THE QUEST FOR INVESTMENT STABILITY IN UPSTREAM PETROLEUM EXPLOITATION:

A LEGAL CRITIQUE OF THE ROLE OF STABILIZATION CLAUSES IN INTERNATIONAL HOST STATE AGREEMENTS

JOSEPH OBLA

1001810

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INTRODUCTION

This paper is intended to present a legal critique of the role of stabilisation clauses in international host state agreements in the quest for investment stability in upstream petroleum exploitation. The paper is going to take a look at the upstream petroleum industry and the contractual terms that govern host state agreements and dispute resolution mechanisms included in these contracts creating an international obligation on the host states. The protection offered by the various forms of stabilisation clauses will also be illustrated through the use of international investment agreements such as multilateral, bilateral and sector specific treaties and the extent to which it will serve to prevent the host state from exercising its powers of sovereignty over its natural resources. The views, benefits and detriments of these clauses on the parts of the host states and the investors will also be taken into consideration looking at the effects the inclusion of these clauses will have on either of the parties as the requirements and needs of the host state and those of the investors may be different depending on the circumstances in question as even though both parties come together to form contractual relationships with the aim of economic and financial maximization, because of the high-value and time consuming nature of petroleum activities these forms of investment are vulnerable to several acts which may not be envisaged at the time the contractual terms were negotiated. This paper will point out the roles and extent to which these clauses have helped in the quest for investment stability in Upstream Petroleum Exploitation.

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UPSTREAM PETROLEUM EXPLOITATION

The process of petroleum exploitation and production processes are divided into two sectors namely; ‘upstream’ which deals with exploration and production activities and, ‘downstream’ which deals with the refining and processing of natural resources.1 The focus here is on the activities of the upstream petroleum sector and the quest for investment stability and the role of stabilization clauses in international host state agreements.

The upstream petroleum industry consists of various activities and processes namely;

Exploration, which is the first stage of gathering information through activities like the review of geological maps, aerial photography, magnetic, gravimetric and, seismic surveys and exploratory drilling in determining the viability of natural resource reserves.

Appraisal, which involves the drilling of additional wells where an exploratory drill has been successful in order to determine the sizes of the resource reserves. This process is involved in the evaluation of size, and attributes of reserves, which helps identify the required number of wells to be drilled, and finally to determine if further seismic work is required.

Development and Production, this process deals with the identification of production wells and the recovery of the natural resources through primary, secondary and tertiary activities.

Construction of Infrastructure, permanent structures are needed to support full-scale production activities. These are required to gather and separate the recovered natural resources. This is the stage of separating water, oil and gas and processing the oil before it is transported to refineries.

Decommissioning of installations at the end of their commercial life, which is usually, 20- 40 years involves the removal of installations from the site when it is no longer in use. It is important to consider decommissioning at the beginning to ensure minimal environmental obstruction as the process is very expensive and abandoned installations may pose environmental risks. And,

Transportation, this involves the transfer of natural resources before it is distributed. This is usually done using pipelines, tankers or trucks, which convey them to the refineries to be converted into commercial products.2

Contractors who offer specialist services on behalf of the host state or the owner of natural resources are relied upon mostly carry out these activities. Upstream petroleum exploitation involves the initial stages of searching for the natural resources, the extraction of these resources up to the refining and distribution to the downstream petroleum sector. The relationship between these contractors and the natural resource owners are governed by different types of petroleum contracts such as the grants of licenses and concessions, production sharing

1 ‘Overview of the Oil and Gas Exploration Process’ http:www.etectinternational.org/new_pdfs/lessImpact/AttOverview2 ‘The Upstream Petroleum Sector’. http:www.pc.gov.au/data/assets/pdf_file/0007/87982/05/chapter2>

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agreements, joint operating or joint venture agreements and service contracts which contain the terms of the contract and also points out the obligations of the parties to the contract. These contracts are known as Host State Contracts, which bind both parties and provides for the running of industrial operations, deals with the distribution of costs and profits, it also provides for investment protection, dispute resolution and taxation but, these forms of contracts are subject to the laws of the Host State and to result in issues unfavorable to the investors as the host states may unilaterally alter statutory provisions which may lead to direct or indirect expropriation. There are other issues, which may arise in the petroleum industry, which include political, economic, environmental and physical security issues and will depend on the nature of the investment and where it is located . These issues are complex in nature and most of the times would not be provided for in national legislation and may require the application of international law in resolving these issues.3

