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Part I, 1 Energy Investment Law

From: International Energy Investment Law: The Pursuit of Stability (2nd Edition)

Peter D Cameron

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. date: 04 March 2024

(p. 3) Energy Investment Law

It is idle to try to freeze the position of the parties for long periods to conditions that become so out of date … Our attention, then, should be focussed not on stopping change but only making it more orderly, more equitable, and less likely to cause the sort of panic that disrupts international economic cooperation.

Detlef F. Vagts1

A.  Energy Investment Law

1.01  Investments in various kinds of energy comprise a higher proportion of total international investment than any other sector of the global economy. Accordingly, they require a very extensive body of law to facilitate commercial transactions and provide for the settlement of any disputes that may arise. The strategic sensitivity of energy investments to nation-states has also guaranteed a strong state interest in the flow of these investments, and in establishing sound legal arrangements among states to support these transactions and the resolution of differences. States, then, take responsibility for the allocation of rights to investors, regulate the resulting activities, and often participate to some degree in them. The uneven geographical distribution of energy resources, investment capital, and markets for consumption also give energy investment a highly international character. The result has been a combination of commercial law, administrative law, and public international law meshed in ways that vary greatly according to the activity, the type of energy, and the stage of the energy cycle itself.

1.02  If we were to take a step back and try to discern those features of energy investments that are both typical and have significant legal implications, there are at least six that are commonly (p. 4) noted by observers.2 Energy investments are usually (but not always) international, large scale, longer in duration than most, demonstrate a pervasive state presence, operate in a context of price volatility, and have a degree of complexity. To this list we may add two other features, extrinsic to the investments themselves, but relevant to the context in which most energy investments operate: the transformational potential in economic and social terms, and the legacy of investment history.

1.03  This unusual combination of features leads to a risk profile for energy investment that in turn requires all parties to lay considerable emphasis on the design of a stable and predictable legal framework for the investments concerned.3 In most cases, the absence of such a framework, which allows for calculations of risk and expected return on the investment over time, will prove fatal to an investment proposal. Yet, clearly some of those features—volatility and policy changes for example—require any such framework to contain flexibility of some kind. This book examines the legal responses to this tension between the need for some flexibility mechanisms in energy investment and the overall imperative of stability guarantees backed by law. It does so conceptually, and through an examination of specific legal mechanisms, mostly in contract and treaty, and then tries to concretize this analysis through specific case studies of regions that have strongly promoted inward investment into their energy sectors by offering—among other incentives—a stable and predictable legal framework. It argues that two linked ideas can help us to explain how the design and operation of legal stability can be achieved in this sector. These are the notions of partnership and adaptation. Greater awareness of their significance may improve our capacity to understand and test the robustness of legal responses to the parties’ interest in the preservation of these long-term relationships in which the ‘stability imperative’ often plays a key part. It may also assist the parties to investment relationships to cooperate more successfully with each other and achieve their respective goals. These notions will be discussed later in this chapter and elaborated in subsequent chapters of this book. The results, including the case studies in Part II, may contribute to an argument for energy investment law as a distinct field of study. More immediately, they should assist scholars and practitioners of international investment law in their understanding of the structure and operation of law in a sector that forms a large part of their (p. 5) field of interest and one which will—almost certainly—continue to generate issues of principle and practice for many years to come.

(1)  Energy investments

1.04  The volume of energy investment worldwide has been estimated at over US$1.8 trillion annually, accounting for 2.2 per cent of global gross domestic product and 10 per cent of global gross capital formation.4 This very large body of investment typically exhibits many or all of six characteristics, and two important contextual features. They merit some elaboration.5

(a)  International

1.05  Much energy investment is international. A significant proportion of it is destined for countries that export non-renewable forms of energy and related minerals comprising around 20 per cent of world GDP and global exports.6 A mix of high-, middle-, and low-income countries holds a large share of the world’s natural resources, including about 90 per cent of crude oil reserves and 75 per cent of copper reserves.7 This uneven distribution of resources creates a necessity for cross-border cooperation in almost all cases if economic development of these resources is to occur on a scale that brings maximum advantage to the countries concerned. The resulting uneven spread of investment locations follows from necessity as much as investor choice. Nor should it be assumed that the ‘resources model’ of energy is the sole driver here. In an international pipeline project, such as one transferring oil from the Caspian Sea area to Turkey and beyond, the project crosses the borders of three countries, involves seventy-eight different parties from several countries, and required 208 finance documents along with 17,000 signatures, to commence.8 This cross-border feature of energy investment has persisted for many decades and has an important north–south feature to it, even if that is more nuanced by south–south capital flows in the twenty-first century than it was two or three decades ago.9 Among the newer forms of energy, investment in renewable sources has begun to follow a similar pattern, with capital and expertise exported from a (p. 6) limited number of countries and regions in response to welcoming signals from governments keen to broaden their energy mix. Here, the necessity might lack geological roots, but the economic ones are just as compelling to drive cross-border investment. Similarly, with nuclear energy, the international aspect of the industry has long been evident but is less related to the uneven geographical distribution of its raw material, uranium, than to the limited distribution of the necessary technical and commercial expertise.

1.06  This international character of energy investment has encouraged investors to explore and utilize pioneering forms of corporate structuring, involving global supply chains, and requiring a risk calculation about the long-term behaviour of the host state. In doing so they have pioneered the use of international contracts and treaties addressing investment and taxation. The resulting global chain and use of special purpose corporate vehicles in diverse jurisdictions have raised questions for host states about the ultimate owner of the investment and the corporate seat. Given the strategic character that energy investments often have for a host state, as well as their implications for profit shifting and tax avoidance, the network of interdependence established by this international aspect is very important for policymakers to understand when planning what may seem on their face largely domestic energy policies and legal measures.10

(b)  Scale

1.07  In terms of scale, energy investments are often large, with commitments being made over distinct periods following bespoke decision-making processes by the investors concerned, often after some consultation with and assurance from the host state. For example, a nuclear power plant might cost between US$6 billion and US$9 billion from construction to operation; a natural gas pipeline like Nord Stream 2 can cost US$10.5 billion and a gas liquefaction and export terminal in Mozambique has an estimated cost of around US$20 billion. Given this scale, the social and economic impacts will vary from one phase to the next and usually have a visible local footprint in the communities near the physical location prior to and during any significant revenue being generated for the host state.

1.08  The investors too can often be very large. In the international oil industry, there are examples ranging from private companies such as Shell and Exxon to state companies such as Aramco (Saudi Arabia) and the China National Petroleum Corporation.11 For example, Shell’s capital investment in a single year has reached US$25 billion.12 In addition to providing capital for investment, these companies offer the specialist management skills required to carry out a large, long-term, complex project with many dozens of sub-contractors. In the renewables sector too, the scale can be large and is increasing—for example, the Norwegian Government Pension Fund Global has a legal mandate to invest up to US$20 billion.13

(p. 7) 1.09  Large investments such as these raise questions about the timing of a return to cover costs and generate a reward. The period between the initial commitment of the investment and the first return on it can take several years. However sound the calculations in the investment plan, this time-lag between investment and return including recovery of the investment cost ensures that there is a notable risk associated with an investment of this size. It contrasts with other economic sectors such as international banking, which enjoys a shorter period of infrastructure and capital investment, with expenditure being relatively limited and the return occurring earlier. It also ensures that the claims made in international energy arbitrations are among the largest made, and in some cases the awards are also among the very largest issued in international arbitral proceedings.

(c)  Long-term

1.10  Energy investments also tend to be long-term in character, often with a duration of at least twenty to twenty-five years or more, reflected in the very high incidence of long-term contracts evident in petroleum, natural gas, power, and many energy-related mining activities. For example, in 2019 a petroleum agreement awarded in 1966 to a US oil company, American Oil, was permitted to continue in force subject to a change in character from production sharing to a so-called gross split form in Indonesia. Commercial contract design is therefore challenged by the need to provide the investor with assurances that the legal instrument or package of measures makes the project viable and yet also allows for adjustments or termination that may be required in the light of changed circumstances at unknown points in the life of the contract.14 To preserve an ongoing relationship, the parties may activate contractual mechanisms to adjust the contract or concession to the effects of a dramatic change in the commodity price, for example. In the sale and purchase of natural gas, provisions for price review and re-openers are common, allowing for such adjustments of the obligations in the basic agreement. In recognition of this need to preserve long-term relationships, the OECD has produced a set of non-binding Guiding Principles for Durable Extractive Contracts, which declare that such contracts need to be ‘anchored in a transparent, constructive long-term commercial relationship and operational partnership between host governments, investors and communities, to fulfil agreed and understood objectives based on shared and realistic expectations that are managed throughout the life-cycle of the project.’15 In other energy contracts, as is evident from examples in this book, there are provisions for adjustment on an amicable basis and for third party dispute settlement if that fails. Preservation of this long-term relationship may be a reason for the parties to prefer an arbitral forum for settlement of any disputes over recourse to courts, where the greater formality in examining differences may accentuate division.

