International energy law frameworks and regulation

International Energy Law

International Energy Arbitration

This paper will examine the role of arbitration in the international energy sector over the past 50 years. Discussion is organized around the five decades leading up to the current state of affairs in the international energy sector. In each section, major arbitrations are identified and tied to the categorical intention of arbitrations of that period. For instance, arbitration awards that occurred during a period of substantive concession agreements -- termed the first generation of concession agreements by Kosheri (n.d.) -- include the Abu Dhabi award of 1951, the Qatar award of 1953, and the Aramco award of 1958.

The next period, which occurred roughly in the 1960s and 1970s, was characterized by arbitration awards that evidenced a climate of confrontation, during which host nations took the position of abstaining from participation in arbitration proceedings. These nations were unilaterally interested in bringing the earlier concession relationships to an end. Included here is the Sapphire decision against Iran in 1963, and the three Libyan cases with BP in October in 1973, Texaco in January in 1977, and Liamco in April of 1977. To add color to this stark listing of categorical arbitrations, the discussion turns briefly to the socio-economic and political environments of these two periods.

The International Energy Sector Landscape: In the 1960

It's a well-know, often recited aphorism: America fell in love with the automobile. In the span of four decades following the mass manufacturing of the automobile, cars became a fixture -- almost a member of the family -- that enabled Americans to move to the suburbs, dictated the extension of a national highway system, and compelled Americans to discover their country by car. Inarguably, World War II played a part in the conversion. Eisenhower saw to it that the nations' roads could adequately transport soldiers and tanks and munitions cross-country to the ports. And soldiers returned home after fighting in World War II having learned new and hard lessons about the importance of access to energy resources. But automobiles weren't put up on blocks along with retired tanks. Americans embraced automobiles and developed a concomitant sense of entitlement with regard to oil. In concert with their new post-war prosperity, Americans' expectations about oil extended to other forms of energy. It no longer made sense to rely solely on the coal, natural gas, and petroleum stores held within the borders of one's own country when there were, after all, supplies all over the world.

The power of seven. During the Cold War, most developed countries regarded other nations suspiciously and tightly guarded their national boundaries and the resources enfolded by those boundaries. There was very little interaction between the major industries within these nations, particularly those of the Seven Sisters oligopoly -- a phrase coined by Italian energy magnate Enrico Mattei to refer to the oil companies that dominated the world's oil production after World War II ("Italy," 1962). Mattei was supposed to dismantle the Italian Petroleum Agency (Agip) following World War II because it was considered to be a Fascist enterprise ("Italy," 1962). Instead, the National Fuel Trust or Ente Nazionale Idrocarburi (ENI) was borne through Mattai's efforts as he reorganized and enlarged the Italian Petroleum Agency ("Italy," 1962).

Little Italy breaks the stronghold. The oligopoly of the Seven Sisters was broken by ENI under Mattei's direction when he arranged an important trade agreement with the Soviet Union and negotiated with the Middle East for other oil concessions ("Italy," 1962). A member of the Italian resistance and decorated partisan fighter, Mattei was not afraid to go counter to the flow, but Mattei was a victim of his own shrewd willingness to break the rules ("Italy," 1962). In 1962, he was killed in a plane crash believed to have been caused by enemies he had made as a result of his foreign dealings ("Italy," 1962). At the time, the "Sisters" included Standard Oil of New Jersey, Standard Oil of New York, Standard Oil of California, Golf Oil, Anglo Persian Oil, Royal Dutch Shell, and Texaco (Vardy, 2007). Mattei's initiative was the harbinger of a new age in international energy.

Energy market silos. Energy markets in this decade were quite stable and existed within separate markets (Walde, 2003). The oil industry was dominated by the a few powerful international companies. Gas extraction was primarily limited to domestic and regional consumption in the major markets in the U.S., Europe, and the Soviet Union (Walde, 2003). Trade of liquefied natural gas (LNG) was just emerging (Walde, 2003). In developing countries without the infrastructure to utilize the natural gas that results from drilling for oil, natural gas was being flared, or burned (Walde, 2003). Countries tended to rely on their own resources for generating electricity. Coal was the predominant source of power generation, followed by limited hydropower plants, and an emerging nuclear power industry, the latter particularly in the U.S. And France (Walde, 2003). Very little interaction between these energy markets occurred -- they tended to function like independent silos. The markets were not integrated within individual countries, and certainly there was even less interest in integration on a global level (Walde, 2003).

