Legal Aspect for Oil and Gas Industries


‘Despite recent developments in the field of Litigation, parties embroiled in an oil and gas dispute still prefer to choose International Commercial Arbitration as a preferred method of resolving their disputes.’
Examine the truth behind this statement and evaluate the reasons why this may be the case in Oil and Gas Disputes.

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As rightly indicated by Espinosa (2010), international petroleum business deals often involve a national or a domestic oil company. International laws applicable to oil and gas industry acknowledge the principles of sovereign immunity. Rinaldi (2014) opines that sovereign immunity proscribes a nation as well as its state-owned bodies from undertaking legal actions in the courts of other nations absent and subject to indirect waiver of sovereign immunity.

Krueger (2010) opines that sovereignty refers to the critical right of a state to control the populace or things within its own boundaries. However, the principles of sovereignty can be necessarily extended to the regulation of the natural resources of a country. Despite modern trends in the direction of privatization, the natural resources such as the oil and gas of the world continue to remain publicly owned and administered by government bodies. As rightly put forward by Pierce (2010), sovereignty of nations are free of charge to alter their legal systems as well as principles governing natural reserves and have the authority to expropriate the possessions of foreign nationals undertaking business activities in their own nation. Assessment of such kind of expropriations by domestic nations of the possessions, property as well as contractual authorities of foreign nationals is not permitted by different set of guidelines of international law.

As correctly mentioned by Pierce (2010), the United Kingdom pursues a law comparable to the FSIA. However, the State Immunity Act of 1978 along with the European Union has assumed the European Convention on State Immunity as well as the Additional Protocol. Joffe et al. (2009) opines that several countries have statutes to facilitate the adoption of the restrictive theory as regards the sovereign immunity. Again, the United States implement the Foreign Sovereign Immunities Act (FSIA) with the intention of granting permission to courts to locate an express or else an implied waiver of sovereign immunity. In general waiver can be construed closely under the FSIA, while the foundation for the waiver are extensive wherever the national oil corporation and governmental unit is engaged in activities related to global mineral development and are parties to agreements as well as private contracts.

As correctly put forward by O’Rourke (2013), the key principles for resolution of disputes, judgments enforcement along with arbitral awards with the application of international law are considerably manipulated by the legal system followed in a particular country. Rinaldi (2014) opines that the domestic law of a particular nation or of more than one nation might possibly be taken into consideration for international petroleum development transactions in cases where the real development takes places within the borders of a particular nation but engages various multinational firms.

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As rightly put forward by Hasson (2013), the majority contracts as well as operating agreements comprise of the provisions for dispute resolution, which includes the choice of law as well as the choice of forum along with the method for resolving the identified disputes. Whilst litigation and different other forms of substitute dispute resolution (ADR) might possibly be used, together with mediation the favoured method is arbitration in worldwide petroleum transactions Davis (2012).

Mitchell et al.  (2012) suggests that the clauses for the choice of law are in general upheld through dispute resolution, although enforceability of the law depends on whether the involved parties are susceptible to face arbitration or lawsuits. However, in case of arbitration, clauses for choice of principles agreed to are given effect to resolve arguments and disputes relating to the matter of the global petroleum transaction.

Again, the clauses for forum selection permit the involved parties to choose a distinct group or court to take notice of their dispute. Nevertheless, in the context of arbitration, the choice of the cluses for selection of forum is integrated within a particular clause of arbitration and is included by orientation to the central arbitration of a particular institution that stipulates the associated legal actions. On the other hand, in cases of litigation, there is certain kind of uncertainty regarding the choice of law clauses and whether the clauses for the choice of forum will be advocated in all jurisdictions.

As rightly mentioned by Tissot and Welte (2012), the parties in the contract may be in agreement to ad hoc and institutional arbitration. Hasson (2013) suggests that ad hoc arbitration engages arbitration measures selected by the involved parties in contract, compliant with mutually acceptable rules as well as measures. Therefore, ad hoc arbitration necessitates the participating entities in the contract to assume responsibilities of controlling and planning the complete arbitration with no supervision of a conventional institution.

Hasson (2013) righty suggests that the United Nations Commission laid down the International Trade Law, with the acronym (UNCITRAL) instituted arbitration rules with no institution to administer the proceedings in order that parties could utilize the UNCITRAL regulations in their ad hoc procedures or entail the institution selected to implement the rules. However, there is no quality management and supervision by a highly regarded institution in ad hoc arbitration. Despite the fact that ad hoc arbitral awards are taken into consideration by almost all the parties and are applicable under the identical laws, international courts are expected to get involved in the arbitration (Clemençon, 2015)

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In worldwide petroleum transactions, parties prefer to resort to institutional arbitration under the public as well as the private institutions. However, the most recognized as well as esteemed institutions include the International Chamber of Commerce, the International Centre for the Settlement of International Disputes. Apart from this, the London Court of International Arbitration and the American Arbitration Association are also included(Tissot and Welte, 2012) However, prior to litigating or else arbitrating a particular dispute, various parties prefer mediation, reconciliation and mini-trial together with some other pre-arbitral or pre-litigation substitutes.