(d)  The State

1.11  In energy investment, the role of the state is evident not only in attracting the investment but also in the post-investment phase, as participant, regulator, and monitor or overseer, as well as protector of the investor’s rights. The very high degree of public interest in most or all phases of energy activity means that the state’s presence—directly, or through one or more (p. 8) of its agencies—is ubiquitous. Moreover, the public interest may be concentrated on a single investment or series of investments since in many countries a single hydrocarbons field or a mine may have overwhelming importance for the national economy. Examples could include the Pande-Temane gas field in Mozambique and the Oyu Tolgoi mine in Mongolia. This feature creates vulnerability to host state actions at a later date and is exacerbated by the fact that an energy project is often legally based on a long-term contract or series of contracts and licences linked to a physical location, making production or generation facilities hard to move. A policy or legal measure may be adopted by the state and cast in general terms but in practice it may be relevant only to a single or to very few investments. If negative in character, it can easily appear to be discriminatory, and be prone to legal challenge. This pervasive role of the state in the energy sector is fundamental in most countries and is given recognition and support in multilateral treaty instruments such as the Energy Charter Treaty (ECT) in its provision on sovereignty over energy resources16 and in the division of competences in the chapter on Energy in the Treaty for the Functioning of the European Union (TFEU). For the investor, it is a persisting feature that creates a high level of political risk.

(e)  Price volatility

1.12  For the discerning lawyer, it is the volatility in the pricing of energy outputs that is a magnet for attention and concern. Whatever the parties have agreed upon in an investment contract, a sharp, sudden movement in price, due to the operation of international energy markets, represents an external factor that directly or through a chain of events threatens the commercial bargain at its core. A negative movement throws into jeopardy both months or years of investment planning and calculations of a return, with default on obligations to follow, activation of force majeure defences, reductions in capital expenditure plans, and disputes among a wide variety of parties involved in the investment chain. A positive movement will usually highlight the investor’s vulnerability to unilateral measures by the host state such as so-called windfall taxes; while for states, a decline will often trigger financial disruption and an increase creates opportunities for some who want to renegotiate the original bargain. As a recurring feature with significant legal implications, this feature is commonly noted. An IMF report states: ‘Commodity prices are highly volatile and unpredictable, posing significant challenges to policymakers in resource-rich economies. Shocks to commodity prices are often large and persistent. Booms and busts can involve prices moving by as much as 40–80 percent for as long as a decade.’17

1.13  In some energy markets, volatility may derive from the impact of government policies such as liberalization or deregulation of markets, such as has triggered several waves of gas price arbitrations in Europe between suppliers and buyers. The price of gas set by the parties under long-term contracts can suddenly look expensive compared with the price of gas on the short-term, or spot market.

1.14  The outcome of such vulnerability to price swings is to encourage long-term contracts to provide for mechanisms that allow adjustment and flexibility, albeit usually within certain parameters. In most of the investment agreements discussed in chapter 2, such adjustments (p. 9) are provided for to enhance the prospects of a robust long-term relationship between the parties.

(f)  Complexity

1.15  Complexity is a feature of energy investments for several reasons and takes several forms: energy contracts can be closely linked, with performance of obligations in one contract, such as a gas sales and purchase agreement, dependent upon the operation of another contract, such as an exploration and production agreement (legal complexity); the body of technical knowledge can be extensive and reach far beyond that of a conventionally educated lawyer or legal academic (technical complexity); each energy industry can, and usually does, claim it has a special approach to its investment related activities, with specific industry usage, rendering disputes complex and requiring the involvement of experts in arbitral proceedings (commercial complexity); and often energy projects rely on specially designed equipment to operate in challenging natural environments (technological complexity). In this respect, comparisons may be drawn with the kind of projects that form the subject matter of construction law and which often leads to the use of and reliance on engineering or similar specialist skills in arbitral or court proceedings. Taken together, these forms of complexity can support an argument that energy disputes are better suited to arbitral than court proceedings, where a specialist knowledge on the part of at least one of the arbitrators is more likely to be available than in most court proceedings.

(2)  Context-based features

(a)  Transformation

1.16  The powerful and far-reaching social and economic effects of energy investment are particularly evident in two ways, one positive and one negative: its role as a catalyst for accelerated development and its linkage to environmental problems such as increasing CO2 emissions and climate change.

1.17  With respect to the first, the linkage of energy investment to the promotion of social and economic benefit, particularly in low- and middle-income countries, is a familiar one in international aid programmes. In recent years, these positive benefits have tended to be assumed as conditioned on successful anti-corruption or governance programmes. The emphasis on a particular set of energy sources—especially oil and coal—can obscure the fact that this connection of social and economic benefits is of importance to all countries for their growth no matter what their current economic status and no matter what their choice of energy sources. Even as many countries stimulate a new balance in their energy mix away from traditional sources, a feature of an energy investment that is likely to persist is the notion that such investment will contribute positively to the national and local economy.

1.18  The wealth from natural resource extraction has allowed many countries to accumulate substantial assets, giving them an opportunity to provide fundamental social services and to share the benefits with future generations. In principle, it allows them an opportunity to tackle one of the United Nations Sustainable Development Goals: access to affordable, reliable, sustainable, and modern energy for all. Investments can also be linked to the provision of much needed infrastructure in countries where ports, transport and power plants are few (p. 10) or absent. Examples of transformation in countries from different ends of the income spectrum are the impact of energy from unconventional sources on the US economy, and the discovery and development of hydrocarbons in Guyana, a very low-income country, as it adjusts to a new role as a major petroleum exporter. Many international and national aid development entities and banks have long seen the potential in energy and minerals development to act as engines for low-income countries to escape from poverty. In practice, the responsible and sustainable use of these resources has revealed a path which many countries have followed but only a few have done so successfully.18 The reasons for this disappointing result are many and diverse but the challenge of a ‘catch up’ on development is usually accompanied by a variety of other challenges such as a tendency to prioritize short-term gain or ‘rent-seeking’, the pressures of a growing population with high expectations, minimal infrastructure, and a trend to become over-dependent for growth on a very few kinds of energy investment.19

1.19  The transformative role of energy investment in the second area—as a contributor to the negative and non-sustainable effects of the dominant kind of energy mix in which the major part is played by fossil fuels—has a more recent origin. In contributing to rising CO2 levels globally, energy consumption has become a target for policies aimed at addressing this problem and for achieving objectives aimed at lowering carbon intensity. The scale, extent and impact of these policies is such that the overall process is commonly described as an ‘energy transition’.20 Among the already visible effects are a redefinition of ‘energy investment law’, at least in terms of the forms of energy that comprise its subject matter, and an expansion to include investments in energy-related minerals. Contextual developments include: energy investments are becoming more diverse than ever before with investments in renewable power and fuels reaching more than US$280 billion a year in the five-year period between 2014 and 2018;21 linkages to non-energy sectors such as mining and infrastructure are being reshaped;22 and the regulatory role of the state in this reshaping of the energy mix is already showing evidence of becoming fundamental and pervasive. Further, if the terms of the UN Paris Agreement are implemented (with its overall goal of a reduction of global warming to two degrees centigrade), this would leave 29 per cent of oil reserves stranded and by one estimate would destroy US$360 billion from the value of the largest IOCs measured by reserves, over one sixth of their total enterprise value.23 The threat posed by a shift in investment priorities is evident when it is recalled that in a single year banks provided about (p. 11) US$654 billion in financing to fossil fuel companies.24 In this respect, the energy transition factor has two important impacts on future investment flows: it creates a perception of reduced risk associated with investment in lower carbon technologies and subsidized public programmes to promote the shift to lower carbon usage, allowing a shift in capital allocation into these areas; at the same time, it creates a perception that traditional sectors such as fossil fuels or financing coal assets, have become riskier, since a long-term project of around twenty-five years encounters scenarios of peaking markets for these energy resources. It also creates a new set of political risks arising from policy shifts, as governments take measures to promote low carbon with no prior experience of tackling this sort of problem, stimulating the application of still-evolving technologies. This ‘transition’ factor is not found in other major economic sectors such as banking or finance.

