Oil and Gas Law

However, most host countries lack capital and expertise that are required for the extraction of petroleum. In order for the host countries to improve their level of petroleum production, they get into foreign investment contracts. To ensure that there is harmony between host countries and oil companies, oil and gas laws have stability and renegotiation clauses that ensure that agreements are met and both parties do not exploit each other. Since the investments are long term, they are exposed to a lot of risks during their period. The projects are faced with different interests from the parties involved. The act of good faith in the principle ensures that the international contract laws are taken seriously. Moreover, the doctrine only applies to the parties that are in the agreement; it does not take effect where a third party is involved.

However, this principle of sanctity has exceptions but only in the principle of hardship. Pacta sunt servanda principle is considered as the foundation of international law; in fact, judges use this principle in some private law and oblige parties to obey the law in good faith. In the ICC award case number 5485 of 1987 the arbitrator ruled that; The rule of pacta sunt servanda states that the contract becomes the law of the signatories which they have agreed to obey in order to regulate their relationship. During these long periods, the clauses protect investors from any actions and change of laws by the host government which may affect the initial terms of an agreement. Stabilization clauses strengthen the relationship between host state and investors.

The clauses are included in petroleum contracts entered by host states who are usually the owners of the resources and foreign investors to ensure that neither of the parties takes independent decisions which may alter or terminate the contract. Stabilization clauses act as mitigation tools to protect foreign investors from different kind of risks. In the case of Gas Transmission against Argentina, it was argued that the use of stabilization clauses is important to protect investors and in maintaining contractual stability. It requires the host country reinstate the foreign company to its former position before the law was changed. Just like the previous laws, it is divided into limited hybrid clause and full hybrid clause. Full hybrid clauses ensure that foreign investors are protected from financial implications and fully compensated.

A limited hybrid clause on the other hand, shields investors from any financial problems that may come up due to limited change of law. However, the validity of the stabilization clauses which are supported by the doctrine of pacta sunt servanda is really questionable. In the case of Texaco Overseas Petroleum Company against the Libyan Arab Republic, the judge clearly defined that if a contract is internationalized then the state places itself under international law and therefore the state prevents itself from taking nationalized measures. 3 Moreover, in the case of Lena Goldfields against USSR, it was held that an agreement between a private party and a sovereign state should not be overseen by the domestic law of that country but it should be internationalized.

Nevertheless, pacta sunt servanda principle has played a huge role in international law’s history. Despite its role, contracts that are made under this principle are in constant tension to the changing circumstances and the passing time. Hence there has been a huge debate about the stability and change in circumstances. 4 It is important to note that the principle of rebus sic stantibus only applies where change is fundamental. The change in circumstances has to jeopardize host state’s survival. For example, a simple loss of economic gain or currency reforms is not grounds for change. In the Fisheries Jurisdiction case, the international court declared that changes must be vital and that they have to be unforeseeable. Fluctuations cannot be used as a basis for renegotiation.

Without understanding the circumstances under laying renegotiation clauses one can easily disregard the principle of rebus sec stantibus. However international courts understand that the two principles should work for hand in hand and judge cases depending on the circumstances surrounding a case. This is evident in the case of Saudi Arabia against Arabian American Oil Company. In this case, there was a disagreement because the government had granted the right for transporting oil to the oil firm and later an agreement of transportation was given to Saudi Arabian Maritime Makers Ltd. The Judge rules that the state held sovereignty power which provided it with legal power but this did not allow it to breach the contract till termination of the period.

These kind of clauses have provisions that mention factors that are supposed to be taken into consideration during renegotiation. Hardship clauses are much broader than the limited renegotiation. In these kinds of clauses, the triggering events are not specifically defined. Hence there are no instructions or guidelines of which contractual terms are liable to change and how they can change. Wide renegotiation clauses, on the other hand, are broader in scope; the triggering event is not described at all. Contracts cannot rely on the principle of rebus sec stantibus while le they cannot rely on the principle of pacta sunt servanda. Since petroleum contracts are influenced by many dynamic factors such as political climate, price change social and economic conditions, it hard for parties to rely wholly on the doctrine of pacta sum servanda.