When it comes to arbitration, the energy sector seems to be its closest friend, with almost half of all international disputes in the history of the system arising from the energy sector. Arbitration’s role in energy dispute settlement has only continued to become much more obvious than it has ever been with disputes arising right from the time Host states decided to grant a level of privatization to their energy sector to investors. However, foreign investors vs host states are not the only source of dispute in the energy sector.
The dispute in the energy sector ranges between parties to parties, parties to states, and states to states, and the trends of the sector dominance in arbitration are yet to change as it stands. As of 2020, different institutions have established the fact that the pursuit of dispute settlement in the energy sector dominated the number of cases filed and submitted by disputing parties.
For The Computed ICC Dispute Resolution Statistics (ICCDRS), up to 167 new energy-related cases were recorded, and when checked based on foreign investor and host state investment disputes, the sector still dominated most of the submitted cases.
Interestingly The ICCDRS was not the only record that showed the dominance of the Energy sector in international investment arbitration. Following the International Centre for Settlement of Investment Disputes (ICSID) Annual report for 2020, the energy sector was the leading sector for international investment disputes, with the sector accounting for up to 50% of investment arbitration disputes. The closest sector to it was that of construction, which accounted for 17%.
The reason for dispute in the energy sector is not exactly far-fetched as the sector is extremely vast, and the unstable setting in prices is one of its major banes. Many disputes have arisen from the issue of pricing and energy policies and going forward. These trends are unlikely to change.
This article will consider the global trend of dispute in the energy sector, with arbitration’s role in energy dispute settlement being outlined.
Global Overview of Dispute Trends in the Energy Sector
Upstream and downstream oil
While there is no doubt that the number of awards issued since the establishment of international arbitration is in the energy sector, disputes in the energy sector arising from the upstream and downstream of oil are responsible for a large chunk of this award.
Upstream is generally defined as disputes that result from a drop in oil price and is one of the reasons contracting parties easily go to the tribunals due to the adverse effect. Drop-in oil process usually leads to low oil exploration and its development, the semi-closure or total termination of contracts, and the inability of parties in the contract to fulfill their contractual obligation.
Since Joint Ventures and subsequent agreements are very popular in the energy sector with uncertainty in oil prices, disputes are easily triggered. However, the situation has become more obvious in 2020, following the pandemic rise and the extreme drop in oil prices that followed. To date, despite the relief enjoyed globally after the vaccines were rolled out, the oil prices seem to have plummeted beyond the possible rise. While these have reduced the issue of employer/contractor disputes, due to reduction in projects, disputes between operator/non-operator over royalty disputes and license obligations have continued to skyrocket.
However, disputes resulting from oil rises have been quite low, as most oil cases have been involved with upstream oil with more companies filling bankruptcies, forcing investors to seek compensation from arbitration tribunals. Most downstream case recently, though is from issues domestic companies in the same states, and the national courts perform the dispute settlement as opposed to international arbitration.
Investor-state is the major energy investment dispute handled by arbitration with the impact of the investment law. From times of early civilization, states have always been the ones in charge of their energy sectors, with all companies involved in the sector, being fully state-owned. However, due to the inability for states to fully maximize the sector, they began to cede a level of control to private parties, with most private members being investors, which could be from the states or from a foreign one.
However, as semi privatization of states’ energy continues to grow and states welcome more investment input for private entities, investment disputes have also continued to grow in an unparalleled fashion. The reason for these disputes is not far-fetched as states usually try to make use of their resources while investors look to make significant ROI. Hence the majority of Energy Investment disputes are from capital importing states that welcome foreign investment.
Disputes in the energy sector have continued to grow. However, there are areas that seem to be at the receiving end more than others, and this article has taken time to outline them to give parties an idea of the major areas in which disputes are more likely to arise.
As long as the energy sector is concerned, dispute will continue to rise with the instability of oil and gas prices playing a major role in it. Also, as disputes continue to pile, arbitration will continue to play its role as a system for dispute settlement in the energy sector. This means that parties with arbitration clauses in their contracts must be well informed on how it works and how they can harness the advent of disputes.
A party going into an energy contract should get counsel from an arbitration firm to protect its rights at all times when disputes arise. Rattsakuten is a top firm that clients and parties of energy contracts can reach for expert arbitrators to help them get the best out of a case when disputes arise.
Intending Clients can contact the firm management for more enquires on the institution process
Rattsakuten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuten handles dispute resolution and Arbitration matters before the SCC (Swedish Chamber of Commerce), ICC, HKIAC, and several other Arbitration tribunals.