(b)  The legacy factor

1.20  Until recently, international energy investment has been focused largely on hydrocarbons with a view to their production and export as a commodity on the global or regional market, and the building and operation of network infrastructure, such as pipelines or grids, often across several national borders. For many countries, the legacy of their first encounters with international investors has shaped not only the current policies of the countries that hosted them, but also those of new entrants into the market for energy investment, particularly in low- and medium-income countries. From Latin America to Africa, this legacy has often been negative, in fact as well as in perception, since it has been associated with disproportionate benefits to local elites, repatriation of profits to parent companies, and legal arrangements that supported unequal or asymmetric partnerships between investors and states. The voluminous literature on the so-called ‘resource curse’ testifies to this negative perception and is supported by ample evidence of negative effects on economies and societies. Deeper down in the historical memory, there is sometimes a legacy of colonial relationships, often economic rather than political, still influential in Latin America, parts of Asia, and Africa. In many of the countries of Central Asia, or Eastern Europe, the legacy has a different character, enmeshed with a transition to—and often a suspicion of—market-oriented economies. In many countries that have actively fostered investment in electricity generation from renewable energy, a different kind of legacy is less visible but is rapidly evolving from the impacts of the first wave of investment. This ‘legacy’ factor will be evident in the case studies presented in Part II of this book.

1.21  The investment culture in all but the youngest nation-states is shaped by the past: so too with investors, even if the past is usually referred to in coded language such as ‘track record’. Calculations of risk are shaped by the past as well as the present. A good track record will lower the supply price of capital in terms of the rate of return that an investor is looking for, and conversely a poor track record with nationalizations or unilateral changes in law will increase the price. In energy investments, this historical feature will be present in many hydrocarbons investments but as yet is largely absent from renewable energy investment.

The outcome is a high-risk profile

1.22  Where an energy investment is international in character, in almost all cases it will not be made until guarantees or assurances have been offered to investors by the host state through its laws and/or contractual arrangements for (p. 12) sufficiently long periods to allow for recovery of their costs and a pre-calculated expected gain. This gives investors—and those willing to lend funds to them—a reasonable expectation that their calculations of financial viability should prove robust over the long-term. Without a dispute settlement mechanism that allows differences to be addressed away from the national courts of the host country, any such assurances are likely to be treated as hollow. Historically, the paradigm case of the international energy investor was the hydrocarbons company, driven by high returns, able to manage a high cost of capital and to tackle a high degree of price volatility. This has shifted to a more diverse energy sector for investment with a growth in the more capital-intensive power industry which has enjoyed lower profitability, lower cost of capital, and less market volatility as is common among regulated assets. Yet, one of the above features has a continuing, special significance for a potential investor in calculating the risk profile of an investment. The state will nearly always have an extensive set of roles in the life of a project, as regulator, owner, and participant, either directly or through one of its agencies or through local components as are common in devolved or federal systems. For foreign investors, this often-overlapping series of roles implies a higher than usual degree of vulnerability to policy reorientations and indeed to policy inconsistency.

(3)  Frameworks as a legal response

1.23  In designing a legal response to the risks that typically arise from energy investment, lawyers in the investment community and in government circles have often been pioneering. Their work has contributed to an energy industry that has been one of the earliest industries to benefit from and engage continuously with globalization, seeking innovative legal and financial responses to the risks that accompany its activities. Prior to making an investment, it has developed or drawn upon a wide range of techniques to mitigate many of the six features of energy investment that generate risk: structuring its investments by using, for example, special project vehicles; aggressive tax planning, and locating offices in favourable states for treaty protection. It has been able to rely on the rules and principles of international law which will apply to energy investments in the same way as to any other investments, as well as a range of contracting practices, some of them peculiar to the energy industry. Additionally, it can rely upon the provisions of the Energy Charter Treaty (ECT), a treaty instrument specifically designed to apply to investments made in the energy sector of its contracting parties, and matters such as energy trade and transit. It offers basic guarantees to investors about their treatment in the territory of its contracting parties, including non-discrimination, protection in the face of expropriation, the right to transfer capital, and access to international arbitration in the case of an investment dispute. An increasing number of scholars have noted the influence of the ECT, and awards made under it on the general body of international investment law.25 It lies at the heart of the legal framework for international energy investment. At the same time, many of the concepts in the ECT are readily familiar to any international investment lawyer since they are in common use (substantive protections such as Fair and Equitable Treatment, the doctrine of legitimate expectations, the use of investor-state arbitration to settle disputes, for example).

(p. 13) 1.24  It may be asked whether the legal response to the special features of energy investment has led to the creation of a distinct or special legal regime. An early attempt to do so was the thesis advanced by Doak Bishop that a special regime was emerging called lex petrolea, an argument based largely on a series of published arbitral awards concerning the international oil and gas industry.26 This has not stood up well over time.27 However, it invites the question whether it was made too early, before the energy sector had matured and evolved beyond its carbon-intensive roots. Can it be said that a special legal regime for energy investments exists today, based upon the responses of governments, industry, and other parties to the kind of features outlined in the preceding section?

1.25  Of course, not all legal issues that arise from the workings of the energy economy are ones that concern investments, even if one considers only issues that have an international character rather than purely domestic ones, of which there will be many. In her survey of the international law that governs energy activities, Catherine Redgwell reviews,28 among others, the Law of the Sea Convention, the role of the International Energy Agency in energy security, and the regulation of maritime transport and energy trade. While they clearly have an investment aspect, these areas of law are far removed from the kind of economic activities considered in this book. From the Redgwell perspective, the international law on energy is essentially a subset of public international law rather than a self-contained regime and is concerned with the regulation of any energy activities. By contrast, much of the subject matter of international energy investment law is facilitative, helping to establish and sustain relationships between private parties and between private and public parties, with familiar legal institutions such as property rights and contract playing a leading role. Its commercial law roots are robust, as is the influence of international commercial practice developed for contract-based transactions. At the same time, its dependence on general investment law is evident by providing for the settlement of disputes in the same way as under general investment law, by the same international arbitral tribunals, drawing upon the same international investment rules, principles, and procedures as are applied to non-energy investment disputes. States make contracts with investors but do so in a quasi-commercial manner even if the contracts themselves contain regulatory elements.29 The part-commercial aspect (p. 14) of energy investment law gives it much more in common with what is usually associated with international investment law. In this sense, there is a notable difference with the rapidly emerging discipline of international energy law, which embraces all the legal issues arising from the diverse energy sub-sectors, in all their phases of activity and methods of delivery, and among each of the diverse actors or parties.30 International energy law, on this view, is a highly complex, transnational discipline, embracing many ‘soft law’ instruments such as guidelines, standards (such as the UN Guidelines on Business and Human Rights), network codes, and regulatory instruments as well as industry practices, and more conventional binding legal instruments. This is a broad scope that extends well beyond that of ‘energy investment law’ as used in this study.

1.26  At present, the legal framework for energy investment would comprise the large number of international investment treaties or agreements (IIAs), including the multilateral ECT; arbitral awards made under them; tens of thousands of investor–state contracts governing a variety of energy activities; national energy laws, and related legislation, mostly specific to energy sub-sectors; a host of model or standard form agreements, used by industry and associations as templates in thousands of transactions; and many non-legally binding instruments such as standards, guidelines, and voluntary codes of practice, developed by governments, international agencies, industry associations, and increasingly by civil society.31 Such a wide collection of conventional international and national law, contracts, awards, and less conventional but nonetheless influential instruments falls within the scope of international energy investment law, as a category that includes national, sub-national, private, and soft law instruments. Within this sweeping body of rules, principles, and standards, there is a very wide diversity and limited examples of standardization, although where industry standards have been agreed these are usually highly influential on practice. Apart from the ECT, there are no special legal instruments that might justify the description of a special regime, still less a self-contained one. The foundations of a sui generis body of law in this area are at present elusive, even if this does not detract from the claim, surely justified, that energy as an economic sector has an unusual degree of influence on international investment law. Nonetheless, the bedrock of public international law, commercial law, and administrative law, on which this broad edifice rests, is a familiar one for international investment lawyers.

