Book Part 9781786434654 11

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THE OIL AND GAS INDUSTRY IS PRONE TO

DISPUTES
Elina Aleynikova, Tuuli Timonen and Eduardo G. Pereira
I. PROLIFERATION OF ENERGY DISPUTES 1.01 III. COMPLEX AND HIGH-VALUE OPERATIONS 1.27
II. MULTIFACETED OIL AND GAS INDUSTRY 1.14 (a) Upstream projects: High risk, big
(a) Strong state presence 1.14 investments and strong governmental
(b) Role of states in oil and gas operations 1.16 involvement1.29
(c) Heterogeneity of countries with oil and (b) Midstream and downstream projects:
gas resources 1.18 Complex structure, long terms and
(d) Strong presence of foreign investors 1.25 numerous commercial parties 1.44
I. PROLIFERATION OF ENERGY DISPUTES
1.01 The energy sector historically generates the largest number of cases in a variety of forums. In
2020, energy disputes accounted for about 18 per cent of the ICC caseload.1 According to the
Caseload Statistic 2021 of the International Centre for Settlement of Investment Disputes
(ICSID), disputes in the oil, gas and mining industry represented 25 per cent of all cases regis-
tered under the ICSID Convention and 29 per cent of new ICSID cases registered in FY2021.2
By way of another example, out of the 49 cases that were initiated at the Permanent Court of
Arbitration (PCA) in 2019, 20 per cent relate to oil and gas industry.3 Projects in the oil and
gas sector are particularly prone to disputes due to several reasons.
1 International Chamber of Commerce, ‘ICC Dispute Resolution Statistics 2020’ (2021) DRS 901 ENG, 1, 17 https://
iccwbo.org/publication/icc-dispute-resolution-statistics/ accessed 26 August 2021.
2 International Centre for Settlement of Investment Disputes, ‘The ICSID Caseload Statistics, issue 2021-2, ICSID
1, 26 https://icsid.worldbank.org/sites/default/files/Caseload%20Statistics%20Charts/The%20ICSID%20Caseload
%20Statistics%202021-2%20Edition%20ENG.pdf accessed 26 August 2021.
3 Permanent Court of Arbitration, ‘Annual Report 2019’ (2019) https://docs.pca-cpa.org/2020/03/7726c41e-online
-pca-annual-report-2019-final.pdf accessed 29 June 2021. Similar statistics were presented in Permanent Court of
Arbitration, ‘Annual Report’ - 2018 https://pca-cpa.org/en/about/annual-reports/accessed 29 June 2021.
Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Downloaded from https://www.elgaronline.com/ at 03/25/2024 12:17:49AM
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THE OIL AND GAS INDUSTRY IS PRONE TO DISPUTES
First, such projects are typically large-scale, long-term, and capital-intensive undertakings 1.02
with an average life span ranging between ten and 40 years.4 A long-term nature of oil and gas
projects, coupled with the significant upfront investments that they might require, increases the
industry’s exposure to a wide range of risks, including geological, technical, political, environ-
mental, operational, legal and economic risks.5
Second, states play a meaningful role in the sector, both as the owners of natural resources (in 1.03
most cases) and as regulators. Although petroleum products drive the development of global
economies, resources are fairly sparse, and the owners of natural resources are often in a posi-
tion to dictate terms of petroleum agreements, which may lead to a misbalance of interests and
hence incentivise disputes.
Further, complex terms and multilayered structure of oil and gas transactions increase the 1.04
possibility of disagreements between players at all levels.
Finally, international oil and gas operations tend to involve multiple parties, often of different 1.05
jurisdictions. This wide international exposure may cause an immense level of uncertainty, par-
ticularly with regard to the development of extensive infrastructure, such as, for instance, Shell’s
Australian Prelude FLNG operation,6 LNG operations in Mozambique,7 or cross-border
pipelines in Europe and North America.8
Several remarkable oil and gas disputes are pending at the present time. Probably one of the 1.06
most important ones is Nord Stream 2 AG v European Union, arising out of the measures under
the EU Gas Directive amendment of 2019, which prohibits gas supplier companies from being
owners of gas pipelines, and stipulates the compulsory diversification of gas supply sources.9
The claimant in this case alleges that the EU’s actions put the Nord Stream 2 gas pipeline
project at a disadvantage, by ‘treating it as ineligible for derogation from the amended Directive
that existing pipelines benefit from’.10 According to the claimant, the EU violated its obliga-
tions under the Energy Charter Treaty (ECT) such as the standards of fair and equitable treat-
ment, the minimum standard of treatment, and the full protection and security. The claimant
also invokes denial of justice, expropriation and discriminatory measures.11
4 Tim Martin, ‘International Dispute Resolution’ (IPAA 2011) www.ipaa.org/wp-content/uploads/2016/12/IPAA_D

isputeResolution2011.pdf accessed 29 June 2021.
5 See e.g., Simon Vorburger and Angelina M Petti, ‘Chapter 11: Arbitrating Energy Disputes’, in Manuel Arroyo
(ed), Arbitration in Switzerland: The Practitioner’s Guide (2nd edn, Kluwer Law International 2018) 1277.
6 Shell, ‘Prelude FLNG,’ (Shell, 2018) https://www.shell.com.au/about-us/projects-and-locations/prelude-flng.html
accessed 29 June 2021.
7 Total Energies, ‘Mozambique LNG’ (Shell, 2018) http://www.mzlng.com/The-Project/accessed 29 June 2021, Coral
South: the gas field off the coast of Mozambique (ENI, 2020) https://www.eni.com/en-IT/operations/mozambique
-coral-south.html accessed 26 July 2021.
8 See Sergei Vinogradov and Gokce Mete, ‘Cross-Border Oil and Gas Pipelines in International Law’ (2013) 56 German
Year Book of International Law 101–102.
9 Directive (EU) 2019/692 of The European Parliament and of the Council of 17 April 2019 amending Directive
2009/73/EC concerning common rules for the internal market in natural gas [2019] OJ L117/1.
10 Nord Stream 2 AG Case (Nord Stream 2 AG v. European Union) (2020) Permanent Arbitration Court 2020-07.
11 Letter from Nord Stream 2 to the European Commission - Request for a clarification on the application of derogation
regime to the Nord Stream 2 pipeline (12 April 2019).

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GOVERNING LAW AND DISPUTE RESOLUTION IN THE OIL AND GAS INDUSTRY
1.07 Other complex disputes related to pipeline projects arose in Canada and the USA. There are
a number of issues dealing with federalism, environmental protections, indigenous rights and
other disputes which halted pipeline infrastructure projects in North America.12
1.08 In another pending case, Big Sky Energy Corporation v Republic of Kazakhstan, the US corpora-
tion Big Sky Energy commenced ICSID arbitration proceedings against Kazakhstan alleging
indirect expropriation, violation of the fair and equitable treatment, and most-favoured nation
standards.13 At issue is the invalidation by a Kazakh court of a transfer of oil rights from
KoZhaN LLP, a Kazakh company, to a Canadian special purpose vehicle Big Sky Energy
Kazakhstan LLP, which is wholly owned by the investor.14
1.09 A number of oil and gas cases are connected to the nationalisation of an investor’s property
and shares by the host state. A current example is Akfel Commodities Pte. Ltd. and I-Systems
Global B.V. v Republic of Turkey, which was registered by ICSID in September 2020.15 In the
aftermath of a 2016 failed political coup, Turkey adopted a decree which allowed the host state
to take control over private companies suspected of financing an alleged terrorist organisation,
FETO. According to the claimant, following adoption of this decree its investment was de
facto nationalised by the Turkish government and forcibly placed under the control of Turkey’s
Savings Deposit Insurance Fund.
1.10 Barrick (PD) Australia Pty Ltd v Papua New Guinea16 is another case in which the claimant
deemed the host state’s actions to be ‘tantamount to nationalization without due process’, in
violation of the Papua New Guinea-Australia BIT and international law governing foreign
investments 17 Barrick (PD) is seeking to recover damages that allegedly result from the wrong-
ful refusal of the host state to extend the lease for the Porgera Gold Mine, following advice
from its Mining Advisory Committee, which concluded there were ‘environmental and social
problems’ – amid accusations by landowners and residents that the mine is polluting the local
water supply.18
1.11 In 2016, NJSC Naftogaz of Ukraine and six of its subsidiaries commenced an arbitration
against the Russian Federation under the Russia-Ukraine BIT (Naftogaz and others v Russia).19
The claimants were aiming to recover damages arising from the Russian Federation’s alleged
12 See: Keystone XL Pipeline Halted After Biden Blocks Permit (CNN, 2021) https://www.bbc.com/news/world-us
-canada-57422456 accessed 26 July 2021, Hummingbirds Halt Work on Canada’s Biggest Oil Pipeline Project
(Bloomberg, 2021) https://www.bloomberg.com/news/articles/2021-04-26/nesting-hummingbirds-halt-work-on-trans
-mountain-pipe-expansion accessed 26 July 2021, Oil Pipelines Disputes Raise Tensions https://www.greatlakesnow
.org/2021/04/ap-oil-pipeline-disputes-raise-tensions-us-canada/ accessed 26 July 2021.
13 Big Sky Energy Corporation v. Republic of Kazakhstan, ICSID Case No. ARB/17/22.
14 Although a decision has yet to be handed down in this arbitration, details on the factual context have surfaced in related
US proceedings (see Republic of Kaz. v Lawler, 2019 U.S. Dist. LEXIS 185954, 2019 WL 5558997 (D. Ariz. 2019)).
15 Akfel Commodities Pte. Ltd. and I-Systems Global BV v Republic of Turkey, ICSID Case No. ARB/20/36.
16 Barrick (PD) Australia Pty Ltd v Papua New Guinea, ICSID Case No. ARB/20/27.
17 Barrick, ‘2020 Quarterly Report Q1’ (2020) 1, 3 https://barrick.q4cdn.com/788666289/files/press-release/2020/Barrick
-Makes-Solid-Start-to-Year.pdf accessed 21 June 2021.
18 Global Arbitration Review, ‘Papua New Guinea mine to reopen after ICSID conciliation’ https:// glo
balarbitra
tionreview.com/papua-new-guinea-mine-reopen-after-icsid-conciliation accessed 29 June 2021.
19 Naftogaz and others v Russia, PCA Case No. 2017-16.