PROTECTION OFFERED BY INTERNATIONAL LAW

International law plays an important role in the protection of investments by imposing obligations on host states through the provision of remedies for foreign investors in treaties. The treaties set a standard of treatment to be accorded to foreign investments by host states such as full protection and security, fair and equitable treatment, prohibition against expropriation without compensation, and the arbitration process. In order for these international provisions to apply there has to be a provision included in the state contract which provides for the laws applicable to the contract thereby, giving international law jurisdiction over national legislation.4 These standards are found in provisions of the treaties, which the host states will only be subject to through the inclusion of ‘stabilisation clauses’ which freeze the provisions of national legislation in order to prevent the imposition of future unilateral alterations to national legislation adversely and further imposes an obligation on the state subject to the law applicable to the contract. The purpose of the inclusion of the stabilisation clause in state contracts by investors is to minimize the risk of change in the political and socio-economic framework in which the terms of the state agreement was negotiated as a result of unilateral alterations which may be made by the host state.

An example, which shows the protection offered by international law through the stabilisation clauses, could be found in the case of AMCO v Indonesia,5 which was a contract between AMCO, an American company and a P.T Wisma, which was an Indonesian company operating under the guidance of the Indonesian government. This was a production sharing agreement in which AMCO was to invest and manage a hotel/office complex for 30 years. After a while disputes arose between AMCO and P.T Wisma , which led to P.T Wisma through the help of the Indonesian army and police personnel forcefully taking over management

3 Jessica G, Nicola L, Energy and investment Security: Protection under International Law ( International Energy Law Review 2013)168.4 Bertrand Montembault, The stabilization of state contracts using the example of oil contracts. A return of the Gods of Olympia?( International Business Journal 2003)593.5 Case No. ARB/12/14

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of the hotel. Furthermore, AMCOs license to engage in business activities in Indonesia was revoked following a request by the chairman of the Capital Investment Coordinating Board. AMCO had included an arbitration clause in the contract, which made it subject to Art. 42 (1) ICSID Convention,6 which provides for the ‘freedom of contract’ allowing the parties to a state contract to choose the law applicable to their contract. AMCO brought proceedings in an ICSID arbitration and it was found that Indonesia had been in breach of their duty to protect AMCO against the forceful takeover of the hotel and thus constituted a breach of international law obligation to protect aliens against unlawful acts of its citizens. It was also found that by the unjustly revocation of AMCOs business license Indonesia was in violation of the principle of due process and were therefore liable to compensate AMCO for loss suffered as a result of the revocation. This case shows an example of the international obligation placed upon host states as a result of the presence of stabilisation clauses which enable investors bring actions with reliance on international law as the national legislation of the host states most of the time would not provide sufficient protection for investors and how it offered AMCO protection against the direct expropriation which had taken place. The treaties give investors a high level of confidence in their investments as well as making them aware of the protections and remedies available to them while planning contractual activities by providing a mechanism for enforcement within the treaties.7

THE NEED FOR INTERNATIONAL PROTECTION IN HOST STATE AGREEMENTS

As a result of the expensive nature of upstream petroleum exploitation and the risks taken by foreign investors when contracting with host states, there is a need for additional protection of the investments of the contractors as not only are they faced with the issues of expropriation (direct or indirect), they are also vulnerable to risks such kidnapping, natural disasters, piracy, terrorism and national crisis. All this goes to show that more protection is required to safeguard the interests of the foreign investors. There are several forms of international law that provide for the protection of foreign investments which are mostly in the form of bilateral investment treaties (BITs), multilateral investment treaties, investment promotion and protection agreements (IPPAs) and regional free trade agreements.8 These treaties provide protection for foreign investments by creating an obligation for the host states subject to international law, allowing investors bring claims with reliance on international law without a need for an action in the national courts.9

Another example of the protection investors derive from the applicability of international law was seen in the case of Texaco Overseas Petroleum Company v Libya,10 where all properties, rights and assets relating to the deeds

6 ICSID Convention, ‘Regulations and Rules’ .7 Jessica G, Nicola L, Energy and investment Security: Protection under International Law ( International Energy Law Review 2013)168.8 Ibid.9 ibid.10 53 I.L.R 389, 422.

