Europe and Central Asia, even allowing for the evident differences that exist within each of these broad regions. The past in Africa plays a role of course: the legacy of colonialism is still a factor in the popular mindset, capable of influencing the reception and treatment of foreign investment. However, threats to the long-term stability of energy investments have been many and highly diverse, with disagreements over benefit sharing as perhaps the single common feature among the various kinds of dispute.

9.02

Common features in international energy investment in Africa may be found in the timing and destination of investments. These may be distinguished into two broad periods and groupings of states. Each one was largely focused on hydrocarbons, with a small but growing interest in its renewable energy sector.3 In the immediate post-colonial period, several large states deliberately used their known energy potential to attract significant western investment. Most African states, for a variety of reasons, did not. This first group includes several states in North and West Africa, notably, Algeria, Angola, Egypt, Equatorial Guinea, Gabon, Libya, and Nigeria. These states built up their export-driven energy industries on the back of substantial foreign investment from the 1980s onwards. With nationalizations taking place across the Middle East, closing the doors to energy (effectively, hydrocarbons) investment in traditional locations, alternative sources in North and West Africa found themselves with unexpected offers of capital, a blessing for them at a time when most were emerging from periods of violent internal conflict. Inward investments could be protected by long- term contracts, usually on production sharing terms rather than the tax-royalty basis of concessions, and by an offer of international arbitration, reassuring to investors considering the then condition of many national courts. Later, these protections were supplemented by investment treaties. In line with new trends, investors were subject to extensive state participation, usually through a national energy company. In the event, conflicts between this grouping of states and foreign investors were to arise despite stability guarantees and adaptations were made to the initial relationships between the two.

9.03

A second wave of energy investment commenced about two decades later in the early 2000s. The gap between these phases was not so much due to a lack of interest in investment by the governments concerned or of perceived geological prospects as it was due to low commodity prices, complexity of commercialization, and doubts about the scale of prospects. In some cases, internal conflicts played a role in slowing the advent of foreign investment due to security concerns for investors. As the global market for commodities improved, and prices rose sharply, a new generation of African states attracted significant inflows of investment into their energy and minerals sectors. In this group were a mixture of states from the West, such as Ghana and Senegal, and the East, such as Mozambique, Tanzania,

9.04

3 Africa’s oil and gas reserves amount to 7.5 and 7.1 per cent respectively of the world’s total reserves: BP Statistical Review of World Energy 2018. Major hydropower projects have been undertaken in Malawi, Zambia, and Lesotho. Large-scale wind generation projects have been undertaken in Morocco, Egypt and South Africa, while geothermal power projects have been commenced in Kenya, Uganda, Ethiopia and Tanzania: Finizio, S.P. (2018) ‘Energy Arbitration in Africa’, in The Middle Eastern and African Arbitration Review, 44.

464 Chapter 9: Africa: Treaty and Contract Stability and Uganda. Within this grouping, and in a relatively short time, conflicts arose between host governments and investors, perhaps driven by the fact that the states receiving investment were doing so at a time when investment capital seemed limitless. Another variable creating new dynamics in investor–state relations was the changing character of the energy investors themselves, often driven by private equity and an exploration-only focus, attracted to Africa’s under-explored territories and offshore waters. The tests of stability for the long- term contracts typically used by international energy companies were however significantly different from those arising in the first grouping of states. 9.05

A feature of the conflicts in the second wave of investment was its demonstration of the extent to which legal infrastructure was lacking or untested in key areas such as public finance management. Early successes in hydrocarbons investment revealed that many states had insufficient human or institutional capacity to manage large-scale inward investment (for example, Cameroon, Somalia, Central African Republic). Even relatively stable economies, such as Ghana, Mozambique, and Uganda, quickly began to show signs of strain in the face of significant hydrocarbons discoveries. In most cases, the legal and fiscal frameworks in place proved to be incomplete, out-of-date, or enforced only intermittently. In this sense, investors had to negotiate their way through the kind of volatile business environment reminiscent of Central Asia and Eastern Europe in the 1990s: in the areas of greatest promise to investors, the laws were in flux or could reasonably be expected to change, and courts were frequently under-resourced. Tax regimes were modified with new impositions on investors.4 Transfers of oil and gas rights to third parties were challenged by governments.5 Contractual rights were cancelled, and licences revoked6 and invoices under power purchase agreements unpaid.7 Operations linked to LNG facilities were suspended and interrupted.8

9.06

Not surprisingly, the number of Africa-related ICC arbitrations significantly increased during this period, from 72 cases in 2004 to 153 cases in 2017.9 Similarly, disputes under LCIA Rules also increased, from only two Africa-related cases in 2002 to 8 per cent of new cases in 2016.10 However, given the scale of investment flows over the past two decades, from 4 For example, Total E&P Uganda BV v Republic of Uganda, ICSID Case No ARB/15/11; Tullow Uganda Operations Pty Ltd and Tullow Uganda Limited v Republic of Uganda, ICSID Case No ARB/13/25. Chad is an example where the dispute was settled. Tanzania is an example with respect to mining. 5 For example, RSM Production Company v Republic of Cameroon, ICSID Case No ARB/13/14; Shell Nigeria Ultra Deep Limited v Federal Republic of Nigeria, ICSID Case No ARB/07/18. 6 Among the many instances of this are: WalAm Energy Inc v Republic of Kenya, ICSID Case No ARB/15/ 17 (revocation of a geothermal licence); African Petroleum Gambia Limited (Block A4) v Republic of the Gambia, ICSID Case No ARB/14/7 and African Petroleum Gambia Limited (Block A1) v Republic of the Gambia, ICSID Case No ARB/14/6 revocation of offshore hydrocarbons licences; settled following reinstatement); Togo Electricite and GDF-Suez Energie Services v Republic of Togo, ICSID Case No ARB/06/7 (termination of an electricity licence). 7 Standard Chartered Bank v The United Republic of Tanzania, ICSID Case No ARB/10/12. 8 For example, Union Fenosa Gas SA v Arab Republic of Egypt, ICSID Case No ARB/14/4; Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/11. 9 ICC, ‘ICC Dispute Resolution Bulletin’, Issue 2: ICC Practice and Procedure, 2018, at p. 53: ; The ICC (Spring 2005) ‘2004 Statistical Report’, ICC International Court of Arbitration Bulletin 16(1) at 6 (update). When North Africa is added to sub-Saharan African claims in the ICC report, the total number reaches 208, compared with 365 for Latin America & Caribbean, and 323 for South & East Asia and Pacific or 542 for Asia & Pacific, and 981 for Europe (at 53–55). Note that these cases are Africa-related and not necessarily energy-related. 10 LCIA, ‘Facts and Figures—2016: A Robust Caseload’, at 9; LCIA, Director General’s Report 2002 at 2. The LCIA figures from 2013 indicate that 15 per cent of its Africa-related disputes were related to the oil and gas industry and an additional 7 per cent related to the broader energy and resources sector. See also the discussion in Notaras, A. & Bartle, J. (July/August 2015) ‘Arbitration in Africa: High Stakes and Big Claims in Resolving Disputes in Africa’, Legal Business http://www. simmons-simmons.com/~/media/Files/Corporate/External%20publications%20pdfs/Africa%20Insight.pdf> at 106.

A. Introduction 465 US$6 billion in 1994 to US$57 billion, according to one estimate, the increase in disputes is less remarkable.11 To attribute this to ‘resource nationalism’ would be an over-simplification and understate the investor-friendly responses of many governments. Indeed, it is hard to find a single case in which actions were taken to advance a sustained anti-foreign investor agenda comparable those in Venezuela or Bolivia in recent years.12 Further, with budget pressures on scarce resources, it would be unreasonable to expect significant increases in public investment in legal and institutional infrastructure until evidence of large-scale deposits became available. Once that evidence emerged, the government response was in most cases swift. In the light of this new knowledge and understanding, there is evidence of a continuing investment in the legal infrastructure for investment (section 1 below).

9.07

Inevitably, there are exceptions to the above classification of investment flows into two parts. South Africa, for example, as the continent’s leading and almost sole producer of coal, has had a quite different investment pattern, and in African terms, unique. Like many other minerals in Africa like gold and diamonds, coal has a timeline for international investment that reaches back to a much earlier era. For a variety of reasons, it is now an industry in decline. Another caveat to the above classification is that, arguably, the circumstances that gave rise to the second wave of investment in Africa came to an end with the oil price declines from 2014 onwards and the impact of the COVID-19 virus, hastening a transition away from fossil fuels, if not many classes of hard mineral.

9.08

This chapter will focus on several African states within each of these two groupings and will examine how legal stability for long-term, often complex energy investments has been tested, and with what results in terms of preserving (or ending) the relationship between host state and investor. As with preceding case studies in this book, it draws on a wide range of publicly available sources of information.

9.09

(1) Legal responses The scale of investment in Africa, particularly in the energy sector, has triggered a reappraisal of the long-neglected investment law infrastructure, led by African governments themselves.13 Actions at the national level to modernize and innovate have included the adoption of new or revised investment and energy laws, or codes, dedicated fiscal regimes, and specialist institutional development. Model concessions too and public-private partnerships have been adapted to encourage local settlement of disputes.14 Regional and continental initiatives, some of which are described below, have also been taken. However, for 11 According to one estimate, FDI (not only energy-related) increased from just over US$6 billion in 1994 to US$57.2 billion in 2013, representing 853 per cent compared with a global average of 466 per cent growth: Notaras and Bartle (2015). 12 For evidence of such measures, it is necessary to reach further back in African history to the nationalization of the mining sector in Zambia in the 1960s or petroleum refineries in Nigeria in the 1980s. 13 Between 2000 and 2018 UNCTAD estimates that FDI into Africa rose from US$10 billion to US$46 billion (UNCTAD, World Investment Report 2019, p. 44). 14 For example, Egypt’s model concession, article XXIV (b) and (f): (accessed 14 September 2020). Egypt also amended its Investment Law No 8/1997 in 2015 which included a removal of investor-state treaty arbitration. For an analysis of the law, see Fatma Salah, ‘Egypt: New Investment Law-ADR for Investment–State Disputes’, 14 April 2015: . Tanzania’s Public Private Partnership (Amendment) Act came into force in 2018: section 22 of the Act requires any dispute arising from a PPP agreement in cases of arbitration to be adjudicated by judicial bodies or other organs

9.10

466 Chapter 9: Africa: Treaty and Contract Stability energy investors, the key rules are likely to remain those in municipal law, with rights allocated through various contractual structures, involving the state, state-owned or controlled entities, as well as international partners, and access to international arbitration. 9.11

Several observers have rightly noted the significant efforts to bring Africa into the scope of the international investment treaty regime.15 Many of these efforts originate from African states or regional African bodies. Not that African states were slow to embrace the treaty regime in the past. The first ever arbitration initiated under ICSID was against an African state, Morocco, in 1972.16 Forty-five African countries became members of ICSID at an early stage and were quick to conclude BITs, with the first one being signed between Egypt and Somalia in 1982. Other states that were early initiators of BITs included Morocco and Tunisia. African states are now parties to more than 500 BITs17. What is happening now is more like a conscious intensification of that process in the knowledge that continued economic expansion requires a tighter embrace of the Rule of Law.

9.12

Evidence of these efforts lies in the negotiation of several FTAs and regional trade agreements.18 Among the former, there is the Agreement Establishing the African Continental Free Trade Area, effective from May 2019;19 a Tripartite Trade Agreement (2015)20 and, earlier, an economic partnership agreement with the EU (2003).21 These instruments are indicators of common priorities, and cooperation among states with different interests, cultural traditions, and geographical positions. Among the regional trade agreements, there are the South African Development Community (SADC) Protocol on Finance and Investment,22 the Economic Community of West African States (ECOWAS), and its 2008 Supplementary Act on Foreign Investment,23 and the Common Market for Eastern and Southern Africa (COMESA) Treaty.24 The latter can provide similar protection to those established in Tanzania and in accordance with its laws, putting an end to international arbitration over projects relating to natural resources. 15 Le Bars, B. (2018) ‘The Evolution of Investment Arbitration in Africa’, in The Middle Eastern and African Arbitration Review 2018, 2. 16 Holiday Inns SA and others v Morocco, ICSID Case No ARB/72/1. 17 Finizio (2018) at 45. 18 For some details, see Denters, E. & Gazzini, T. (2017) ‘The Role of African Regional Organizations in the Promotion and Protection of Foreign Investment’, Journal of World Investment and Trade18, 449–92; Páez, L. (2017) ‘Bilateral Investment Treaties and Regional Investment Regulation in Africa: Towards a Continental Investment Area?’, The Journal of World Investment and Trade 18, 379–413. 19 On which see Mbengue, M.M. (2019) ‘Africa’s Voice in the Formation, Shaping and Redesign of International Investment Law’, ICSID Review-FILJ 34, 1–27; El-Kady, H. & De Gama, M. (2019) ‘The Reform of the International Investment Regime: An African Perspective’, ICSID Review-FILJ 32, 482–95. 20 The three parties to the Agreement were the East African Community, COMESA, and SADC. 21 The African Caribbean Pacific (ACP)–EU Partnership Agreement (the Cotonou Agreement), entering into force in 2003. 22 The Protocol provides substantive investor protections such as a prohibition on expropriation and provides guarantees for fair and equitable treatment. It allows ICSID or UNCITRAL arbitration subject to exhaustion of local remedies and a six-month notice period. States parties include Angola, Mozambique, and Tanzania. There is an Energy Protocol to the SADC which came into force in 1998 and was placed under review in May 2019 for updating. 23 This imposed a set of obligations on investors and at the same time limited the usual investment protections, curtailing the offer of international arbitration, for example. ECOWAS also has an Energy Protocol A/P4/1/03, adopted in 2003 as one of several measures aimed at attracting investment into the power sector, ratified by 13 out of 15 ECOWAS states. Some of its definitions appear to be influenced by those in the ECT: see the discussion of this by Wheal, R., Oger-Gross, E., & Sayegh, B.C. (15 March 2019) ‘Protecting Energy Sector Investors in West Africa’, White & Case Insight. 24 This was the first investment agreement in Africa to try to limit the scope of protected investments, to consolidate standard obligations by states to investors and to safeguard the interests of local communities. Its arbitration provisions are not yet in force.

A. Introduction 467 offered by BITs. Further, the African Union has introduced a Pan-African Investment Code in 2015, which includes a chapter on investors’ obligations, and obligations that are imposed jointly on host states and investors. Its practical impact is minimal, however, limited to inspiration and not binding. The Energy Charter process has also become attractive to a significant number of African states. With the adoption of an International Energy Charter in 2015, African states signing it included Benin, Burkina Faso, Gambia, Kenya, Mali, Rwanda, Senegal, Sierra Leone, Eswatini (formerly Swaziland), and Tanzania.25 Regional bodies signing it included the East African Community, the Economic Community of Central African States, the Economic Community of West African States, and the G5 Sahel. Six African states also signed the original (1991) European Energy Charter.26 No African state has yet ratified the ECT, however, so its binding obligations do not apply.

9.13

Engagement with ICSID has been robust. According to published data, ICSID has over the years registered 101 cases involving a sub-Saharan African state (as at June 2018) with several dozen more from North Africa (ICSID does not break up the percentages into numbers and classifies North Africa with the Middle East). Some of these ICSID disputes arose from intra-African BITs. Many disputes concerned hydrocarbons, electricity, and mining.

