The energy sector is characterized by long and intricate projects that require a substantial amount of capital. These ventures involve a range of activities, from exploration and development to production and distribution. However, the energy sector is also exposed to a high degree of risk due to geological events, such as natural disasters and resource depletion, as well as political changes and environmental regulations.
Given the complexity and risks involved in the energy sector, disputes are a common occurrence. These disputes can arise from a variety of issues, such as contract interpretation, project delays, environmental impact assessments, and regulatory compliance. As such, the energy industry has turned to arbitration as the preferred method of resolving disputes.
Arbitration is a form of alternative dispute resolution (ADR) that involves a neutral third party who hears and evaluates the arguments and evidence presented by both parties. The arbitrator’s decision is final and binding, and the process is typically faster and more cost-effective than traditional litigation. In the energy sector, arbitration has become the preferred method of resolving disputes, particularly at the international level, due to its flexibility and enforceability.
In the intricate landscape of arbitration matters in the energy sector, seeking guidance from a team of legal professional’s lawyers in Karimi & Associates Law Firm is highly recommended.
Statistics
According to the 2020 ICC Dispute Resolution Statistics, a significant number of disputes handled by the ICC are related to the energy sector. In fact, in 2020 alone, the ICC registered 167 new cases related to the energy industry. Even in investor-state disputes, the energy sector remains a dominant player. The 2020 Annual Report of the International Centre for Settlement of Investment Disputes (ICSID) confirms that the energy sector continues to have a strong presence in its caseload.
The Energy Sector
Renewable and Non-Renewable Energy
Energy is a vital component of our daily lives. The energy used in major energy projects can be categorized into two types: “non-renewable” and “renewable” energy.
Non-renewable energy refers to energy that cannot be reused once it has been used. This type of energy source is mainly formed by fossils of animals and plants. The most common examples of non-renewable energy are oil and natural gas. These sources of energy are limited and, once depleted, cannot be replaced.
Renewable energy, on the other hand, comes from geophysical and biological sources that are replenished continually. This type of energy source is considered to be sustainable and environmentally friendly. Examples of renewable energy include solar, wind, and hydro energy. These sources of energy are not only unlimited but also produce minimal to no emissions that can harm the environment.
Upstream and Downstream Companies
Companies operating in the energy sector are typically located in either the “upstream” or “downstream” segments of the supply chain. Upstream companies are primarily engaged in the exploration and production of energy. Exploration involves finding and assessing new sources of energy, while production involves the extraction of raw materials and the initial processing of those materials into usable forms.
In the non-renewable energy sector, upstream companies are mainly involved in the extraction and production of fossil fuels like coal, oil, and gas. This phase often involves joint operating and drilling agreements between investors and states. Downstream companies in this sector are involved in all operations that follow the production phase, including refining, processing, and distributing the energy to end-users.
In the renewable energy sector, upstream companies are often engaged in research and development, which involves the creation of new technologies and methods for generating energy from renewable sources like wind, solar, and hydro power. Downstream players in this sector are mainly involved in selling and distributing renewable energy to end-users.
In addition to upstream and downstream, there is also a “midstream” segment of the energy supply chain, which includes the transportation and storage of energy. Midstream companies are responsible for moving energy products like crude oil, natural gas, and refined petroleum products from production sites to refineries and end-users. They also manage the storage and distribution of these products through pipelines, trucks, and other means.
Disputes in the Energy Sector
Energy disputes can fall into different categories, with two common types: disputes between States (including State entities) and private parties, and disputes between private parties.
A. Investor- State Dispute
The energy sector has a long history of being heavily regulated. For many years, both states and state-owned companies held a monopoly over energy extraction and supply. Although privatization programs have presented new opportunities, states still play a significant role in energy projects. The close relationship between the private and public sectors can sometimes lead to disputes, especially in countries that rely on imports for their capital. The legal basis for these disputes may vary and is explained below:
1. Contract-based disputes
Private companies in the energy sector often make agreements with the State or companies that are owned or controlled by the State. These agreements usually include an arbitration clause that refers any future disputes to arbitration. For example, oil and gas contracts are often made with a State or a national oil company (NOC) for the exploration, production, and distribution of oil and gas. In general, arbitrations resulting from energy contracts made with States are quite similar to commercial arbitrations between private entities, unless the agreement itself allows for investor-State arbitration.
2. Treaty-based disputes
It refer to agreements between countries that may take the form of bilateral or multilateral investment treaties like Energy Charter Treaty (ECT) or NAFTA. These treaties offer a unilateral option to sovereign states to arbitrate in the event of certain categories of disputes. Investors can accept the state’s offer by filing a request for arbitration.
3. Domestic investment law-based disputes
Another legal basis for claims in the energy sector arises from the domestic legislation of host States, specifically, the laws and codes that aim to incentivize and encourage foreign investments. These laws may provide for unilateral consent by the host State to arbitrate. In turn, investors can express their consent by way of a written communication addressed to the State or by filing a request for arbitration. Unlike treaty-based disputes, the offer to arbitrate in domestic legislation is not always subject to the nationality criterion.
B. Private Dispute
Most energy disputes involve private companies. These disputes can arise from a variety of transactions. If the private disputes can be resolved through arbitration, they will generally be classified as commercial arbitration based on contractual agreements. Joint ventures (JV) and joint venture operating agreements (JOAs) are common in the energy industry. They allocate risks, increase capital and share expertise. JOAs designate the operator and the technical framework. However, disputes can arise over the standard of care, “deadlocks,” and failures to make cash calls. In these cases, arbitration is expected.
Challenges of Arbitration in the Energy Sector
Arbitration is preferred in energy industry disputes due to benefits such as party autonomy and enforceability. But consolidation of multi-party transactions in complex construction contracts and JV agreements is a challenge. Procedures for consolidation have been introduced by many arbitral institutions, but some are ineffective. Another challenge is the question of arbitrability, especially with JV disputes. Arbitrations involving price review may require experts, but expert determination and arbitration clauses can be ambiguous.
In the energy sector, arbitration matters can be quite complex. That’s why seeking advice from professional lawyers is more important than ever. By contacting us, you can connect with a team of experienced legal experts who can provide you with the necessary help and guidance to keep your cases on track!