(p. 15) 1.27  The ECT remains a source of some doubt about the soundness of the above conclusion. At first sight, it appears to set up a special regime for energy investments, although it addresses other subjects in its scope, such as trade and transit, and even competition and environment. Most commentators agree however that the ECT provisions on investment have been taken from then existing BITs that have generic application to all kinds of investment.32 It is almost correct to state that there is nothing in the basic ECT rules and principles on investment that would surprise an international investment lawyer other than their application to an energy subject matter. The result would seem then to be better described as a subset of international investment law. It is moreover one that applies to a large but still limited number of states parties. As far as the ECT itself is concerned (and not its two related Declarations) the number of ratifications is limited both quantitatively and geographically.

1.28  One caveat may be made to this. All energy investment, domestic as much as international, must come to terms with the high profile of the state in this economic sector. Energy is usually considered to be the basis for any farther-reaching economic activity, such as production of goods and rendering of services. Moreover, it is also commonly understood to be a socially sensitive sector, because energy supply as a basic good must remain affordable for the population. Investments in energy also have potentially important impacts on public health, safety, human rights, and the carbon footprint of a society. For this reason, we see the otherwise odd provision in the ECT—Article 18, on sovereignty over energy—that is not expressly evident in a typical BIT or IIA. For a treaty addressing energy subject matter this blunt reiteration of state rights is de rigeur. From a legal point of view, this provision contains nothing new and is otherwise redundant.

1.29  In another sense, the special character of energy investment is evident in the very existence of the ECT. Its characteristic as an instrument intended to help catalyse rapid and extensive growth in a country’s economy is evident in the Preamble of its text,33 in its rapid negotiation and ratification, and in the sense that the large-scale transformation of Eastern European and Central Asian economies into market-oriented ones was one that would benefit from a special multilateral treaty instrument. There is probably no other economic sector that has within it the promise of such transformative social and economic impacts.

1.30  The search for evidence of a special regime in international energy investment law needs to explore its interaction with municipal law. Like any such investment it will have to interact with municipal or national legal systems. Such legal regimes are likely to be extensive, however. Where energy resources require to be extracted from the subsoil on land or below the seabed, ownership almost always lies with the state itself, qualified in the case of the seabed and inland waters by the relevant international law, and is accessible to investors only subject to a regime for administrative allocation of rights by concession, licence, lease, production sharing contract or similar arrangement. Further, the state will also typically be responsible for regulatory oversight of energy network and distribution activities, through national regulations and enforced by ministries and public bodies. In many cases, the state is also a participant in activities such as production, transportation, and supply. This can involve the establishment of a national or mixed-owned company and the use of joint venture arrangements with foreign and/or domestic investors, and strategic acquisitions of assets. The courts (p. 16) are likely to place a role in the review of state action and enforcement of any protections due to investors under domestic investment law and relevant jurisprudence. Given the centrality of energy supply to economic growth, this pervasive role for the state and its administration is hardly surprising. It does, however, give investment in these energy industries a unique sensitivity to political risk, with no parallel in, for example, telecommunications or manufacturing. Since energy investments are usually made for long periods of time, the probability that public policy on the state’s diverse roles will evolve or change during the life of an investment is very high.

1.31  This potential for tension between investors and states is further underlined in two ways. For some states, the need for a domestic special legal regime for energy will be a recent phenomenon. In contrast to legal regimes for mining, which may date from many decades or even centuries ago (the various Napoleonic codes in Europe are examples of this), those applicable to hydrocarbons or renewable sources of energy have a much more recent vintage. The need to adapt such regimes to greater complexity as the demands on it grow, is likely to create more investment uncertainty for investors, existing and potential. Secondly, in certain parts of the world energy occupies a greater role in the Gross National Product than in others, underlining its sensitivity.

(4)  The offer of stability

1.32  To promote and protect inward investment, States have frequently offered specific, legally binding assurances of long-term stability in varying forms. Such assurances can be in the form of customized contractual provisions, domestic laws, regulations, or administrative measures, bolstered by accession to international investment treaties, offering investors substantive guarantees. As an UNCTAD report has noted,

[w]hen entering highly regulated or government-controlled markets or industries with huge investments—which is typically the case in infrastructure and extractive industries—foreign investors often seek government promises in investment contracts to ensure predictability and stability of key parameters.34

These assurances are common currency in the world of international investment.35 Such commitments by States have an unusual significance for energy investments. Without offering them in some form, it is likely that many of these large, long-term investments will not be made, with a resulting loss to the States concerned of revenues, employment, and related benefits.36

(p. 17) 1.33  For many years international organizations have also been keen to emphasize that there are benefits to the host state from the offer of investment stability. Among the incentives for them is that the grant of such commitments enables them to attract investment at the lowest possible cost. An authoritative statement on the underlying reasons for the obligation to respect legitimate expectations is in the 2005 World Bank Development Report:

Governments and firms can both benefit. Governments benefit from a commitment device that can address concerns from investors, and thus help them attract more investment at lower cost, and also reduce the risk of any later dispute becoming politicized. Firms benefit from reduced risks and a more reliable mechanism for protecting their rights if the relationship with the host government deteriorates.37

The assumption here is that the fiscal terms governing an investment project together with stabilization provisions would represent the bargain negotiated and agreed between the foreign participant and the host government.

1.34  Assurances of long-term stability have then a dual aspect: to promote investment in a particular setting and to protect investments once made. Typically, States will offer them in competition with their neighbours to attract scarce capital. They have value to investors since they offer a level of protection to their investments from the risk that at some future date a government or an agency of government may take actions that modify the legal and business framework in ways that are economically disadvantageous to the investor. To be credible, the assurance offered to the investor must be linked to a mechanism for redress of grievances and compensation for loss that will usually require more than reliance on the local courts. In this respect, international law offers support by means of the many investment treaties that states have concluded over the past thirty years.

1.35  When a prospective investor assesses such assurances it will be aware that the party giving them is the State. Even without any grasp of international investment history, the investor will be aware that there is a risk that the host State may take unilateral measures at some future date that are detrimental to the investment’s value and potential. Given the extreme sensitivity of energy investments in national economies, it is not hard to imagine circumstances arising in which the state might believe it appropriate to take some action that impacts upon established investments. Moreover, in contrast to the typical investor with its defined set of commercial goals, a state is likely to have a more varied and not always cohesive (or constant) set of goals in response to different constituencies. Even without the national development aspect of an energy investment, most states are likely to identify a strategic interest in all or parts of their energy sector that will encourage them to take some interest in the evolution of the investment.

1.36  For the investor, this is a source of concern about possible interference by the state at some future date in ways that are economically damaging to its investment.38 This arises in (p. 18) addition to the conventional business or market-related risks, which any investor must face. For the host state, this ‘risk’ is likely to be understood rather as a potential need to intervene at some future date to protect a key national interest and a reflection of the custodian role it ultimately plays in most energy investments. For the energy lawyer, this presents a challenge to identify mechanisms that—in very particular contexts—allow both parties to reach agreement on the making of an investment which over time may promise to have potentially transformative effects on the State from an economic and perhaps also a social point view.

1.37  The timing of potential interventions by the State has received much attention in the literature on energy investment. The risk facing investors has been described by Professor Vernon as one of an ‘obsolescing bargain’. The prospective investor concludes a formal agreement with the host state to carry out exploration and/or extraction, or to invest in fixed transmission and distribution networks, or in power generation facilities, on the basis of guarantees and incentives offered by the host state, usually expressed in contractual form, and supported by a wide ranging legal and regulatory framework.39 After the bulk of the investment has been made, the allocation of risk shifts rapidly from the capital-hungry host state to the investor. Negotiating leverage shifts to the State during the project life cycle: the investors require a long period to achieve their expected return while, once the investment is made, the host state has at least received the first instalment of what it is seeking. From that moment on, the theory goes, the bargain struck with the foreign investor has a declining value until a point when it may conclude that the original bargain is obsolete and invites the investor to discuss a revision of its terms. These reasons may include a change of government40 and the introduction of new policies; the discovery of natural resources in commercial quantities and commencement of development, offering the prospect of large and speedy accumulation of wealth, and the social and economic implications for the host state of the operation of the pricing or tariff regimes for electricity and gas. In the years following the making of (p. 19) an investment—often a very large, fixed one in this sector—the investor therefore faces an increasing risk that the host state may exercise its sovereign powers to modify the terms of the contract in ways that achieve a new government’s policy goals. Such sovereign powers are likely to be used in more subtle ways to reduce the value of a project than through outright expropriation of the asset, although that risk still exists.