9.14

International arbitration, as a key element in the international investment process, has received much attention. There has been a growth of regional arbitration centres in recent years, with five states establishing major arbitral institutions: Egypt, Kenya, Madagascar, Mauritius, Nigeria, and Rwanda. Linked to this, is an effort to increase the number of African arbitrators appointed to hear international disputes. Another initiative is the adoption of the Uniform Arbitration Act by the Organization for the Harmonization of Business Law in Africa (OHADA).27 Nevertheless, if the benchmark of a modern arbitration regime is the incorporation of the UNCITRAL Model Law into national arbitral legislation, and signature of ICSID and the New York Conventions, only ten of the fifty-four countries in Africa can be said to have a modern arbitral framework in their law.28 While ICSID membership exceeds forty-five countries, there are some notable omissions such as Angola, an important hydrocarbons producing state, and South Africa, one of the largest economies in Africa. Indeed, Angola is a party to very few BITs and is not a member of a regional investment treaty such as OHADA. This underlines the fact that engagement with the above mechanisms tends to vary considerably across the continent.

9.15

Criticism of the investor-state dispute system has nonetheless been as sharp in Africa as elsewhere, with some States reluctant to ratify new BITs. The Investment Protocol for the African Continental FTA, under negotiation, may not include investor–state dispute settlement in its

9.16

25 For details see (accessed 14 September 2020). 26 Burundi, Chad, Mauritania, Morocco, Niger, and Uganda. 27 The Organization for the Harmonization of Business Law in Africa (OHADA, an acronym based on the French name) is an international organization based in Cameroon. It comprises 17 Central and West African Francophone states and has the goal of harmonizing the business laws of its members, including in arbitration, and so promote investment in the region. To address the small number of cases it received, and encourage more, it introduced a revised Uniform Arbitration Act and revised Rules in 2018. 28 Karanja, E. & Muriuki, N. (October 2016) ‘The Proliferation of International Arbitral Institutions in Africa and What the Future Holds for Institutional Arbitration on the African Continent’, TDM OGEMID 13, 2.

468 Chapter 9: Africa: Treaty and Contract Stability final architecture.29 Recurring themes in the reluctance of states to ratify new treaties are the need to include sustainable development goals and provide greater scope for the state’s right to regulate in the areas of health, safety, or environmental standards. An interesting example of an intra-African BIT is the Morocco-Nigeria BIT, signed in 2016.30 It is concerned not only with the protection of foreign investments but also with their facilitation. In its definition of ‘investment’, it includes the four Salini criteria followed by a list of assets that qualify as investments and a list of assets that ought to be excluded from the definition of investment, such as portfolio investments, claims to money and other debt instruments.31 It contains several obligations on investors, concerning human rights, environment and corporate social responsibility standards. 9.17

For energy investors, planning for large, complex investment and commercial disputes, international arbitration is certain to be the preferred option instead of relying on local courts and unfamiliar laws. This is often provided by contract. For large-scale energy projects, the parties typically agree to a choice of foreign law such as English, New York, Texas, or French law. Where a state or a state-owned party insists on the application of local law, this is likely to be in an established producing country such as Nigeria or Algeria or Egypt. Where international arbitration is provided for, this is typically designed under the rules of the long- established arbitral institutions such as the ICC, the LCIA, the AAA/ICDR, or UNCITRAL Rules. Typically, the investor will seek to have the seat of arbitration outside Africa to avoid interference in the arbitral process by local courts. Only thirty-nine out of fifty-four African states are signatories of the New York Convention, which gives rise to concerns about the enforceability of awards outside of the ICSID framework. The judiciary in some states has a record of being interventionist too.32

9.18

The limits to the evolving legal infrastructure are only one of several kinds of risk that face large-scale energy investment in Africa. With considerable variation from one country to another, these include political instability, expropriation, corruption, environmental issues, and lack of infrastructure. The legal means of mitigating that risk are sometimes constrained, as is demonstrated by some of the country examples in this chapter.

(2) Africa and BITs: South African ‘Rejectionism’ 9.19

The wealth of minerals in South Africa has long given rise to benefits that have been limited in ways that reflected the country’s colonial past. To rectify this, legislation was introduced to redistribute the ownership and control of minerals. At about the same time, South Africa’s policy of attracting foreign investment to expand the economy in the 1990s led it to sign 29 Caution is required in making generalizations. While some states may hesitate to offer international arbitration, others do: for example, the Japan–Mozambique BIT (entered into force, 2014), Article 17(4); the Canada– United Republic of Tanzania BIT (entered into force 2014), Article 23(1). 30 For an analysis of the Morocco–Nigeria BIT seeEjims, O. (2019) ‘The 2016 Morocco–Nigeria Bilateral Investment Treaty: More Practical Reality in Providing a Balanced Investment Treaty?’, ICSID Review-FILJ 34, 62–84. 31 Morocco–Nigeria BIT. 32 A recent example was the OHADA supreme court, the Common Court of Justice and Arbitration (CCJA)’s decision to annul an award in the case of Getma International v Guinea in 2016: the award in a dispute about a port concession was set aside on the grounds that the tribunal had breached its mandate by entering into a fee arrangement with both parties, in excess of the fee limit that was permitted under the CCJA rules. Both parties had entered into the revised agreement in relation to fees and had received assurances by the CCJA Case Manager about their increase.

A. Introduction 469 several dozen BITs. In so doing, it joined many other countries in different parts of the world at the time.33 Unexpectedly, the two strands of policy were to come into conflict. By comparison with any other part of the African continent, the negotiation and conclusion of BITs by the Republic of South Africa (RSA) was in a league of its own in the years immediately after a new democratic government took office in 1992. Starting with a BIT with the UK signed in 1994, the RSA had signed forty-nine BITs by 2009 of which only twenty-two were ratified.34 By contrast, the USA signed around fifty BITs over the same period. In each case, the BIT contains a general consent to investment arbitration with foreign investors, although the RSA has not signed or ratified the ICSID Convention. While nothing in these BITs was unusual in terms of content, the number signed was high. By signing these BITs, South Africa has agreed ‘to subject its exercise of public power to international arbitration’.35 As a result of these BIT protections, foreign investors could expect to receive higher levels of compensation for any expropriation or nationalization of property than might be available under South African law. At the time the justification for this activist approach to taking on board standard form BITs might have been to provide existing and potential investors with reassurance that their investments would be protected by the new African National Congress (ANC) government with no track record on foreign investment and protection of property rights. It may also have arisen from the fact that South Africa was and is a significant capital-importing state with US$77 billion of foreign investment stock, compared with say Venezuela, which at that time had US$45 billion, and India, which had a stock of US$50 billion.36 South Africa also became a significant capital exporting state during this period, especially into other African states, with a stock of investment amounting to US$28.8 billion by 2004.37

9.20

In the BITs themselves, there appears to have been little or no attempt to take into account the country’s transitional status and its need for domestic policies that contributed positively to that transition. There were no reservations or exceptions for legislation that might be introduced to redress the effects of past racial discrimination, involving land, water or resources reform. Given the importance of social upliftment in the country’s new Constitution it is odd that the goals, and values in the Constitution were not referred to in the BITs, for example in the Preamble. So, in the event of any dispute arising, an arbitral tribunal cannot benefit from measuring the governmental action in relation to the values of the Constitution and the goals of social upliftment it mentions in its preamble. The result of this omission is to make the BIT more investor-friendly.38 Nor was there any legal requirement for the BITs to be scrutinized in Parliament and the implications of entering into them debated in that forum.39

9.21

33 Globally, throughout the 1990s the number of BITs increased from 385 to 1,857: UNCTAD (2000) Bilateral Investment Treaties 1959–1999, UNCTAD/ITE/IIA/2, 1. 34 Schlemmer (2016) at E.C. (2016) ‘An Overview of South Africa’s Bilateral Investment Treaties and Investment Policy’, ICSID Review-FILJ 31(1), 167–193 at 169. The number of ratified treaties has been updated. 35 Leon, P. (2008) ‘A Fork in the Investor-State Road: South Africa’s New Mineral Regulatory Regime Four Years On’, 42 Journal of World Trade, 671–690 at 673. For a contrasting view, see Vickers, B. (2002) ‘Foreign Direct Investment Regime in the Republic of South Africa’, Paper for Centre for International Trade, Economics and Environment. 36 Leon (2008). 37 Peterson, L.E. (2006) ‘South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights’, Friedrich Ebert Stiftung, Occasional Papers No 26. 38 Schlemmer (2016) at 174. The BIT itself could have been renegotiated to remedy this. 39 Schlemmer (2016) at 170–171.

470 Chapter 9: Africa: Treaty and Contract Stability 9.22

The possibility that this investor-friendly structure might have unintended and unwanted consequences became apparent as the government implemented its policy of Black Economic Empowerment (BEE), which was designed to discriminate in favour of ‘historically disadvantaged persons’ and assist them ‘to enter the mineral and petroleum industries’. In the Mineral and Petroleum Resources Development Act 2002 (MPRDA), this objective was expressly used to ensure that no mining right or conversion of such right may be granted by the Minister without compliance with this policy.40 This reflects the principle of positive discrimination in the Constitution, which is rooted in a desire to redress historical, social and economic inequalities arising from the country’s apartheid era. Section 9 states that ‘legislative and other measures designed to protect or advance persons disadvantaged by unfair discrimination may be taken’. As one observer commented at the time, key tenets of the country’s social policy reflected in the MPRDA ‘potentially conflict with its international law obligations’.41 The question therefore arose as to whether any of the various BITs were likely to limit the RSA’s scope for implementing policies such as BEE that are deemed to be in the national interest, not least by leaving the RSA open to claims by investors for compensation.

9.23

A BIT claim against South Africa, rooted in this tension, became a reality in 2007. A group of Italian investors were granted their request for compulsory international arbitration against the South African government by ICSID, using the Additional Facility procedure.42 Based on South Africa’s BITs with Italy and the Belgo-Luxemburg economic union, the claimants argued that the MPRDA had extinguished the ownership of the investors’ South African mineral rights without providing prompt, adequate and effective compensation as required by the BITs. The MPRDA had vested all mineral rights in the state and invited existing owners to apply for permission to convert their ‘old order rights’ into ‘new order rights’ within a prescribed timetable. This would involve 26 per cent of the shares in mining companies to be transferred to historically disadvantaged South Africans. This legal measure was therefore, the claimants argued, an unlawful expropriation of their investments, which were owned indirectly through intermediaries and subsidiaries. The investors also claimed that a violation of the BIT requirement to grant investors fair and equitable treatment took place when they were required to divest 26 per cent of their investments to historically disadvantaged South Africans, as a condition of the conversion of (or migration from) their existing rights to new rights under the MPRDA. They further argued that they suffered discrimination in favour of the historically disadvantaged South Africans which violated the BITs’ requirements to accord fair and equitable treatment to investors.

9.24

The original claim was reported to have been for €260 million but was settled, although the tribunal was required to make an award on costs.43 The companies were permitted to convert all their old order mining rights for 5 per cent BEE by an offset against the companies’ beneficiation activities, a different outcome from the 26 per cent required by the Mining Charter.44 40 Mineral and Petroleum Resources Development Act 2002, No 28 of 2002, Chapter 4: Mineral and Environmental Regulation: (accessed 16 December 2009). Specifically, applicants for a licence would have to demonstrate how they would meet specific social, labour and development goals that were laid down in a wide-ranging, socio-economic empowerment mining charter. 41 Peterson (2006). 42 Piero Foresti, Laura di Carli & Others v Republic of South Africa, ICSID Case No ARB (AF)/07/1. 43 Award, 4 August 2010, paras 98 et seq; Schlemmer (2016) at 186, and note 92. 44 The system of beneficiation refers to processing and adding value to the extracted mineral. A credit for beneficiation meant that a mining company could reduce its ownership target below the level of 26 per cent set in the Charter: domestic beneficiation would lead to employment for historically disadvantaged South Africans and provide opportunities for businesses owned or managed by them.

A. Introduction 471 The irony of the outcome is that the Government’s policy was in line with the Constitution’s commitment to social upliftment in the post-apartheid era, but the absence of any reservation in the relevant BIT or a national treatment exception meant that ‘the government’s policy that culminated in the amendments to the relevant act . . . could not be taken into account’.45 In a separate development, in 2009 the South African High Court found that the holders of mineral rights under the old legal regime (that is, prior to the MPRDA) were able to seek compensation under South African law for alleged expropriation.46 The BEE requirements were not at issue in this case, however. The compensation implications are worthy of note. Under Article 25 of the RSA Constitution, an award of less than full market value compensation is permitted under certain circumstances. The latter include those where the justification for the expropriatory measures was the achievement of an important social goal such as a more equitable access to the country’s natural resources. By contrast, a treaty-based international arbitration would appear to offer more favourable compensation to a potential claimant. For example, the RSA–Italy BIT (now terminated) calls for ‘immediate, full and effective compensation’ in the event of expropriation. The many BITs concluded in the 1990s therefore provided investors with significant opportunities to explore this potential in the event of their property rights being taken by the RSA.

9.25

In this context, it is hardly surprising that the RSA’s ‘open-door’ investment policy of the 1990s led to a reaction. Negotiations on further BITs were suspended by the government while a review of the investment policy framework was carried out in 2008–2009. The review committee reported that ‘the inexperience of negotiators at that time and the lack of knowledge about investment law in general resulted in agreements that were not in the long term interest of the RSA’,47 and that it was ‘uncertain whether a direct correlation exists between FDI and the conclusion of BITs’.48 It also noted the withdrawal from ICSID by certain Latin American states at the time and the renegotiation of BIT models by Canada and the USA to ‘provide narrower protections to investors’.49 The response was to unilaterally terminate all BITs with EU and EEA States, amounting to thirteen BITs between 2011 and 2014, with a twelve-month notification period. Other BITs with non-European countries such as those with China, Russia, Argentina, Cuba, and some African states remained. However, any investments made prior to the effective date of the notice of termination will be protected for between ten and twenty years by a sunset clause in the relevant treaty, noted by European investors.50 A new investment law was adopted in late 2015 and entered into force in 2018, the Protection of Investment Act, removing investor-state dispute settlement and limiting the treatment of foreign investors to that of South African nationals and subjecting them to domestic law and domestic courts. This shifted dramatically the legal context for new investors with respect to expropriation, compensation, and interaction with the BEE policy.

9.26

45 Schlemmer (2016) at 188. 46 Agri South Africa and Annis Mohr Van Rooyen v The Minister of Minerals and Energy, Judgment of 6 March 2009, High Court of South Africa (North and South Gauteng High Court, Pretoria). The Ministry’s response is available at: (accessed 16 December 2009). 47 Republic of South Africa Department of Trade and Industry, Bilateral Investment Treaty Policy Framework Review: Government Position Paper, Government Gazette 32386 (2009) at 5. 48 Ibid, at 22. 49 Ibid, at 23. 50 European Parliament, Question to the Commission for Written Answer E-002587-19: South Africa’s Bilateral Investment Treaties, 29 August 2019. The German, Swiss and UK treaties have a sunset term of twenty years while The Netherlands has a fifteen-year term.