Energy policies were domestically-focused. The oil industry was being deregulated and price controls were largely going away. However, the breakup of Standard Oil still held sway over the structure of the international oil industry (Walde, 2003). In most countries, gas supplies and electricity supplies were operated by companies owned by the state as monopolies or through an extensive system of exclusive licensing (Walde, 2003). International trade just wasn't occurring in the electricity industry, and only the smallest degree of cross-border trading was being carried out by the Dutch, who actually piped gas to neighboring countries (Walde, 2003). According to Walde, Germany certainly had a state-owned system, but some other countries, the governments provided protection from competition by structuring the gas and electricity industries like the corporativist models of the 1930s or like cartels (Walde, 2003). If the industry sectors adopted tri-partisan, negotiations for the setting of economic policy would take place between business interests, labor interests, and governmental interests (Slomp, 2000, p. 81).

World War I, the Great Depression, and World War II had swept aside entrepreneurship in the energy sector. The international oil industry stood apart, functioning against the background of a competitive international market, such as it was at the time. But a different orientation to the other forms of energy prevailed. As Walde summarized, "It was seen as natural and inevitable that energy…should be produced, transported, and distributed as a key industrial, social, and political service by the state or under its very close control to consumers, often with civil-service types of organization and attitudes" (Walde, 2003, p. 1).

The International Energy Sector Landscape: In the 1970s

As in the 1960s, the beginning of this decade was characterized by nationally segregated coal, electricity, and nuclear industries, and there were no international energy laws -- because there was no trade, to speak of, to regulate (Walde, 2003). The oil industry provides a single exception to this portrayal since it was shipped internationally (Walde, 2003). During the post-war period, the extraction and shipment of oil occurred far from the oil refining and marketing processes. The energy sector did not function as a standard industry within a typical market. National oil markets often experienced price controls and were otherwise tightly regulated (Walde, 2003). The market lacked essential competition as the state dictated the standards by which imports and exports could take place (Walde, 2003). Tariffs were set by the states, reflecting strong preferences for the national oil companies and expectations that these national companies would meet the states' needs for oil (Walde, 2003). Where limited international trade did occur -- electricity swaps or the importing and exporting of gas -- all terms and conditions of usage were established by the states (Walde, 2003). Investments in energy were coordinated and made by the states, especially with regard to the enormous commitments made in the 1960s to the nuclear industry (Walde, 2003).

This decade was tumultuous for the oil industry, in particular. Two major oil supply crises occurred between 1973 and 1981, along with the Arab-Israeli war in 1973 (Walde, 2003). Oil producing countries reclaimed land that held oil supplies and new state-owned oil companies were established. These new oil companies led the world in oil production and now held the winning hand. Negotiations and renegotiation in this decade were often coerced, which led to a rash of incidences of arbitration. A prominent arbitration took place between Libya and three oil companies (Mills, et al., 2005). The arbitration garnering the most attention occurred in 1971 as a result of Libya's expropriation of BPs holdings as a reaction to U.K. political conduct in the Persian Gulf regarding sovereignty over three islands (Mills, et al., 2005). As previously mentioned, this arbitration took place during a period of confrontation. Kosheri (n.d.) describes a second generation of concession arbitrations that differed from the first generation, in that, this second group took place with the full participation of the host nations. State authorities sat in front of formal and proper arbitral tribunals and were assisted by foreign counsel, the result of which were important, fair, and legally balanced cases (Kosheri, n.d.).