1.38  The theory has been criticized as being time-bound to a context of nationalization and expropriation in the natural resources industries, and ill-suited to applications in non-energy-related fields of investment.41 In several case studies carried out subsequently, evidence presented suggests that internationally operating companies have been able to retain relative bargaining power and prevent opportunistic behaviour by host governments so that the bargains in practice did not obsolesce over time.

1.39  Some economists have described the same phenomenon in slightly different terms. In their view, guarantees of stability arise as a legal response to the problem of ‘time inconsistency’ or ‘dynamic inconsistency’ in government policies.42 This problem arises when a government announces a policy in advance but finds later than it is ‘welfare-increasing’ to go back on the commitment generated by the policy. The cost of acting in this way is that the government is perceived by investors as one that reneges on its promises, and it loses credibility. In dealing with ‘time-inconsistent’ actions such as a unilateral tax change, the adoption of legal rules helps to produce a better outcome. At least, it can contribute to improving the adaptability and progressivity of a state’s fiscal regime. However, in practice it is rarely a change in government policy that initiates a new stage in relations with the investor(s): more usually, it is a change in the government itself, bringing in new policies.

1.40  It should not be forgotten that the greatest risk to the value of the investment lies in the investors’ appraisal of the potential and actual operation of the market: the business risk. This is particularly vivid in the commodities sector, which is subject to spikes and troughs in price: the ‘commodities rollercoaster’.43 The investor concludes an agreement based on assumptions about price that are within a specified range, appropriate to the project and linked to expectations about future international market conditions. Subsequently, the international price rises or falls dramatically, leading to unexpectedly consequences for the investor. Where gains are involved, the host state may deem these to be unearned and by implication unfair. If the contract has not been designed to capture this possible outcome, the host state may seek to capture these gains by, for example, imposing a special tax or initiating a (possibly forced) renegotiation of the terms of the original contract. Clearly, this is a scenario that is more relevant to those commodities that have their prices set by an international market, such as oil and many hard minerals (gold, silver, platinum), but it also applies to natural gas since many international sales and purchase contracts link the price of natural (p. 20) gas to that of crude oil. The justification for state action may be couched in terms of ‘fairness’, but the driver on this scenario is the price. Where the price has fallen, the state’s concern may lie more in mitigating the negative consequences and persuading the investor not to take advantage of its contractual freedom to make an early exit. Where renewables are involved, the situation is yet more complex since the price is artificially established through state intervention in the first place (through feed-in tariffs, for example). The result is similar in terms of volatility, however. In this respect, the investor’s commercial judgments, often linked to its overall international business operations, can, when mistaken, have negative consequences not only for the investor but also for the host State or States in which it has invested. For the State, it is therefore important to try to identify investors with a track record of sound business skills as well as technical and financial capacity. This is the mirror image of ‘political risk’.

1.41  In the light of this potential for tension arising in relations between governments and investors over the life of an investment, we can expect energy investment agreements to make provision for maintaining and adjusting the initial agreement within certain defined parameters. Where they do so, stability acquires a dynamic character and underlines the continuous interdependence of the parties which—at least in terms of design—is to be a fact of life throughout the investment. As Professor Detlef Vagts once wrote: ‘[e]ither parties will include renegotiation provisions in their contracts or they will act as if they were there.’44 However, the question then arises, when the relationship comes under strain, does this mean the parties to the contract can recalibrate the relationship or do they require the intervention of a third party, an arbitrator?

B.  Overview of the Book

(1)  Aims

1.42  This book has two principal aims. Firstly, it aims to provide a comprehensive map of one segment of international investment law, that concerning the energy sector, and particularly, the way in which that body of law tries to provide for stability of the long-term business environment for energy investments. Secondly, it asks whether the extensive treaty protections that have been introduced into international investment law have enhanced the stability provided by contract or not. In providing an answer to this question evidence is gathered and assessed through case studies of unilateral state actions taken in three regions—Latin America, Central Asia/Russia, and Africa—and through an examination of the relationship of this body of law to the various issues known as Environment, Sustainability, and Governance (ESG).

1.43  The first and most fundamental legal mechanism that provides for stability is found in the investment agreement itself (stability by contract). This includes dedicated contractual instruments as well as specific clauses in wider commercial contracts. The second mechanism is the extensive global network of international investment agreements, whether bilateral or multilateral in character (stability by treaty). This has superseded the old diplomatic protections provided by international law and offers an investor a degree of protection which is of a quite different order of importance and assurance. However, there is also a significant (p. 21) measure of stability provided by the legislative frameworks for energy investment and the legal doctrines of the host state, such as the doctrine of actos proprios in Latin America (stability by domestic law). Too often this is understated or even ignored by scholars and commentators in the rush to emphasize foreign investors’ preferences not to subject their disputes to the jurisdiction of local courts. The international investor can—and often does—rely upon all three of these sources of legal stability in structuring the legal framework for its investment. Of the three sources of stability, it is the large number of investment treaties now in effect that constitutes the novel feature of the international legal context in which investor-state disputes unfold. The impact of this factor—tested in the specific regional settings of the case studies—is the main focus of this study. This legal context provides a new setting for an in-depth analysis of the various contractual forms of stabilization and for their overall goal of providing investors with mitigation against political risk. To what extent has the international legal framework of treaty protection enhanced and strengthened the more familiar protections offered to investors by contract in the face of these actions by host states? In answering this question, account has to be taken of the fact that the first generation of treaties (we might call it Investment Treaty Law 1.0) is already more than twenty years old and is now being replaced by a new generation of treaties that often include a more restricted scope for investor protections. Even the ECT is in the process of being ‘modernized’. This study aims to provide the first in-depth analysis of this still evolving legal architecture for international investment in the context of the energy sector.

1.44  For the investor in the international energy industry, the addition of the international treaty structure to its bedrock of contracts with the host state constitutes the latest phase in a long-term ‘pursuit of stability’ in relations with states which host their investments. Behind such a pursuit is a sense that for many years there was a trend towards a weakening of the bargaining position of foreign investors vis-à-vis many, if not all, host states and their national energy companies. On the face of it, the expanded international investment regime constituted a major step forward in mitigating the cyclical developments in political risk to which investors in the international energy industry have been exposed. If so, its high point may have peaked, and an assessment is timely as it moves into a new phase.

(2)  Approach

1.45  The approach of this book to its subject matter combines several familiar elements in legal research. It is international and comparative and in part historical; it uses a case study method to examine groups of countries from a particular region, and it analyses important arbitral awards in some detail. This eclecticism of method is a response to challenges presented by the subject matter and will be—the author argues—justified by the results.

1.46  Two key challenges face any researcher in this area. The first concerns the quality of available data. The contracts which investors and states conclude with respect to a particular investment will sometimes be in the public domain but often they are not or are hard to obtain. Fortunately, over the past ten years there has been a significant increase in the volume of contracts that are available. There may be additional barriers imposed by the language of the contract. In the event of a dispute between the parties that is subject to arbitration, the proceedings will normally be heard in private and if there is an award on the merits, it is not certain that it will be published (with the exception of most ICSID awards), although more and more awards are being made available in the course of enforcement proceedings. Two (p. 22) key sources of data are therefore available only on an incomplete basis, which recommends caution in making generalizations that rely upon legal materials in the public domain or are accessible to the researcher through other means. A second challenge arises from the fact that the application of international investment law is heavily dependent upon the facts of a particular case and indeed on the wording of the particular BIT or MIT that provides the legal frame of reference. The diversity of circumstances and heterogeneity of international investment agreements means that an empirical, case-by-case approach (what has been called by the legal theorist William Twining as the classic legal method in the social sciences, the ‘method of detail’) is unavoidable if one seeks to identify trends. There is also some evidence that patterns are emerging in the development of international investment law (see chapters 4 and 5). Nonetheless, the real differences in culture, history and circumstances among the states involved require careful attention and appreciation; this has been attempted in the case studies in chapters 7, 8, and 9.