472 Chapter 9: Africa: Treaty and Contract Stability

(3) Taxation measures 9.27

9.28

(a) Arbitrability of taxation measures

Investors in Africa have become increasingly vulnerable to the imposition of adverse taxation measures, sometimes of a technical and complex character, such as new interpretations of contract provisions on the calculation of royalties and petroleum profits tax, and sometimes of a more direct character, such as the imposition of a windfall profits tax, a capital gains tax (CGT), or penalty for alleged non-payment of taxes.51 The inclusion of international arbitration clauses in many contracts has meant that protections such as contractual tax exemptions and stabilization clauses may have a role to play in supporting the investor when faced with such measures. However, this protection has been undermined when the host state has been in a position to challenge the settlement of such disputes by arbitration. Central to this capacity of the state to challenge awards has been the willingness of domestic courts to intervene. The principal argument a state can make is that tax matters are not arbitrable and that if tax exemptions were offered and accepted, these were granted ultra vires. In Nigeria and Uganda, for example, this position has been upheld by the domestic courts and tribunals. Nigeria provides considerable evidence of how this situation can unfold for an energy investor. Its domestic arbitration law, the Arbitration and Conciliation Act, is unclear about the kind of disputes that cannot be referred to arbitration. There is, for example, no list of such matters provided by the law, leaving it to the courts to decide on a case-by-case basis. Where recognition and enforcement of an award made under the Act is sought, a court may refuse the application on the ground that ‘the subject matter of the dispute is not capable of settlement by arbitration under laws of Nigeria’ or ‘that the award is against public policy of Nigeria’.52 The wide discretion in deciding whether or not a dispute is arbitrable is evident from three cases with the same underlying facts, involving hydrocarbons taxation, involving consortia of companies led respectively by Shell, Esso and Statoil.53 The Federal Inland Revenue Service (FIRS) attempted to intervene in arbitral proceedings concerning the alleged lifting by NNPC of a greater amount of crude oil than was allocated to pay the Petroleum Profits Tax (PPT)(discussed in (3) below). FIRS sought a declaration from the Federal High Court (FHC) that the disputes arising out of several PSCs and subject to arbitration were essentially tax disputes and as such were not arbitrable under Nigerian law. The oil companies countered that these were contractual disputes arising from the PSCs.

51 An example of the latter is the fine imposed by the Government of Chad on a consortium led by ExxonMobil in 2016. The Chad High Court upheld a request by the Finance Ministry that the consortium should pay US$819 in overdue royalties. The fine demanded was a remarkable US$74 billion, apparently in line with the methodology of the customs code of the Economic and Monetary Community of Central African States: ‘ExxonMobil Resolves Tax Dispute with Chad to Evade $74B Fine’, Nasdaq, 13 June 2017. 52 Arbitration and Conciliation Act, Section 48 (b) (i) and (ii) respectively. 53 Statoil (Nigeria) Limited and Anr v Federal Inland Revenue Service [2014] LPELR-23144 (CA). This was the first of the three to be heard and primarily concerned the locus standi of FIRS to challenge arbitral proceedings to which it was not a party. The FHC supported it on the ground that the issues for determination in the proceedings were tax related. For a comparative analysis of the Statoil and Shell cases, see Chinedum Umeche, ‘Arbitrability of tax disputes in Nigeria’, Arbitration International, 2017, 33, 497–502. The Shell and Esso cases are examined in some detail by Uzoma H. Azikiwe and Festus Onyia, in ‘Nigeria’, in The Middle Eastern and African Arbitration Review 2018, L&B Research, 2018.

A. Introduction 473 In the case involving Shell,54 the FHC held that the disputes were tax disputes and as such were not arbitrable. The PSC, it also held, was a special contract with statutory flavour in the sense that some of its provisions are governed by statutes, such as the Petroleum Profits Tax Act, and the Deep Offshore and Inland Basic Production Sharing Contract Act, and so falls within the jurisdiction of the FHC. In 2016 an appeal to the Court of Appeal resulted in a judgment that the claims before the arbitral tribunal were inarbitrable since they were ‘centrally and effectively’ tax matters and not contractual disputes.55 In the second case,56 a similar judgment by the FHC led to an appeal by the oil companies, and resulted in a more nuanced decision by the Court of Appeal: that the dispute was primarily contractual but that some of the reliefs that the oil companies sought from the arbitral tribunal led to tax disputes. In particular, the parts of the claim that sought to order NNPC to cease making PPT returns that were inconsistent with the tax returns prepared by the oil companies themselves, and which sought the award of damages and compensation for losses caused by the alleged breaches of the PSC by NNPC, including wrongful overlifting of crude oil cargoes, raised matters that were essentially tax disputes. The part of the FHC’s judgment that nullified the award of those claims that raised tax disputes. However, the Court held that the FHC was mistaken in nullifying the entire arbitral award on the ground that this kind of dispute was not arbitrable.

9.29

The Nigerian cases are one illustration of a concern about domestic court interference in the commercial arbitration of disputes in Africa.57 In practice, many hydrocarbons cases will tend to be resolved through domestic courts due to restrictions imposed by national hydrocarbons laws, reserving certain matters to the domestic courts;58 courts’ willingness to interfere in the arbitration process and a reported concern that arbitration gives the international investor an advantage.59 In this context, the familiar difficulties facing investors when attempting to settle a tax dispute with a state60 will tend to have a sharper edge to them.

9.30

(b) Capital Gains Tax

The applicability of a special tax to assignments of interests by investors has become highly controversial in a number of African countries, partly since the rules governing its application have not always been clear or consistent, and partly because investors in Africa have included a class of investor with a time horizon shorter than the traditional international energy investor (see c hapter 2). The latter group—so-called ‘first movers’—are likely to accept 54 Suit No FHC/ABJ/CS/744/2011—FIRS v (1) NNPC, (2) Shell Nigeria Exploration & Production Company Limited, (3) Esso Exploration & Production (Deep Water) Limited, and (4) Total Exploration & Production Nigeria Limited. 55 Shell Nigeria Exploration & Production Limited and three Ors v Federal Inland Revenue Service and Anr (unreported) CA/A/208/2012; judgment delivered on 31 August 2016. 56 Suit No FHC/ABJ/CS/764/11: FIRS v (1) NNPC, (2) Esso Exploration & Production Nigeria (Deep Water) Limited, and (3) Shell Nigeria Exploration & Production Company Limited. 57 For example, Torgbor, E. (2017) ‘Courts and the Effectiveness of Arbitration in Africa’, Arbitration International 33, 379–394, at 393: ‘In Africa the in adequate powers of the arbitrator and the lack of confidence in both the arbitral and judicial systems have negatively impacted and polarised their respective positions and compromised their effectiveness.’ 58 For example, the arbitration provision in the Kenya Model PSA provides for arbitration under the auspices of UNCITRAL with the seat in Nairobi, Kenya: Article 41(3) of the Kenya Model PSA. 59 Beeley, M.J. & Goins, A.L. (2016) ‘Arbitration of Energy Disputes in Africa’, Transnational Dispute Management 13(4), 1–14 at 2. 60 Among the many discussions of this topic see Park, William W. (2020), ‘Tax and Arbitration’, Arbitration International, 36(2), 157–220; Waelde, T.W. & Kolo, A. (2008), ‘Coverage of Taxation under Modern Investment Treaties, in Muchlinski, P., Ortino, F. & Schreuer, C. (eds) The Oxford Handbook of International Investment Law, 305–362.

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474 Chapter 9: Africa: Treaty and Contract Stability a high degree of risk and if successful to sell to a larger investor, taking what may prove to be a very substantial gain prior to production and even development of the discovery.61 Given the feature of commodity price volatility, such transactions can be influenced both positively and negatively by sharp fluctuations in price. Examples of both are below. 9.32

For many states, such as those in the OECD area, capital gains tax (CGT) is imposed using different schemes provided for in the general tax law.62 Although conventional tax theory may be settled in this area, practice in hydrocarbons producing countries is not standardised. In Norway, for example, the gain is not subject to tax: instead, an administrative process ensures that the transaction has no negative impact on the long-term revenues to the state. Essentially, the gain is usually re-invested in Norway.63 For low-income countries that are new to hydrocarbons or minerals activities, the tax rules applicable to assignments may well be ones that have scarcely been thought about, with fiscal rules being designed mainly to attract investment so that basic exploration takes place and less on how to tax any resulting production. Contract or investment treaty terms may also overlook the issue or else treat it in terms that are unclear. In many older African contracts, it was common to provide in an investment contract that CGT would not apply at all. A Kenyan PSC, for example, stated that the ‘Contractor may assign free of any tax to a person other than an Affiliate part or all of its rights and obligations under this Contract with the consent of the Minister, which consent shall not be unreasonably withheld . . .’.64 This was the settled approach in Kenya for several decades.

9.33

The object of recent interest in CGT is not itself controversial. Licence or concession interests often change hands, and for a variety of reasons, such as the investor’s need to fund additional exploration work in the contract area, or to respond to some commercial logic that otherwise affects its plans. The assignment mechanism allows an IOC usually subject to the host state’s approval to assign all or part of their rights and obligations in the upstream contract to third parties. Provided that such transfers are located in a clear legal framework, they can serve a useful function for all parties. For a state that has granted rights to a small company with an appetite for risk which then makes a commercial discovery, there are advantages to be gained if the same company proposes to sell its interest on to a much larger company with access to the capital and management skills required to develop the discovery and provide necessary infrastructure. Such an option is likely to have been built into the initial company’s long-term planning. However, the investor may be able to structure the sale so that the tax liability is minimal: for example, by transferring interests upstream rather than by sale of in-country assets, when the tax rules may be incomplete or unclear. 61 Such companies are typically interested in locations that are hydrocarbons-rich, but which have been overlooked or considered difficult to explore by larger industry players due to political, security or geological risk. They tend to be small, focus on building local contacts, use highly specialised teams, and make decisions quickly, with a business model centred on the creation of shareholder value (ie returning gains to shareholders). 62 A number of the issues discussed in the paragraphs below are examined in more detail in Cameron, P.D. (2017) ‘Stabilization and the Impact of Changing Patterns of Energy Investment’, J World Energy L & Bus 10, 389–403. 63 Norway was one of the first countries to publish a detailed regulation on assignments and how they would be taxed. This approach was followed by the UK and Australia. 64 PSC between Total/Amoco/Marathon/Texaco and Government (Block 1) (1989), Barrows Basic Oil Laws and Concession Contracts, South and Central Africa Series, Supplement 124, 1. In Egypt, at the same time, a concession contract contained a provision on assignment which stated that ‘[a]‌ny assignment made pursuant to the provisions of this Agreement shall be free of any transfer or related taxes, charges or fees’: Amoco Concession Agreement dated 18 July 1989, between Egypt, the Egyptian General Petroleum Corporation (EGPC) and Amoco Egypt Oil Company (Sallum Area, Western Desert), Barrows Basic Oil Laws and Concession Contracts, North African Series, Supplement 95, 17.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 475 For states hosting international investments, the gains attributable to domestic resources can be realised far outside the jurisdiction in which the reserves are located. This can ‘add numerous complications and uncertainties to resource taxation’.65 They also raise issues about the fairness of de iure or de facto exemptions from CGT in such circumstances. Clearer, more detailed rules may be the appropriate response.66 A lack of clarity may allow a situation to develop in which the state appears to be negligent in capturing a gain due to the host country. In Uganda and Ghana, the disposal of hydrocarbons licences for exceptionally large amounts soon after billion-barrel discoveries were made has led to conflicts over CGT.67 In Central and East Africa alone, controversy provoked by CGT issues in energy and mining compelled three governments to review their CGT rules (Congo, Kenya, Tanzania) and another, South Africa, was called upon to do so by an influential policy institute within the governing party.68 Kenya re-introduced CGT at 30 to 37.5 per cent of the gain arising on sale of rights in the extractives sector.69 Tanzania made a CGT assessment against Shell in 2016 in relation to its acquisition of BG on the ground that the transaction involved the transfer of interests in two natural gas blocks in the country.70 The assessed amount of US$520 million led to BG’s bank accounts being frozen in Tanzania and applications for renewal of exploration licences in the two blocks were suspended until the dispute was resolved.71 Disputes have also arisen in certain other African states; the main ones are considered in Section C below.

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B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria Among the countries with the longest continuous experience of attracting and managing energy investment, Algeria, Egypt, and Nigeria, are probably the ones that immediately stand out, even if the investments are almost exclusively in the hydrocarbons sector, and not to any significant degree in other energy sources.72 Indeed, hydrocarbons production occupies 65 Daniel, P., Keen, M. & McPherson, C. (eds) (2010) The Taxation of Petroleum and Minerals: Principles, Problems and Practice, Abingdon: Routledge/IMF, 328. 66 A good discussion of such rules and the issues is contained in Burns, L., LeLeuch, H. & Sunley, E. (2017) ‘Taxing Gains on Transfer of Interest’, in Daniel, P., Keen, M., Swistak, A. & Thuronyi, V. (eds) International Taxation and the Extractive Industries, Abingdon: Routledge/IMF, 160–189. See also Cameron, P.D. & Stanley, M.C. (2017) Oil, Gas and Mining: A Sourcebook for Understanding the Extractive Industries, Washington, DC: The World Bank, 163–166. 67 As Keith Myers notes, ‘[t]‌he returns may seem extraordinary in retrospect, but it is rare for a small company to be instrumental in the discovery of a new billion-dollar barrel petroleum province’. Indeed, the seller would argue that large capital gains indicate that their efforts have created significant future value for the government through their activities to be realised through future taxes and royalties for years to come: Revenue Watch Institute, Selling Oil Assets in Uganda, and Ghana—Taxing Problem, 16 August 2010, p. 4. Cairn Energy’s discovery of the Rajasthan field in India is another example of small company enjoying similar success, but it differs in having remained post-discovery and developed the oil for several years before selling its interest in 2010. 68 ‘Congo Oil Law May Impose 40% Tax, Allow Drilling in Gorilla Park’, Bloomberg News, 22 January 2014; ‘Kenya dismisses concern over capital gains tax’, Mail & Guardian, 19 June 2013; ‘Tanzania says to demand $258 mln tax on Ophir gas deal’, The Zambesia, 20 December 2013; in South Africa, a report by the ANC Policy Institute, State Intervention in the Minerals Sector, March 2012, contained a section entitled ‘Exploration Right Speculators’, and stated, at 34: ‘In order to discourage mineral right speculators we must introduce an exploration right transfer capital gains tax of 50%, payable if the right is on-sold or the company changes hands before mining commences. This will encourage genuine mineral property developers rather than speculators (“flippers”).’ 69 ‘Capital gains tax to slow activities in oil, gas exploration, says study’, Daily Nation, 25 January 2015. 70 ‘Shell appeals to Tanzania tribunal over $520m in capital gains tax claim’, The East African, 18 June 2016. 71 ‘Taxman freezes BG Group’s accounts in $500m tax row,’ The East African, 9 July 2016. 72 Libya also has a long period of engagement with foreign investment in its hydrocarbons sector. However, the demise of the Ghaddafi regime in the Arab Spring and the subsequent armed conflict have led to a large number of BIT claims, mostly concerned with the alleged destruction of property. This kind of dispute does not fall within the scope of energy investment in this study.