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of concession were nationalized and recourse was taken with reliance on clause 28 included in the deeds of concession which contained an arbitral clause even though the Libyan government was cooperative by refusing to designate an arbitrator even after the company had designated an arbitrator. The President of the International Court of Justice appointed an arbitrator and during the proceedings it was found that the state had the power to make international commitments under both state and international laws and such a commitment couldn’t be seen as a negation of the sovereignty of the state but rather proof that such sovereignty exists and as a result would not be allowed to use its sovereign powers to escape commitments it made freely through the exercise of its sovereignty. It has been established that a country has sovereignty over its natural resources and the case of Libya identifies the important issue and problems foreign investors may face as a result of contracting with these countries and why stabilisation clauses have become important tools in the management of political risks when entering into oil contracts as not only are these commitments of great substantial value and for a long period of time but that the presence of the state party in the contract poses a risk of unilateral alteration of the states legislation as a result of these sovereign powers which may affect the investors adversely.

The fact that the protection offered by contract law is usually less than that offered by the stabilization clauses together with the intentions of the foreign investor not being to place itself in a less position than that enjoyed by nationals of the host state is an additional reason the inclusion if these clauses have become important during the negotiation of oil contracts.11 Stabilisation clauses play different roles in protecting foreign investments, which are listed as follows;

Creates a stable international legal framework to facilitate and protect foreign investments by guaranteeing substantive standards of treatment to be accorded to investors.

Protection from unlawful expropriation and provision for compensation to investors where the criteria sufficient for expropriation has been met.

Promotion of economic relations between host states and investors. Protection from potential threat of exercise of the host state of its

sovereign powers . Protection from nationalization .

VALIDITY OF STABILISATION CLAUSES IN HOST STATE AGREEMENTS

In order for these clauses to be functional it must be agreed by the parties during negotiations on what form of international law the contract would be subject to. These clauses are drafted in various forms of investment protection mechanisms like bilateral investment treaties which set out rules in which investments made by two member states in each others territories will are to be regulated and protected, regional investment treaties or multilateral investment treaties which is the most effective form of protection for long-term foreign investments. The

11 Bertrand Montembault, The stabilization of state contracts using the example of oil contracts. A return of the Gods of Olympia? ( International Business Journal 2003) 593.

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Energy Charter Treaty is an example of a multilateral investment treaty, which creates a widely recognized and specific legal framework to address energy security issues and supply disruption. Its objectives are “to strive towards open, efficient, sustainable and secure energy markets and to promote a constructive climate conducive to energy independence on a mutual basis of trust between parties. This level of protection is necessary because energy investments are a target for piracy, hostage taking, and civil unrest, terrorism which lead to security crisis and international emergencies to ensure effective collaboration between states by creating an international obligation to treat the foreign investors as the nationals of the host state would be treated.12 The oil contract plays the most important role which will determine how the treaty provisions are applied as it is the clauses contained in the contract that allow the rules of international apply over national legislation.13 Various forms of stabilization clauses which can be included in state contracts and the roles they play will be discussed in further detail below. Some of the clauses found in bilateral investment treaties are:

National Treatment Clause;

This is a term of which provides guidance for parties to the investment treaty, establishing the standard of protection the state is required to accord foreign investors. It imposes an obligation on the host state to accord foreign investors the same treatment as it would national investors. An example of the role of this clause could be seen in the case of, Occidental Exploration and Production Company v The Republic of Ecuador14 where Occidental who in past times had been reimbursed amounts of VAT paid by it for purchases made pursuant to exploration and production activities undertaken by it were denied and asked to refund amounts previously reimbursed on the grounds VAT was already accounted for in the contract. It was found that Ecuador had been in breach of its obligation by according treatment less favorable than that accorded to other national investors who continued to benefit from VAT returns and were liable to compensate Occidental. The national treatment clause is intended to place foreign investors and national investors in identical situations.