Case studies

1.47  There are many illustrations and examples in this book from practical experience, but Part II is concerned mostly with three extended case studies of disputes from different regions—Latin America, East Europe/Central Asia, and Africa. In each case there have been many disputes over the stability of long-term energy investment agreements in the period when international investment law had expanded to offer greater protection to investors than ever before. In contrast to countries in some regions (Asia and the Middle East are the obvious examples), there is sufficient published material on many of the disputes for an in-depth analysis. Europe might have been an obvious selection for a case study since materials are available, but the linkage between energy investment and development, a sub-theme of this book, is absent, and in addition, the investment scene for energy and more generally is in an unprecedented state of flux, due to a still-evolving evolution of European Union policy on investments, making the legal framework for this region something of a ‘moving target’ and detailed study premature.

Energy and international investment law

1.48  While the focus of this book is upon energy investment, there are inevitably many references to institutions, concepts, principles, and procedures common to international investment law in general. Given the ready availability of literature on international investment law, this study will provide only references to works on such common areas, rather than attempt to cover ground that has been well-researched and is likely to be familiar or accessible to many readers already.

(3)  Scope


1.49  The leading energy industries are the focus of this book, with the incidence of investor-state disputes over the terms of long-term contracts (and public knowledge of such disputes) increasingly evident in all sectors. Where appropriate, consideration is given to non-energy natural resource industries such as hard minerals (for example, copper, cobalt, lithium) or water, which play an important role in the energy transition. Within the group of energy industries, it is the investments in oil and gas extraction that have so far generated the largest share of known awards in disputes between investors and states in the international energy and natural resources industry.

1.50  Operational considerations can help to explain imbalances in the investor–state disputes we know of that arise from diverse energy industries. By and large, oil companies appear in this (p. 23) study as investors engaged in the exploration for and extraction of oil and sometimes gas. Buyers and sellers of piped or liquefied natural gas constitute a smaller group and one that has demonstrated a much lower incidence of disputes with host states. In practice, the discovery of a large gas field under one of the principal kinds of petroleum contract requires the design of supplementary and quite different contractual arrangements to develop and market the commodity. The host state will certainly be involved in its development, whether it is destined for local consumption, perhaps to generate electricity, or for export or both; issues of long-term contract stability will arise at this stage and require a clear contractual solution, not least because the project will require the construction of pipeline networks, large-scale fixed infrastructure, possibly liquefaction facilities, and the participation of international banks. For the investor in renewable energy, the assurances offered by support schemes for long periods of operation have been an attraction, but disputes over the state guarantees for such schemes have burgeoned in recent years, raising important questions of law in investment treaty cases; where reported, these are considered in this book.


1.51  The subject matter of this book comprises three distinct but often interrelated sources of legal stability. Firstly, it examines and assesses the variety of contractual mechanisms used to promote stability in long-term contracts in the international energy industry. These include both dedicated contract provisions such as stabilization clauses, and specific contractual instruments such as the legal stabilization agreements used in certain Latin American countries. Secondly, it considers in some detail the BITs and MITs which provide investors with recourse to international arbitration in the event of a dispute. Finally, it considers the stability provided to investors by the domestic legal setting which in many countries provides for various forms of stability guarantees for the contracts which investors make with host states or state entities. This tripartite setting is the legal context for ‘stability’ as it is understood in this book. Inevitably, there is an interface with wider trends in international investment law, but the reader is reminded of a caveat already made: the focus of this study is energy-specific, and the result is not intended to be a treatise on international investment law, even if it contributes to an understanding of it.

Arbitral awards

1.52  This study makes use of arbitral awards from several sources. However, it should be emphasized that many disputes in the international energy industry are settled before they reach the stage of an arbitral award, reflecting the importance of both commercial realities and the need to preserve a long-term relationship between investor and host state. Materials relevant to cases that do not reach the award on the merits stage are nevertheless included in this study, not least given the insights that may be gleaned from the frequent challenges made by parties at the jurisdiction stage.

Environment and human rights

1.53  Looking to the future, this study examines the growing challenges presented by environmental and ‘social’ risk to the stability of long-term energy investment agreements (chapter 10). If an investor seeks to stabilize core economic provisions of a long-term investment agreement, does this mean that a host state’s actions will be so limited that it may not implement its human rights obligations in international law? Does that extend to the social and environmental obligations of a state and if so, how? From a legal point of view, this is an area fraught with definitional questions and replete with the language of aspiration. Several arbitral awards have also been obliged to consider how the protections offered to investors through BITs fit with the protections of human rights offered in international law or the scope of sovereign powers to act in support of environmental protection.

(p. 24) 1.54  Chapter 10 also reviews the hardening of environmental obligations and their potential impact given the dynamic potential of such obligations: changing attitudes may be reflected in international treaty obligations and a more onerous set of commitments during the life of the contract. Is it necessary for investors to seek stability of contract in non-economic areas such as environmental protection and social issues? These developments, especially when seen in the context of the development of climate change law, appear likely to generate a further, important source of constraint on the stability of investor–state relations.

(4)  Structure

1.55  This book has a tripartite structure. Part I examines the relevant parts of the international investment regime to the pursuit of stability in long-term energy contracts. It considers the basic problem of investor vulnerability to unilateral change by the host state after the investment has been made and how investors have, by cooperating with states, developed contract-based mechanisms such as stabilization clauses, and treaty-based mechanisms in international investment law to mitigate this risk. It also examines in some detail the rules that emerged from a set of ‘classic’ arbitral awards many years ago but which retain considerable influence in legal doctrine. Different legal responses have emerged since then, particularly those that are treaty-based, and have now been widely tested, including how they interact with contract-based stability, supplementing and reinforcing it. This treaty-based framework which has emerged over the past twenty-five years or so is currently being reformed but enough material is available to assess its impact on the stability of long-term investments in the energy and natural resources industries.

1.56  Part II is concerned with the tests which the new investment regime has faced and the impact of these tests upon contract-based stability. It reviews this through a general overview of treaty practice, and a case study approach to three geographically large energy regions. In a separate chapter, it addresses new challenges that are emerging in investor–state relations in areas such as environmental protection, human rights, and enforcement. These risks to the stability of long-term agreements are of recent origin.

1.57  Finally, Part III examines two important areas relevant to the stability of investments: the prospect and practice of damage awards in the event of a breach of state assurances, and the enforcement of arbitral awards, before concluding with an overall assessment and a look ahead. The question addressed is whether the various steps taken in pursuit of stability have in fact led to an improvement in the investors’ ability to mitigate risk: for example, by smoothing out the cycles which generate investor vulnerability, while protecting state interests. If so, have they done so at the price of harming the sense of mutual benefit that states and investors need to have about the operation of the international investment regime? Have they depoliticized the legal relationship between the investor and the host state, or failed in this objective?


1  Vagts, D.F. (1978) ‘Coercion and Foreign Investment Rearrangements’, AJIL 72, 17–36 at 22.

2  The following list is based on the literature on various kinds of energy investments referred to in the footnotes of this book and descriptions of energy projects in the various arbitral awards it examines. Some may argue for the inclusion of other features in the list, such as innovation and national security. Innovation is certainly emphasized in most energy sectors, especially in reducing the carbon footprint. It is also directed at reducing costs and increasing energy efficiency and identifying new or alternative forms of energy (commercialization of hydrogen, and fusion, for example). Nonetheless, this seems to have an optional character rather than being a defining feature of energy investments compared with others, such as telecommunications. National security concerns are also evident in the energy sector, although these vary a great deal from one region to another. They are most evident in countries with import dependence on another or others, and in M&A transactions. The energy-specific character is arguably not unique since such concerns arise in other economic sectors such as IT/telecoms which are central to the workings of a nation-state economy.

3  Whether or not these six features (with or without the two additional contextual features) are sufficient to support a claim that the resulting combination of legal measures, principles and procedures applicable to energy investments constitutes an autonomous or emerging body of law unique to this sector of the international economy—a sort of lex specialis for energy investments, a lex energia—is not the main concern of this book. Individually, these features are not unique to the energy sector, even if collectively they have a presence in this sector that contrasts with most, and perhaps any other. For some, the existence of these features will not be enough to persuade them that this body of ‘energy law’ is any more than a subset, even if an important one, of international investment law in general. Even so, the assumption in this book is that, where there is an energy aspect to international investment law, its specialized usage, practice, or conceptual apparatus is very likely to influence the relevant law and its application to the settlement of disputes.