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unlawful seizure of the group’s assets in Crimea which included special permits for offshore
exploration or for subsoil use in the Black Sea, gas pipelines, gas stocks and supply vessels and
equipment.20 In March 2019, the UN Commission on International Trade Law (UNCITRAL)
tribunal upheld jurisdiction over the case and concluded that the Russian Federation was liable
for the expropriation of the claimants’ assets in Crimea.21 At that time, Naftogaz estimated the
value of its claim at USD 5 billion (without interest).22 The hearing on quantum was held in
The Hague in May 2020, and the final award is expected in 2021.23
In December 2015, Tatarstan’s Ministry of Land and Property filed a USD 300 million 1.12
claim against Ukraine under the UNCITRAL Arbitration Rules based on Article 9 of the
Russia-Ukraine BIT (Tatarstan v Ukraine).24 Tatarstan, one of the 22 semi-autonomous
‘federal subject’ republics within Russia, alleged that Ukraine expropriated its 28.8 per cent
shareholding in Ukrtatnafta, the joint venture behind Ukraine’s largest oil refinery in the city
of Kremenchuk. In an unanimous award issued in December 2019, the tribunal ruled that the
claimant was a protected investor under the Ukraine-Russia BIT, and rejected Ukraine’s objec-
tions that the dispute should be resolved under the BIT’s state-to-state arbitration clause.25
Ukraine purportedly applied to the Paris Court of Appeal to set aside the award on jurisdiction
in January 2020.26
Finally, in Seamec Ltd v Oil India Ltd,27 the dispute arose out of a contract for drilling oil wells 1.13
in the State of Assam. The claimant demanded compensation under Clause 23 of the contract
which stated that Oil India Ltd ‘would be required to reimburse any additional financial costs
20 ‘Permanent Court of Arbitration in The Hague finds Russia expropriated Naftogaz assets in Crimea in viola-
tion of investment treaty’ (Naftogaz Group, 1 March 2019) https://www.naftogaz.com/www/3/nakweben.nsf/0/90
E8ACADAC9BA783C22583B0005C7E88?OpenDocument&year=2019&month=03&nt=News& accessed 29 June
2021.
21 Damien Charlotin, ‘In new BIT ruling, Russia found liable for expropriation of Naftogaz assets’ (IAReporter, 1 March
2019) https://www.iareporter.com/articles/in-new-bit-ruling-russia-found-liable-for-expropriation-of-naftogaz-assets/
accessed 29 June 2021.
22 ‘Permanent Court of Arbitration in The Hague finds Russia expropriated Naftogaz assets in Crimea in viola-
tion of investment treaty’ (Naftogaz Group, 1 March 2019) https://www.naftogaz.com/www/3/nakweben.nsf/0/90
E8ACADAC9BA783C22583B0005C7E88?OpenDocument&y ear=2019&month=03&nt=News& accessed 29 June
2021.
23 Damien Charlotin, Lisa Bohmer and Luke Eric Peterson, ‘Russia round-up: an update on 19 treaty-based arbitrations
against the state’ (IAReporter, 17 May 2020) https://www.iareporter.com/articles/russia-round-up-an-update-on-19
-treaty-based-arbitrations-against-the-state/accessed 29 June 2021.
24 Ministry of Land and Property of the Republic of Tatarstan v Ukraine, available at: Investment Dispute Settlement
Navigator PCA Case No. 2016-15; Yelena Burova, ‘Russian Investors Turning More Frequently to Investment Arbitration’
(CIS Arbitration 22 November 2016) http://www.cisarbitration.com/2016/11/22/russian-investors-turning-more
-frequently-to-investment-arbitration/ accessed 29 June 2021.
25 Sebastian Perry, ‘Second BIT Claim over Ukrainian Refiney Gets Green Light’ (GAR, 17 February 2020) https://glo
balarbitrationreview.com/article/1214624/second-bit-claim-over-ukrainian-refinery-gets-green-light accessed 29 June
2021.
26 Ibid.
27 Supreme Court of India, Seamec Ltd. v Oil India Ltd, Civil Appeal No. 900 of 2012. See also Shebani Bhargava and
Jai Sanyal, ‘SEAMEC v Oil India – Was the Award Really Perverse?’ (IRCCL, 10 June 2020), https://www.irccl.in/single
-post/2020/06/11/seamec-v-oil-india-was-the-award-really-perverse accessed 29 June 2021; Aishwarya Sat, ‘India:
Seamec Ltd. v. Oil India Ltd: A Case For Price Variation Clause Over Change In Law Clause’ (Mondaq, 9 September
2020) https://www.mondaq.com/india/government-contracts-procurement-ppp/981762 accessed 29 June 2021.

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that SEAMEC would have to incur owing to a change in law’, following an increase in the
price of high-speed diesel that was established through a circular issued by the state. The
tribunal found in SEAMEC’s favour, stating that ‘while an increase in HSD price […] is not
“law” in the literal sense, but has the “force of law” and thus falls within the ambit of Clause
23.’ In 2020, the Supreme Court of India set aside the arbitral award, stating that the tribunal’s
interpretation is ‘erroneous and is against the public policy of India’.
II. MULTIFACETED OIL AND GAS INDUSTRY
(a) Strong state presence
1.14 Large multinational oil and gas companies historically dominated the development of oil and
gas resources worldwide during the nineteenth and early twentieth centuries.28 However, there
has been a major trend towards the nationalisation of oil and gas resources in the last decades,
accompanied by the creation of national oil companies in most oil-producing countries.29
A large number of countries with significant oil and gas reserves (including, but not limited
to, Argentina, Angola, Algeria, Bolivia, Brazil, China, Egypt, Ghana, Indonesia, Iran, Iraq,
Malaysia, Mexico, Mozambique, Nigeria, Norway, Russia, Saudi Arabia, the United Kingdom
and Venezuela, among others) have seen a spectrum of attempts by their governments through-
out the past decades to either fully nationalise, or at least increase sovereign power over their
oil and gas resources (even though some of them shifted back and forward with opening their
market for new investments and less governmental control like Argentina, Brazil and Mexico
over the recent years).30
1.15 Such a trend followed the UN General Assembly’s recognition of state sovereignty over oil
and gas resources31 but states themselves often lack the technology, funding, and/or support
to develop these resources themselves.32 Therefore, oil and gas resource development becomes
largely a corporate and private enterprise, but is subject to much state control, intervention and
regulation.33
28 Enerst E Smith and John S Dzienkowski, ‘A Fifty-Year Perspective on World Petroleum Arrangements’ (2005) 3(1)
OGEL 13, 13–14.
29 E Smith, J Dzienkowski, O Anderson, J Lowe, B Kramer, and J Weaver, International Petroleum Transactions, (2nd edn,
Rocky Mountain Mineral Law Foundation 2000) 28–29.
30 Elisabeth Eljuri, ‘Resource Nationalism, Expropriation and Creeping Expropriation Affecting the Extractives Sector’
RMMLF-INST (2013) 4–18. Venezuela, for instance, operates upon a policy designed to ‘recover “full petroleum sov-
ereignty”’. J. Cárdenas García, ‘Rebalancing Oil Contracts in Venezuela’ (2011) 9(6) OGEL 235, 239 (citing in footnote
17. Hildegard Rondón De Sansó, El Régimen Juridico De Los Hidrocarburos: El Impacto Del Petrlóeo En Venezuela (2nd
edn, Caracas Epsilon Libros 2009) 411–26.
31 UNGA Res 1803 (XVII) (14 December 1962) 17th session ‘Permanent sovereignty over natural resources’.
32 Two notable exceptions to the general rule of sovereign ownership over natural resources are the US and Canada, where
the doctrine ‘cujus est solum, ejus est usque ad coelum ad infernos’ (whoever’s is the soil, it is theirs all the way to Heaven and
all the way to Hell) grants mineral ownership to the landowners under whose soil the mineral or gas lies. John S Lowe,
Oil and Gas Law in a Nutshell (7th edn, West Academic 2019), 13.
33 UNGA Res3201 (S-VI) (1974) 6th Special Session ‘Declaration on the Establishment of a New International Economic
Order’; UNGA Res 1803 (XVII) (14 December 1962) 17th session ‘Permanent sovereignty over natural resources’ UN
Doc. A/5217/1962. See also Patricia Park, International Law for Energy and the Environment (Taylor and Francis 2013).

