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Arbitration matters in oil and gas disputes in the Asia Pacific region

November 05, 2021
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This article has been written by Ashok Om Prakash Pandey pursuing the Certificate Course in International Commercial Arbitration and Mediation from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho). 

Introduction

With commercial transactions becoming more and more complex and technical, arbitration is generally chosen by the contracting parties as the mode of dispute resolution. This is because it not only gives the liberty to choose the procedural as well as the substantive law governing the dispute, it also gives parties the liberties to pick an arbitrator of their choice, who would possess the technical skills required to effectively adjudicate upon the dispute, an option which would otherwise not be available if the dispute was subjected to courts. Moreover, while courts’ intervention is needed for the challenge and enforcement of the award, it is a settled principle that courts cannot delve into the merits of the dispute. 

Maritime disputes, oil and gas-related disputes, construction disputes, and information technology-related disputes are some examples of disputes which have created their own sub-domains in the domain of international commercial arbitration. In this article, we shall stick our focus to oil and gas disputes and the efficacious resolution of such disputes, particularly in the Asia-Pacific region.

Oil and gas disputes (along with the other examples of the complex disputes given above), require flexibility in terms of various aspects such as joinder of parties, the procedure governing the adjudication of the dispute, third party funding regulations etc. In the light of these, let us see how the Asia-Pacific region is working to make itself a dispute resolution friendly destination for its growing oil and gas trade. 

How is the Asia-Pacific coping?

While the global oil consumption growth took a dip in 2020, the lowest dip was recorded by the Asia Pacific region i.e. a dip of 5.9 % against the global average dip of 9.7 %. This dip is majorly attributable to the global lockdown and stoppage of industries on account of the COVID pandemic. However, a look at the statistics of the preceding years is testimony to the growing demand for oil and gas in the Asia-Pacific region. It is estimated that the Asia-Pacific’s share of energy consumption is going to rise up to around 48% of the global energy consumption by 2040. As of 2019, the Asia Pacific region has the highest consumption of oil compared to any other region (35% of the global consumption) and it accounted for 72.9% of the global liquefied natural gas import in 2017. As the good old saying goes, with more development come more disputes. And this growing potential of disputes pertaining to the oil and gas sector call for changes in the Rules of institutes offering arbitration, and also in the national laws of countries.

Amendment of Institutional Rules

Some notable changes were made by some renowned institutions in the Asia-Pacific region which provides a conducive atmosphere for the oil and gas industry to prosper in this region. The most notable development took place as early as November 2014 when the Perth Centre for Energy and Resources Arbitration (PCERA) was established in Perth, Australia. It comprises an expert panel of arbitrators, specifically for energy and resources related arbitrations. Its rule is a more complex adoption of the UNCITRAL Model Law on Arbitration which ensures uniformity of procedure as per international standards. 

The Hong Kong International Arbitration Centre revised its Rules in 2018 to include a variety of new developments which would benefit all forms of international arbitrations, including disputes relating to oil and gas. The most notable developments include early settlement of claims and counterclaims (Article 43), the commencement of a single arbitration between multiple contracts between two parties (Article 29), the requirement that the tribunal notifies an approximate date of award delivery not more than three months after the proceedings are concluded (Article 31.2), shortening the time limits under an emergency arbitration (Article 23.1 and Schedule IV). Furthermore, the amendments also introduce provisions regulating third party funding where the concerned third party is required to disclose the existence of any funding agreement and details of the funder (Article 34.4).

Singapore International Arbitration Centre (SIAC) also amended its Rules in 2016 wherein it added provisions relating to consolidation of two or more arbitrations (Article 6), Joinder of parties to an ongoing arbitration (Article 7), early dismissal of claims and defenses (Article 29).

Keeping in view the complexities surrounding oil and gas disputes, involvement of multiple parties in a transaction who may or may not be parties to the arbitration agreement, and the funding of arbitration by third parties since arbitration at renowned institutions can be a costly affair, are all instances which the newly amended Rules of the abovementioned prominent arbitration centres of the Asia-Pacific region adequately discuss. However, a dispute may not always arise out of commercial contracts. Cross-border investments in the oil and gas sector have exponentially increased over the past years. Therefore, a lot of investors raise claims under the dispute resolution clause of the investment treaty which governs the business relationship. In the light of the same, let us look at some developments in the field of investment arbitration concerning oil and gas disputes.   