4  International Energy Agency (IEA) (2019) World Energy Investment, Paris: OECD at 11. This includes all sources of energy from coal, hydropower, solar, and nuclear power to oil and gas. The statistics for global gross domestic product and global gross capital formation are from 2018 (ibid, at 20). As such, they predate the effects of the COVID-19 pandemic.

5  This approach builds upon earlier work done by Cameron, P.D. & Malone, B. (2015) Dispute Resolution in the Energy Sector: Initial Report, Edinburgh: International Centre for Energy Arbitration (ICEA).

6  International Monetary Fund (IMF) (2015), Riding the Commodities Roller Coaster, Washington DC: IMF, 1.

7  The IEA statistics suggest much variation here among the different forms of energy, with overall a very large proportion (90 per cent) of total energy investment concentrated in high- and upper-middle income countries and regions. This category includes Brazil, Mexico, China, parts of the Middle East, and some Southeast Asian countries.

8  See chapter 10, paras 10.138–10.150.

9  There has been a growth of investment by entities based in China, India, Russia, and the Middle East which challenges the north (and largely Western) flows of investment to the global south. However, statistics show that where such flows can be described as ‘south–south’, they remain significantly less than those from the north to the south. Indeed, UNCTAD data reveals that a significant part of the FDI between developing countries is ultimately owned by developed country multinational enterprises. When measured based on ultimate ownership, the share of south–south investment in the total investment (2018 data) falls from 47 to 28 per cent: UNCTAD (2019) World Investment Report 2019, Geneva. Whatever its scale, the south–south axis of investment has impacts on energy disputes: for example, India’s Oil and Natural Gas Corporation (ONGC) registered a claim against Sudan in 2018 to recover funds lost from an oil project when part of Sudan seceded in 2011, the first arbitration claim ever filed by ONGC against a government: GAR, 17 April 2018, ‘Indian state energy company brings claim against Sudan.’

10  This is underlined by the joint work of four international organizations: the IMF, the OECD, the United Nations, and The World Bank in the Platform for Collaboration on Tax, which aims at framing technical advice to developing countries as they seek more capacity support and greater influence in the design and implementation of standards on international tax matters: <https://www.worldbank.org/en/programs/platform-for-tax-collaboration> (accessed 25 May 2021).

11  More than 90 per cent of energy investment is financed from the balance sheets of investors (using retained earnings from business activities, including those with regulated revenues), ‘suggesting the importance of sustainable industry earnings, which are based on energy markets and policies, in funding the energy sector’: IEA (2017) 13. Project finance (which involves external lenders that share risks with the project sponsor and depends on cash flows for a given asset) has a small role but is especially significant in integrated LNG projects, some oil refining projects and a growing amount of power generation investment, including the use of solar PV and wind.

12  Royal Dutch Shell Annual Report and Form 20-F for the year ended 31 December 2018, 9.

13  ‘World’s Biggest Sovereign Wealth Fund To Ditch Fossil Fuels’, The Guardian, 12 June 2019.

14  The term of a typical energy or natural resource project will normally be much longer than the term of office of the host state government that welcomed the initial investment and committed the state to its terms and conditions. Achievement of the investor’s objective is therefore vulnerable to the effects of a change of policy by a successor government, or a broader political realignment in the host country, perhaps following some dramatic economic change of circumstances, prolonged conflict, or even an abrupt regime change.

15  OECD Development Centre Policy Dialogue on Natural Resource-based Development (2019), p. 4.

16  ECT, Art 18.

17  IMF (2015) The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times, 2. Oil price volatility has attracted research interest among energy economists. For overviews of the trends in research, see Kilian, L. (2010) ‘Oil Price Volatility: Origins and Effects’, Staff Working Paper ERSD-2010-02, World Trade Organization, January 2010; Stevens, P. (2005) ‘Oil Markets’, Oxford Review of Economic Policy 21, 19–42; Energy Charter Secretariat, Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas, 2007.

18  For example, see the literature cited in chapter 1 of Cameron, P.D. & Stanley, M.C. (2017) Oil, Gas and Mining: A Sourcebook for Understanding the Extractive Industries, Washington DC: World Bank Group, 3–17; and BGR (Bundesanstalt fuer Geowissenschaften und Rohstoffe/Federal Institute for Geosciences and Natural Resources), CCSI (Columbia Centre for Sustainable Investment), and Kienzler, D. (2015) Natural Resource Contracts as a Tool for Managing the Mining Sector, Hannover: BGR.

19  Karl, J. (2014) ‘FDI in the Energy Sector: Recent Trends and Policy Issues’, in de Brabandere, E. & Gazzini, T. (eds) Foreign Investment in the Energy Sector: Balancing Private and Public Interests, Leiden: Brill/Nijhoff.

20  The International Renewable Energy Agency (IRENA) describes it in these terms: ‘The energy transition is a pathway toward transformation of the global energy sector from fossil-based to zero-carbon by the second half of this century. At its heart is the need to reduce energy-related CO2 emissions to limit climate change’: <https://www.irena.org/energytransition> (accessed 25 May 2021).

21  Renewables 2019 Global Status Report: see <https://www.ren21.net/gsr-2019/pages/summary/summary/> (accessed 25 May 2021). This figure does not include hydropower projects larger than 50 MW. Much of this investment has been in solar power.

22  Further, energy-related claims can also extend to the various minerals such as lithium and cobalt that are essential to modern batteries to run electric vehicles. Mining disputes no longer fall neatly into a different, largely unrelated category, and are more obviously part of an energy supply chain.

23  Jenkins, P. (2020) ‘Energy’s Stranded Assets are a Cause of Financial Stability Concern’, Financial Times, 2 March 2020 (based on FT data).

24  Ibid. The year was 2018. The report also notes that if traditional private capital investors such as banks and large asset funds withdraw from the sector, ‘non-banks’ (less regulated and less accountable) may fill the gap if the cash flow is attractive. The capital flow need not simply cease altogether.

25  For example, many of the contributions in Leal-Arcas, R. (ed) (2018) Commentary on the Energy Charter Treaty, Cheltenham: Edward Elgar; see also citations in the footnotes in chapter 4 below.

26  The most robust claims in defence of a sui generis discipline have been around the notion of a ‘lex petrolea’ or international oil and gas law. See Bishop, R.D. (1998) ‘International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea’, YB Comm Arb 23, 1131; Childs, T.C.C. (2011) ‘Update on Lex Petrolea: The Continuing Development of Customary Law relating to International Oil and Gas Exploration and Production’, JWEL&B 4, 1; Talus, K., Looper, S. & Otillar, S. (2012) ‘Lex Petrolea and the Internationalization of Petroleum Agreements: Focus on Host Government Contracts’, JWEL&B 5, 181–93; Martin, T. (2012) ‘Lex Petrolea in the International Oil and Gas Industry’, in King, R. (ed) Dispute Resolution in the Energy Sector: A Practitioner’s Handbook, London: Globe Law and Business.

27  For different kinds (and tones) of criticism, see Bowman, J.P. (2015) ‘Lex Petrolea: Sources and Successes of International Petroleum Law’, Texas State Bar Oil, Gas & Energy Res L Sec Rep 39, 81–94; Wawryk, A. (2015) ‘Petroleum Regulation in an International Context: The Universality of Petroleum Regulation and the Concept of lex petrolea’, in Hunter, T. (ed) Regulation of the Upstream Petroleum Sector: A Comparative Study of Licensing and Concession Systems, Cheltenham: Edward Elgar, 3–35; Daintith, T. (2017) ‘Against “lex petrolea”’, JWEL&B 10, 1–13.

28  Redgwell, C. (2016) ‘International Regulation of Energy Activities’, in Energy Law in Europe (3rd edn), Oxford: OUP, 13–144. At an even further remove from investment law is the focus on energy justice that fits into and builds on the energy transition discussion: For example, Benjamin K. Sovacool and M.H. Dworkin (2014), Global Energy Justice: Problems, Principles and Practices, Cambridge: CUP.