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(b) Role of states in oil and gas operations34
States vary, of course, in their exercise of sovereign power over natural resources and have devel- 1.16
oped different legal regimes by which they govern the ownership and use of natural resources.
As a general rule, the oil and gas industry is highly regulated, imposing a myriad of environ-
mental, legal, and market requirements on companies operating in the industry. In order to
preserve the sustainability of oil and gas operations and their economies, states frequently insist
on including specific provisions in their investment protection instruments, which impose
various measures to protect public interests (e.g., health, prevention of corruption, etc.).35
Regulations and controls on the oil and gas industry generally operate to ensure that private 1.17
companies do not disproportionately profit from a publicly-owned resource, so that the resource
is sustainably developed, and that exportation and importation of resources do not negatively
affect the state economy.36 States may fulfil these goals by a variety of different means such as
controlling the licensing process, asserting controls on trade, import or export, or levying fees
on companies developing the resource or through their own national oil company or through
local content requirements.37
(c) Heterogeneity of countries with oil and gas resources
The oil and gas producing states have divergent geographies, legal systems, infrastructures, and, 1.18
ultimately, disparate risks associated with investment. Moreover, countries may seek to fulfil
different policy goals through the development of their hydrocarbon resources. A host country
may strive to develop its oil and gas resources for a number of reasons; however, preeminent
among these concerns are normally the country’s goals for economic growth. For instance,
Ernest Smith et al notes:
The reasons a country seeks to develop its natural resources depend on whether it is a net importer
or a new exporter of the mineral in question. If it must import petroleum to meet its energy needs,
domestic production in the host country can reduce trade deficits. For developing countries with suf-
ficient resources to permit their export, development means an additional source of income from the
world market. In either case, the development of natural resources is also a means for securing a tax
base for the government, employment and income for individual workers, and capital for economic
expansion.38
Countries desiring the economic growth which accompanies natural resource development may 1.19
often share the general characteristics of a weak or downturned economy due to the so-called
‘resource curse’.39 However, the legal regimes under which these countries control or develop
34 Below in this subsection we address the issues of host states’ protectionism over their resources through the mandatory
application of their laws and certain states’ reluctance to give parties free rein over the resolution of petroleum disputes.
35 T W Wälde, ‘The Current Status Of International Petroleum Investment: Regulating, Licensing, Taxing and
Contracting’ (July 1995) 1 OGEL 1–2 https://www.ogel.org/article.asp?key=818 accessed 29 June 2021.
36 Thorvaldur Gylfason, ‘Natural Resource Endowment: A Mixed Blessing?’ (2011) CESifo Working Paper No. 3353
https://www.cesifo.org/DocDL/cesifo1_wp3353.pdf accessed 29 June 2021.
37 See ibid.
38 Smith, et al. (n 29), 40.
39 Ibid.

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their resources are diverse as to how they manage their resources. Such legal regimes may
influence the amount or type of control a sovereign exerts over its hydrocarbon resources, in
tandem with a strategy to fulfil also those goals for economic or social development which are
delineated above.
1.20 Naturally, the kind of governance which a state asserts over its hydrocarbon resources hinges
upon the state’s designation of those resources as public or private. As a general rule, most states
clearly attribute ownership of the valuable hydrocarbon within their borders to the sovereign,
with the notable exceptions of the US and Canada.40 As noted above, a historical trend towards
nationalisation and expropriation of privately-held hydrocarbon resources has spurred a change
in the legal landscape in which developers should expect to operate. Today, development
in many countries is most likely to entail negotiations with both the sovereign owner of the
resource, as well as the investor. With regard to the involvement of the surface owner, parties to
an international oil and gas transaction should at least expect to consult with or accommodate
the owners of the surface area under which the hydrocarbon resources are located and receive
the necessary permissions.41 As an example, oil and gas companies in Brazil must pay a 0.5/1
per cent royalty to the landowner/surface owner, in addition to governmental payments.42
1.21 While acknowledging that states have asserted increasing ownership over the hydrocarbon
resources within their borders, the level of control which states actually exercise over their oil
and gas resources depends on their variable overriding legal regimes. International oil and gas
transactions demand the ability for parties to navigate through these regimes, with an under-
standing of not only of the applicable substantive law, but also of the procedural application
of that law. At a general level, states’ legal systems may be based upon common law, civil law,
customary law or Islamic law principles, which each apply different approaches to the mineral
ownership for the purposes of resource development.43 For instance, countries operating
under common law often depend upon a unified judiciary to implement common standards of
ownership based on prior court precedent. Conversely, states operating under civil law leave to
their legislatures the task of creating laws based on a set of commonly understood principles,
with the courts left to mostly interpret and apply that law. Experienced practitioners are likely
already familiar with the common law and civil law systems but should ideally be equipped with
a knowledge of all legal regimes (including customary and Islamic law).44
1.22 The legal regime and history particular to a specific state may affect the stability of their legal
resource, and thus, the investments of developers.45 Empirically speaking, the level of control
or actual development rules which states impose on the development of their oil and gas
resources depend upon states’ experience of political turmoil. Contemporaneously, countries
with significant oil and gas resources tend to experience higher levels of socioeconomic and
40 John S Lowe, Oil and Gas Law in a Nutshell (7th edn, West Academic 2019), 13.
41 Smith et al, (n 29), 188.
42 Park (n 33), 78.
43 Smith et al (n 29), 188.
44 Ibid.
45 Kwaku Ohene-Asare, Charles Turkson and Anthony Afful-Dadzie, ‘Multinational Operation, Ownership and
Efficiency Differences in the International Oil Industry’ (2017) 68 Energy Economics 303.

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political instability.46 In part, this correlation is due to the volatility of oil supply and price,
which affects entire economies of countries which rely heavily on oil and gas resources.47 This
instability, in turn, may result in more frequent and dramatic changes in how these countries
regulate their oil and gas resources.48 For instance, Hugo Chávez’s controversial tenure as
president of Venezuela, once one of the world’s largest exporter of oil, resulted in an overhaul
of the country’s oil and gas policies, economic downturns, and some periods of strike within
the oil and gas industry.49 Under Chávez’s regime, a series of oil and gas expropriation policies
ultimately conveyed control over Venezuela’s oil and gas upstream and downstream industries
to the state, resulting in losses to private investors.50
The various levels of state involvement in the operation of their oil and gas industries 1.23
has historically depended not only on a balance of domestic factors, but also on foreign
market developments. For instance, in 1938, following a period of monopoly over oil
resources by large multinational companies, Mexico established its own state-owned petroleum
company, Petróleos Mexicanos, with exclusive authority to develop Mexico’s oil resources.51
In 2013, Mexico restructured its oil regime to allow for contracts with private operators,
although Petróleos Mexicanos retains its existing operations and undiscovered prospects.52
Comparatively, the US depends all but exclusively upon private companies to develop even its
state-owned mineral resources, as well as resources held by private mineral estate owners.
In summary, host countries operate under varying regimes of resource ownership and resource 1.24
control, flavoured by the country’s legal system and its attention to domestic and foreign
markets. International oil and gas transactions must necessarily develop an understanding of
these regimes and economies in order to navigate transboundary transactions fluidly, with an
appreciation of the risk that may be involved within such a deal.
46 See Gylfason (n 36).