Most Favored Nation Clause;

Such a clause is another, which places an obligation on the host state to refrain from any discriminatory activities, which would result in depriving a foreign investor, its profits. The host state is required to accord treatment no less favorable than that granted to other investors.15 As a result of this provision any preferential treatment accorded to any investor shall be accorded to all investors allowing an investor to rely on the contents of the agreement where an investor 12 Jessica G, Nicola L, Energy and investment Security: Protection under International Law ( International Energy Law Review 2013)168.13 Bertrand Montembault, The stabilization of state contracts using the example of oil contracts. A return of the Gods of Olympia? (International Business Journal 2003) 593.14 Case No. ARB/06/1115 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in Investment Contracts (International Business Law Journal 2009) 267.

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receives treatment which appears to be more favorable as the concept behind this clause is that of equality of states or investors. The Most Favored Nation Clause could also be combined with a National Treatment Clause as could be found in Art.3 (1) & (2) of the German 1998 Model Treaty.16

Fair and Equitable Treatment Clause;

This clause was introduced to investment treaties to ensure host states provide foreign investors with a conducive environment and to maintain a stable framework for investment and maximum utilization of economic resources. This was also seen in the case of Occidental Exploration and Production Company v Ecuador,17 where the Fair and Equitable treatment standard was interpreted to be an objective one whether the host state acted in good faith or not and also added that the standard was one which required the “stability of the legal and business framework” and had to meet the requirements of stability and predictability which Ecuador did not satisfy as a result of the actions taken by the tax authority without providing any clarity about the meaning , extent and practice of the laws it unilaterally altered amounted to an inconsistency with the concept of Fair and Equitable Treatment. Ecuador was therefore found to be in breach of an obligation under international law. This case shows the standards required by the Fair and Equitable clause and the protection it offers foreign investors but certain issues may be taken into consideration also when applying this rule as was held in the case of LG&E v Argentina,18 it was found that the Fair and Equitable Treatment standard required not only the essential element of “stability of legal and business framework” but also that expectations of investors and business risks that may arise be taken into consideration and acknowledged a state may be in breach of its obligation where it fails to act transparently. Argentina was found to be in breach of its obligation by failing to honour the guarantees it had provided to investors therefore violating the “stability and predictability” requirement. The courts recognized that Argentina had been in a state of necessity and should be absolved from international responsibility for losses that occurred during the period and disallowed the claim for future damages. The clause aims to protect foreign investors and provide a conducive environment to conduct business activities by setting an objective standard of treatment setting out under what conditions a host state will be in violation of its obligations taking into consideration there may be exceptions to actions of host states but not without recourse.

Full Protection and Security;

This clause is usually included to ensure constant protection and security is available to foreign investors as there are several forms of risk in which investments will be vulnerable to such as piracy, terrorism, theft, hostage taking, natural disasters by virtue of their high valued nature and will require more protection than that provided in national legislation as investors also face 16 http://www.oecd.org/daf/inv/investment-policy/3377308517 Case No. ARB/06/11.18 Case No. ARB/02/1.

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economic and political risks which may determine whether a host state will act in good faith when such issues arise.19 This clause could be found in different forms of investment treaties such as, the Energy Charter Treaty,20 which provides for the encouragement and stable, equitable, favorable and transparent conditions for investments and a commitment by the host state to ensure foreign investments ensure constant protection and security at all times. Such a clause could also be found in the United Kingdom-Vietnam BIT UNCTAD 2002,21 and the NAFTA 199222 which also provides for full protection and security of investments but in 2001 also in addition issued guidance statements stating that the standard did not require “any treatment beyond that which is required by the customary international law minimum standard of Aliens”.23 The Full Protection and Security clauses could also be found in U.S. Model BIT (U.S. State Department, 2004)24 which requires each party to provide the level of police protection required under customary international law as well as the case of AMT Inc. v Zaire,25 where Zaire was found to have manifestly failed to comply with the standard of vigilance required by Art II (4) of the U.S-Zaire BIT which provided that “investments shall enjoy protection and security no less than that recognized by international law, by not taking the measures necessary to ensure AMTs investments were secure and thus were liable to compensate AMT for losses resulting from the actions of the agents of the state as there was also a provision in Article IV of the BIT which provided for compensation for damages resulting from acts of war, riots, violence and similar events. This clause places an obligation on the state to provide foreign investments with full protection and security but the standards required are those recognized by international law which in most cases is higher than that which would be provided according to national laws but there has to be a failure on the part of the state to exercise due diligence in protecting the investments which is seen in the case of Tecmed v Mexico,26 where claims of a breach by Mexico of the BIT provision of full protection and security were dismissed as it was held that the authorities had acted reasonably and were only found to be in violation of its ‘fair and equitable treatment’ obligation as its actions also constituted expropriation. These cases show the level of the standard of protection offered by this clause which is that the states are required to act reasonably and does not impose a strict liability on the state as the responses a state will make in such situations might depend on the resources available to it at the time.

