MOST EFFECTIVE LEGAL MECHANISMS FOR STABILISING PETROLEUM CONTRACTS IN THE FACE OF RISK OF UNILATRAL ACTION BY THE HOST STATE

ABSTRACT:
In the face of international contractual agreements, international oil companies may express concern of the risk of host nation's possibility of 'expropriating' their investments particularly when countries involve are prone to unstable political and economic environments. These propelled the international oil companies (IOC) to demand guarantees that host government will observe the expected pacta sunt servanda and to refrain from taking unilateral action that would deny the maximum benefits to the IOC, these request leads to the proliferation of 'stabilisation clauses'. Stability clauses inhibit governments from interfering in the agreement hitherto and they give the IOCs the leeway to operate. This paper establishes that the most effective legal mechanisms which stabilises petroleum contracts are the economic balancing, freezing (stricto sensu) and hybrid clauses. By composition the economic balancing has been considered the most effective tool among all. Commitment to the provisions of stabilisation clauses especially on the part of governments are challenging. In some extreme cases the adaptation, force majeure, the hardship, the impracticability and impossibility clauses may be used in the common law, international treaties are also available for grieving parties. The researcher used arbitral rulings and provisions in stabilisation contracts as exemplum in this work.

ABREVIATIONS
HC Host Country
HG Host Government
HN Host Nation
HS Host State
IOC International Oil Company
IPA International Petroleum Agreement
NOC National Oil Company
SC Stabilization Clause
UK United Kingdom
USA United States of America

CHAPTER ONE
1.0 INTRODUCTION
On the grounds of “international energy contracts, 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”.

The issue of investment security is a major concern to international oil companies ( IOCs ) given the condition that host nations (HNs) may exercise their 'sovereign power' over contractual agreements that both parties append signatories to, given such economic conditions IOCs will be rendered both politically and economically vulnerable. Analyst of stabilization clauses (SCs) sighted that since SCs are unanimously agreed by all parties concern and because it is within both local and international law it could be said to be effective and valid. But the researcher observe that most host states (HSs) initially agree on stabilisation provision to 'bate' IOCs for investment advantages and not because the content was satisfactory. They further points out that base on the 'principle of estoppel' (voluntary decision to participate) host countries (HCs) cannot reverse the agreement because they would have made IOCs to commit some substantial amount of resources and therefore such decisions are irreversible.

It is also establishes that HCs' sovereignty is not hampered because they still have the leeway to operate as a country irrespective of the existence of 'jus cogens' in the agreement. And that since stabilization clauses thus exist means they are effective and valid. Our concern here is that existence may not be effectiveness or validity. We also maintained that 'stricto sensu' clauses do not totally take away government sovereignty but only stress on those that affect the contract. Finally, it is stress that the united nation Security Council does not support the permanent sovereignty of states over natural resources. This research will only concentrate on the practicability of what has been rectified with regards to the subject matter. even though we admitted however that there is no any strict punitive measure against those who violate stability clauses, some articles state that Obliging to stabilisation clauses means the HN have agreed to surrender its legislative independence to the IOC because of shift of balance of power .

To some extent governments actions are determined by international law, in which case states must have accepted the international economic treaties that limit their sovereignty. Governments have the sovereign freedom to regulate their international trade and policies or agreements. It is up to the treaties to define boundaries of international trade regulation for their members. First, it is evident that companies will have to comply with the local law applicable. For some countries, especially US there may be reluctance and resistance to see legislation that is often produced for reasons of short-term political interest and agitations that destroy significant business opportunities of local companies. The IOC can rely in a first-stage analysis on a professional interpretation of international law for redress. But international law cannot prevent government's machinery from enforcing and amending its domestic laws wherever it can. The law, both international and local provides some extent of protection from extraterritorial interruption . This therefore defeat the effectiveness of some stabilisation clauses

Considering these arguments the author is curios in finding out whether it is fair for governments to unilaterally temper with such agreements without a prior consent of the other party which may be invariably detrimental to their economic sustainability? And whether is it equally reasonable for IOCs to hide behind stabilization clauses and hand couth governments from exercising some legislative provisions which without may be detrimental to the vulnerable citizenry giving the current status quo?

This work is a three chapter based. Chapter one highlights on literature review or introduction and a summary of most effective legal mechanism for stabilizing petroleum contracts. Chapter two gave a detailed analysis of the various stabilization clauses; it will establish the problems that stabilization clauses face, and other legal issues apart from stabilization clauses. Final chapter three provides conclusion and recommendation

1.1 MOST EFFECTIVELEGAL MECHANISMS FOR STABLISING PETROLEUM CONTRACTS

Stabilization clauses even though are very common they may not exist in every contract, some stability clauses 'in the 1960s' were geared towards bidding to 'guard against a wave of nationalization of foreign investor's projects in oil and mining.' Lately it stretched its wings to protect the IOCs interest against governments raising taxes or demanding more after the singing of contracts contrary to the agreement, 'including the right to monetize (which may include the right to export products, and sell interest in the investment), the right to develop a petroleum discovery deemed to be commercial, and exchange regime ( to keep payments in hard currency, repatriate funds outside the host states and make payments) and the governance of the project itself,' fear of government expropriation unilaterally, upfront payments difficulties and long lead time of projects call for guarantees. The global dynamic and unpredictable nature of oil prices and cost of production becomes a worrying fact for investors; these and many factors are the reasons for today's stabilisation clauses .