47 Ohene-Asare, Turkson and Afful-Dadzie (n 45).
48 Luisa R Blanco et al., ‘Oil Curse and Institutional Changes: Which Institutions are Most Vulnerable to the Curse and
Under What Circumstances?’ (2015) 33(2) Contemporary Economic Policy 229–49.
49 Stacy Rentner, ‘Venezuela: How A Hydrocarbons Law Crippled an Oil Giant’ (2004) 27 Hastings International and
Comparative Law Review 352. Ibid., 358–59, one of Chávez’s first actions upon election was to amend the Constitution
as related to oil and gas:
The most important provisions of the Constitution of 1999 relating to the petroleum industry are Articles 12, 302 and
303. Article 12 reserves ownership of the country’s hydrocarbons still in reservoir (unextracted petroleum products) to
the state. This is not abnormal for petroleum-exporting countries to do, even those that do not exercise state ownership
over the oil industry. Article 302 reserves to the state the right to manage virtually every aspect of the petroleum indus-
try through the passage of appropriate legislation; Article 303 decrees that ownership of all of the shares of PdVSA will
remain property of the state, but excludes shares in affiliates of PdVSA.
50 Luis E Cuervo, ‘The Uncertain Fate of Venezuela's Black Pearl: The Petrostate and Its Ambiguous Oil and Gas
Legislation’ (2010) 32(3) Houston Journal of International Law 637, 667.
51 Ernest E Smith and John S Dzienkowski, ‘A Fifty-Year Perspective on World Petroleum Arrangements’, (1989) 24 Tex.
Int’l L.J. 13, 14, 29–31.
52 Owen L Anderson and J. Jay Park, ‘South of the Border, Down Mexico Way: The Past, Present, and Future of
Petroleum Development in Mexico’, (2016) Part I, 56 Nat. Resources J. 257, 260.

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(d) Strong presence of foreign investors
1.25 Oil and gas projects are expensive and usually require a significant amount of investment,
expertise and highly developed technology early on in the project. Particularly in the countries
with underdeveloped economies, host nations may depend upon foreign investors to develop
the technology, put the relevant infrastructure in place, and set forth the capital necessary to
carry out a major project.53
1.26 Although the aim of a foreign investment is to export the profits generated from the devel-
opment and extraction of natural resources, the countries with underdeveloped economies
may nonetheless turn to foreign investment as a necessary means to develop their own natural
resources and attract the required technology and personnel to do so.54 One common method
of supporting foreign investment in oil and gas operations is through bilateral investment
treaties, where countries agree to provide a heightened level of protection to foreign investors.55
As discussed below, these treaties can provide some safeguards against the risks associated with
foreign investment.
III. COMPLEX AND HIGH-VALUE OPERATIONS
1.27 The oil and gas sector encompasses a wide range of commercial activities from the exploration
of reserves deep in the ground to the sale of the final product to the end customer. The ECT,
the most renowned international treaty in the field, defines the scope of activities in the energy
sector very broadly to include those ‘concerning the exploration, extraction, refining, produc-
tion, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy
Materials and Products’.56
1.28 The oil and gas industry is often empirically presented in form of a ‘value chain’, i.e., a set of
activities performed sequentially in order to deliver a final product, and includes upstream,
midstream and downstream segments.57 Upstream projects are commonly referred to as the
exploration and production projects.58 They involve the search for and recovery of crude oil,
an unrefined petroleum product, and/or natural gas, as well as a number of auxiliary services.59
The midstream sector involves the processing, transportation and storage of hydrocarbons as
they move from a field to the market. Finally, downstream projects entail oil refining and gas
processing, which turn the extracted hydrocarbons into usable products, and distribution of the
53 E Smith, J Dzienkowski, O Anderson, J Lowe, B Kramer, and J Weaver, International Petroleum Transactions, (3rd edn,
Rock Mountain Mineral Law Foundation 2010) 54–55.
54 Ibid.
55 Ibid; Park (n 33), 67.
56 Energy Charter Treaty (1994) art 1(5).
57 James M Gaitis and Thomas W Wälde, ‘Chapter 42: International Arbitration in Oil, Gas and Energy’ in Lawrence W
Newman (ed) The Leading Arbitrator’s Guide to International Arbitration (3rd edn, Juris 2014) 1030.
58 James Chen, ‘Exploration and Production (E&P)’ (Investopedia, 21 April 2019) www.investopedia.com/terms/e/
exploration-production-company.asp accessed 29 June 2021.
59 Silvana Tordo, Brandon S Tracy, and Noora Arfaa, ‘National Oil Companies and Value Creation’ (2011) World Bank
Working Paper No 218, 1–2.
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processed products to wholesale, retail, or direct industrial clients.60 The line separating the
midstream and downstream activities is easily blurred as they are interconnected and are often
regulated by related or similar contractual instruments.61 As discussed below, the choice of law
and dispute resolution provisions in the underlying contracts may be affected by the specifics of
each segment of the value chain.
(a) Upstream projects: High risk, big investments and strong governmental involvement
Upstream projects constitute the largest segment of the oil and gas industry. The states’ role is 1.29
prominent in the upstream activities as sovereigns hold rights over the natural resources in their
territory.62 At the same time, these sovereign rights are limited by the states’ obligation under
the public international law to observe in good faith foreign investment agreements and to pay
appropriate compensation to foreign investors in the event of any breach.63
Oil and gas exploration projects usually begin when a host state and a petroleum company 1.30
reach an agreement concerning exploration or development of the field or other area. Different
types of granting instruments are available in the oil and gas industry, and they are often
found in combined and/or hybrid forms.64 Some of them might be contract-based, others
regulatory-based or a combination of the two.65 The contract-based instruments generally
provide further assurances to the investors as compared to regulatory-based instruments (such
as, e.g., a license for the exploration and use of the natural resources).
60 Ibid.
61 For example, gas sale contracts concluded between the supplier and the buyer directly may include transportation of gas
to the delivery point through the supplier’s own pipelines, or large construction projects may involve building of both
midstream and downstream infrastructure.
62 This principle is embodied in several international instruments and has been recognised in a series of international adju-
dicating bodies’ decisions. For instance, according to the UN General Assembly Resolution on Permanent Sovereignty
over Natural Resources: ‘[t]he right of peoples and nations to permanent sovereignty over their natural wealth and
resources must be exercised in the interest of their national development’. UNGA Resolution 1803 (XVII) (14 December
1962) para 1. The principle of states’ sovereignty over natural resources has been recognised as constituting customary
international law by the International Court of Justice in Armed Activities on the Territory of the Congo (Democratic Republic
of the Congo v Uganda) ICJ Judgment of 19 December 2005.
63 GA Resolution 1803 (XVII) (14 December 1962) 4, 8.
64 Eduardo Guedes Pereira, Cătălin-Gabriel Stănescu, Wan Mohd Zulhafiz, Felipe Rodrigues Caldas Feres, Waniss
Almashri Otman, Yanal Abul Failat and Aaron Koenck, ‘Host Granting Instrument Models: Why Do They Matter
and for Whom’, (2020) 6 Oil & Gas, Nat. Resources & Energy J. 23, https://digitalcommons.law.ou.edu/onej/vol6/iss1/3
accessed on 26 July 2021.
65 Cătălin Gabriel Stănescu, Eduardo G Pereira and Aaron Koenck, ‘Petroleum Concessions, Licenses and Leases:
“Same-Same but Different”?’ (2020) 8 LSU J. of Energy L. & Resources available at: https://digitalcommons.law.lsu.edu/
jelr/vol8/iss1/6 accessed on 26 July 2021.
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1.31 There are three main categories of upstream agreements between states and investors:
● Concession agreement, which transfers ownership of the right over the extracted petroleum
to the investor in exchange for a royalty and/or tax payment to the state66 if the field reaches
commercial production;67
● Production-sharing agreement (the ‘PSA’), in which the state remains the owner of the
extracted petroleum.68 In exchange for executing its obligations under the agreement, the
private investor is granted a share of the extracted petroleum and might pay certain taxes
as well;69 and
● Service contract, in which a private company carries out the exploration and development of
the field at its own risk (‘risk’ service contract) or not (‘pure’ service contract) in exchange
for a payment when petroleum is commercially extracted.70 Ownership of the petroleum
remains in the hands of the state.71
1.32 Parties to the upstream agreements need to understand the strategic importance of the choice
of law and dispute resolution clauses. While a state party would naturally insist that a contract is
governed by its own law (which is fairly often the case nowadays),72 the investors have progres-
sively sought to protect themselves from the associated risks by establishing, at least in some
measure, ‘an extraterritorial or enclave status’ by way of references to international principles
and/or laws.73
1.33 Disputes in the upstream sector often arise out of the breach of the agreements by an investor
or a host state. For example, in Georgian Oil and Gas Corporation and the State Agency of Oil
and Gas of Georgia v Frontera Resources, the two Georgian state entities secured a favourable
award against two subsidiaries of a Texas-based oil and gas company, Frontera Resources, with
which they had signed a production sharing agreement in 1997. The tribunal handed down its
award in April 2020 and ruled that Frontera subsidiary had committed a material breach of the
contract by refusing to relinquish and return the exploration area (representing 99 per cent of
the contract area) to Georgia.74 While Georgia had initially announced that it would terminate
66 Mark Hammerson, Upstream Oil and Gas: Cases, Material and Commentary (1st edn, Globe Law and Business 2011)
31–69.
67 Ernest E Smith, ‘From Concessions to Service Contracts’ (2013) 27 Tulsa L J 493, 501–13; Paul Michael Blyschak,
‘Arbitrating Overseas Oil and Gas Disputes: Breaches of Contract Versus Breaches of Treaty’ (2010) J Intl Arb 579, 582.
68 Bernard Taverne, ‘Product Sharing Agreements in Principle and in Practice’ in Martyn R David (ed), Upstream Oil and
Gas Agreements: With Precedents (Sweet & Maxwell 1996) 156.
69 Paul Michael Blyschak, ‘Arbitrating Overseas Oil and Gas Disputes: Breaches of Contract versus Breaches of Treaty’
(2010) J Intl Arb 579, 582–3.
70 Peter D Cameron, International Energy Investment Law: The Pursuit of Stability (OUP 2010) 1.91–93.
71 Smith (n 67), 519–20; Blyschak (n 69), 583–4.
72 Tom Childs, ‘The Current State of International Oil and Gas Arbitration’ (2018) 13 Texas Journal of Oil, Gas and Energy
Law 1, 14. The author explains that the law of certain civil law countries allows the state to unilaterally modify the terms
of public contracts in light of the evolving needs of the public, and that states tend to consider the subjection of their
contracts to the law of another state as an affront to their sovereignty. See www.kslaw.com/attachments/000/005/767/
original/1-1-18_Texas_Journal_of_Oil__Gas__and_Energy_Law.pdf?1523558994 accessed 29 June 2021.
73 Roland Brown, ‘Choice of Law Provisions in Concession and Related Contracts’ (1976) 39 Modern Law Review 625,
625.
74 ‘Frontera-Gogc: The International Arbitration Tribunal rendered its final award’ (Georgian Oil & Gas Corporation, News
Release, 21 April 2020) https://www.gogc.ge/en/article/frontera-gogc-the-international-arbitration-tribunal-rendered
-its-final-award-/479 accessed 29 June 2021.
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the contract in light of the tribunal’s award,75 it has since changed its position and is now to
allow the company to continue operating in a part of the original contract area (amounting to
1 per cent of the search area, as the rest had been returned to the state pursuant to the arbitral
award).76
Contractual disputes in the upstream sector may also concern the validity and interpretation 1.34
of contractual provisions.77 For example, in Petroleum Development v Sheikh of Abu Dhabi, an
investor entered into an oil concession with the Sheikh of Abu Dhabi that conferred to the
investor the right to drill and exploit oil within a certain area in Abu Dhabi.78 A dispute arose
over the scope of the concession agreement. The investor sought a declaration from the tribunal
that the area covered by the concession agreement included Abu Dhabi’s territorial waters
and continental shelf, rather than only the mainland and islands. In resolving this dispute, the
tribunal had assessed the meaning of the disputed provision under the law that was applicable
to the parties’ dispute under the contractual choice-of-law provision.79
Investor-state claims often arise in the upstream sector. While based on the alleged breach 1.35
of a relevant provision of an investment treaty, such claims are frequently associated with the
breaches of the investment agreements.80 For instance, Phillips Petroleum v Iran concerned
expropriation of rights under a joint structure agreement (the ‘JSA’) for the exploration and
exploitation of petroleum resources in the Persian Gulf. Iran raised a defence alleging that the
Iranian revolution frustrated the JSA due to ‘forces outside the control of the Government’
amounting to force majeure which made performance of the JSA impossible. The tribunal noted
that the force majeure defence was generally associated with contractual aspects of a relationship,
but was nonetheless relevant to the expropriation claim ‘insofar as it relate[d] to whether any
contract rights remained to be taken following the Revolution’. The tribunal ruled that the
deprivation of the investor of its rights under the JSA amounted to expropriation and obliged
Iran to compensate the investor.81
Investment agreements in the upstream sector often contain stabilisation or freezing clauses, 1.36
which seek to protect the investor by preventing the host state from making changes to the
law in force at the time when the contract took effect. These clauses are commonly assessed
in the context of energy arbitrations as the host states’ actions against a foreign investor often
take form of a change in law. For example, in American Independent Oil Company (Aminoil) v
Kuwait, a disagreement arose as to whether a nationalisation was lawful in light of the stabili-
75 ‘Agency sends termination notice to Frontera’ (Georgian Oil & Gas Corporation, 29 April 2020) https://www.gogc.ge/en/
article/agency-sends-termination-notice-to-frontera/480 accessed 29 June 2021.
76 Vladislav Djanic, ‘CIS Round-Up: An Update On New Developments In The Region’ (IAReporter, 7 August 2020)
https://www.iareporter.com/articles/cis-round-up-an-update-on-new-developments-in-the-region/ accessed 29 June
2021.
77 James Gaitis and others (eds), The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (4th
edn, JurisNet 2017) 5.
78 Petroleum Development Ltd v. Sheikh of Abu Dhabi, Award (September 1951) 18 ILR 144, 144–5, 147.
79 Childs (n 72).
80 Ibid., 3–4.
81 Phillips Petroleum Co Iran v Iran, Award (29 June 1989) Iran-US Claims Tribunal. See also Gujarat State Petroleum Corp
v Yemen, ICC case No 19299/MP, Final Award.
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sation clauses contained in a concession agreement concluded between an American investor