29  This contrasts with the perspective offered by Stephan Schill who argues that energy investment law ‘epitomizes a regulatory approach to investment relations, embedding them in a broader governance framework of economic, environmental and social governance’: Schill, S. (2014) ‘Concluding Observations: Foreign Investment in the Energy Sector: Lessons for International Investment Law’ in De Brabandere, E. & Gazzini, T. (eds) Foreign Investment in the Energy Sector: Balancing Private and Public Interests, 259–282 at 261. Indeed, one can find evidence of this governance framework in the ECT, for example, but it is striking how much of the non-investment provisions of the ECT that can be taken to support its governance aspiration have become irrelevant (trade and transit) or are very weak in their content (competition, environment). The ECT is on stronger ground when it provides for protection of pro-market measures such as access to capital markets, and investment promotion. Even then, such provisions have a uniqueness that is explicable more in terms of the context from which the ECT emerged than an attempt at ‘economic governance’.

30  cf. Schill (2014) 267. The most influential definition of energy law sees it as the ‘allocation of rights and duties concerning the exploitation of all resources between individuals and the government, between governments and between states’: Bradbrook, A. (1996) ‘Energy Law as an Academic Discipline’, J En Nat Res L 14, 194. This is implicitly nation-based (there are few international bodies that allocate rights, except under the Law of the Sea Convention and various Joint Development Zones), regulatory in approach (it does not capture international gas contracts, for example) and public law in orientation, understating the extensive role of international commercial law in energy transactions (oil trading, for example). Since this definition was offered, ‘energy law’ has become highly internationalized in some areas (EU energy law, energy investments under international treaties, for example), limiting further the definition’s ability to capture its subject matter. More recent work has taken a consciously consolidationist approach, represented largely by the work of R. J. Heffron (2021) Energy Law: An Introduction (2nd edn), New York: Springer, and especially R.J. Heffron, A. Ronne, J.P. Tomain, A. Bradbrook and K. Talus (2018), ‘A Treatise for Energy Law’, JWEL&B 11(1), 34-48.

31  In this context, the comprehensive overview of model contracts in the hydrocarbons sector may be noted: Martin, A.T. & Park, J.J. (2010) ‘Global Petroleum Industry Model Contracts Revisited: Higher, Faster, Stronger’, JWEL&B 3, 4.

32  For example, Bamberger, C. (1996) ‘The Energy Charter Treaty and Beyond’ in Waelde, T.W. (ed) The Energy Charter Treaty and Beyond: An East–West Gateway for Investment & Trade, London: Kluwer Law International.

33  Recital (5) of the Preamble: ‘Wishing to implement the basic concept of the European Energy Charter initiative which is to catalyse economic growth by means of measures to liberalize investment and trade in energy.’

34  United Nations (2009) ‘The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries’, UNCTAD Series on International Investment Policies for Development, Geneva: UNCTAD/ DIAE/IA/2009/5, 24.

35  However the UNCTAD Report goes on to add that ‘[i]n competitive and less regulated industries, foreign investors have to rely on the host country’s overall laws and regulations, its track record and general reputation as regards predictability and stability of key policies that matter for FDI’: ibid, at 24–25.

36  A leading light in the early drive by international organizations to support investment in developing countries was the late Ibrahim Shihata, General Counsel to the World Bank. In one of his many publications, (1987) ‘Factors Influencing the Flow of Foreign Investment and the Relevance of a Multilateral Investment Guarantee Scheme’, Int’l L 21, 671 at 686–687, he noted: ‘There are quantitative and qualitative costs attached to perceptions of instability in developing countries. Quantitatively, if the risk profile is perceived to be too high, the projected investment would not be made, thus decreasing the overall volume of capital inflows into the host country … Investments will also be carried out at a higher cost, to the detriment of the host country, for a premium will be charged for the added risks, and anticipated returns will have to be much higher to compensate for such risks’.

37  World Bank, World Development Report 2005 (‘A Better Investment Climate for Everyone’) at 179, available at: http://siteresources.worldbank.org/INTWDR2005/Resources/FNL_WDR_SA_Overview6.pdf (last accessed 27 December 2019); Paulsson, J. (2010) ‘The Power of States to Make Meaningful Promises to Foreigners’, Journal of International Dispute Settlement 1, 341 at 348.

38  Studies have been carried out into the impacts of policy-related economic uncertainty: Baker, S.R., Bloom, N. & Davis, S.J. (2013) ‘Measuring Economic Policy Uncertainty’, Chicago Booth Research Paper No 13-02: <https://dx.doi.org/10.2139/ssrn.2198490> (accessed 27 May 2021) (the authors developed an aggregate index to measure the overall level of policy uncertainty in an economy); Gulen, H. & Ion, M. (2016) ‘Policy Uncertainty and Corporate Investment’, The Review of Financial Studies 29, 523–564 (empirical support provided to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility); Fabrizio, K.R. (2012) ‘The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation’, The Journal of Law, Economics and Organization 29, 765–798 (a US-focused study, following the implementation of Renewable Portfolio Standard policies; perceived regulatory instability reduces new investment and undermines policy goals).

39  The notion of the obsolescing bargain was developed by Raymond Vernon, a former Professor at Harvard Business School and Director of Harvard University’s Centre for International Affairs: Vernon, R. (April 1967) ‘Long-Run Trends in Concession Contracts’, Proceedings of the American Society for International Law. It denotes ‘the process that leads governments repeatedly—almost predictably—to reopen the issues involved in the exploitation of raw materials’: Vernon, R. (1971) Sovereignty at Bay: The Multinational Spread of US Enterprises, New York: Basic Books, 53–60 at 53. It has been used extensively as a model of investor-state relations: for example, Wells, L.T. Jr. & Gleason, E. (1995) ‘Is Investment in Foreign Infrastructure Still Risky?’, Harvard Business Review (Sept/Oct), 1–12; Post, A.E. & Murillo, M.V. (2014) ‘Revisiting the Obsolescing Bargain in Post-Crisis Argentina: Investor Portfolios and Regulatory Outcomes’: <https://leitner.yale.edu/sites/default/files/files/resources/papers/PostMurilloYaleJan.7.2014.pdf>; Becker, E. (2018) ‘Saudi Arabian Oil: The Obsolescing Bargaining Model’, TCNJ Journal of Student Scholarship, 20. For applications of the idea to energy infrastructure investment, especially ‘greenfield’ independent power generation, see Woodhouse, E.J. (2006) ‘The Obsolescing Bargain Redux? Foreign Investment in the Electric Power Sector in Developing Countries’, NY J Int’l L & Policy 38, 121; Gould, J.A. & Winters, M.S. (2007) ‘An Obsolescing Bargain in Chad: Explaining Shifts in Leverage between the Government and the World Bank’, Business and Politics 9(2): http://www.bepress.com/bap/vol9/iss2/art4; and Wells, L. & Ahmed, R. (2007) Making Foreign Investment Safe: Property Rights and National Sovereignty, Oxford: OUP, 66–74.

40  Vernon (1971) at 59–60 is emphatic that a change of government can add a decisive momentum to this process: ‘even when the original agreement between foreign investors and the government is modern and well balanced, this fact adds only marginally to the security of the investor’. Changes in policy usually have a reactive character; they presuppose a prior, effective policy in persuading investors to make significant commitments, at which time the obsolescing bargain process kicks in, creating the conditions that a later, incoming government may choose to characterize as unsatisfactory and requiring remedial action.

41  Eden, L., Lenway, S. & Schuler, D.A. (2005) ‘From the Obsolescing Bargain to the Political Bargaining Model’, in Grosse, R. (ed) International Business and Government Relations in the 21st Century, Cambridge: CUP, 251–272. For a less critical appraisal, see Serik Orazgaliyev’s study, Orazgaliyev, S. (2018) ‘Reconstructing MNE-Host Country Bargaining Model in the International Oil Industry’, Transnational Corporations Review 10, 30–42.

42  Daniel, P. & Sunley, E.M. (2010) ‘Contractual Assurances of Fiscal Stability’, in Daniel, P., Keen, M., McPherson, C., et al. (eds) The Taxation of Petroleum and Other Minerals: Principles, Problems and Practice, New York: Routledge.

43  IMF (2015) ‘The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times’, Fiscal Monitor October 2015, IMF (available at <https://www.imf.org/en/Publications/FM/Issues/2016/12/31/The-Commodities-Roller-Coaster-A-Fiscal-Framework-for-Uncertain>). It notes that commodity prices are volatile, unpredictable, and subject to long-lasting shocks, and examines the conduct of fiscal policy under the uncertainty caused by dependence on natural resource revenues.

44  Vagts (1978) at 22.