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476 Chapter 9: Africa: Treaty and Contract Stability an overwhelmingly dominant role in the economies of each of these countries, and large national oil and gas companies play an important role in the development of the resources. In each case, governments have made legally binding assurances to investors to address the risk of future unilateral changes and provide guarantees to long-term investments. In each case, these commitments have been tested. In Algeria, the challenge to investor stability was largely focused on a single legislative measure, Law 86-14, which provoked contract and treaty arbitrations from foreign investors in response. In some ways, it parallels the approach of some Latin American governments during the same period. In Egypt, the disruption to the operation of gas supply contracts was justified by reference to among other things a state of necessity created by popular unrest associated with the Arab Spring. In Nigeria, a range of stability guarantees have been offered to investors over the years, but different governments have had recourse to diverse measures to undermine their effect and increase the state share of the benefits from hydrocarbons production. 9.36

In this examination of how legal stability is provided and how it functions in several country settings a common structure of four sections is adopted: the first section examines the context of political risk and the policy decision to attract foreign capital for energy investment; the second examines the ways in which the government sought to provide legal assurances to prospective investors to mitigate that risk and make their investments; the third concerns disputes that emerged at a later date between investors and states, usually triggered by the state’s measures to secure a greater share of the benefits; the fourth section considers the outcomes.

(1) Algeria 9.37

(a) Political risk and attraction of capital

Algeria relies on hydrocarbons for around one third of its total government revenue. As Africa’s largest producer of natural gas, it is known for its international exports of liquefied natural gas to Europe and North America, which have led to various high-profile arbitrations with buyers.73 However, the oil sector has also been highly significant for the country’s overall economic development.74 In this sector, foreign investment has played an important role. For many years, the basic law for hydrocarbons was Law 86-14 of 19 August 1986, which covered the activities of prospecting, exploration, exploitation, and conveying by pipeline of hydrocarbons. Its origins lay in the effects of a period of decline following a limited nationalization of the Algerian oil industry in 1971,75 the predominant role of the state hydrocarbons

73 Ironically, it was an early dispute with an American buyer, Panhandle, that led to the US independent, Anadarko, acquiring rights to explore for and produce hydrocarbons in Algeria in 1989. For an overview of Algerian gas at the time, see Hayes, M.H. (2006) ‘The Transmed and Mahgreb projects: gas to Europe from North Africa’, in Victor, D.G., Jaffe, A.M. & Hayes, M.H. (eds) Natural Gas and Geopolitics: From 1970 to 2040, Cambridge: CUP, 49–90. 74 For an early but still authoritative analysis see Aissaoui, A. (2001) The Political Economy of Oil and Gas, Oxford Institute of Energy Studies, OUP. 75 For concessions already producing oil, the nationalization involved the transfer of 51 per cent of their assets to the state. For natural gas projects and the related production installations, and oil and gas pipeline operations, the transfer was 100 per cent. Sonatrach was the holder of the shares in the various projects; see Gaillard E. & Lebois, M. (2015) ‘Algeria’, in Pereira, E. & Talus, K. (eds) African Upstream Oil and Gas, London: Globe Business, 17–47 at 20.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 477 company, Sonatrach,76 and disappointing discoveries. In January 1986, the oil price fell from about US$30 a barrel to US$10 per barrel in June of the same year. Law 86-14 was a response to a situation of stagnation, lack of investment, technology, knowledge and expertise;77 it represented a bold change of direction by the government, aimed at reversing this decline.78 By 1989, Sonatrach had entered into twenty-six exploration and production contracts with foreign companies.79 Among these, a large US independent oil company, Anadarko Petroleum Corporation, made a series of important discoveries of oil in the Algerian Sahara Desert, changing the prospects for investment in the hydrocarbons sector. Publicly available contracts show that stabilization clauses had been negotiated in at least some of the production sharing agreements (PSAs) reached with foreign investors.80 Investment risk remained a factor however, as civil war broke out in 1992 and continued to 1998, with the deaths of more than 100,000 people. After a period of considerable success in hydrocarbons activity, the situation changed again in 2005 and 2006 when the Algerian Government introduced legislation to overhaul the applicable legal regime, leading to several investment claims, both contract-and treaty-based, in which the mechanisms for stabilizing the relationship set out in the PSAs played a central part.

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(b) Legal response to risk (i) Law 86-14 The aim of Law 86-14 was to reverse this decline in foreign investment by offering foreign oil companies a legal framework for a very different allocation of political and commercial risks and potential rewards. The NOC would continue to have a central role in the operational aspects of any petroleum activities.81 The State would also retain a monopoly on hydrocarbons activities, but under Law 86-14 it was able to entrust that monopoly to national undertakings and by means of an association with that undertaking, foreign investors could carry out petroleum activities, including by means of PSAs. The relationship between State, NOC and foreign investor became a triangular one established by the new Law. It also (after an interval of several years) allowed recourse to international arbitration for the resolution of disputes between Sonatrach and the foreign investors.

76 Sonatrach is derived from its full name, Société Nationale pour la Récherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures. For a detailed analysis of Sonatrach in relation to other NOCs, see Marcel, V. (2006) Oil Titans: National Oil Companies in the Middle East, Washington, D.C.: Brookings Institution Press, esp. 77–86. 77 Algerian Law No 86-14 concerning activities of prospection, exploration, production and pipeline transportation of hydrocarbons, Journal Officiel de la République Algérienne Démocratique et Populaire (JORA), 35, 27 August 198, p. 1019 ( accessed 28 September 2020). 78 Audu, J. (January 1990) ‘Oil: Algeria’s Engine of Development’, OPEC Bulletin 27, 30: ‘The country needs every dollar it can make from its oil and, indeed, from any other source, to cater for the needs of its population of well over 23 million people and service its massive foreign debt. It relies on hydrocarbons for 98% of its total income.’ 79 Gaillard and Lebois (2015) at 22. The companies included BP, Total, BHP Billiton, Cepsa, CNODC, CNPC, Petrobras, Repsol YPF, Statoil, Talisman, and Woodside: Platts, ‘Update: Algeria imposes 5–50% windfall tax basis $30/barrel Brent’, 7 September, 2006. 80 For example, the Agreement on the Exploration and Exploitation of Liquid Hydrocarbons between Sonatrach and Anadarko Algeria Corporation, 23 October 1989: (accessed 20 September 2020). Other contracts are available in specialist (by-subscription) sources such as the Barrows Oil and Gas Law and Contracts series rather than on freely accessible government or non-governmental websites. 81 86-14, Arts 3, 4, and 27.

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Law 86-14 contained several elements that were to become important in a later controversy arising from measures taken in 2006. It contained a requirement that foreign enterprises conclude an agreement with the national company82 that would cover among other things participation in charges, risk, and results, as well as the profit share of the foreign associate.83 It also required the conclusion of a separate ‘protocol’ between the State and the foreign investor which defined the scope of the activities planned to be carried out with the national company and the obligations the foreign company would have vis-à-vis the State. Both of these instruments were to be subject to legislative approval. Various forms of profit sharing were envisaged:84 for example, the foreign partner could expect a share of the produced oil as a payment for expenditures and as compensation (in effect, a production sharing arrangement).

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A major source of commercial uncertainty for prospective investors was taxation, and the risk that at a future date fiscal change may be unexpectedly imposed with damaging effects to the investment. Without some means of limiting uncertainty about future tax liability, any economic analysis of production shares or contract value would be a pointless exercise. To address this, stabilization was offered to investors in three Articles: • Article 39 allocated fiscal risk to the NOC, Sonatrach, which ‘shall deliver to the foreign partner that share of production from the discovered field according to its production share, FOB port of loading85 free of all charges and taxes as well as all petroleum fiscal obligations or repatriation of funds’. It required the NOC to pay the royalties for the entire production and the relevant tax on results when it performed petroleum activities alone or when the forms of profit-sharing concerned partnerships. The NOC, after paying royalty and income tax was to make available to the foreign associate the portion of production of hydrocarbons due to it, free on board (FOB) at the port of loading, ‘free of all charges and taxes as well as petroleum related fiscal obligations or repatriation of funds’. This was reiterated in the implementing regulations for Law 86-14, especially Art 8(c) of Decree 87-19. • Articles 57 and 58 contained extensive tax exemptions granted to the foreign associate, including an exemption from any single aggregate tax on production, business relation to equipment, substances, and products destined for use directly in the hydrocarbons activities and carried out by undertakings themselves or on their behalf. There were also exemptions from customs duties, taxes, and royalties, import of equipment, substances, and products destined for and to be used in hydrocarbons activities carried out by undertakings themselves or on their behalf.

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In summary, if the foreign investor were to agree on a PSA under the Law, the partnership with the state would have the following allocation of risks. Essentially, the IOC or foreign associate was to assume responsibility for and bear all the costs and risks of exploration, while Sonatrach was to pay its share of costs and production only in the event of a commercial discovery. The IOC therefore took on the exploration risk and in return Sonatrach took on the fiscal or political risk posed by the State’s ability to change the law by levying taxes, royalties, and other charges. If, at some future date, the Government were to exercise its fiscal powers 82 Ibid, Art 21. 83 Amended by Law 91-21 of 4 December 1991, amending and supplementing Law No 86-14, JORA, 63, 7 December 1991, p. 1958. 84 Ibid, Art 22. 85 That is, after oil is delivered into the contractor’s shipping (receiving) vessel.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 479 in ways that were potentially detrimental to the foreign associate, the responsibility for any additional payments was to be allocated to Sonatrach by operation of its obligation to deliver the foreign associate’s share FOB port of loading free of charges, taxes, and other petroleum related fiscal charges. This is an example of the allocation form of stabilization examined earlier (see c hapter 3), and in this case it was integral to the underlying bargain between the foreign investor and the state that Algeria would offer. The Law’s requirement that the foreign investor sign a Protocol with the State at the same time as the contract with Sonatrach confirmed the State’s involvement and support of the contract provisions. Law 86-14 was amended by Law 91-21 in December 1991 to further enhance Algeria’s attraction to the international hydrocarbons industry. It expressly allowed international arbitration of disputes with Sonatrach.86

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Algeria also entered into nearly fifty BITs from 1991 to 2006, providing foreign companies with additional security for their investments, and with clarity about how disputes may be resolved.87

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(ii) The Anadarko PSA The impact of Law 86-14 on the first of the new PSAs was considerable. Not only did it succeed it attracting a significant number of companies to the negotiating table, but its provisions—still untested in practice—shaped the first generation of Algerian PSAs that emerged from the negotiations. For example, its notion of partnership was central to the PSA concluded by Anadarko Algeria Corporation with Sonatrach in October 1989, with an extensive role envisaged for Sonatrach at all stages of the operations, and extensive benefit sharing if the high-risk venture proved a commercial success.88 At the same time, as a forward-looking instrument, this PSA was designed to include safeguards against the risk that a future government might take action that diminished or destroyed the value of the investment, especially since the investor would have to take the NOC as its counterparty. It sought to achieve this by introducing multiple forms of stabilization into the PSA, reproducing text from the Law itself as a term of the contract applicable to the parties for the duration of the contract (sometimes called ‘contractualizing’ a law89), such as the wording of

86 There was an earlier amendment to the Law. Article 39 created the risk that foreign companies might not be eligible to claim foreign tax credits in their home countries (since Sonatrach was assigned responsibility for the Algerian tax on results under the Law) and face the risk of double taxation. Algeria amended the Law through Law 91-12 so that the foreign associate would be nominally responsible for paying the tax on remuneration but confirmed that Sonatrach would pay the tax otherwise ‘owed’ by the foreign associates under PSAs. In this way it offered an incentive to foreign investors (mainly US ones were involved) but retained the basic premiss that Sonatrach would pay the tax and the foreign investor would receive its share of production free of taxes, royalties, and any other fiscal obligations. 87 UNCTAD, Investment Policy Hub, International Investment Agreements Navigator: https:// investmentpolicy.unctad.org/international-investment-agreements/countries/3/algeria 88 This was the first PSA to be signed and differs from at least some later ones (if one reviews the terms of PSAs that are publicly available, and models developed by Sonatrach over the years). Most other contracts used a ‘price cap’ (which limits the price that the foreign associate receives for the oil sold and directs the excess over the price cap to Sonatrach), or a formula based on rates of return (the ratio of revenues to expenditures) to calculate payments to the foreign associates. The Anadarko contract did not have a price cap mechanism and its share was based on gross production, out of which it would pay its percentage interest share of costs and make a profit. Ultimately, the value of this contractual relationship was based on production volumes. In practice, the effect of TPE on the bulk of the PSAs would be limited by their price cap or rate of return formulae. In Anadarko’s case, however, the large volumes of hydrocarbons it produced from its prolific discoveries gave it a higher exposure to the TPE than the few other foreign investors without price caps or rate of return mechanisms. 89 Essentially, the aim of this technique is to subject the contract and by extension the parties to its terms, not only in the applicable law provisions but in other ways: in this case, examples are evident in Articles 1.1, 2.34, 26.4,

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480 Chapter 9: Africa: Treaty and Contract Stability Article 39,90 of which key terms are repeated with respect to the parties’ rights and obligations on taxes and royalties, and also by incorporating the triangular relationship between the State, the IOC, and the NOC. 9.46

There are three forms of stabilization in the PSA. The first is stabilization by allocation, based on Article 39 of Law 86-14, and carried out through Articles 4.4 and 2.22 (this mechanism is sometimes called ‘deemed paid’ or ‘taxes paid’). Under this, Sonatrach undertook to deliver Anadarko’s percentage share of production, FOB at the port of loading (that is, exempt from all charges and taxes and all petroleum related fiscal obligations), even if additional fiscal changes had been imposed since the contract was signed. The burden of any such additional charges was automatically shifted to Sonatrach by means of this contractual mechanism, without any need for negotiation or adjustment, and with Sonatrach accepting the obligations entailed by the operation of the mechanism as contractual commitments to Anadarko.

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The PSA has a second, complementary form of stabilization: freezing.91 The law applicable to the PSA is frozen as between the parties. Article 27, paragraph 1, expressly freezes the law applicable to the Anadarko PSA. It provides that the PSA ‘shall be subject to Law 86-14 and to its application decrees, and to the legislation and regulations in force on the Effective Date of this Agreement’. Article 26.8 also provides that the applicable law should be Algerian law, notably Law 86-14, as amended and modified and the regulations for its implementation. This expressly refers to Law 86-14 as it was amended and modified in March 1997 when the parties entered into Avenant No 1. Notably, the very first Article in the PSA (‘Purpose of Agreement’) states that the PSA is ‘ruled by Law 86-14 of August 19, 1986 and the regulations promulgated for its application’, anchoring the PSA to the Law but also declaring that Law to be its foundation.

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There is therefore more than one example of freezing in this contract’s approach to stabilization. The interest of the approach taken in the contract lies in its illustration of how a freezing kind of stabilization clause can be drafted so as not to restrict the host state’s legislative power, but rather to prescribe the law between the contracting parties. Freezing of law in this case is a way of incorporating by reference the provisions of a legal measure, in this case Law 86-14, into the PSA.