As rightly put forward by Tissot and Welte (2012), international mediation refers to a prescribed process in which the participating parties put forward their dispute to a commonly agreed-upon party or to a specific mediation or else ADR institute selected by the parties. The global organizations have expanded the common procedural laws for mediation such as the Commercial Arbitration and Mediation Centre for the Americas and many other rules (Mitchell et al., 2012). Krueger (2010) opines that conciliation can be regarded as a less official substitute to mediation and is comparatively used less for the intention and purpose of acquiring a final settlement as well as agreement between the identified parties, but is applied more frequently with the intention of enhancing the process of communication between the said parties involved in the contract. Different international associations such as the “ICC Rules of Optional Conciliation” that are structured to support the conciliation procedure and guarantee neutrality, equity as well as justice have propagated the common procedural principles.

Nonetheless, the enforcement of rules as well as arbitral awards can be considered as the concluding step in the process of dispute resolution and can time and again be more challenging than taking a legal action or arbitrating the particular dispute itself. Krueger (2010) opines that the enforcement attempts generally have need of bilateral as well as multilateral contracts among nations. Acquiring contentment upon a decision often require agreements with diverse legal systems with public strategies that can be mentioned in order to keep away from enforcement and limit the approval required.

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As rightly put forward by Ford et al.  (2014), the global laws governing the oil exploration helps to examine the environmental impact of the exploration and discovery of oil.  However, there is no international law that necessitates the enforcement of foreign rulings. Arbitral awards can be routinely enforceable in different nations under the regulations stipulated under the 1958 United Nations Convention also regarded as the New York Convention. Everett et al.  (2012) suggests that the arbitral awards cannot be implemented under the New York Convention, where domestic regulations  as well as bilateral and local contracts of a host nation offer a method for putting it into effect. For instance, different Latin American nations are not participants to the New York Convention; though, majority of the participating members have established countrywide arbitration regulations and are in some cases limited by the “Inter American Convention”.

Of late, a sequence of mishaps on offshore oil as well as gas platforms have elevated awareness of the public to a large extent regarding offshore oil as well as gas discovery and exploitation that is consequently leading to extreme environments (Espinosa, 2010). The increasing deep water explorations and drilling is influenced by the desire of the consumer nations to reduce their reliance on the Gulf States by improvement of their own sources of energy and by advancement of the technology used for further drilling of the coastlines and at larger depths (Schumacher and Morrissey, 2012.).

As rightly suggested by Everett et al. (2012), companies were undertaking drilling, exploration activities in, and around 10 metres of water after the Second World War. Thereafter, the drilling activities have now become extensive for rigs to drill at a level of 2 kilometres depth.

As correctly indicated by Schumacher and Morrissey, (2012.), approximately one-third of the oil along with a quarter of the natural gas utilized are essentially derived from underwater areas, and the rates are supposed to enhance in the future. The oil explorations activities remain certainly remain high in conventional offshore areas while oil explorations are also moving into uncovered areas, for example, the eastern Mediterranean areas and the East Africa.

It can be observed that accidents on offshore oil as well as gas stations might possibly bear transboundary impacts .The global community question the appropriateness of the present framework for the directive of offshore drilling actions. Certainly, the 1982 United Nations Convention speaking about the law of the sea enforces a common obligation to defend the marine environment (Omonbude, 2012). However, no worldwide convention distinctively sets intercontinental standards shaping the circumstances under which government entities should issue drilling approvals. Furthermore, there is presently no intercontinental contract that provides explicit laws on liability as well as on compensation due to occurrence of accidents. Based on the double regulatory gap, negotiations have lately been reopened at the global as well as regional levels, regarding the prospects and viability to strengthen the regulations and directives administering the level of safety, accountability along with compensation issues related to offshore drilling (Tissot and Welte, 2012).

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In the current situation, IDDRI launched an international project regarding regulation of offshore oil as well as gas exploration and exploitation. The common objective of the project was to be aware of alternatives to maintain the international guideline of offshore drilling activities in order to provide for the negotiations that presently happen in global as well as local arenas.

As mentioned by Clémençon (2015), The Natural Gas Act (NGA) can be regarded as the direct Federal regulation of the natural gas industry. The authorities of the intercontinental pipeline corporations supported the NGA and provided Federal Power Commission (FPC) the authority to apply “just and reasonable rates” for the sale of natural gas in intercontinental business deals.