The International Energy Sector Landscape: In the 1980s

During this decade, the International Chamber of Commerce (ICC) arbitrators of the International Center for Settlement of Investment Disputes (ICSID) panels rendered rulings that exhibited the maturation in the field of arbitration (Sabater, 2011). AGIP v. Congo, Case No. ARB/77/1 occurred during this period, as did the Aminoil Tribunal of 1982, which was characterized by its elaborated and detailed reasoning (Sabater, 2011). A number of petroleum claims were submitted from 1983 through 1987 that were brought before the Iran / USA arbitration Tribunal (Sabater, 2011). In the Sunoil case that lasted from 1985 to 1987, arbitration was further developed (Sabater, 2011). The unanimous decision of the award for the Grace Petroleum case in 1995, rendered by the ICC, could fairly be said to fall in this category, though it is of a subsequent decade (Sabater, 2011).

In the oil price heat-up of 1981, fundamentally a re-run of the 1973 oil shortage (or perceived shortage, as Walde puts it), and during the Iraq-Iran war in the 1980s, overarching transfers of oil field control occurred. During what amounted to a half century following Mattei's time, the industrial powers of Mattei's time shifted substantially, and the New Seven Sisters were selected by the Financial Times -- not an Italian oil magnate. The Financial Times ranked the New Seven Sisters on factors such as the scale of their domestic market, level of output, resource base, corporate ambition, and industry influence. Decades after the mid-century oligopoly reigned, a handful of state-owned enterprises in the emerging markets have taken their places as the primary global oil companies (Vardy, 2007). Ordered by prominence, those enterprises consist of the following: Saudi Aramco, Gazprom of Russia, China National Petroleum Company (CNPC), National Iranian Oil Company (NIOC), Petroleos de Venezuela, S.A. (PDVSA) of Venzuela, Petrobras of Brazil, and Petronas of Malaysia (Vardy, 2007). Over the next 40 years, the International Energy Agency (IEA) has forecast that developing countries will provide 90% of the new supplies of oil (Vardy, 2007).

A wildcatter outlook kept oilmen out of the court houses, it seems, during the 1980s. Dundas (2004), recalling the good old days, maintained that the focus of the "land men" in the field and oil workers in outposts was "primarily on construction, project management, not on arguing exclusion, liability, and other clauses in the legalistic sense, but were of engineering and construction. Most of the personnel involved were non-lawyers, often engineers or Quality Surveyors (Dundas, 2004). That was the culture in Conoco's Projects Division in the early 1980s: Sort out your own problems and don't bother head office" (Dundas, 2004).

The International Energy Sector Landscape: In the 1990s

During this decade, the fourth category of arbitration types dominated. Disputes became more functional and were focused on opposing the interests of public entities (Kosheri, n.d.). These public entities were charged with providing natural resources to their countries "within the context of joint operating agreements" (Kosheri, n.d.). The joint operating agreements were established for the purpose of permitting foreign private entities to exploit the natural resources that were publically owned (Kosheri, n.d.). Arrangements about the production and supply of electricity also fell under the joint operating agreements under what was known as Build-Operate-Transfer (BOT) and other types of profit-sharing or production-sharing agreements of a similar bent (Kosheri, n.d.).

The characteristics of arbitration that addressed these new joint operating agreements had to do with disagreements about international oil companies losing control and ownership of their national reserves. For the most part, national oil companies want to retain ownership and control of their national reserves, but they also want to tap into the technical and managerial expertise, as well as the financial support, of the international oil companies (Hvozdyk & Mercer-Blackman, 2010). Also, national oil companies believe that international oil companies over-produce in their fields in order to keep shareholders satisfied in the short-term (Hvozdyk & Mercer-Blackman, 2010). There is a sense on the part of national oil companies that they do not get the full benefit of their production sharing agreements (Hvozdyk & Mercer-Blackman, 2010).

Several of the foundational arbitrations were the Wintershall case against the Qatari authorities in 1988, the Himpurna California Energy and Patuha Power cases against the Indonesian authorities in 1999, and the Karaa Bodas case which also focused on Indonesia from 1999 to 2000 (Kosheri, n.d.). These arbitration cases ushered in a new era in modern gas and oil cooperative agreements between foreign investors and host countries with BOTs, Build-Own-Operate-Transfer (BOOT) agreements, and other similar arrangements (Kosheri, n.d.).