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The third form of stabilization is set out in Article 27, paragraph 2.92 It is the kind variously described as balancing, adjustment, or renegotiation (see chapter 3). It allows the parties to

26.8, and 27., with references to Art. 39 of Law 86-14 in contract Arts. 2.22, 4.4, 18.1, Annex E (taking procedure), Article 6. 90 FOB is defined in Art 2.31: ‘means the title to Liquid Hydrocarbons delivered by SONATRACH (or by an Affiliate of SONATRACH) at the Port of Loading shall be transferred to ANADARKO free on board ship when such Liquid Hydrocarbons pass through the loading flange of the marine shipping vessel designated by ANADARKO, and may be exported from Algeria free of any obligation to furnish Liquid Hydrocarbons to the domestic market of Algeria, free of charges for the Transportation of Liquid Hydrocarbons, terminalling and pump fees, and exempt from all charges and taxes as well as all petroleum related fiscal obligations, and free of any requirement for the repatriation of funds received by ANADARKO from the sale of Liquid Hydrocarbons.’ 91 Freezing was not unknown in Algerian contracts. Algerian gas contracts included stabilization by means of freezing through incorporation of law into the contract. For example: ‘The law applicable shall be Algerian law as in force at the date when this contract is signed’ (Sonatrach LNG Sales Contract, 1975, quoted in Terki, N.E. (1991) ‘The Freezing of Law Applicable to Long-term International Contracts’, J Int’l Banking L 6, 43, 44. 92 ‘In case of modification of Law 86-14, and any of its application texts which substantially affect the interest of either Party, the Parties shall meet and renegotiate in good faith the eventual modifications to be brought to the contractual terms in order to re-establish the equilibrium of the respective interests of the Parties’.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 481 meet and renegotiate in good faith the eventual modifications to be brought into the contractual terms in the event of a modification of Law 86-14 and any of its application texts which substantially affect the interest of either party. The existence of this third form of stabilization might seem redundant in a contract with two robust forms of stabilization both expressly rooted in Law 86-14. A possible explanation for its inclusion is to address acts that might be taken by the host state, other than an increase in taxes or similar charges. Such actions might nonetheless impact upon the economic bargain struck by the investor with the host state in the contract. They could, for example, include (see chapter 3 at 3.74): legal measures imposed in connection with climate change mitigation policies, or some aspect of the energy transition that may impact upon the value of the investment; local content or local benefit programmes with requirements for substantial outlays by the contractor or social spending requirements such as on infrastructure. A reasonable inference is that the negotiators realised that they could not anticipate all the ways in which a host government might try to claw back value from the investor, and in that context a general renegotiation clause might prove to be a useful fallback measure at some future date. The co-existence of several forms of stabilization is not unusual (see the section on Ghana in this chapter). It serves to assure the prospective investor that the PSA under negotiation will function as one capable of providing maximum security for a long-term investment, by anticipating every kind of contingency. In this case, the multiple forms of stabilization seem designed to reassure the investor that it would receive its full contractual share of gross production without deductions of any kind for the entire duration of the contract.93

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It is perhaps worth summarizing how this kind of regime was intended to benefit Algeria itself. To begin with, the Government had the goal of ensuring a robust role for Sonatrach in any commercial success that the venture might have. It also sought to attract investment while avoiding any exploration risk and obtain a significant share in the benefits from hydrocarbons production such as to require the IOC to carry a 51 per cent interest for the NOC,94 but to ensure that in the event of commercial production, its liability for 51 per cent of the production costs was accompanied by a right to take an increasingly higher share of production on a sliding scale basis (up to 78 per cent), with Sonatrach’s percentage interest share rising as production volumes increased (if the cumulative results of exploration were higher than the parties might have expected at the outset). Further, Sonatrach had the right to control hydrocarbons through all of the phases from extraction (for example, by its ownership of the pipeline system) until the point of delivery where it had to deliver a share to the IOC equal in value to its percentage interest share, and its cost recovery share. The large contractual share for Sonatrach would have been hard to secure if Sonatrach (and behind it, the Ministry) had not been able to agree to the guarantee that it would pay all taxes according to the allocation mechanism.

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93 In terms of extra-contractual risk mitigation, it brought in two foreign companies as partners: LASMO, a UK-based company and Maersk, a Danish company. 94 This means that for example, Anadarko, with interests at the time in Blocks 404 and 208 had a 50 per cent interest in the PSA before participation at the exploitation stage by Sonatrach. Prior to participation by Sonatrach, its two partners had a 25 per cent interest each. In the event of commercial success and the exercise of the participation right, Sonatrach would become responsible for 51 per cent of the development and production costs, and Anadarko and its joint venture partners became entitled to recover Sonatrach’s share of exploration costs from production during the development phase: SEC Form 10-K: Anadarko Petroleum Corporation, February 23, 2011: ‘Annual report with a comprehensive overview of the company’, p. 7.

482 Chapter 9: Africa: Treaty and Contract Stability 9.52

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The result was that a large US independent company signed a PSA and its entry encouraged others to follow, especially when it made a series of oil discoveries in the Algerian desert from 1993 onwards, including a world class field at El Merk in 1998.95 (iii) A new regime is introduced A legislative overhaul began in 2005 when a new Hydrocarbons Law was adopted by the Algerian Government and Parliament. Law 05-07 aimed at a restructuring of the hydrocarbons sector and at modifying the role of Sonatrach in it.96 Given the near twenty-year gap since the last law, the introduction of a new measure was hardly surprising. It was to repeal Law 86-14, but it also provided for the continuation of the existing PSAs entered into under Law 86-14 until their expiry dates. Under Article 101 it expressly respected the will of the parties to existing contracts; if they wished the provisions of Law 86-14 to continue to apply with respect to their contracts, that would remain the case. The new Law and its implementing texts also made it clear that Sonatrach had responsibility for all taxes with respect to the existing PSCs.

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In 2006, a quite different legal measure was introduced, abandoning the reforms set out only the previous year and imposing a tax on holders of existing PSCs. The measure, known as Ordonnance 06-10,97 amended the Law 05-07 by re-introducing certain privileges to Sonatrach from 1 August 2006 (thereby reversing the previous attempt at liberalization) and introduced a new Article 101bis, which provided for a non-deductible tax on ‘exceptional profits’ (TPE) realized by those foreign associates which were already operating in Algeria under PSCs.98 At the time, the context was one of rising oil prices, with prices rising from US$50 a barrel in 2005 to US$60 in 2006 and US$80 the following year. In effect, this was what is often called a ‘windfall profits tax’.

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This TPE was to be applied to the part of the petroleum production when the monthly arithmetical average of the price of Brent crude became higher than thirty dollars a barrel.99 The rate of this tax was to be a minimum of five per cent and a maximum of 50 per cent. However, subsequent regulations set the rate of TPE for most of the production at the highest rate of 50 per cent and applied it to the full value of the oil, not only the value over US$30 per barrel. 95 Arab Oil and Gas Directory 2007: Algeria, 37–38. 96 Law No 05-07 of 28 April 2005 regarding Hydrocarbons, JORA, 50, 19 July 2005, p. 3. A key feature would have been the removal of Sonatrach’s dual role in regulating and administering the hydrocarbons sector on behalf of the government while also being a company participating in commercial agreements in the sector it administered. Instead, two new agencies would assume Sonatrach’s regulatory and administrative functions, and the statutory requirement that Sonatrach be given a majority stake in every exploration and production project would be removed, as would its monopoly over pipelines and refining activities. For background to the legal and institutional reforms proposed and the considerable opposition they provoked, see Entelis, J.P. (2012)‘Sonatrach: the Political Economy of an Algerian State Institution’, in Victor, D.G. et al. (eds) Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge: CUP, ch. 13, 557–598; a longer-term perspective is offered by Lowi, M.R. (2009) Oil Wealth and the Poverty of Politics: Algeria Compared, Cambridge: CUP. This Law was replaced in 2019 by Law No 19-13 of 11 December 2019, but contracts awarded under the earlier laws remain governed by them. 97 Ordonnance No 06-10 of 29 July 2006 amending and supplementing Law No 05-07 of 28 April 2005 regarding Hydrocarbons, JORA, 48, 30 July 2006, p. 4. 98 The text of Article 101bis read as follows: ‘Notwithstanding the provisions of article 101 above, for contracts of association entered into between Sonatrach and one or more foreign associates in the context of Law no. 86-14 of 19 August 1986, referred to above, a non-deductible tax on the exceptional profits realised by these foreign associates is applicable to their share of production when the monthly arithmetical average of the price of Brent crude is higher than 30 dollars per barrel. Said tax is applicable from 1st August 2006. The rate of this tax applicable to the foreign associates’ share of production will be a minimum of 5% and a maximum of 50% . . .’ 99 Executive Decree No 06-440 of 2 December 2006 establishing the procedure, conditions of application and method of calculation of the tax on exceptional profits (TPE).

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 483 Sonatrach, in control of the transportation network, would act as the tax collector for the TPE by taking additional quantities from the foreign investors’ share of produced oil: that is, by means of a deduction of the quantity of hydrocarbons which corresponded to the amount of this tax from the foreign company’s share of production. Article 101bis added that ‘any agreement contrary to the above provisions shall be null’, which appeared to explicitly undermine the stabilization guarantees provided under Law 86-14 and the PSAs concluded under it. This raised the issue of whether Sonatrach could excuse its non-performance of certain PSA requirements because of a change of law made by the State. Two regulations followed in December 2006 and April 2007 which set out the methodology by which the TPE would be applied and calculated, as well as the procedure of its collection. This clarified that the TPE would apply to the entire value of all hydrocarbons produced for the foreign associates’ account. There were not to be limited to the difference in value attributable to the price above the US$30 per barrel threshold. For PSAs such as the kind held by Anadarko, TPE would also be applied on a contract-wide rather than a field-by-field basis.

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A notable feature of the new regime was that Sonatrach was to collect the TPE on behalf of the Algerian Treasury from the foreign associates’ share of production, and to do so in the quantity of hydrocarbons that corresponded to the amount of the TPE. This was to have retroactive effect from the date of the Ordonnance, 1 August 2006. This became operational from March 2007, when Sonatrach, using its control over the pipeline system, began to withhold each month up to 50 per cent of the volumes of hydrocarbons produced under the PSAs, to which the foreign companies were contractually entitled, plus an additional amount to make up for the collection of TPE back to the 1 August 2006 effective date of the Ordonnance.

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The thrust of Article 101bis is strikingly different from that of the original Article 101 of Law 05-07. Importantly, it was a measure aimed at all existing investors, rather than being simply aimed at future PSAs with foreign investors. This meant that despite the design of a stabilization regime in the PSAs by the foreign parties, the wording of Article 101bis would nullify the effect of that regime. The evident lack of regard for the provisions in Law 86-14, which provided for exemptions from taxes, is striking. Moreover, the language of Article 101bis was clearly intended to negate the contractual stabilization provisions of the various PSAs awarded to foreign investors and to excuse Sonatrach’s breaches of contract. Inevitably, this raised the wider issue of the value of a stabilization clause or combination of clauses as included in the PSAs in relation to an apparent intention by a host state to nullify them.

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From March 2007 Sonatrach took 50 per cent of the foreign partners’ share of production in payment of TPE. By June 2011 Sonatrach had lifted more than 60 million barrels as TPE with a value of around US$5 billion.

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(c) Disputes

The introduction of Ordonnance 06-10 led to several high-profile disputes, most notably involving Anadarko Petroleum Corporation and its partner, Maersk Oil, reported to be seeking compensation of around US$11 billion.100 However, while these and other investors had the right to take their claims to international arbitration (following an attempt at conciliation), none of the disputes appear to have reached a final award by an international tribunal;

100

GAR, 24 August 2009: ‘Algerian oil-tax gives rise to ICSID and contract claims.’

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484 Chapter 9: Africa: Treaty and Contract Stability all appear to have been—ultimately—concluded through a commercial agreement between the parties. There is therefore no arbitral ruling on the alleged breach of any of the stabilization clauses discussed above. 9.61

Prior to any arbitral proceedings, conciliation took place between the parties, but proved unsuccessful in resolving the disputes.101 The two IOCs above commenced arbitration against Sonatrach in February 2009 with a seat in Geneva based on contract breach. A second arbitration was commenced by Maersk Oil based on the BIT which Algeria had with Denmark and was registered at ICSID.102 Each company was a partner in several blocks in Algeria under a PSA arrangement with Sonatrach (and Eni, as successor to LASMO). However, each chose to take a different route with respect to the legal basis for arbitration. There were several other IOCs that were affected by the TPE but for whom the measure had less financial impact.

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In its argument against the tax, Anadarko disagreed with the collection of the new tax, and informed Sonatrach of the fact.103 In its view, fiscal stability was provided through several provisions in the PSA that required Sonatrach to pay all taxes and royalties in the event of such a change in law. Essentially, their argument was that the collection by Sonatrach of the TPE from the companies’ share of the oil production due to them under the PSA was a breach of that contract which should be compensated.104 At this stage, Sonatrach had already started to collect taxes under the disputed law. Indeed, Sonatrach gave notice to Anadarko under the PSA that the new law triggered Sonatrach’s right to renegotiate the PSA to re-establish equilibrium of Anadarko’s and Sonatrach’s interests.105 There was disagreement over whether Sonatrach had a right to renegotiate under the PSA and a formal non-binding conciliation process (under the terms of the PSA) commenced to resolve the dispute. This was concluded in 2007 without a definitive resolution.

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With respect to the arguments based on alleged breach of an investment treaty, it is only possible to speculate on what they might have been, such as expropriation of an investment, breach of the FET standard and unreasonable and discriminatory treatment of the investor. The imposition of a tax is usually assumed to be a lawful exercise of state power unless proved otherwise but there are exceptions to this: one of these is the circumstance where a state has assured a foreign investor, either expressly by agreement or by means of a stabilization clause that it will not vary the agreed tax for a specific number of years. A unilateral repudiation of such a commitment to tax limitation would amount to an expropriation. A second exception arises when there is an unreasonable, confiscatory, and discriminatory tax. Could Algeria’s taxation measure (the TPE) amount to such a measure? If the question was ever put to the tribunal, its answer will never be known.

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A further dispute arising out of the TPE was reported in May 2016.106 The Algerian subsidies of Total and Repsol filed a claim against Sonatrach,107 under a 1996 PSC for the development and operation of a natural gas field at Tin Fouye Tabankort (TFT) in eastern Algeria.

101 Arab Oil and Gas Directory 2007, 23-27. 102 Maersk Olie, Algeriet A/S v People’s Democratic Republic of Algeria, ICSID ARB/09/14. 103 Annual Report 2010/Anadarko Petroleum Corp—APC, Form 10-K, p.7. 104 Maersk Oil, Settlement of Algerian tax claims, 9 March 2012, News Release: https://investor.maersk.com/ news-releases/news-release-details/settlement-algerian-tax-claims (accessed 23 July 2021)(web link). 105 Form 10-K at p.7. 106 GAR, 8 May 2017: ‘Total and Sonatrach to drop ICC claims.’ 107 Total E&P Algerie SAS, Repsol Exploración Argelia, SA v Sonatrach SpA, ICC Case No 21969/DDA.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 485 The operator was a joint venture company called Groupemont TFT, comprising Sonatrach, Total, and Repsol. Sonatrach and Total each have a 35 per cent stake, and Repsol holds the remaining 30 per cent. The companies alleged that the tax breached a stabilization clause in their agreement and requested reimbursement by Sonatrach of the amounts (about US$400 million) that they had paid the Algerian Government. An ICC claim by Repsol and two South Korean partners was defeated in 2016. It also concerned the TPE.

