Question:
Evaluate the function and aims of stabilisation clauses and comment on how they seek to achieve the stability that parties’ desire.
Answer:
In the oil and gas industry fiscal stability is very important. However in reality it is difficult to deliver the same as there is constant change in the circumstances. The countries almost every month introduce or announce fiscal changes such as a fiscal management that is new for an exploration basin that is new, a regime that is existing is amendment, taxes that are higher, incentive introduction for stimulating investment that is late-life, or the tax loopholes closing which are a few of them.
A fiscal stability that is long-term is not easy for the governments to maintain and one of the reasons behind it is the existence of important unknowns when there is, at the start of opening of the province designing which often has been much before even a single well has been drilled for exploration, fiscal regime which has been decided at first. The evolving of the gas and oil basins invariable is in ways that were unpredictable, for example, the riches that were there under the North Sea were not anticipated in the 1970s when the drilling had began first in the 1970s, the revolution of shale, the Gulf of Mexico (Mato, 2012).
The fiscal regimes are kept almost at all times review that is continuous, given the volatility in the gas and oil prices the dynamics of what would be the fair share of the rent of the resources are unstable fundamentally, geologically unpredictable, and competition that exists globally for know-how and capital that is scarce. While there is common aim that both investors and governments for maximizing the hydrocarbon resources’ exploitation, they want ensure that there is a resource’s fair share for the governments, whereas on the other hand, there is wish for ensuring that there is a minimum return for the investment, and a regime for tax that is stable (McIntosh & Van Wielingen, 1987). The problem with objectives like these is that the investors and government interaction is very dynamic making the fiscal stability an enduring one a proposition that is challenging in practice. These uncertainties were attempted to be neutralized by the investors by putting stabilization clauses in place; there are different forms that these come in however the main aim of these are for the fiscal terms lock in for the term of the project. The reference of the term stabilization is for the attempt made towards avoiding any of risks or conflicts that could potentially arise with respect to regime alteration in which the project has taken place (Erkan, 2010, p.101). There has been mixed results when it comes to the success of this mechanism; where the deterioration of the relationship between investors and governments to the stage where there is invocation of the legal provisions, there may be disappointment in the investors with respect to the effectiveness of the stabilization clause. However they remain for the laws that govern the activities of gas and oil and agreements of contract a mechanism, for various countries. There may be wide range of host countries whose laws are covered under the stability clause which includes that law relating to the control of the government over the decisions of production and participation of shares, the environment, labour, obligation for providing infrastructure locally and nationalization possibility. A clause that deals exclusively with royalties and taxes is fiscal stability clauses or the FSCs which is a particular type of standardization clause. FSCs cover either potentially all or some kind of fees and taxes, including royalties, income taxes, imported material duties to be paid and capital equipment, value added tax, excises and other tax related sales on imported domestic services and goods (Singh, n.d.).
The stabilization clause’s main aim is to ensure that the project is insulated from any kind of changes that is adverse to the fiscal and the legal environment. The Investor’s basic understanding with respect to the principle issues that are involved with aid him in negotiating a stabilization clause that is most appropriate or if the clause is one which cannot be negotiated then analyze the inherent risks that are there in the clause which has been prescribed by the host state.
Half of all stabilisation clauses world-wide appear in contracts relating to projects in extractive industries (such as oil, gas and minerals), another quarter in infrastructure project contracts, and a large portion of the rest in transport project contracts. Investors in those sectors should therefore be particularly aware of the relevant issues.
These stabilization clauses the inclusion of which is being made in the present international oil and gas agreements have become a feature that is common. The main interest of both the parties contracting to the agreement which is concerned with the unilateral modification or termination be wither of the parties which there bein a consent of the other party which has obtained in advance is protected (Cameron & Schwebel, 2010). The interest of the foreign investors is safeguarded who intend to invest in the country in which there are certain conditions both social and economic that are prevailing different from the legal systems that are in practice. The various concerns which are there in the mind of the investor one of them is the poor governance and political instability of the states that is hosting is the most high on the list. In general the investors for avoiding their worst fears to come true demand generally a guarantee from the host country’s government in which the investment is to invest a large amount of technical know-how and capital. The financial institutions and banks which the project are financed by also have the fear for risk that is same as much it is feared by the investor and would prefer a regime of contract that is more stable. Therefore a stabilization clause in the form of obligation that is contractual is thought to be the universal remedy for all these kinds of risks that are feared. Thus the stabilization clause’s inclusion creates a pattern that is standard and avoid the government’s fancies and whims which would otherwise jeopardizes that investor’s interest. It has been observed by a scholar that the 21st Century’s dawn, the stabilization clause has become a very important tool legally more than before for the managing the political risks which have not yet disappeared rather seems to have extended into areas which had been viewed earlier as being stable (Chekol, 2008).