This decade saw international oil companies dealing with lower oil prices along with fewer geographical opportunities (Hvozdyk & Mercer-Blackman, 2010). The result was that this period saw large oil companies employ cost-cutting strategies and consolidate, all the while abiding by their constitutional mandates that forbid foreign ownership of oil producing lands (Hvozdyk & Mercer-Blackman, 2010). National oil companies experienced substantive fiscal constraints during this period and sought private financing in creative ways. For instance, the INOC of the Islamic Republic of Iran established Build-Operate-Transfer projects with international oil companies (Hvozdyk & Mercer-Blackman, 2010).

Twenty national and international oil companies own nearly 80% of the proven reserves in the world (Hvozdyk & Mercer-Blackman, 2010). Sliced again, of this figure, 60% of the world's proven reserves are fully owned by national oil companies that have complete control over their oil wells; these national oil companies are in Saudi Arabia, the Islamic Republic of Iran, Iraq, and Kuwait (Hvozdyk & Mercer-Blackman, 2010).

The International Energy Sector Landscape: In the 2000s

A little oil b'dness background. In order to frame some of the reasons why commercial disputes increasingly rely on arbitration in this decade, it is illustrative to explore the fiscal and operational constraints associated with, for example, off-shore drilling for oil (Gordon, 2010). To begin, the exploration and development of oil fields in a complicated, costly, and risky business (Gordon, 2010). Typical development of an off-shore drilling project requires coordination on a massive scale. There is "a myriad of contractors, sub-contractors, and sub-sub-contractors, etcetera, expensive sub-sea installations and the construction or conversion of expensive off-shore production assets, all of which must be coordinated to achieve near simultaneous completion within a very tight window" (Gordon, 2010, p. 1). As Gordon points out, if the coordination is not complete within that narrow window, the consequences will be very expensive. Lining up an oil drilling rig takes a long lead-time, and the going rate is in excess of U.S.$400,000. A complex range of sub-sea works must be constructed and completed before the oil drilling rig can be deployed to the site. If the sub-sea construction doesn't come together according to schedule, a delay of many months can ensue -- the result is "millions of dollars in wasted rig hire and multi-million dollar losses due to deferred production" (Gordon, 2010, p.1). To make matters more dire, a Floating Production Storage and Offloading (FPSO) rig will have cost its owner between U.S.$100 million and U.S.$500 million, so the owner of the FPSO will not be at back away from insisting on receiving payment whether production is on schedule, or not (Gordon, 2010). To put it mildly, as Gordon does, "For these reasons, operators and contractors in the offshore construction industry are generally unforgiving, and this leads to disputes" ( 2010, p.1).

Energy industry sector is dispute-intensive. Dispute-intensive is the tag placed on the energy industry sector. Haigh (2007) argues that it is the most likely of all the industries in the world to be in conflict. An extraordinary high level of disputes is generated with regard to oil and gas contracts. The disputes cover a wide range of issues of interest to: Operators and non-operators; those engaged in joint ventures in the acquisition, exploration, and development of oil and gas property; those engaged in the supply and marketing of energy; and those engaged in gas and oil construction projects.

International disputes present a range of substantive challenges. Most fundamental is that of language differences, which may frequently impose the need for translators. Also at issue is that different types of legal systems are in place, even in developed countries. For instance, in Canada, as Haigh (2007) points out, the legal system is based on common-law, while in France it is based on civil-law. Interestingly, many international disputes may be arbitrated in Alberta since the Canadian legal system in Alberta is the hub of disputes across the country, which has resulted in a highly developed corpus of law (Haigh, 2007). Because arbitration outcomes are more widely recognized on an international scale than those derived from court systems with limited jurisdiction, many international disputants elect to employ arbitration (Haigh, 2007). In fact, the New York Convention ("Convention," 1958) permits the awards for oil and gas disputes that result from international arbitrations to be recognized and enforced across the globe, including in the United Arab Emirates (UAE) (Haigh, 2007). According to the United Nations Website, there were 24 signatories to this convention, and participants included, for instance, Egypt, Saudi Arabia, Kuwait, Lebanon, and Jordan, but not Syria, Iraq, or Iran (Haigh, 2007). The international arbitration process is governed by pertinent legislation that is in place where the arbitration occurs. In Alberta, Canada, for instance, the International Commercial Arbitration Act is the domestic law, but it adopts by reference the UNCITRAL Model Law (Haigh, 2007). Haigh (2007) argues that international commercial arbitration is able to circumvent many of the legal jurisdictional tangles that would arise if multi-national corporations sought to settle their disputes within the legal systems.