The most common and effective stabilisation clauses can be categories as 'stricto sensu' and 'economic balancing'. A third category is cited as a blend of the two thus partially freezing and or partially economic balancing; this is usually called the 'hybrid' type.

CHAPTER TWO
2. 0 FREEZING CLAUSES

The applicability of stabilization clauses may be dependent on the kind of contract involved. For example oil related provisions even though may be similar but they may not be the same as that of gas contracts. In the same vein contract provisions may also change based on industry considerations.

Freezing usually describe as 'stricto sensu' is one of the major categories of stabilisation clause that is aimed at establishing its own laws outside the HCs existing laws and also against future ones, these laws are usually refer to as 'contract law'. By establishing its laws that which exist in the HC's which are most likely to hamper the contract's life span are 'freezed'. Classical examples of freezing clauses are seen in the Mozambique petroleum agreement:'“The Government shall not revoke or amend the Authorisation granted to ENH to explore for and produce Petroleum from the Contract Area without taking effective measures to ensure that such revocation or amendment does not affect the rights granted to the Contractor hereunder”' .

2.1 ECONOMIC BALANCING
Losing a countries sovereignty or legislative power to an IOC could be inimical to the vulnerable citizenry, not only do some stabilization clauses modify or temper with HC's existing laws to suit them, they also hand couth HGs from further enacting laws that may be beneficial to the country but detrimental to the IOC and the contract's existence. Consequently, a more flexible and commonly used category of stabilization clause is available for both parties; the 'economic balancing'.

Stabilization clauses are double edge swords the do not favour IOCs in all cases. there are times when the IOC will want the provisions to be changed due to some changes in economic or market conditions, likewise HCs get dissatisfied when the 'black stone' in a reserve exceed geological and geophysical estimations or better still they bawd down to IOCs request so quickly because they want them at the site, as soon as this is achieved then the HG press for 'obsolescing bargaining'. To satisfy the interest of both parties 'Economic balancing' becomes the most suitable contract provision, it 'does not maintain the status quo regarding the laws and regulations that exist when the international petroleum agreement (IPA) was made. Rather an economic equilibrium provision provides for adjustment of the IPA terms , typically the fiscal terms to assure that a change in law does not have a material adverse impact on the IOCs economic benefits under the IPA '.

A typical example could be seen in Gabonese production sharing contract, article 43.1 of a 1997 provides the parties involved in this contract agreement that the terms and conditions of the provision stands but in the case of need of change they must all come to mutual consensus. Another good example of economic balancing provision is found in Clause (47b) of the 1974 petroleum production agreement between Government of Ghana and Shell production co Ltd which is as follows:

'''It is hereby agreed that if during the term of this Agreement there should occur such changes in the financial and economic circumstances relating to the petroleum industry ,operating conditions in Ghana and marketing conditions generally as to materially affect the fundamental economic and financial basis of this Agreement, then the provisions of this Agreement may be reviewed or renegotiated with a view to make such adjustments and modifications as may be reasonable having regard to the Operator's capital employed and the risks incurred by him, always provided that no such adjustments or modifications shall be made within 5 years after the commencement of production of petroleum in commercial quantities from the production area and that they shall have no retroactive effect'''

2.2 HYBRID CLAUSES
As heavily capital intensive as petroleum contracts are so should care be taken to ensure that all participating parties reached a satisfactory deal? The 'hybrid' stabilisation provisions come as either partly 'freezing' or partly 'economic balancing' or better still the blend of both. The logic behind the hybrid category is to reach economic symmetry where the NOC restore the IOC to the same level that it was before the adjustments were made; it also seeks exemption from all or some of the laws of HCs.

2.3 PROBLEMS FACED BY STABILIZATION CLAUSES
Though some stabilisation clauses achieved their aim by skirting HC's laws, stalemating NOC to paying heavily as compensation and amongst others means stabilisation provisions still come with growing concern. That not all agreements see daylight with regards to holding governments to the terms of the contracts, because countries are sovereign state and internationally recognized to use such sovereignty to govern, to prevent them from performing some legislative duties because of contractual provisions is unenforceable. For example in the case of Parkerings vs. Lithuania the arbitrator settled that, 'ʺIt 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. 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. As a matter of fact, any businessman or investor knows that laws will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.ʺ'

Many others such as the case between Kuwait vs. Aminoil, AGIP vs. Congo, and Revere Copper vs. OPIC the arbitrators ruled on compensating the IOCs or on 'restitutio in integrum' which even saw little or no success in these cases. So the efforts of stability seem to be moving towards only the economic balancing. To further aggravate IOCs troubles governments sometimes act unilaterally at non-contractual areas which adversely affects the economic performance of international companies. The 'wave phenomenon', oil price shocks, governments rush to take decisions, and climate or environmental changes all are important concerns to the provisions of a contract.