and the government of Kuwait.82
1.37 Certain investor-state claims in the upstream sector may be unrelated to a breach of an invest-
ment agreement. Such claims may for instance have at their source a host state’s discriminatory
treatment of the investor. For example, in Anatolie Stati v Kazakhstan, a claim was brought by
the foreign investors under Article 10(1) of the ECT, which provides that the management,
maintenance, use, enjoyment or disposal of investments shall not be impaired in any way ‘by
unreasonable or discriminatory measures’.83 The claimants, which had invested in oil field
operation assets and infrastructure, submitted that the campaign of harassment and coercion
and seizure of their investment singled out the claimants from other investors in Kazakhstan’s
oil and gas industry.84
1.38 The upstream activity is not solely the domain of investor-state relations. Commercial parties
in this segment may enter into contracts amongst themselves to create joint ventures.85 Indeed,
because the upstream projects are complex, risky and expensive, companies often decide to
collaborate to share the financial risks and exchange expertise. They use specialised joint
venture agreements to govern their mutual rights and obligations. For instance, a joint study
and bidding agreement86 sets out the general terms of the joint venture before a concession or
other granting instrument is even granted by the host state. It normally outlines the high-level
terms of the more detailed joint operating agreement (the ‘JOA’) that the JOA parties sign after
a concession or other granting instrument is granted. Parties to the JOA are commonly the
‘operator’, which tend to possess the largest interest in the operation and leads the operation,
and ‘non-operators’, which are other entities that shall provide financial and further support to
the relevant consortium.87
1.39 Parties to a JOA are commonly free to select the law applicable to their contract. However, it is
important to bear in mind that historically model JOAs were developed in common law juris-
dictions and existing JOA models do not address all of the requirements from a large variety
of civil law perspectives. For instance, the model JOA of the Association of International
Petroleum Negotiators (‘AIPN’) is inspired by the common law approach. AIPN issued a short
guidance note on the application of its model JOA provisions in civil law jurisdictions, which
was welcomed in the industry but was far from providing a comprehensive guidance on every
82 American Independent Oil Company (Aminoil) v Kuwait, Ad hoc Arbitration, Final Award (24 March 1982). Similarly,
in Amoco International Finance Corp v Iran, a dispute arose following Iran’s adoption of the Single Act concerning the
nationalisation of the oil industry in Iran, which annulled all agreements contrary to the principles of nationalisation of
the Iranian oil industry. Amoco International Finance Corp v Iran, Iran-US Claims Tribunal 15 Iran-US CTR, at 165–73.
See also Vorburger and Petti (n 5), 1297.
83 Energy Charter Treaty, art 10(1).
84 Anatolie Stati, Gabriel Stati, Ascom Group S.A., Terra Raf Trans Traiding Ltd v The Republic of Kazakhstan, SCC Case
116/2010, Award (19 December 2013) 1267.
85 Mike Williams, ‘Contracts with Contractors for Services’ in Anthony Jennings (ed.), Oil and Gas Production Contracts
(1st edn, Sweet & Maxwell 2008); Brian Cassidy, ‘Contracts with Other Joint Ventures for Services’ in Jennings, ibid.
86 Alison Huxtable, ‘Joint Bidding Agreements’ in Hammerson (n 66), 31–69.
87 Tuuli Timonen and Anais Harlé, ‘Governing Law and Dispute Resolution Clauses in JOAs’ in Eduardo G Pereira (ed),
Understanding Joint Operating Agreements (Intersentia 2016) 247–92.
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detail of such application.88 The parties to JOAs should thus be mindful of the enforceability
of contractual provisions under the chosen legal system, especially if they wish to adopt the
laws of a civil law jurisdiction as governing law. As such, attention should primarily be paid
to principles related to contract interpretation, the operator’s liability towards non-operators,
the impact of changes in the contractual framework over time, relationship of the parties,
liquidated damages provisions, default, exclusive operations, and assignment, among others.89
As regards dispute resolution provisions, because oil and gas exploration projects are interna- 1.40
tional in nature and JOAs are multiparty agreements, the parties should typically need ‘(i) an
efficient and quick process that will not paralyze the project for any longer than necessary; (ii)
a process that will, to the extent possible, preserve the parties’ relationship; (iii) a process that
will preserve the parties’ procedural rights; and (iv) a process that will lead to an enforceable
decision’.90 JOA’s dispute resolution clause will often combine several methods to reach a set-
tlement before referring the dispute to a third-party decision maker.
Disputes between JOA parties typically relate to the duties, rights, and liabilities of an operator 1.41
and a non-operator, as well as their actions or omissions. For instance, most JOAs contain an
exculpatory clause providing that the operator shall not bear liability (apart from its partici-
pating interest) for any losses sustained or liabilities incurred by the non-operators due to the
operator’s conduct of activities apart from gross negligence or wilful misconduct, which might
be outside the scope of such exculpatory clause.91 This clause can give rise to disputes between
the JOA parties when an incident strikes the project and concerns about the enforceability
of such provisions could be questioned depending on the applicable law. By way of example,
following the 2010 Deepwater Horizon disaster in the Gulf of Mexico (‘Macondo Spill’),
British Petroleum (‘BP’) commenced arbitration against Anadarko, an American company,
under the JOA between the two companies, claiming that Anadarko breached the terms of the
JOA by refusing to pay its 25 per cent participating interest share of the costs related to the
disaster. Anadarko counterclaimed that BP was liable for all the costs related to the disaster
because its gross negligence caused the explosion and oil spill. Ultimately, the case was settled
88 Guidance Note to AIPN 2012 Model Joint Operating Agreement, Guidance Note on Civil Law, 2 cited in Timonen
and Harlé, ibid., 252. See also: Eduardo G. Pereira and Damilola S. Olawuyi (eds), Practical Considerations to Negotiate
an Enforceable Joint Operating Agreement Under Civil Law Jurisdictions (2nd edn, Kluwer International Law 2020) 388.
89 Timonen and Harlé (n 87), 253–263.
90 Ibid., 270–271.
91 The question of negligence on behalf of the operator is illustrated in JV Yashlar v Government of Turkmenistan. In this
case, the claimants, an independent oil and gas holding company based in Argentina and its Turkmenian-based joint
venture, brought a claim against the Ministry of Oil and Gas of Turkmenistan on the basis of a joint venture agreement
to carry out oil exploration in the Yashlar region. The claimants sought a ruling acknowledging the existence and
enforceability of the joint venture agreement and claimed damages for the breach of the agreement. The respondent
claimed that the joint venture agreement should be terminated because of repudiatory breaches of the agreement and
fiduciary duties by Bridas during the drilling of two exploratory wells. These alleged breaches included a failure to inform
the Turkmenian partner of a number of defined matters and to conduct drilling operations in a prudent and competent
manner. The tribunal dismissed the respondent’s defences and ruled that such breaches did not amount to a repudiation
of a contract. Joint Venture Yashlar v Government of Turkmenistan, ICC Case 9151/FMS/KGA, Interim Award (8 June
1999). See also Childs (n 72), 10.
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and Anadarko agreed to pay BP USD 4 billion in return for a release from liability for all costs
related to the disaster.92
1.42 Disputes may also arise in relation to the parties’ participating interests in a JOA. For example,
an ICC tribunal ruled on a dispute between the parties to a shared management agreement and
to a JOA governed by English law concerning the crude oil production in Yemen, where one
of the parties allegedly breached its obligations to deliver letters of credit and to make timely
payments of cash calls. The tribunal ordered the breaching party to assign its participating
interest to the other participants to the JOA.93
1.43 Finally, disputes in the upstream sector may arise between the IOCs and their relevant service
contractors.94 Typically, IOCs do not perform the relevant work by themselves (e.g., seismic
acquisition or drilling). This is why outsourcing work is essential part of the upstream sector.95
Furthermore, third parties might initiate a claim against an oil and gas company.96 Such third
parties are most likely to be affected or concerned individuals like landowners, fishermen, local
communities, or even civil society.97 The above-described dispute in the Gulf of Mexico is
a good example of how many disputes could arise out of a single oil and gas granting instru-
ments. BP and its consortium parties faced claims from different US governmental authorities,
dispute amongst themselves, as well as disputes with service contractors and third parties.98
(b) Midstream and downstream projects: Complex structure, long terms and numerous
commercial parties
1.44 The midstream segment is the operational link between upstream and downstream opera-
tions.99 It covers operations following the extraction of the raw material from the ground before
they are refined and processed into fuels. The main midstream operations are processing,
transportation and storage oil and gas.100 Downstream projects in turn deal with the refining
92 Kyriaki Karadelis, ‘Quenched: BP and Anadarko settle their dispute for US$4 billion’ (Global Arbitration Review, 24
October 2011) https://globalarbitrationreview.com/article/1030719/quenched-bp-and-anadarko-settle-their-dispute
-for-ususd4-billion accessed 29 June 2021. See also Childs (n 72), 10.
93 ICC Case No. 11663 of 2003, Final Award on Jurisdiction, in the Collection of ICC Awards 2001-2007 (Kluwer 2009)
496, paras 69–72.
94 See note 29.
95 A Timothy Martin, ‘Model Contracts: A Survey of the Global Petroleum Industry’ (2014) 22(3) Journal of Energy &
Natural Resources Law 281–340.
96 Ibid.
97 See John C Cruden, Steve O’Rourke, and Sarah D Himmelhoch, ‘The Deepwater Horizon Oil Spill Litigation: Proof of
Concept for the Manual for Complex Litigation and the 2015 Amendments to the Federal Rules of Procedure’ (2016)
6(1) Michigan Journal of Environmental & Administrative Law.
98 See ‘US Deepwater Horizon explosion & oil spill lawsuits’ (Business & Human Rights Resource Centre) https://www
.business-humanrights.org/en/latest-news/us-deepwater-horizon-explosion-oil-spill-lawsuits/accessed 29 June 2021.
99 Vorburger and Petti (n 5), 1280–81.
100 Peter Roberts, ‘Petroleum Storage’ in Eduardo G Pereira and Professor Kim Talus (eds), Encyclopedia of Oil and Gas
Law: Midstream and Downstream, vol 2 (2nd edn, Globe Law and Business 2015) 49.
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process, distribution and marketing of oil and gas products in order to deliver them to the final
customer.101
The midstream and downstream transactions are often high-value and long-term contracts 1.45
exposed to multiple commercial and political risks. They are particularly vulnerable to external
events and prone to large and complex disputes.102 For example, in early 2020, a settlement
agreement concluded between Ukrainian Naftogaz and Russian Gazprom brought an end
to what was referred to as ‘one of the largest commercial arbitrations of recent times’. 103 The
claims and counterclaims in this case were estimated at around USD 125 billion and arose out
of long-term gas supply and transit contracts signed in 2009. Under the new arrangements,
Gazprom committed to provide 65 billion cubic meters of gas for transit in 2020 and 40 billion
cubic meters for each year between 2021 and 2024. As commentators observed, reaching the
deal was ‘vital for European energy security’.104
As opposed to the upstream segment where the governmental presence is usually strong, the 1.46
midstream and downstream sectors tend to involve relationships that are mostly commercial in
nature. Indeed, in the midstream and downstream sectors ‘for every one of the investor-state
cases there are ten significant commercial arbitrations’.105 Nonetheless, even when the state is
not directly present, it often ‘casts a shadow over commercial contracts of large projects’,106 by
exercising its administrative powers to issue and cancel licenses, to set operating conditions,
or to approve operator appointments, assignments, and new entrants into joint ventures.107
Furthermore, as in the upstream sector, issues relating to changes in the host state’s national
law may arise, prompting investor-state disputes.108
Many transactions in the midstream and downstream industries, such as construction, sales, 1.47
transportation and shipping contracts, are not energy-specific and call for a ‘rather normal
101 Doak Bishop, Eldy Quintanilla Roché, and Sara McBreatry, ‘The Breadth and Complexity of the International Energy
Industry’ in William Rowley QC (eds), The Guide to Energy Arbitrations (3rd edn, GAR 2019) 5. See also Vorburger and
Petti (n 5), 1280, where it has been stated that the rationale for this definition is that ‘the closer a company is to the end
user the further “downstream” it is.’
102 Abba Kolo and Thomas W. Wälde, ‘Renegotiation and Contract Adaption in the International Investment Projects:
Applicable Legal Principles and Industry Practice’ (2004) 1(2) Transnational Dispute Management 1.
103 Ibid., and Sebastian Perry, ‘Gazprom settles Ukrainian disputes with new transit deal’ (GAR, 2 January 2020) https://glo
balarbitrationreview.com/article/1212347/gazprom-settles-ukrainian-disputes-with-new-transit-deal last accessed 29
June 2021.
104 Ibid.
105 Gordon E Kaiser, ‘Disputes Involving Regulated Utilities’ in Rowley QC (n 101), 142.
106 Ibid., and Gaitis and Wälde (n 57), 1032.
107 Ibid.
108 For example, in TransCanada Pipeline Corp v United States, the subject matter of the dispute was the denial by the
Obama administration of a permit for the building of a pipeline of the Keystone XL Pipeline, designed to transport
900,000 barrels of crude oil per day from Alberta, Canada, to Texas, US. The Canadian investor claimed violations
of North American Free Trade Agreement (‘NAFTA’) provisions on investor protection. However, the arbitration
was discontinued in 2017 after the Trump administration granted the permit for the project. See [United States
chapter, para. 38]. Luke Peterson, ‘TransCanada Says It Has Permit for Keystone Pipeline, and ICSID Case Is Swiftly
Discontinued’ (IAReporter, 24 March 2017) https://www.iareporter.com/articles/transcanada-says-it-has-permit-for
-keystone-pipeline-and-icsid-case-is-swiftly-discontinued/accessed 29 June 2021.
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application of commercial law’.109 For instance, the issues that may arise in relation to the
downstream and midstream construction projects (e.g., construction of pipelines, refineries,
and LNG plants) are, to a large extent, the same as those in any ‘technically complex, lengthy,
high-value construction project with multiple, specialist suppliers based in different coun-
tries’.110 Controversies here may include claims of alleged defects of design and operation, or
delay and disruption.111 However, some unique considerations apply to the energy construction
projects, including political factors that can influence legal and economic policy, such as terms
of trade, subsidies and taxes.112 In addition, for the offshore installations (i.e., offshore pipe-
lines, platforms and floating production systems), the industry-specific risks are significantly
greater as the construction takes place in a very deep water, is subject to severe and unpredict-
able weather, and requires large and specialised equipment,113 which in turn impacts the issues
that may lead to disputes. Offshore construction projects, which depending on the size and
complexity might have a life span between two and five years or even longer, are also consid-
erably subject to changes in the market. While poor offshore market conditions will give rise
to cancellation disputes, under a rising offshore market, the builder may experience significant
cost overruns and delays thus encouraging claims for extensions of time or additional payments
for variations to the work.114
1.48 In contrast, long-term gas sale agreements raise many industry-specific questions.115 Pipeline
gas sales and purchase agreements (GSPAs), are concluded between a producing company or
sales agent (seller) and a consuming company (buyer), usually for a long term, even though
there is a recent trend to proceed with shorter term as well.
1.49 To ensure pricing of gas at competitive level providing an adequate return for all parties,
long-term GSPAs commonly include price review clauses (or ‘price reopeners’) which allow
periodic and special price adjustments based on market developments over the life of a con-
tract.116 The interpretation of these clauses has often caused disagreements and has led to the
majority of disputes in the downstream sector.117 ‘Such disputes will generally relate to ‘(i)
whether an alleged change of circumstances means that the current price no longer reflects
the parties’ bargain (ii) whether the proposed adjustment restores the parties’ bargain and (iii)
whether the revision is otherwise “fair and equitable”’.118 For example, in recent years Gazprom,
109 Gaitis and Wälde (n 57), 1029.