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Sonatrach filed a counterclaim alleging that Total and Repsol had failed to operate the gas field in accordance with the applicable environmental laws and had extracted more gas from the field than was permitted by the geological models agreed by the parties to the contract when it was signed.108 As a result, their actions endangered the preservation of the field.

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(d) Resolution

In the dispute between Anadarko and Sonatrach, a settlement was reached in 2012. This followed negotiations after the award had been written by the tribunal and was about to be delivered to the PCA in The Hague. Its contents are unknown since it proceeded no further. Summary details of the settlements, based on reciprocal concessions, were disclosed in SEC filings and various press releases in 2012.109 There were three main elements. Firstly, Sonatrach was to deliver additional crude oil volumes to Anadarko in an amount of about US$1.8 billion over a period of twelve months from the effective date of the settlement. Secondly, the parties agreed to amend the existing PSA so that Anadarko would receive a higher volume of profit barrels. The effect of this change was, by Anadarko’s calculation, that it would receive about US$2.6 billion of additional net present value over the remaining term of the PSA (thereby lowering the effective TPE rate). Thirdly, the amendment confirmed that the term for each development licence granted under the PSA would be extended, in line with the terms of the PSA and as a result would have a term of twenty-five years from the original effective date, so that the expiry dates would range from December 2022 to December 2036.110

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Anadarko’s joint venture partner, Maersk Olie, Algeriet A/S, reached a settlement at the same time. It provided for additional crude oil volumes to be delivered by Sonatrach in the amount of approximately US$920 million over a period of twelve months from the effective date of the settlement. The effect of the improved terms of the PSA was said by Maersk to ‘moderately increase’ its share of oil production from the effective date and for the remaining term of the PSA.111

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Total and Sonatrach agreed to settle their claims in April 2017 based on a commercial agreement, and so to end the two ICC arbitral proceedings that were ongoing. The parties agreed to continue with the joint exploitation of the TFT field within the framework of a new contract, and also to develop a new project.

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108 Sonatrach SpA v Total E&P Algerie SAS and Partex Oil and Gas (Holdings) Corporation, ICC Case No 22362/DDA. 109 Anadarko Press Release, 9 March 2012: ‘Anadarko announces resolution of Algeria Tax Dispute’; Anadarko Press Release, 2 April 2012: ‘Anadarko receives final approval of Algeria tax agreement.’ 110 Anadarko Annual Report 2012, Form 10-K, Anadarko Petroleum Corp—APC, 19 February 2013. 111 Maersk Oil, ‘Settlement of Algerian tax claims’, 9 March 2012, News Release: https://investor.maersk.com/ news-releases/news-release-details/settlement-algerian-tax-claims (accessed 23 July 2021) (add web link).

486 Chapter 9: Africa: Treaty and Contract Stability

(2) Egypt 9.70

(a) Political risk and attraction of capital

Egypt’s efforts to attract foreign investment into its energy sector have been largely confined to its hydrocarbons sector, with an emphasis on oil giving way over time to natural gas. Currently, hydrocarbons production is the largest single industrial activity representing around 13.6 per cent of the total GDP.112 The country is the largest non-OPEC oil producer in Africa and its second largest gas producer.113 The focal points for investment promotion have been a continuing interest in oil and gas exploration and development which began several decades ago, and the encouragement of investment in natural gas trade. At the same time, it has expanded its non-hydrocarbons energy projects.114 As one of the African countries with the longest record of foreign investment, Egypt also pioneered an approach to the stabilization of hydrocarbons contracts that combined contractual guarantees with domestic legislative processes which it continues to use.

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With the growth of natural gas prospects, successive governments have modified their approach to the attraction of foreign investment. In policy terms, domestic use of natural gas has become more and more pressing rather than export to Europe. Gas export and import to Israel has long been under discussion, with contractual arrangements developed to permit this trade, discussed below. Domestic production has been robust. The giant Zohr gas field was discovered in the Mediterranean Sea in August 2015 by Eni, and gas produced from this deep-water field amounted to 12.2 bcm in 2018. Further discoveries have been made in the Western Desert. In the years between 2001 and 2016 there were around 800 oil and gas discoveries made.115

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In the hydrocarbons sector, Egypt introduced a hydrocarbons law as long ago as 1953, and at the same time adopted a Presidential Decree requiring all concessions to be issued as laws, rendering each of them a lex specialis.116 This approach of enacting contracts as laws was unusual at the time but became common to several Middle Eastern countries and indeed globally. Article XVIII of a typical concession agreement includes a stabilization clause, such as the following:117

(b) Legal response to risk

112 As at 2018: US Department of Commerce, International Trade Administration, Energy Resource Guide 2020, Egypt—Oil & Gas: . 113 Hegazy, K. (2015) Egypt’s Energy Sector: Regional Cooperation Outlook and Prospects of Furthering Engagement with the Energy Charter, Energy Charter Secretariat Knowledge Centre, 2. In 2020, gas production expanded to make Egypt the fifth producer in the Middle East North Africa region: Egypt Today, 14 December 2020: ‘Egypt produces 6.2 billion cubic feet of gas per day, ranks 13th in world’: https://www.egypttoday.com/ Article/3/95335/Egypt-produces-6-2-billion-cubic-feet-of-gas-per (accessed 23 July 2021). 114 In Aswan the Benban solar park is the largest grid-connected solar installation in the word; there is a clean coal power plant at Hamarawein, which is the largest coal-fired plant in the Middle East and Africa, and a nuclear plant at El Dabaa: Lexology, 20 November 2019, Investment Arbitration in Egypt. 115 Presentation by Prof. Dr. Mohamed S. Abdul Wahab (2019), 4th Annual Conference on Energy Arbitration and Dispute Resolution in the Middle East and Africa, 7–8 March 2019. 116 Petroleum Exploration and Exploitation Concessions Law No.66 of 1953; Presidential Decree No 61 of 1958; Art 123 of the 1971 Constitution. 117 Concession Agreement of 6 June 2002 for Exploration and Exploitation between Egypt and Egyptian General Petroleum Corporation (‘EGPC’) and Repsol Exploration Egypt S.A. and Mobil Exploration Egypt Inc. and Amoco Egypt West Mediterranean. See also the Concession Agreement of 2002 for Petroleum Exploration and Exploitation between Egypt and the Egyptian General Petroleum Corporation and Dover Investment Ltd, Art. XVIII; Concession Agreement for Petroleum Exploration and Exploitation between Arab Republic of Egypt and Ganoub El-Wadi Holding Petroleum Co. and Centurion Petroleum Corporation on Komombo Area block 2,

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 487 ‘(b) The rights and obligations of EGPC and CONTRACTOR under, and for the effective term of this Agreement shall be governed by and in accordance with the provisions of this Agreement and can only be altered or amended by the written mutual agreement of the said contracting parties. (c) The Contractors and sub-contractors of CONTRACTOR and Operating Company shall be subject to the provisions of this Agreement which affect them. In so far as all regulations which are duly issued by the GOVERNMENT apply from time to time and are not in accord with the provisions of this Agreement, such regulations shall not apply to CONTRACTOR, Operating Company and their respective contractors and sub- contractors, as the case may be. (d) EGPC, CONTRACTOR, Operating Company and their respective contractors and sub- contractors shall for the purposes of this Agreement be exempted from all professional stamp duties, imposts and levies imposed by synodical laws with respect to their documents and activities herewith. However, since contract provisions can be overridden by a law, stabilization by contract alone was deemed to be inadequate. As the late Professor Ahmed El-Kosheri commented: ‘(t)he supremacy of a subsequent legislative rule over any previously concluded contractual text deprives the stabilization clause of its legal value’.118 There had already been examples of cancellation of concessions by decree such as Iran’s cancellation of the 1901 D’Arcy Concession in the 1920s and later, the Iranian oil nationalization in 1950. As an alternative to this inadequate guarantee, and by way of protecting the legitimate expectations of the foreign investor, a special law was to be promulgated that granted supremacy to the contractual provisions of a concession over any legislative rules that might be adopted in the future. In this way, the supremacy of the vested contractual rights over the present legislative system was ensured and further changes prevented that might be introduced by subsequent laws that may affect the acquired contractual rights during the term of the concession. It had the effect of freezing the applicable legal system for that concession. This was the pattern adopted by Egypt in all the laws that authorized the Minister of Petroleum to conclude concessions with EGPC, the state hydrocarbons company, acting as the concession holder, and the foreign investor, which was referred to as the ‘Contractor’. The text of the authorizing legislative act reads:

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The rules and procedures contained in the annexed clauses have the force of Law, and are enforceable notwithstanding any legislative provisions contrary thereto.119

Two clarifications may be added to understand what this approach achieves and what it does not do. Firstly, the legal character of the contractual rules is not changed by this procedure. They do not emerge from this process as a form of statutory rules. The benefit to the investor is analogous, El-Kosheri advises, to the effect of extending

Art. XVIII; Concession Agreement of 1999 for Petroleum Exploration and Exploitation between Egypt and the Egyptian General Petroleum Corporation and Dublin International Petroleum (Egypt) Ltd, and Tanganyika Oil Ltd (Barrows, Basic Oil Laws and Concession Contracts), Art. XVIII, all of which are pre materia with the above provision. 118 El-Kosheri, A.S. (1996) ‘Settling Disputes in the Energy Sector: The Particularity of the Conflict Avoidance Methods Pertaining to Petroleum Agreements’, ICSID Review-FILJ 11, 272–285 at 274. 119 Article 2, cited in ibid, at 275.

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488 Chapter 9: Africa: Treaty and Contract Stability national treatment to certain categories of aliens; it does not make them citizens, however.120 Secondly, the legislature is not entitled to amend or exclude any of the provisions that have been agreed upon by the parties to the concession and included in the draft already initialled by the foreign investor. The exercise of parliamentary control resembles that involved in the ratification of treaties: authorization or rejection.121 The amendment of the proposed instrument may not be made nor may its provisions be supplemented in any way. This approach to petroleum concessions is one that continues in the present day.122 9.75

Natural gas While the legal regime for foreign investment in the oil sector seems to have worked well on the whole, apart from repeated late payments to foreign investors by the EGPC, the same cannot be said for the safeguards put in place to promote and protect the country’s emerging natural gas sector. Initially, this was heavily aligned to exports. In 2005, for example, Egypt and Israel signed an inter-State Memorandum of Understanding to formalise their understanding that significant quantities of Egyptian gas would be exported to Israel through a so-called Peace Pipeline, built and operated by EMG, a foreign investor. A combination of growth in domestic demand and gas discoveries in Israeli waters meant that the relationship has reversed, with Israel becoming the exporter instead of the importer. In the meantime, a series of arbitrations were initiated among the initial parties. Nonetheless, the country’s strategic location and developed energy infrastructure plus large gas reserves discovered in the East Mediterranean make it feasible to develop a role for Egypt as a regional energy hub. Contractual arrangements to make this possible were put in place well before the Arab Spring events.123 Since then, pressure on the Government has mounted to use domestic supplies of natural gas in the home market to address shortages. Disputes over several gas contracts are discussed below. A more recent government response to the prospects for development of natural gas has been to adopt a new gas law No 196 in 2017 and establish the Gas Regulatory Authority. Earlier, Law No 20 of 1976 had established EGPC and was amended by Presidential Decree No 164 of 2007. Subsequently, a PM Decree No 1009 of 2001 established the Egyptian Natural Gas Holding Company (EGAS), the state-owned gas entity.

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In terms of its general legal infrastructure for investment, Egypt is a party to the ICSID Convention and the New York Convention, and has concluded 115 BITs,124 making it among the states with the highest number globally. Its regional centre for international commercial arbitration at Cairo is well known. Its Investment Law was adopted in 2017 and adds another instrument for avoiding the court system with the Egyptian Arbitration and Mediation Centre.

120 Ibid, at 276. He cites Henry Cattan (1967: The Law of Oil Concessions in the Middle East and North Africa, New York, 29): ‘the legislation approval ordinarily prescribed for the grant of an oil concession does not materially alter its contractual character’. 121 El-Kosheri (1996) at 276–277. 122 For example, in July 2020 the Egyptian House of Representatives passed 12 exploration and production bills that allow the Minister of Petroleum and Mineral Resources to sign contracts with different oil and gas companies: (accessed 30 September 2020). 123 For example, the Sale and Purchase Agreement at issue in the Unión Fenosa case (below) was signed on 1 August 2000 with EGPC as the seller of the gas. 124 Amr Abbas and John Matouk, Egypt, in Middle Eastern and African Arbitration Review 2020: .

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 489

(c) Disputes

In the gas sector the government has intervened in the operation of certain gas sale and purchase contracts, with a view to diverting natural gas destined for export to domestic use. This behaviour, combined with an unwillingness to pay for the gas diverted, has led to disputes between foreign investors and the state entities about whether guarantees of gas supply have been breached by Egypt, and whether contractually agreed allocations were not met by the state entities in breach of their obligations to foreign investors. Two high-value cases addressing these issues have led to arbitral awards and merit some scrutiny. (i) The Israel–Egypt gas pipeline A group of disputes involving natural gas sale and purchase contracts had its origins in events several decades ago. A state–state agreement on energy cooperation was reached between Egypt and Israel in 1979, in which the initial basis for energy cooperation lay in sales of oil by Egypt to Israel. However, very large discoveries of natural gas led to a reassessment of this emphasis and its replacement with prospective sales of large domestic resources of natural gas. To facilitate this new basis for cooperation, three agreements were signed in 2005: first, a sale and purchase agreement (SPA) for gas to be piped from Egypt to Israel was made between the gas sellers, EGPC and EGAS, two state-owned corporations, and the intermediary, the East Mediterranean Gas Company SAE (EMG), an entity incorporated in Egypt but owned by Israeli, US, German, Thai and private Egyptian investors; second, an on-sale agreement was reached between EMG and the customer, an Israeli electricity utility (the downstream supply of gas); and third, all three parties signed an overarching ‘tripartite agreement’. In addition to these three agreements, the States of Israel and Egypt signed an inter-State Memorandum of Understanding (MoU) setting out a roadmap for gas trade and signed by the representatives of the respective governments. The Tripartite Agreement was also attached to the SPA as a Schedule and became like the MOU an integral part of the SPA.