When Law Invalidates Arbitration. Not all countries recognize arbitration, and some, like Iran, consider arbitration agreements and awards to be invalid (Mills, et al., 2005). In Iran, at least, the national law does not allow the State entity to engage in arbitration (Mills, et al., 2005). Laws such as these are sometimes enacted long after the arbitration took place (Mills, et al., 2005). Occasionally, the complaint about arbitration not being valid occurs after the enactment of the national law declaring the limits on arbitration (Mills, et al., 2005). Such is the case of the Single Article Act of 1980, which in one instance in Iran, was enacted long after the contract containing the arbitration clause was signed (Mills, et al., 2005). When evaluated by a Tribunal, it was determined that Article 47 of the Vienna Convention on the Law of Treaties of 1969 requires that a country notify the State with which it is negotiating of any restrictions regarding arbitration before consenting -- on behalf of his country -- to the treaty (Mills, et al., 2005).

Investment Arbitration. About one percent of the arbitration cases currently fall under a category known as investment arbitration. Although the occurrence is small, the influence wielded by investment arbitration is weighty (Sabater, 2011). For instance, in a recent investment arbitration, the proceedings needed to be carried out in both English and Spanish, even though the clause specified English (Sabater, 2011). The reason given for the demand for bilingual proceedings was that this was standard practice in the International Centre for Settlement of Investment Disputes (ICSID) system (Sabater, 2011). This was received as an unhappy precedent by the claimant. There is concern that further unwarranted changes could be implemented because of pressure from investment arbitrators to make the commercial arbitration system align with that of the investment arbitration system. For example, in 2011, the ICC plans to amend its international arbitration rules. During a recent webinar, the International Chamber of Commerce (ICC) officials announced via PowerPoint slides that one of the changes interested parties could anticipate is "greater transparency in the arbitral process" (Sabater, 2011, p. 2). The notion of transparency is a term borrowed straight from the investment world, and it is patently "alien to commercial arbitration practice" (Sabater, 2011, p. 2). In investment arbitration, reference to transparency is made in order to justify various practices, such as increased willingness to permit intervention by third parties and the regular publication of awards (Sabater, 2011). Perhaps even more unsettling is the fact that investment arbitration has introduced the notion of whether arbitral case law is actually binding. Fairly, this is a discussion that frequently takes place in investment tribunals with the argument running along the lines of whether earlier decisions must be followed. This idea -- other than where it is brought up by specific nations with regard to their legislation -- is not a normative practice in commercial arbitration. That the influence of investment arbitration is gaining strength is evident from the agenda, of an ICC two-day conference held in Dubai in the fall of 2010, which specified that a topic of discussion was whether "arbitral awards create binding case law" (Sabater, 2011, p. 3). Sabater argues that a number of risks accompany "unqualified adoption of investment solutions in commercial arbitration" (2007, p. 3). The first, according to Sabater, is that adopting investment arbitration solutions could bring about the codification of commercial arbitration, and this would create a loss of flexibility in the processes. As they now stand, commercial arbitration rules are concise, cogent, and "adjustable by the parties and the tribunal to the needs of the case" (Sabater, 2011, p. 3). One particular consideration associated with this type of codification would be the granting of the right of intervention to third parties, and extension of the investment solutions that could severely hamper the flexibility that is traditional to commercial arbitration. Second, Sabater argues, is the risk that the influence of investment arbitration traditions will impose a model based on legal case law. If this becomes the rule, then arbitration decisions will be bound by prior arbitral decisions, thereby eroding the capacity of commercial arbitrators to freely decide cases (Sabater, 2011). By extension, as investment arbitrators may be bound by the case law of the jurisdiction in which the dispute originated, so too might commercial arbitrators (Sabater, 2011). Currently, commercial arbitrators are able to overlook prior arbitral decisions from prior cases unless particular circumstances of a case warrant that consideration (Sabater, 2011). Thus, codification of commercial arbitration would move such decisions from a position of judgment to one of regulation. Third, there is a risk, according to Sabater, that commercial arbitration would take longer and cost more were it to adopt the procedural techniques of investment arbitration (2011). The idea that commercial arbitration costs and procedural length would increase is derived from an examination of investment arbitration cases. Specifically, investment arbitration cases involve more language transcription and translation than commercial arbitration -- here Sabater cites Article 22 of the ICSID Arbitration Rules. (Sabater, 2011, p.3). Also, investment arbitration includes more procedural states and administrative involvement. Sabater offers the examples of the need to register an arbitration request in investment arbitration and the "almost ubiquitous bifurcation between jurisdiction and merits" (2011, p. 3). To clarify the seriousness of his concerns about the risks involved with adopting investment arbitration rules, Sabater provides the following example. Suez v. Argentina, which can be taken as a representative ICSID arbitration exhibiting the most recent investment arbitration solutions and trends, took seven years for the liability award to be issued. And for this case, the determination of the exact amount of damages was deferred -- potentially for two or three years -- to a later stage of arbitration (Sabater, 2011). Further, notes Sabater, ICSID has an extremely high rate of award annulments, which at 40%, is twice that of annulment rate reported by U.S. federal and state courts -- here Sabater cites Mills, et al., Bader, Brewer, and Williams (2005). If award annulment is not seen as sufficiently wasteful and time-consuming, Sabater notes that these annulments typically lead to claims being refilled, with further new arbitrations scheduled, and potentially additional annulment proceedings. Sabater would have the reader examine Aconquija v. Argentina in order to fully appreciate the tangle that can ensue. In Aconquija v. Argentina arbitration led to a first award, followed by an annulment, a new arbitration that led to a second award which was confirmed -- the process consumed 13 years (Sabater, 2011). Fourth, and finally, Sabater points to the substantive risk of the entire commercial arbitration process mirroring that of court litigation. That this is an authentic risk, Sabater explains, is exemplified by the intervention of third parties, often against the desires or without adequate demonstration of the consent of both parties to the arbitration (Sabater, 2011). With Biwater v. Tanzania, Sabater provides a cogent example of the impact of third party intervention in commercial arbitration. In Biwater v. Tanzania, according to Sabater, five NGOs requested to be granted access to the arbitral record, to make amicus curiae (unsolicited friend of the court) submissions, and to participate in the oral hearings (Sabater, 2011). The participation of the NGOs was opposed by the claimant who stated that "the allegations that may be made by the NGOs were 'factually and legally irrelevant' to the outcome of the arbitration" (Sabater, 2011, p.4). On the other hand, the respondent "admitted that it was 'difficult to come to a firm conclusion as to whether a submission from the [NGOs] would be useful to the Arbitral Tribunal in deciding matters before it'" (Sabater, 2011, p. 4). The tribunal did permit the amicus curiae submissions, but did not grant access to the arbitral record or permit the NGOs to participate in the oral hearings (Sabater, 2011). Regardless, from this examination, it is apparent that support for third party intervention was not forthcoming from either of the arbitrating parties (Sabater, 2011). It is problematic, from Sabater's perspective, to consider permitting unsolicited third party intervention in commercial intervention, and if this case is representative of others coming before arbitration tribunals, it ensures that arbitration will become increasingly complex (Sabater, 2011). One of the core principles of commercial arbitration, according to Sabater, is that the arbitrating "parties must have a say in deciding who participates in it, who does not, and what the arbitration is about" (2007, p. 4). In fact, the entire concept of commercial arbitration is based on the idea that the parties will not be forced into litigation within a system that they did not create.