Umbrella Clauses;

Such a clause has the effect of creating an international obligation from a contractual obligation between a state and an investor. C. Schreuer states these clauses are included in BITs to provide protection which is beyond the

19 Jessica G, Nicola L, Energy and investment Security: Protection under International Law ( International Energy Law Review 2013)168.20 Energy Charter Treaty, Art. 10(1). 21 Article 2(2) UNCTAD 200222 Article 1105(1) NAFTA (1992)23 NAFTA Free Trade Commission, 2001.24 Article 5 (2) (b).25 Case No. ARB/93/1.26 Case No. ARB(AF)/00/2.

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traditional international standards as it is broad and could provide for several obligations host states will be required will be required to fulfill in accordance with international law. An example of an umbrella clause could be found in the Energy Charter Treaty,27 which provides “Each contracting party shall observe any obligations it has entered into with an investor of any other contracting party”. These clauses change the position of a states contractual obligation into one under international law making a breach of contractual provisions a breach of international law but will not apply where the courts do not have jurisdiction which will be clear from the claims arising from the contract and treaty provisions .28The UNCTAD 2004, describes this clause as one so broad it covers not only contractual obligations but also may cover explicit, implied and non contractual obligations but, T. Walde adds that umbrella clauses make it possible to freeze the powers of the host state to make any unilateral alterations to the regulatory and legislative framework of the state and that these clauses will only protect investors against breaches which are subject to government powers and the government has exercised its powers to either escape or interfere with commitments between the host state and the investor.29 The case of SGS v Pakistan,30 the tribunal interpreted an umbrella clause did not derogate from the international law standard of a breach of contract will not by itself amount to a violation of international law. It was also held that the clause was not one of first resort as it provided further commitment on the part of the host state to ensure the effectiveness of state contracts and it was concluded in this case that the umbrella clause in the contract did not create an international obligation in the present situation. 31 This interpretation is unclear and in a case that followed SGS v The Philippines,32 the contract between the two parties contained a provision, which stated the courts of the Philippines would have exclusive jurisdiction over any disputes arising from the contracts and SGA initiated proceedings claiming that under the BIT between the Philippines and Switzerland its contract claim could be elevated to a treaty claim and it was held, the umbrella clause in principle had the effect to confer jurisdiction on the arbitration tribunal identified in the BIT to resolve contractual disputes between investors and host states and found that even though it had jurisdiction under the BIT to arbitrate purely contractual claims, it would not do so in the present situation as the parties to the contract had agreed on the courts of the Philippines to have exclusive jurisdiction. The interpretations offered from both cases do not provide a clear or uniform description of the umbrella clause but shows that it offers greater protection than host state legislation as seen in the approach adopted by the Philippines which showed that a breach of a state contract would amount to a violation of a primary obligation under the BIT therefore creating an international obligation.

STANDARD OF PROTECTION OFFERED BY INTERNATIONAL LAW

27 Art. 10 (1)28 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in Investment Contracts (International Business Law Journal 2009) 267.29 ibid30 Case No. ARB/01/13.31 UNCTAD, ‘State Contracts’, UN 2004.32 Case No. ARB/02/6.

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Investment stabilisation in upstream petroleum agreements play an important role in the protection of foreign investments as they offer a greater level of protection through the imposition of an international obligation as a result of agreements previously made between the host states and the investors including dispute resolutions which may be subject to bilateral, multilateral or sector specific treaties which contain various forms of stabilisation clauses offering a higher standard of protection than that offered by host states in most cases. These clauses as mentioned above and seen in the cases mentioned offer an international objective standard of protection and a host state may or may not be found to be in breach of its international obligation depending on the particular circumstances of the case.