The Natural Gas Act had a huge influence on the market of natural gas in the United States. However, the industry of natural gas has gone through remarkable change since the year 1938. In addition to this, the pipeline corporations can no longer act as marketer of gas to local distribution corporations (LDCs). The primary guidelines therefore, continue to stimulate the directives of natural gas in the United States. There is an increasing concern regarding directives administering the drivers of natural gas in the marketplace. Ford (2014) opines that the features of the oil industry involve a united global advance in order to evaluate, regulate, as well as to develop measures for ensuring safety of activities.

Joyce (2015) rightly put forward that international oil and gas corporations function in different locations under diverse regulatory management. The regulations generate certain state of affair and circumstances where corporations make the most of weak nations that lack regulation and explore recklessly by means of old technology.

In United Kingdom, there is urgent need to work in close association with the regulators in diverse offshore oil as well as gas provinces in order to ensure the achievement of highest standards of safety globally by way of exchange of effective best practice lessons. Consequently, a worldwide environmental system can authorize governments for the sake of regulation of the industry, by delivering information from international regulators to the industries (Ford, 2014). For example, the ExxonMobil’s declaration regarding integration of a marine well scheme developing potential for maintaining an underwater well control event in the U.S. Gulf of Mexico is certainly an instance of corporations implementing measures under diverse regulatory systems (O’Rourke and Connolly, 2013). According to Ford (2014), The Gulf of Mexico was put through a moratorium after the BP blowout incident during the year 2010. The oil corporations in service strived to employ pioneering technologies to steer clear of possibilities of similar blowouts in the near future.

In a nutshell, an international system therefore, can overcome the existing challenges in government directive as well as in self-regulatory principles laid down by the oil and gas industries. Furthermore, the global community shows a considerable interest in safeguarding existing resources within the boundaries of the EEZ, the coastal areas that lack capability to assess harm. However, the oil corporations cannot reasonably inhibit their operations for remote risk of losing to other organizations. In conclusion, it can be said to avert the risk of over-exploitation and make use of of old technologies in areas where guidelines are absent.

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Espinosa, D.K., 2010. Environmental Regulation of Russia’s Offshore Oil & (and) Gas Industry and Its Implications for the International Petroleum Market. Pac. Rim L. & Pol’y J., 6, p.647.

Krueger, R.B., 2010. International and national regulation of pollution from offshore oil production. San Diego L. Rev., 7, p.541.

Pierce, R.J., 2010. Reconsidering the Roles of Regulation and Competition in the Natural Gas Industry. Harvard Law Review, pp.345-385.

Joffé, G., Stevens, P., George, T., Lux, J. and Searle, C., 2009. Expropriation of oil and gas investments: Historical, legal and economic perspectives in a new age of resource nationalism. The Journal of World Energy Law & Business, 2(1), pp.3-23.

O’Rourke, D. and Connolly, S., 2013. Just oil? The distribution of environmental and social impacts of oil production and consumption. Annual Review of Environment and Resources, 28(1), pp.587-617.

Hasson, N., 2013. Deep Water Offshore Oil Exploration REgulation: The Need for a Global Environmental Regulation Regime. Washington and Lee Journal of Energy, Climate, and the Environment, 4(2), p.277.

Davis, C., 2012. The politics of “fracking”: Regulating natural gas drilling practices in Colorado and Texas. Review of Policy Research, 29(2), pp.177-191

Mitchell, J., Marcel, V. and Mitchell, B., 2012. What next for the oil and gas industry?. Chatham House.

Ford, J.A., Steen, J. and Verreynne, M.L., 2014. How environmental regulations affect innovation in the Australian oil and gas industry: going beyond the Porter Hypothesis. Journal of Cleaner Production, 84, pp.204-213.

Everett, R., Boyle, G., Peake, S. and Ramage, J., 2012. Energy systems and sustainability: power for a sustainable future. Oxford Univerity Press.

Schumacher, J. and Morrissey, J., 2012. Legal Landscape of Fracking: The Oil and Gas Industry’s Game-Changing Technique Is Its Biggest Hurdle, The.Tex. Rev. L. & Pol., 17, p.239.

Omonbude, E.J., 2012. Cross-border oil and gas pipelines and the role of the transit country: economics, challenges and solutions. Palgrave Macmillan.

Tissot, B. and Welte, D., 2012. Petroleum formation and occurrence: a new approach to oil and gas exploration. Springer Science & Business Media.

Clémençon, R., 2015. Sustainable Development, Climate Politics and EU Leadership: Who Else Can Lead the World?. European Journal of Sustainable Development, 5(1), pp.125-144.

Joyce, J.L., 2015. NORTH CAROLINA. Tex. A&M L. Rev., 2, pp.227-397.

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