2.4 OTHER LEGAL PROVISIONS: THE CONTRACT LAW DOCTRINE

Giving its long term investment in the industry, oil related agreements span between 20 to 40 years. It is also a common knowledge that the future comes with uncertainties and therefore there is the need to protect it against any eventualities by way of legal facets of contractual agreements. In that regard 'adaptation' or 'negotiation' and 'renegotiation' provisions, 'force majeure clauses' could be invoked taken into consideration what was agreed upon in the contract.

As part of measures to guard against unforeseeable future the adaptation or negotiations clauses may be included in the agreement, in the case of ineffectiveness of stabilization agreement against HSs attempting to preserve their sovereignty might pose some influence on the contract. The adaptation or negotiation agreement obliged any of the interesting parties to call for a modification or renegotiate the terms of the contract in case the concerning party suffers unforeseeable economic or material crises. This is considered on the grounds of fairness, equity and good faith. A typical adaptation clause is trace to the 1994 PSA of Quatar, (art 34.12 'Equilibrium of the Agreement'):

'''Whereas the financial position of the Contractor has been based, under the agreement, on the laws and regulations in force at the Effective Date, it is agreed that, if any future law, decree or regulation affects Contractor's financial position, and in particular if the customs duties exceed . . . percent during the term of the Agreement, both Parties shall enter into negotiations, in good faith, in order to reach an equitable solution that maintains the economic equilibrium of this Agreement. Failing to reach agreement on such equitable solution, the matter may be referred by either Party to arbitration pursuant to art 31''' .

the 'force majeure clause' unlike adaptation which may require modification, force majeure takes temporal excuses given the unexpected circumstances under consideration which cause hindrances resulting to unable to achieve or meet the contract terms at the time. They are usually considered as natural occurrences in which the parties in question have no capabilities to influence. Meanwhile there are other provisions such as the 'hardship, impossibility and impracticability' clauses which could terminate projects but they go deeper than the force majeure.

CHAPTER THREE
3.0 CONCLUSION

Thanks to SCs in their efforts to strike a balance between NOCs and IOCs, the paper appreciates their existence especially in developing countries where there exist very low economic and political stability. In areas where it matters stabilization provisions step in to restore confidence among all parties.

It also came to light that not all SCs restrict the HN from exercising its sovereignty of amending laws, and that economic equilibrium is widely used in recent times. The most effective stability clauses are the freezing, the economic balancing which has a brighter future of all and the third one being the hybrid clause. Apart from stability clauses other legal provision like adaptation, force majeure, impossibility, impracticability clauses are applicable in the common law and some international treaties are helpful. The fairness of governments expropriating contracts unilaterally and IOCs using stability clauses to limit HCs legislative powers depends on the status quo. It is therefore thrown onto the laps of the reader to decide who is right and who is wrong. What this paper established is that stabilization commitments especially on the part of HNs are to a larger extent minimal.

3.1 RECOMMENDATIONS
It is without doubt that any astute investor will reasonably secure some security from his host before crossing international border taking into consideration the wake of international petroleum agreements (IPA) and also the long lead time of oil and gas projects coupled with heavy capital requirements, so securing both economic and political promise from HCs is welcoming.

A number of provisions are making efforts to cushion or shelter IOCs in their endeavours internationally, Notable of such provisions are the 'stricto sensu' (freezing) clauses, the economic equilibrium clauses and the intangibility (hybrid) clauses. Indeed the author of this script cannot relegate their efforts especially when much attention is been paid to the economic balancing provisions in recent times probably because they do not take away sovereignty from the state neither do they prevent host states from enacting new laws, it also creates a flexible platform for negotiations and renegotiations, compensations are some of its hallmarks. Consider the 1974 petroleum production agreement between the government of Ghana and Shell Ghana co Ltd and the Qatar, Model exploration and production sharing agreement of 1994 ('Equilibrium of the Agreement') all placing emphasis on negotiation.

Over the years issues rising from breach of agreements by host nation have achieved little success apart from the case between Dukes vs. Peru that was officially awarded which is even tax related rather than unilateral expropriation, in most stabilisation disputes the arbitrator ruled on compensations which therefore suggest the ineffectiveness of stabilisation clauses . Also some countries such as the United Kingdom (UK), United States of America (USA), Norway, Brazil, Colombia, Indonesia, Nigeria, and Saudi Arabia have proved beyond doubt that stabilisation clauses are not necessary, because they do not usually include SCs in their agreements .

There are two lesson that we can learn from these countries, firstly, what HC need to do is to ensure political and economic stabilisation, once this is certain then their countries become centre of attraction for IOCs. Secondly geological prudence is another facet that can influence investor's decision irrespective of the existence of stabilization clauses. Middle East more precisely Saudi Arabia is one of such countries that investor have confidence because of her high percentage of not hitting a dry whole when exploration and production activities are carried out.

There exist other alternatives for concerning parties especially apart from the stricto sensu clauses. The adaptation clauses, force majeure clauses, the hardship, the impracticability and impossibility clauses may be used in the common law, and even international treaties are available for grieving parties.

REFERENCE

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Mahama Hudu
Executive Director, Center for Energy Research –Ghana.
Cell 0506734457