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9.78

According to Article 2 of the MOU, Egypt specifically, ‘guarantees the continuous and uninterrupted supply of Natural Gas contracted and/or to be contracted’. Under Article 7, Egypt ‘designates the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Gas Holding Company (EGAS) as representatives of the Egyptian Ministry of Petroleum in signing the tripartite agreement’.125

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Subsequently, the quantities of gas made available by EGAS to EMG were consistently less than the quantities agreed in the SPA, and EGAS sought to increase the base price for its gas and prolong the period for delivery to reach full volumes, leading to ‘forced’ negotiations and the first of several amendments to the contracts. From 2011, disruptions became severe due to frequent terrorist attacks on the pipeline, and diversion of gas to the domestic market, leading to termination of the SPA and the Tripartite Agreement in 2012. EMG was left with an idle pipeline, an investment which had cost it approximately US$500 million, and the Israeli utility, IEC, was compelled to purchase alternative fuels to meet Israel’s electricity demand. No less than four international arbitrations resulted, initiated by the various foreign investors in the EMG,126 which owned and managed the pipeline. The claimants variously

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125 ICSID Case No ARB/12/11, para 141. 126 East Mediterranean Gas SAE v Egyptian General Petroleum Corp, Egyptian Natural Gas Holding Co and Israel Electric Corp Ltd, ICC Case No 18215/GZ/MHM (EMG seeks to prevent EGPC and EGAS from terminating the upstream supply contract); Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company v East Mediterranean Gas (CRCICA case) (EGPC and EGAS request declaration that they had not repudiated

490 Chapter 9: Africa: Treaty and Contract Stability argued that the two state-owned entities with which EMG had reached agreement on this long-term (fifteen-year) investment had breached their contractual obligations and the supply guarantees it contained. 9.81

A Final Award was issued in the ICC case on 4 December 2015, in which the tribunal found that EGAS and EGPC had breached their gas delivery obligations under the Tripartite Agreement and that they had wrongfully terminated the SPA in 2012.

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In the ICSID case, the claimants argued that various measures taken by Egypt had destroyed their investment. For example, Egypt had revoked EMG’s tax-free status, lowering the value of their investment, and had deliberately withheld contractual quantities of gas from coerce price increases and attempt to decrease contractual quantities. The tax exemptions on revenue derived from commercial and industrial activities were based on EMG’s status as a free- zone company, established under Law 8/1997, ‘Promulgating Law on Investment Guarantees and Incentives’. They had a maximum duration of twenty years. In 2008 a new Law 114/2008 revoked the Free-Zone licences of companies such as EMG, with negative impacts on its investment by subjecting it to new taxes.

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The tribunal agreed with the claimant that the licence containing a right to the benefits of a free-zone company, including tax-free status, constituted an investment within the terms of the Egypt–US BIT.127 While revocation of the licence did not in itself destroy the pipeline project, it was a discrete investment protected by the BIT. It held that Egypt ‘knew and accepted from the outset at the highest level of Government’ that EMG’s inclusion inside the tax-free zone system was ‘a fundamental part of the economic structure of the investment’.128 Facts such as these make ‘the consideration of a change in the tax regime applicable to Claimants’ investment in EMG well outside the realm of the ordinary exercise of the State’s regulatory power’. As such, it was not to be subject to changes in official tax policy over the agreed period. The taking was therefore tantamount to an expropriation, it held.129

9.84

All four arbitral rulings found Egypt and the state-owned entities responsible for repudiating the contract to supply gas to Israel via the undersea pipeline and in breach of their international obligations.

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(ii) Unión Fenosa Gas130 A second group of cases arose when the Egyptian state-owned gas company, EGAS, failed to deliver promised supplies of gas to a liquified natural gas plant constructed in Damietta,

the contract); Yosef Maiman, Merhav (MNF), Merhav-Ampal Group and Merhav-Ampal Holdings v Arab Republic of Egypt, PCA Case No 2012/26 (EMG’s shareholders initiate arbitration under the Poland-Egypt BIT); Ampal- American Israel Corp and Others v Arab Republic of Egypt, ICSID Case No ARB/12/11 (EMG shareholders’ claim against Egypt under US-Egypt and Germany-Egypt BITs). Following the settlement to which it was not a party, the Thai investor, PTT Energy Resources, submitted a claim to the Cairo administrative court under the Thailand- Egypt BIT of 2000. Since Thailand has signed but not ratified the ICSID Convention, this avenue of protection was not available to the Thai investor. The claim is for compensation for the same wrongful actions for which Egypt was held liable in the above claims, and is estimated at around US$1 billion: GAR, 20 July 2020: ‘Egyptian court hears billion-dollar BIT claim’. 127 ICSID Award, paras 179–181. The UNCITRAL tribunal in the claim brought under the Poland-Egypt BIT also held Egypt liable for treaty breaches for revocation of EMG’s free zone tax status and for repudiation of the SPA. 128 Ibid, at para 182. 129 Ibid, at para 183. 130 Unión Fenosa Gas S.A. v Arab Republic of Egypt, ICSID Case No ARB/14/4, Award 31 August 2018.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 491 in the north-east of the country, between 2002 and 2005. The plant was connected to the national grid and not to a dedicated gas field, making it wholly dependent on the grid for a supply of gas. The damage caused was worsened when in 2012 supplies of gas ceased entirely during the Arab Spring: shortages occurred in the local market and the government diverted the limited available supplies to other domestic customers. The plant has been inoperative since. A Spanish gas company, Unión Fenosa Gas S.A. (UFG), had an indirect 80 per cent interest in the liquefaction plant which produced LNG for export to Spain.131 In response to these events, it brought a claim against Egypt to ICSID under the Spain-Egypt BIT.132 UFG claimed that Egypt had failed to afford fair and equitable treatment to its investment in the plant by creating and then frustrating the claimant’s legitimate expectations in the contractual performance of the SPA, signed in 2000. Egypt has also, it alleged, failed to ensure an adequate gas supply to the Damietta plant and instead had given priority to the domestic market and other gas consumers at the expense of UFG. It had allegedly pursued gas sector policies and market interventions that caused gas shortages and invoked them to avoid its obligations and had undersupplied the Damietta plant, allocating gas in a discriminatory, disproportionate, and non-transparent manner. Among the issues the tribunal had to consider was whether the provisions of the Sale and Purchase Agreement—which it held to be an investment133—between the claimant and EGPC had been ‘endorsed’ by Egypt even though it was not a party to the contract. If so, it would support the claimant’s case that it had acquired a legitimate expectation in the performance of the contract, and that EGAS’s failure to supply the gas amounted to a breach of Egypt’s international responsibility. Further, it had to consider whether the cancellation of an investment law was done in violation of the expectation that the legal and business framework would remain stable, even though there had been no stabilization agreement made to anticipate this kind of event.

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The majority of the tribunal agreed that the Egyptian state had taken certain steps that in effect ‘endorsed’ the gas supply contract, affirming that the Government would not interfere with the supply of the gas. The majority also found that a series of actions that curtailed supply and ultimately cut it off in favour of other, local customers, were contrary to the claimant’s legitimate expectation, and so amounted to a breach of FET under the BIT.

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131 The Company was owned jointly (50:50) by Naturgy (formerly Gas Natural Fenosa) and Eni. It holds its interest in the plant through an Egyptian subsidiary, Spanish Egyptian Gas Company (SEGAS). 132 Two other contractual arbitrations were held in parallel. Both the contractual claims were administered by the Cairo Regional Centre for International Commercial Arbitration (CRCICA). In December 2017, a tribunal seated at Cairo rejected a claim by UFG for a US$10 million downward price adjustment under the gas supply agreement but also dismissed arguments by EGAS that the contract had been obtained by corrupt means: GAR, ‘Gas investor seeks to enforce against Egypt’, 19 October 2018. There was also a Madrid-seated arbitration administered by the CRCICA in which UFG submitted claims against EGAS for breaches of the gas supply agreement. SEGAS, the Egyptian subsidiary of UFG, also brought a claim against EGAS in an ICC arbitration in Paris in 2013, seeking US$270 million plus interest in penalties under a tolling contract. This was rejected in 2016 on the ground that SEGAS had assigned its contractual rights to an offshore security trustee acting for a syndicate of banks as part of the project’s financing arrangements. As a result, a group of 22 international commercial banks, lenders to the Damietta project initiated a new ICC arbitration against EGAS under the tolling contract, seeking US$470 million in unpaid toll-or-pay fees owed by EGAS to the plant for its maintenance: GAR, ‘Gas investor seeks to enforce against Egypt’, 19 October 2018.. 133 In terms of its execution, amendments and performance by the claimant, the SPA amounted to an ‘investment’ within the terms of the BIT, and satisfied the guidelines set out in the Salini v Morocco award in relation to duration, profit and return, risk and commitment to the development of the Egyptian economy. The claimant’s shares in SEGAS also qualified as an investment, and together these investments were to be treated holistically as one overall investment made by the claimant comprising the Damietta project (paras 6.66–6.68). Of course, the SPA was not a concession agreement but rather a commercial agreement for the sale of natural gas (para 9.104).

492 Chapter 9: Africa: Treaty and Contract Stability 9.88

It is worth looking more closely at the tribunal’s analysis here. There was no doubt that Egypt was not a contractual party to the SPA, but an approval of the SPA appeared to take place in the form of a letter which included the following words: ‘On behalf of the Ministry of Petroleum I have the pleasure to inform you that the Egyptian Government official endorsed the natural gas Sales and Purchase Agreement signed on 1 August, 2000 between UFACEX and EGPC’134 (UFACEX was taken over by UFG in 2003). In the majority tribunal’s view, this was clear evidence that Egypt was associating itself, as a non-contractual party, with the terms of the Article in the SPA which committed EGPC to ensuring that the Government would not interfere with the supply of gas. Under Article 21.1 of the SPA, EGPC expressly: Undertakes to procure that the Egyptian authorities undertake not to interfere with the rights of the Buyer under this Agreement and not to dictate or promulgate any act or regulation which could directly or indirectly affect the rights of Buyer under this Agreement, or affect the capacity of Buyer [sic: Seller] to perform its obligations under this Agreement, even in the case of a NG shortage in Egypt, save for Force Majeure situations as defined in this Agreement . . .135

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In other words, the majority tribunal interpreted this ‘official endorsement’ of the SPA as providing a separate, extra-contractual undertaking as was required by the above wording of Article 21.1 of the SPA. For the majority tribunal: ‘the juxtaposition of timing and the terms of Article 21.1 and the letter exclude any other objective interpretation’.136 The majority considered this ‘undertaking’ essential if the project was to go beyond signing the SPA, since it was essential for the claimant to receive natural gas and the only source was that provided by the EGPC.137 After all, it had entered into long-term agreements to supply natural gas to Spanish power plants and separate agreements to supply gas to Spanish industrial plants. It had also spent US$1.4 billion on completion of the plant.138 At the same time, the terms of the letter and associated conduct could not be transformed into a general guarantee of EGPC’s contractual obligations as Seller under the SPA. Its relevance was limited to part of the SPA only. Its effect was to preclude Egypt over the twenty-five-year term of the SPA from interfering with the rights of the Buyer under the SPA; taking any legal measure that could directly or indirectly affect the rights of the Buyer under the SPA; and affecting the capacity of the Buyer to perform its obligations under the SPA even if there was a shortage of natural gas in Egypt. Non-compliance with the undertaking would therefore amount to a breach of Egypt’s obligations under the FET standard in Article 4(1) of the BIT. Finally, the undertaking could not be absorbed by the SPA’s force majeure provision since it was ‘clearly intended to protect the Respondent from responsibility for a situation where the performance of the SPA was suspended for force majeure’. This was, it held, a limited exception and subordinate to the undertaking itself. It was not open to Egypt to breach its undertaking, to cause a force majeure event and then to assert force majeure as a defence under the FET standard.139

134 At para 9.60. 135 At para 9.62. 136 At para 9.63. The Egyptian Council of Ministers subsequently approved the project following conclusion of the SPA. 137 Under Art 24.3 of the SPA, the Seller of gas was aware that the supply of NG to Buyer under this Agreement is a key element for the successful development of the Project, and therefore Seller represents and warrants that its availability of NG will be sufficient to feed the Complex under the terms and conditions of this Agreement’: cited in Award at para 9.66. 138 Para 9.82. 139 Para 9.74.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 493 This view did not meet with the agreement of the whole tribunal and was included among several items in a dissenting opinion.140 Essentially, he identified several problems with this assessment of the undertaking. To begin with, it was not specific enough to play the important part that the tribunal accorded to it. Further, it may well have referred to the pricing of gas which had just been finalised and required government approval.141 Moreover, did a single sentence in a letter, worded in this way, carry the weight to overcome the policy commitment that Egypt had already made public? For example, a Master Plan published by the Government in 1999 made it clear that ‘gas exports should at no time exceed 25% of Egypt’s total output capacity’. The Plan went on to state that ‘[t]‌his means the domestic gas requirements of Egypt—a top priority of the current Egyptian regime under President Hosni Mubarak—will always be guaranteed’. Was the claimant (or its successor) unaware of this? Another feature was the absence of any mention of an undertaking in the MOU that the parties signed prior to entering into the SPA, a surprising omission given the importance that the tribunal was later to ascribe to it.

9.90

The concerns of the Dissenting Arbitrator may or may not point to a different conclusion on this issue. What they surely underline is the need of a tribunal to examine very carefully all the relevant evidence in a critical manner to ensure that the threshold for meeting the ‘legitimate expectations’ test has been met. In this case, it would seem they could have tried harder.

9.91

A separate claim of violation of the FET standard was unsuccessful but has some interest. The claimant had been granted tax-free status in the Damietta Free Zone in 2001. Profits and dividends of projects established in free zones were excluded from Egyptian tax and regulations. This status was revoked in 2008, when Egypt adopted Law No 114 which amended the Investment Guarantees and Incentives Law and cancelled the Free Zone Licence held by SEGAS. The claimant argued that it had relied on this status in making its investment in the project and was significantly harmed by its revocation. A problem with this argument was that the parties had not entered into a tax stabilization agreement and that the decision to invest had been made, nonetheless. It is unsurprising that Parkerings was cited by Egypt to support the argument that by investing without a stabilization agreement, the claimant carries the risk of any changes that are subsequently made in the legal framework.142 The tribunal did not consider that the claim could benefit from the undertaking in the Ministry’s letter, given its limited scope, so the claim could not be supported by its case on ‘legitimate expectations’ under the FET standard.143

9.92

The Necessity Defence Egypt invoked the defence of necessity under customary international law to preclude its international responsibility for the alleged international wrongdoings under the BIT against the claimant (see c hapter 7). This was an alternative defence if the tribunal were to find that (any of) the claims made were indeed treaty breaches. Egypt claimed that its prioritization of supplying natural gas to feed domestic electricity in Egypt rather than allow it to be exported as intended by the investor was an act of necessity, and the only way to maintain Egypt’s security, public order, and stability, to safeguard its essential interests and to maintain its basic services in the face of ‘grave and imminent peril’.144

9.93

140

Dissenting Opinion of Mark Clodfelter, 31 August 2018. Dissenting Opinion, Paras 25–28. 142 Parkerings, paras 332 and 335–336. 143 Unión Fenosa Gas S.A. v Arab Republic of Egypt, Para 9.89. 144 Ibid, at para 8.7. 141

494 Chapter 9: Africa: Treaty and Contract Stability 9.94

Egypt referred to the historic levels of violence (Arab Spring), riots, and clashes in the country which allegedly constituted a threat to ‘the basic functioning of society and the maintenance of internal stability’.145 It claimed that these events caused a ‘dramatic drop in the supply of natural gas both internally and for exportation’ which led to repeated blackouts and more widespread violence and unrest.146 Had it not prioritized its domestic needs, the situation at the time would have become far worse.