In order for these investment agreements to have effect on contractual agreements between the host state and an investor will depend on the scope of the definition of an investment in the agreement. Where this has been satisfied and it has been established what actions would constitute a breach of contractual obligations owed by the host state to the investor regarding its protected assets, which may include concessionary rights or other rights which are similar such as rights to exploit natural resources as could be found in Article1.(a)(v) of the 1994 BIT between Ecuador and the United Kingdom which extends to business concessions conferred by law or under contract.33 Also Article.1(f)(vi) of the BIT between Canada and the Philippines, which define foreign investment as broad enough to include a large number of contractual rights which may not be provided for by the host states national legislation and elevates these contractual agreements in the host state agreements to be covered by the investment treaty. The Energy Charter Treaty,34 defines investments as “every kind of asset, owned or controlled directly or indirectly by an investor and includes: any right conferred by law or contract or by virtue of any licenses and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector”. As a result of this definition it would appear that state contracts could fall within the view of this treaty because of the conferment of rights to undertake economic activity by law or contracts by the state on an investor which, may be in the forms of joint venture agreements, production sharing agreements, concessions, licenses and other forms of state contracts that involve petroleum exploitation.

The Energy Charter Treaty,35 also extends the protection offered by the treaty in order to encourage the provision of a stable and transparent business environment for foreign investors in order to attract foreign investments by the inclusion of the most favored nation, national treatment, fair and equitable treatment, full protection and security and dispute resolution mechanisms which protect foreign investments from acts of expropriation and those which may be discriminatory in nature which guarantees an investor and its investments the stability, transparency and predictability of contractual agreements. This treaty has been ratified by over 50 states but some states have not ratified because these treaties tend to provide investment stabilisation for the foreign investors alone without providing a balance between the protection offered between the

33 UNCTAD, ‘State Contracts’, UN 2004 pg 1534 Article.1(6)(f) 35 Energy Charter Treaty, Art.10, 21(5) and 26

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host state and an investor, which will create a more flexible business environment for both parties to a contract. This factor therefore will limit the ability of the treaty to encourage investment stability as it appears to ignore the sovereignty of a host state as a natural resource owner as host state as. This might discourage host states from ratifying investment treaties but a failure to ratify means the foreign investors may also be discouraged from making investments because there is no assurance its investments will be safe in the foreign jurisdiction.

Because of the high value and time requiring nature of petroleum activities and the risks associated with a commercial discovery being made or not makes it important for the investors to rely on the stability and predictability an investment treaty offers which differs from the host states who will require a contract which is flexible and will allow it exercise its sovereign powers over its natural resources as further information may be gathered after these contracts have been negotiated revealing that the investor might benefit substantially higher than was anticipated during negotiations which will be against public policy and a stabilisation clause will impose an international obligation on the host state preventing it from exercising its sovereign powers over its natural resources in making alterations to prevent the investors from taking a higher share of profits generated within the petroleum contract. This creates a conflict of interests between the host state and the investors as the stabilisation clause aims to guarantee the protection of the investor from unilateral alterations to regulatory or legislative provisions after the contract has been executed which will make a host state reluctant to the inclusion of a stabilisation clause.36

RENEGOTIATION CLAUSES AS AN ALTERNATIVE

The reluctance of the host states on the reliance on the part of the investors on the provisions of investment treaties based on their individual positions of the extent to which the treaty provides the stable and flexible requirements of both parties raises the need to consider an alternative means of stabilising foreign investments through the inclusion of ‘renegotiation clauses’ which are provisions in contracts that enable parties to a contract to renegotiate and also make alterations to contracts still offering the investors the international treaty protection and also providing for flexibility of contract as these contracts are vulnerable to events which are unexpected and unanticipated but occur and significantly alters the earlier expectations in which negotiations were based. The clause operates to offer parties to a contract the opportunity to renegotiate contracts as it is impossible to anticipate all events that may occur in the future and so provides an opportunity to settle differences instead of the imposition of stabilisation clauses, which certain circumstances might cause a host state to breach its international obligation and under such circumstances the investment treaty could be said to have failed in its effort to provide the investment with a

36 Bede Nwete, To What Extent Can Negotiation Clause Achieve Stability and Flexibility In Petroleum Development Contracts? (International Energy Law & Taxation Review, 2006) 56.