110 Peter Rees QC and Jess Connors, ‘Energy Construction and Infrastructure Disputes’, in Maxi Scherer (ed), International
Arbitration in the Energy Sector (OUP 2018), at 5.15.
111 Vorburger and Petti (n 5), 1296.
112 Doug Jones AO, ‘Construction Arbitrations Involving Energy Facilities: Power Plants, Offshore Platforms, LNG
Terminals, Refineries and Pipelines’, in Rowley QC (n 101), 114, 129.
113 Philip Loots and Donald Charrett, The Application of Contracts in Developing Offshore Oil and Gas Projects (Routledge
2019) 1-2.
114 James Brown, William Cecil and Andreas Darcoulis, ‘Offshore Vessel Construction Disputes’, in Rowley QC (n 101),
136–38.
115 Gaitis and Wälde (n 57), 1029–30.
116 Michael Polkinghorne and Sven-Michael Volkmer, ‘Price Re-Openers in Long-Term Gas Supply Agreements’ in James
M Gaitis, Leading Practitioners’ Guide to International Oil and Gas Arbitration (Juris 2015) 526.
117 Gaitis and Wälde (n 57), 1059–60.
118 Steven Finizio and Michael Howe, ‘Commercial Arbitration in the Energy Sector, Gas Supply Transactions and
Disputes’ in Scherer (n 110), para. 3.42.
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Russia’s major gas provider, Gazprom, was involved in several disputes over the reframing of
their GSA price mechanism, which was tied to oil prices, instead of reflecting competitive spot
market prices.119 There is, however, only a limited number of publicly available cases related to
price review disputes, as confidentiality protects one of the most sensitive information in the
gas industry, i.e., contract price.120
Under GSPAs an investor also typically requires certainty that the buyer will continue to 1.50
purchase an agreed volume of refined product at a price that would justify the investment.
The GSPAs thus often include take-or-pay clauses that bind a purchaser into paying for
a pre-agreed minimum quantity of gas whether or not the quantity is actually taken during the
contract period.121 Prices can vary throughout the duration of the agreement, and as a result,
the content of a take-or-pay obligation can change dramatically in case of a price surge or drop.
Take-or-pay clauses are thus often at the core of gas pricing arbitrations.
The seller may transport gas through its own pipeline, but the transmission may also be facil- 1.51
itated by a transportation agreement providing for the intervention of a third party who owns
pipelines across multiple jurisdictions. As is the case for gas sale agreements, disputes over price
revisions may occur in the context of gas transportation agreements. For example, in September
2019, a Ukrainian state-owned operator of the world’s longest ammonia pipeline prevailed in
a USD 190 million dispute with a Russian chemicals group over the revision of the contractual
tariff for the transit of ammonia.122
When the natural gas is sold in a liquefied form (LNG), its transformation and transportation 1.52
requires large capital expenditures and involves many international participants, which explains
the fact that the LNG business usually involves numerous legal agreements.123 In addition to
gas supply agreements with various gas producers or marketers, an LNG export project would
119 See Cosmo Sanderson, ‘Polish-Russian gas pricing dispute reaches award’, Global Arbitration Review, (31 March
2020), https://globalarbitrationreview.com/polish-russian-gas-pricing-dispute-reaches-award in relation to Gazprom v.
PGNiG; Kyriaki Karadelis ‘RWE wins gas “take or pay” dispute’, Global Arbitration Review, (31 October 2012) https://
globalarbitrationreview.com/rwe-wins-gas-take-or-pay-dispute in relation to Gazprom v. RWE Transgas; Lacey Yong,
‘Naftogaz declares win against Gazprom’, Global Arbitration Review (1 June 2017), https://globalarbitrationreview.com/
naftogaz-declares-win-against-gazprom in relation to Naftogaz v. Ukraine (all accessed 29 June 2021).
120 An illustration of how tribunals address changes in economic conditions is found in Gas Natural Aprovisionamientos,
SDG, S.A. v Atlantic LNG Company of Trinidad and Tobago, 08 Civ. 1109. Atlantic LNG and Gas Natural concluded
a contract for the supply of LNG produced by Atlantic in a Caribbean facility for a period of 20 years. The contract
price was negotiated on the assumption that the LNG would be delivered to and sold in Spain and was therefore
modelled on various aspects of the Spanish energy market. Due to the liberalisation of the Spanish natural gas market
after 1995, the contract price decreased and Gas Natural focused on its business on the New England market. Atlantic
requested a review of the contract price. The tribunal adapted the contract price in light of the buyer’s end user market;
it maintained the Spanish price formula and introduced a New England market price adjustment clause for the LNG
diverted to New England. Pietro Ferrario, The Adaptation of Long-Term Gas Sale Agreements by Arbitrators, (Kluwer Law
International 2017) 172–75.
121 Michael Polkinghorne, ‘Take-or-Pay Conditions in Gas Supply Agreements’ W&C Paris Energy Series No. 7 (3
November 2016) www.whitecase.com/sites/whitecase/files/files/download/publications/paris-energy-series-no7_2016
.pdf accessed 29 June 2021.
122 Sebastian Perry, ‘Ukrainian Pipeline Operator Wins Tariff Revision Claim’ (19 September 2019) https://globalarbitra
tionreview.com/article/1197771/ukrainian-pipeline-operator-wins-tariff-revision-claim accessed 29 June 2021.
123 Vivek Chandra, ‘Gas Pricing’ (Natgas, 2020) http://www.natgas.info/gas-information/what-is-natural-gas/gas-pricing
-contracts accessed 29 June 2021.
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likely include, among others, off take agreements with multiple potential purchasers of LNG,
a construction agreement to build liquefaction facilities, and an operating agreement with the
project’s operator.124 This multiplicity of interconnected agreements requires a careful analysis
of any potential conflict of underlying laws applying to the parties’ relationships and a coordi-
nated choice of forum to optimise dispute resolution procedures.
1.53 Under the LNG sales and purchase agreements, natural gas is shipped overseas in a com-
pressed liquefied form.125 While some of the LNG sale and purchase agreements in the past
chose Japanese or Indonesian law as governing law of their agreements, the parties now almost
universally refer to a common law system – English or New York law.126 This reflects the
substantial costs involved in LNG projects in today’s market and the resultant greater need for
project financing that have prompted the need for a well-developed commercial law.127 Notably
the practice is to exclude the application of the 1980 Vienna Convention on the Contracts
for the International Sale of Goods and the UN Convention on the Limitation Period in the
International Sale of Goods.128
1.54 Dispute resolution in LNG sale and purchase agreements is generally achieved through inter-
national arbitration with a seat in a neutral location (often Paris, London or Singapore).129 In
addition to price review disputes, which are in many ways no different from the price review
disputes under pipeline GSAs, LNG SPAs often give rise to disputes on the application of
destination clauses because the parties refuse to share an ‘upside’ of cargo diversions. Such
diversions relate to the fact that the seller will be keen to ensure it receives full value for any
cargo of LNG diverted due to operational constraints affecting the buyer. As a result, the seller
may demand that any additional costs incurred in the diversion of an LNG cargo will be borne
by the buyer.130 The delivery point in the LNG contracts can also become an area for disagree-
ment. This is because the parties often neglect the importance of agreeing whether delivery is
to take place at the loading terminal or the receiving facility at the time the contract is made.131
1.55 Contrary to the gas sale industry where the disputes are frequent, the oil sale business is less
likely to give rise to high-profile proceedings. Oil sale contracts are commonly governed by
the standard terms and conditions of individual companies involved in trading oil, particu-
larly national oil companies or significant oil traders. These terms and conditions set out the
general terms under which they buy or sell oil, while specific transactions are negotiated on
124 David Harrell et al, ‘International Arbitration of LNG Disputes’, in Gaitis (n 116), 614.
125 Ibid.. 605.
126 Harry W Sullivan Jr, ‘LNG Sale and Purchase Agreements’ in Paul Griffin (ed), Liquified Natural Gas, The Law and
Business of LNG, (3rd edn, Globe Law and Business 2017) 206.
127 Ibid.
128 Ruchdi Maalouf, ‘Liquified Natural Gas and its Agreements’, in Pereira and Talus (n 100), 70.
129 Sullivan Jr. (n 126) 206.
130 James Atkin and Raina Lal, ‘Optimizing the Value of LNG Sale Agreements by Formulating Strategic Cargo
Diversion and Destination Flexibility Clauses’ Bloomberg Law Reports (2009) www.pseudology.org/gazprom/APLR_LN
GArticleNovember2009.pdf accessed 29 June 2021.
131 Gordon Inkson, ‘The LNG Sale and Purchase Agreement: getting to grips with the emergence of Singapore’s energy
market?’ (HFW, 2014) www.hfw.com/downloads/HFW-The-LNG-sale-and-purchase-agreement-November-2014
.pdf accessed 29 June 2021.
20