9.95

In its award, the tribunal found that several events were missing to legitimize the necessity defence, such as the timing.147 Interference in the gas supply to the plant commenced before the Egyptian Revolution and continued ever since. Other users of gas supplies were treated much more favourably by EGAS. Further, the Egyptian Revolution began in 2011 but it was only in 2013 that EGAS made any suggestion that the social and political instability in Egypt was a force majeure event under the SPA. Despite the revolution having ceased in 2015, gas supplies did not resume at that point in time. In fact, the curtailing of supplies to the plant occurred both prior to and following the Egyptian Revolution and therefore, the Tribunal held, could not be the proximate cause of the curtailment. Further, the act of the government was not the ‘only way’ to maintain Egypt’s security situation. In fact, there was a stark disproportionality in the reduction of gas delivered during the relevant period where other users saw a reduction of only between 12 per cent and 60 per cent, whereas the claimant investor suffered a curtailment of 96 per cent.148 Finally, there was a problem with the notion that action (reduction in gas supplies to the plant) was necessary to ‘safeguard an essential interest against a grave and imminent peril’. However, in the Tribunal’s view, the relevant interest lay not in the maintenance of public safety but rather in a shortage of gas in the country, itself an outcome of successive domestic policies, such as subsidising domestic users of gas and electricity, and failing to support gas exploration in Egypt. An imbalance between supply and demand was ‘well established by 2006, as an increasing trend’.149 So, overall, the defence of necessity was one that Egypt had failed to prove.

9.96

Attribution Although the tribunal held that the failure by the State -owned enterprise, EGAS, to supply gas was attributable to Egypt, the tribunal also held that neither EGPC nor EGAS were organs of the Egyptian state with respect to the SPA. In this sense, its holding differs from that of the tribunal in a similar case involving an SPA, Ampal v Egypt (see below).150 In Ampal, the tribunal cited EGPC’s designation as a ‘public authority’, ‘overseen by the Minister of Petroleum’, with capital consisting of ‘[f]‌unds allocated to it by the State’, and a chair and board appointed by and partially consisting of Government officials, with the Minister of Petroleum ‘empowered to amend or cancel [Board] resolutions’.151 So, in that case, EGPC was held to be an organ of the Egyptian State within the meaning of Article 4 of the ILC Articles on State Responsibility. By contrast, in UFG, the tribunal did not find these factors sufficient to show that EGPC was part of the structure of the state to the extent that it would be denied an autonomous existence.152 Further, the transaction in that case had its 145 Ibid, at para 8.10. 146 Ibid, at para 8.10. 147 Ibid, at paras. 8.37–8.61. 148 Ibid, at para 8.46. 149 Ibid, at para 8.53. The Tribunal did not, however, accept the argument that Egypt had contributed to the state of necessity. 150 Ampal v Egypt, ICSID Case No ARB/12/11, Decision on Liability and Heads of Loss, 21 February 2017, para 138. 151 Unión Fenosa Gas, at para 9.109. 152 Ibid, at para 9.109.

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 495 origins in an earlier agreement between the States of Israel and Egypt, a feature that was absent in UFG. Indeed, following that agreement, EGPC, as the representative of the Egyptian Ministry of Petroleum had been tasked to negotiate and conclude the SPA.153

(d) Resolution

In terms of outcomes,154 in the pipeline cases EMG was awarded a combined US$1.6 billion in ICC and Cairo Centre claims against the Egyptian state entities. Polish and US investors in EMG prevailed on liability in the parallel investment treaty claims against Egypt under UNCITRAL and ICSID rules.155 Subsequently, a reorganization of EMG took place: Noble Energy (US), Delek Drilling and EGC were to pay US$518 million to acquire a combined 39 per cent share in EMG, the operator of the pipeline. The pipeline was then to be repurposed to transport gas from Israel to Egypt with Delek and Noble Energy to have the exclusive right to lease and operate it. This built on the prospective turnaround of roles between exporting and importing countries. Israel had made two very large gas discoveries, Tamar and Leviathan, that appeared to have production capacities well in excess of Israel’s domestic requirements. Egypt and the state-owned entities were not parties to the share purchase agreement, but separate settlement agreements were to be entered into, bringing an end to the ongoing arbitrations.156 The transaction was completed in 2019 and gas began to flow through the pipeline in early 2020.157

9.97

In the second group of cases, UFG was awarded US$2.13 billion in damages plus interest by an ICSID tribunal in September 2018. Enforcement proceedings commenced before the US District Court in October 2018. Egypt applied for annulment of the award on 8 January 2019. A settlement was announced in February 2020.158

9.98

(3) Nigeria (a) Political risk and attraction of capital

The attraction of foreign investment in the energy sector became a priority for Nigeria in the years after the country’s independence in 1960.159 The first offshore discoveries of oil had 153 Ibid, at para 9.110, citing para 141 of the Ampal Award. 154 From a procedural viewpoint, having several cases with the same factual matrix, same witnesses and many identical claims created the risk of double recovery and inconsistent outcomes, an argument made by Egypt (Ampal, at para 252). However, the ICSID tribunal noted that Egypt had declined the claimants’ offers to consolidate the proceedings. 155 GAR, 7 February 2018: ‘In new Israel-Egypt pipeline rulings, McRae-chaired tribunal finds BIT breaches, and Collins-chaired contract tribunal orders Egyptian state-owned contract tribunal orders Egyptian state-owned companies to pay $1 billion to investor.’ 156 In a securities filing by Delek Drilling to the Israel Securities Authority in Tel Aviv, Delek stated: ‘[t]‌he Sellers, the shareholders of the Sellers and the Sellers’ affiliates will waive any claim, action, award, decision, order or remedy they have against the Government of Egypt and companies owned thereby, in the context of the Arbitration Proceedings’: ; see also GAR, 27 September 2018: ‘Deal signals end to cases over Egypt-Israel gas supplies.’ 157 Press Release, Delek Drilling, 15 January 2020: ‘Gas flow from Leviathan to Egypt has begun.’ 158 UFG Communication, February 2020: UFG and Egypt ink Agreement to resolve all long standing issues: (accessed 2 October 2020). 159 For good overviews of the history of oil in Nigeria, see Wumi Idelari and Rotimi Suberu, Nigeria (chapter 9) in Anderson, G. (2012) Oil and Gas in Federal Systems, Oxford: OUP; Thurber, M.C., Emelife, I.M. & Heller, P.R. (2012) ‘NN PC and Nigeria’s Oil Patronage Ecosystem’, in Victor et al. (eds), Oil and Governance, 701–752. By contrast, Nigeria’s mining sector has had a longer history, pre-dating independence.

9.99

496 Chapter 9: Africa: Treaty and Contract Stability been made in 1956 in the Niger Delta, and in the 1960s more followed as foreign investors were granted exploration rights on-land and offshore. By the 1970s oil production had reached extremely high levels and revenues burgeoned on the back of a quadrupling of the international oil price. However, a pattern of high political risk emerged for investors that was to persist in subsequent years. It had two notable features: first, there was a familiar cycle of investment promotion followed at a later stage by attempts at de facto renegotiation or reinterpretation of the bargain struck with investors in order to extract additional value from their investments; second, within this cycle there were intermittent, sudden policy changes and ad hoc interventions by state agencies or parastatal bodies that often had their roots in the domestic political context. A curiosity of this process is that Nigeria’s grant of long-term stability guarantees and its apparent reluctance to challenge them directly, has required considerable creativity in these interventions to increase the state share of benefits, often by reinterpreting rules and effectively modifying the fiscal arrangements. 9.100

In the 1960s and 1970s the Federal Government of Nigeria (FGN) pursued an indigenization and import substitution policy,160 taking an ever-larger share of oil concessions: by 1 July 1979, it had increased its share to 60 per cent of all major concessions in the country.161 In 1978, at short notice, it nationalised the 20 per cent equity share held by BP in a joint venture with Shell through the Acquisition of Assets (British Petroleum Company) Act.162 These partially nationalised companies became the core of NNPC, and still dominate production in Nigeria today.

9.101

During the period of high oil prices until 1986 and the subsequent sharp and lasting decline in prices that continued to the end of the century, there were frequent changes in government from civilian to military, accompanied by unilateral changes in the rules applicable to foreign investment. However, Nigerian governments introduced a range of incentives for foreign investors including production sharing contracts and stabilization guarantees, ensuring that large-scale investment in deep water hydrocarbons exploration was able to commence. The foundations for a world-class export-oriented natural gas sector were also laid in the 1990s. At the same time, a succession of cases appeared in the courts brought by many Nigerian companies and foreign concession holders against political actions taken to terminate their rights.163 By the first decade of this century, oil production had begun to fall due to conflicts occurring in the main producing area, the Niger Delta, involving attacks by militants on oil infrastructure and organized theft from pipelines.164

9.102

At around this time (2007), a new law, the Petroleum Industry Bill (the ‘PIB’) was introduced into the Parliament and has remained under discussion since. The PIB is an omnibus piece

160 This means sourcing jobs and commercial operations locally to locally owned businesses, and substitution of imports by locally produced goods and materials. In Nigeria, according to Akinrele, A. (2005) Nigerian Oil and Gas Law, London: OGEL, at 91–92, ‘the policy was never expressed in any composite document or set of guidelines’, it was a practice ‘subject to the broad discretion of the regulatory authorities, which was utilised, for instance to prolong opl terms beyond their statutory limits, waive regulatory requirements for work programmes and in particular, relax the criteria for conversion of opls to omls’. 161 Ahmad Khan (1994) cited in Thurber et al. (2012) at 701. 162 Taverne, B. (1996) Cooperative Agreements in the Extractive Petroleum Industry, The Hague: Kluwer Law International, 123. 163 Kolo, A. (2001) ‘Legal Issues Arising from the Termination of Oil Prospecting Licences by the FGN’, J Energy & Nat Resources L 19, 164. 164 Katsouris, C. & Sayne, A. (September 2013) ‘Nigeria’s Criminal Crude: International Options to Combat the Export of Stolen Oil’, Chatham House (last visited 20 September 2020).

B. Energy Investment, Phase 1: Algeria, Egypt, and Nigeria 497 of legislation aimed at harmonizing all legislation on petroleum and significantly restructuring the petroleum sector in Nigeria, particularly the functions of the various regulatory agencies.165 At various times, the PIB seemed likely to tighten fiscal terms and conditions for deep water blocks and might well have eroded significant value from all of the concessions to which it would have been applied. If enacted in this form, there was a risk that it might make further investment in deep water projects by foreign investors unlikely. The above context created a high level of political risk for foreign investors, only partly offset by the legal guarantees described below. In addition to unilateral interventions by successive governments in the hydrocarbons sector, there were multiple decisions by national courts that offered little comfort to foreign investors about this avenue for defending their interests against actions by the NNPC or the executive (see for example, c hapter 9, paras 9.132– 9.156). This history of tests to the long-term stability of investor-state contracts is both long and continuous to the present day.

9.103

An early example of the enduring uncertainties and seemingly contradictory policies was the cancellation of oil prospecting licences awarded in the 1990s. When the country returned to civilian rule in 1999 under President Olusegun Obasanjo, one of the first measures adopted by the then government was the cancellation of forty-eight oil prospecting licenses awarded by the previous military regimes between 1990 and 1999. These revocations were for alleged non-payment of signature bonuses and/or failure to execute agreed work programmes, notwithstanding the fact that most of them had been awarded to indigenous Nigerian companies. The revocations were based on the recommendation of an Administrative Panel set up by the new civilian government to review contracts, licenses and appointments that were made by the previous military government. However, most of the cancellations were either carried out in breach of contract between the licensees and the Government or in breach of the Nigerian Constitution and the Petroleum Act 1969.166 Some of the affected companies successfully challenged the actions of the Government in the Nigerian courts.167

9.104

The cancellation of oil licences did not end with the departure of the Obasanjo regime in 2007. The government of President Musa Yar’adua also annulled some oil prospecting licences awarded by his predecessor during the 2005 and 2006 licensing rounds. Among the licences annulled were oil prospecting licences (‘OPLs’) 321 and 322, awarded to the Korea National Oil Corporation (‘KNOC’) in return for a pledge of construction of railways lines in Nigeria. The government then reallocated the licences to the Indian Oil and Natural Gas Corporation. KNOC successfully challenged the revocation in the Nigerian Federal High Court (FHC), then at the Court of Appeal and finally at the Supreme Court in 2017. In affirming the decision of the 2009 Court of Appeal, the Supreme Court held that the action of the President in terminating the exploration licence was not within his executive powers as such power is only vested in the Minister of Petroleum Resources. In fact, the FHC that initially tried the case, held that even if the President had such powers, the President failed

9.105

165 In 2015 the PIB was re-packaged as the Petroleum Industry Governance Bill: Akinrele, A. (2016) ‘The Current Impact of Global Crude Oil Prices on Nigeria: An Overview of the Nigerian Petroleum and Energy Sector’, J World Energy L & Business 9, 313–345 at 332–335. 166 Kolo (2001) at 175; Olujobi, O.J. & Oyewunmi, O.A. (2017) ‘Annulment of Oil Licences in Nigeria’s Upstream Petroleum Sector: A Legal Critique of the Costs and Benefits’, International Journal of Energy Economics and Policy 7(3), 364–369 . 167 A challenge was also made at ICSID: ICSID Case No ARB/07/18 Shell Nigeria Ultra Deep Limited v. Federal Republic of Nigeria (related to alleged cancellation of OPL 245), which was later discontinued by the parties (see below at paras 9.157–9.163).

498 Chapter 9: Africa: Treaty and Contract Stability to comply with the procedure laid down in the Petroleum Act for revocation of interests in OPLs. Consequently, it held that revocation was illegal, procedurally unfair, unreasonable and against the legitimate expectation of KNOC.168 Commenting on the unreported 2009 FHC decision, the Reuters news agency noted that, ‘[t]‌he case has been closely watched by the oil industry and foreign investors concerned about the security of contracts when administrations change in sub-Saharan Africa’s second-biggest economy’.169 9.106

The outcome has been a reported slowing down of investment flows over the past decade. No allocations of green field acreage have been made since 2007 with instances of direct awards being re-allocations of rights to existing discoveries.170 The role of NNPC has been subject to criticism as a contributory factor.171 Ironically, the abundance of hydrocarbons in Nigeria, on-land and offshore has been demonstrated by recent discoveries. In 2016 there was a discovery and an increase in estimated production of between 500 million and a billion barrels of oil in the Owowo-2 and Owowo-3 oil fields. In 2018 Shell discovered over one trillion cubic feet of gas in Eastern Nigeria.172

(b) Legal response to risk 9.107

(i) Overview Clarity about ownership of the country’s minerals is provided in the Constitution 1999, as amended. Section 44 (3) states that ‘the entire property in and control of all minerals, mineral oils and natural gas, in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such a manner as may be prescribed by the National Assembly’. This Section is mirrored in Section 1 of the Petroleum Act 1969, which is the basis for the statutory framework for oil and gas activities.173 It is also the vehicle for the allocation of rights to foreign companies. Its aim is ‘to provide for the exploration of petroleum from the territorial waters and the continental shelf of Nigeria and to vest the ownership of and all onshore revenue from petroleum resources

168 OPLs 321, 323: ‘S-Court declares revocation illegal’, Vanguard Newspaper, March 14, 2017, available at (accessed 28 April, 2019); see also Gboyega, A., Søreide, T., Le, T.M. & Shukla, G.P (2011) ‘Political Economy of the Petroleum Sector in Nigeria’, World Bank Policy Research Working Paper 5779 2011, available at