The three essential features as per De Macedo (2011) of a stabilization clause that is typical are: (i) the agreement’s precedence over any of the host country’s provisions which can damage the interest of the investor; (ii) without there being a possibility of changing the contract without there being in writing a previous consent that has been obtained by the other party, (iii) the regulations and legislations that are applicable to the contract are such which have already come into force at the time when the contract was being signed.
The function that these clause seek to achieve and the philosophy that existed behind including in agreement the stabilization clauses is for rendering of the agreements and precluding it from any kind government’s adverse acts that would arise subsequently whether administrative or legislative, there is preclusion of the application to the agreements of any type administrative or legislative act which the administration or the government may issue which may have an adverse impact on the contractual regime which the parties had entered into, vide provisions that are typical in these type of clauses (Coale, 2003). The clauses’ main function is that it ties the hands of the state parties during the project’s lifetime under the development contract for internationally natural resources and energy so that there is no interference by the state party with the investor’s interest (Erkan, 2011). Behind the clause’s negotiation to be included the force that is driving came due to the growing and continuous fear of the government which is the host’s expropriation. The government’s interest along the concern for attracting larger number of investors forces the government to submit to the demands of the prospective investors (Faruque, Shifman, & Hascher, 2006). The investor is assured by the stabilization clause that there shall not be any of the host government’s action or any law that would affect the terms of the agreement of contract. It is specifically that these stabilization clause seek is that the agreement is secure from any kind of changes in the law or action of the government in the future (Gaston, 2011). There are various categories in which the stabilization clause has been divided into, (i) intangibility clause is a clause which states that there may not be any unilateral termination or modification of the contract, (ii) stricto sensu is another type of stabilization clause which states that the law of contracts which is governing shall be of the sate which is contracting at the time of execution of the contract thus prevention the changes that are subsequent’s application in the law of the contracting state, and (iii) good faith or good will is a type of stabilization clause which provides that the performance of the agreement shall at all time be in good faith or good will thus precluding the situation where there is unilateral changing or termination (Luten, n.d.).
The stabilization clause under International Law has been recognized as the state’s right for binding itself to such clause’s enforcement. In the case of Texaco vs Libyan Arab Republic (Texaco Overseas Petroleum Company and Califonia Asia Oil Company vs. The Government of Libyan Arab Republic, 1977) the tribunal has stated that there is nothing which will prevent a state in its exercise of its sovereignty which binding it in a manner that irrevocable by the concession’s provisions and granting the rights to the concessionaire under the concession agreement (Adaralegbe, 2008). The foreign investors however at the time when the terms of the stabilization clause are being accepted should ensure that the same is extremely clearly in indicating what the intent that is behind the clause for stabilization and also the stabilization clause should state express that terms of the stabilization clause will be binding irrespective whether there are any negotiations or amendments of the Foreign Investment Contracts except where there is an acceptance by both the parties in writing with respect to the changing the stabilization clause’s rules.
However despite the fact that the stabilization clause has terms that are extremely explicit the most essential question that arises is with respect to the effectiveness of such clauses. Answering of this question is not easy and it has been lingering since may years because of there being a controversy between the countries that are developed in asserting the contract’s purity based on the doctrines of ‘pacta sunt servanda’. And also the reliance that is placed by the developing countries in claiming their sovereignty over their natural resources and reliance that is place on the ‘rebus sic stantibus’ principle.
Thus concluding the essay it can be stated that there are various dynamic factors which influence the development of oil and gas agreements like political, rise in price, social and economic conditions. The investors in such cases are required to be assured that there is stability in the agreement in which change cannot be done as per the host government’s whims and fancies. It is however often happens that there is a certain unenforceability that comes into the stabilization clause due to the host country’s constitutional and legal framework (Cameron, 2006). There will therefore be no protection that the oil company is left with against a state that becomes hostile. Therefore sometimes in practicality it will not be possible for the stabilization clause to render its function.
References
Adaralegbe, B. (2008). Stabilizing fiscal regimes in long-term contracts: Recent developments from Nigeria. The Journal of World Energy Law & Business, 1(3), pp.239-246.
Cameron, P. (2006). Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil & Gas Investors. Association of International Petroleum Negotiators.
Cameron, P. and Schwebel, S. (2010). International energy investment law. Oxford: Oxford University Press.
Chekol, A. (2008). Stabilisation Clauses In Petroleum Development Agreements: Examining Their Adequacy And Efficacy’, Centre for Energy Petroleum Mineral Law and Policy. Centre for Energy Petroleum Mineral Law and Policy, University of Dundee.
Coale, M. (2003). Stabilization Clauses in International Petroleum Transaction. Denver Journal of International Law and Policy, 30(2), pp.217–37.
De Macedo, J. (2011). From Tradition to Modernity: Not Necessarily an Evolution – The Case of Stabilisation and Renegotiation Clauses. OGEL, 9(I).
Erkan, M. (2011). International energy investment law. Alphen aan den Rijn, The Netherlands: Kluwer Law International.
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Texaco Overseas Petroleum Company and Califonia Asia Oil Company vs. The Government of Libyan Arab Republic [1977]I.L.R 53, p.474.