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a case-by-case basis and concluded separately to specify the type of oil, quantity, price, time
and place of delivery.132
The producers of natural oil and gas may arrange for processing and refining operations by 1.56
contracting with third-party processors and refiners, or invest themselves in building the
processing and refining facilities.133 Under the first approach, a processor commits to construct
the processing facility and to process the raw material on behalf of the producer.134 In turn,
the producer commits to provide a minimum amount of oil or gas per day for processing.135
Under the second approach, after building the processing facilities, the producer may choose to
manage the facilities itself or engage a specialised operating company to do so.136
The final stage of the value chain is the sale of refined oil and gas products from wholesalers 1.57
to end users. When the end users are resellers or large industrial customers, the sale contracts
are usually long-term agreements and share many of the characteristics of sale and purchase
agreements between producers to wholesalers discussed above. In contrast, sales of gas from
wholesalers to resellers to commercial enterprises or residential consumers are often of short
duration and for limited volumes.137
At the re-sale stage, the ability to store gas is an important element of gas supply. Although 1.58
wholesalers sometimes own their own storage facilities, in the majority of cases, storage facil-
ities are owned by third-party storage system operators who agree to provide a certain volume
of storage capacity at a certain price.138 Disputes may arise out of the provisions regarding
title to gas in a storage facility. For example, in Naftogaz Ukraine v RosUkrEnergy, a dispute
arose when Naftogaz removed approximately 11 bcm of natural gas from its storage facility
in Ukraine. RosUkrEnergy brought claims against Naftogaz under the SCC Rules, asserting
that it had title to the gas in the storage facility and that Naftogaz had no right to remove the
gas. The tribunal agreed with RosUkrEnergy and ordered Naftogaz to return an equivalent
quantity, with an additional 1.1 bcm as compensation.139
132 Jenni Lajzerowicz, ‘Oil Sales Contracts’ in Jennings (n 85), 271.