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stable and predictable environment and the host state with flexibility by not offering an opportunity to renegotiate the contract.37

There is a need for a host state contract to have a certain level of flexibility such as that offered by the renegotiation clause because of circumstances that may arise which may fall within the scope of a force majure or hardship concepts denying the state of the protection they offer as a result of risk which were not envisaged which will frustrate the performance of its obligations and a stabilisation clause which hinders the state from making any unilateral alterations will prevent the host state from exercising its powers of sovereignty in the public interest of its citizens.38 An example of the effect a renegotiation may have on an investment contract could be seen in the case of The Government of Kuwait v The American Independent oil company, where the contract between the parties contained a stabilisation clause which prevented Kuwait from unilaterally altering the terms of the agreement, but later on revisions were made to this contract included a renegotiation clause which was introduced to take into consideration an account of changes in the global oil market. Increases were made to the governments share of the profits and the government tried doing so again under the ‘Abu Dhabi Formula’ which Aminoil refused to consent to, resulting in the nationalization of the concession which Aminoil brought proceedings against Kuwait on the basis that the stabilization clause prevented Kuwait from acting as such. It was held that Kuwait was not in breach of this obligation as a result of the change in circumstances, the stabilization clause no longer possessed the absolute power it did as it would only apply where there has been confiscatory expropriation. Although this case was not one in which the investors came out successful as a result of the circumstances in which the investment was expropriated it shows to an extent how the renegotiation affords the parties to reconsider means of adapting the terms of an already executed contract to function efficiently in the event of unforeseen circumstances which may raise a need for a host state to make certain alterations unlike the stabilization contract which provides no such room for adaption and may result in a host state failing to comply with the contractual provisions contained in an agreement. The outcome of the case also shows that these clauses are not in themselves perfect or problem free as issues may also arise as to contractual uncertainty, it increases the contractual costs, some parties to the contract may not be in agreement with a proposed alteration which may ultimately end up in such a party contesting alterations as demonstrated in the case.

Some Stabilisation Clauses and the roles they play in host state agreements have been identified and illustrated through the interpretation of treaty provisions and effects they have had on cases as a result of their inclusion in investment agreements as clauses that aim to prevent the host state from exercising its regulatory powers to make any modifications to contractual agreements unilaterally to the host states detriment and in favor of the investor.39 As a result difficulties may arise in the enforceability of stabilisation clauses but there are 37 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in Investment Contracts (International Business Law Journal 2009) 267.38 Tade Oyewunmi, Stabilization And Renegotiation Clauses In Production Sharing Contracts: Examining Thee Problems And Key Issues. (International Energy Law Review, 2011) 276.

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other significant roles these clauses play in state contracts such as giving the parties to a state contract the opportunity to select what laws are to govern contracts and also strengthen the investors bargaining strength as well as safeguarding investments while preserving the absolute and sovereign powers of the host state. The Clause no longer aims at preventing the host states from exercising its sovereign powers but rather aims at the protection of financial risks that may arise and in addition no longer makes nationalisation and expropriation unlawful but rather to set standards which have to be sufficiently satisfied to consider such acts lawful and inclusion of provisions obliging the host states to place the investors in the same financial position as provided by the contract on the date it was signed as a result of any of the host states actions which would adversely affect the finances of the investors because of alterations made to contractual terms.

CONCLUSION

It has been seen in this paper through illustrations from provisions of investment treaties and outcomes of disputes that have arisen as a result stabilisation clauses in host state agreements and the roles these clauses play in ensuring investment stability in upstream petroleum exploitation. These provisions and cases have shown that stabilisation clauses offer investors a higher level of protection than that offered by host states and imposes further international obligations preventing them from unlawful nationalization and expropriation which are some of the risks foreign investors are exposed to and may discourage investments. As the host states try to encourage foreign investments these clauses are included in contracts in order to guarantee security of investments, which represents a valuable bargaining chip for the investors. The stabilisation clause to a large extent offers effective investment stability but it cannot completely stabilise state agreements as not all future events can be envisaged at the time contracts are negotiated which may result in the state either failing to comply with its international obligations or preventing the host state from exercising its powers of sovereignty which is crucial from the stand point of the host state.

39 Tade Oyewunmi, Stabilization And Renegotiation Clauses In Production Sharing Contracts: Examining Thee Problems And Key Issues. (International Energy Law Review, 2011) 276.

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http:www.etectinternational.org/new_pdfs/lessImpact/AttOverview.8. Tade Oyewunmi, Stabilization And Renegotiation Clauses In Production

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