133 David Wood, ‘The Refining’ in Pereira and Talus (n 100), 99.
134 Steven Finizio and Michael Howe, ‘Commercial Arbitration in the Energy Sector, Gas Supply Transactions and
Disputes’ in Scherer (n 110), para. 3.08.
135 Ibid.
136 Ibid., para. 3.09.
137 Ibid., para. 3.65.
138 Ibid., paras 3.69–70.
139 Ibid., para. 3.94.
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1

THE OIL AND GAS INDUSTRY IS PRONE TO

Elina Aleynikova, Tuuli Timonen and Eduardo G. Pereira

I. PROLIFERATION OF ENERGY DISPUTES

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

4 Tim Martin, ‘International Dispute Resolution’ (IPAA 2011) www​.ipaa​.org/​wp​-content/​uploads/​2016/​12/​IPAA​_D​

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

II. MULTIFACETED OIL AND GAS INDUSTRY

(a) Strong state presence

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

(b) Role of states in oil and gas operations34

(c) Heterogeneity of countries with oil and gas resources

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

46 See Gylfason (n 36).

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

(d) Strong presence of foreign investors

III. COMPLEX AND HIGH-VALUE OPERATIONS

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

sation clauses contained in a concession agreement concluded between an American investor

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

109 Gaitis and Wälde (n 57), 1029.

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

132 Jenni Lajzerowicz, ‘Oil Sales Contracts’ in Jennings (n 85), 271.

Elina Aleynikova, Tuuli Timonen, and Eduardo G. Pereira - 9781786434654

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4 Tim Martin, ‘International Dispute Resolution’ (IPAA 2011) www.ipaa.org/wp-content/uploads/2016/12/IPAA_D