Oil and gas disputes and investment arbitration

Unlike commercial arbitrations which are governed by the law of the seat and have a scope limited to disputes pertaining to the commercial contract in question, investment arbitration covers a fairly broad ambit. Arbitration clauses in investment treaties (whether bilateral or multilateral) are fairly broad and cover any dispute which may concern the investment by the investor in the contracting state party. Unlike commercial arbitration, where the law of the seat is the axis around which the arbitration revolves, investment arbitrations are also governed by principles of international law and treaties and conventions which form an important source of international law.

The nations of Asia are parties to more than 1,200 investment treaties. In the light of this increasing trend of nations entering into BITs and MITs, relevant changes in the national laws and institutions having effective procedures to carry out an investment arbitration are necessary. The International Centre for the Settlement of Investment Disputes (ICSID) is the biggest and most important institution concerning investment treaty disputes. However, with oil and gas disputes being on the rise in the Asia-Pacific region, and the increase in claims arising out of such disputes in investment arbitrations, SIAC and CEITAC (China International Economic and Trade Arbitration Commission) have introduced Rules specific to investment arbitration. These Rules are the Investment Rules of the Singapore International Arbitration Centre, 2017 and China International Economic and Trade Arbitration Commission International Investment Arbitration Rules, 2017

Both these institutional Rules comprehensively cover various issues that ensure flexibility and effective dispute resolution under the investment treaty arbitration clause. While ICSID is still the front runner institute with the majority of the world’s BITs referring their disputes to investment arbitration before it, the fact that two Asia-Pacific Arbitration institutions have made their own rules on investment arbitration sends out a positive message for the other countries and their institutions.  

Investment Treaty Arbitrations 

Countries in Asia are party to more than 1,200 bilateral investment treaties or investment agreements, with each instrument typically providing for commitments by host states to certain standards of conduct. These instruments typically relate to the treatment of foreign investments and facilitate the states’ consent that breaches of such standards may be submitted to arbitration. As such, it is unsurprising that a significant number of oil and gas disputes in the Asia Pacific region have also been submitted to arbitration under various investment instruments. A number of multilateral treaties also cover the Asia Pacific region, including the 2009 ASEAN Comprehensive Investment Agreement (ACIA) and the Comprehensive and Progressive Agreement for TransPacific Partnership (CPTPP), with both providing for arbitration. As discussed in our July 2018 article in the context of the Belt and Road Initiative, there have so far been few China-related investor-state arbitrations. This is because, historically, these types of disputes have been resolved diplomatically or by direct settlement between the parties. It remains to be seen whether China, the biggest economy in the region, will join the CPTPP, 9  or whether it will focus on other multilateral treaties with other trade partners in the Asia Pacific region, including the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the AsiaPacific (FTAAP).

Conclusion

It is often predicted that the next global superpower would be an Asian country. And with greater development would come greater energy consumption and effectively, more disputes in the energy sector. The Asia-Pacific region has embarked on a positive journey by bringing about relevant and contemporary changes to the Rules of its renowned arbitration institutions. This would not only ensure a greater inflow of capital and infrastructure in the region, but also easier and effective settlement of disputes.

Price movements in oil and gas markets are a key driver of change in the industry. They are also a driver of disputes. Parties to energy-related contracts that were formed and negotiated in a different price environment may find themselves or their counterparts tied to agreements that are no longer as profitable as had been anticipated. Further exploration, appraisal or development of existing oil and gas assets may proceed on a slower and more conservative timescale. Parties may seek to get out of or revise, a bad bargain. All of this can give rise to disputes; indeed, the recent low price environment has reportedly given rise to a number of disputes arising out of unpaid invoices or cost overruns, or the suspension, renegotiation or cancellation of oil exploration and drilling obligations.

References 

  1. https://globalarbitrationreview.com/review/the-asia-pacific-arbitration-review/2020/article/oil-and-gas-arbitration-in-the-asia-pacific-region#endnote-019 
  2. https://www.siac.org.sg/images/stories/articles/rules/IA/SIAC%20Investment%20Rules%202017.pdf 
  3. https://siac.org.sg/our-rules/rules/siac-rules-2016 
  4. https://droitfrancechine.org/wp-content/uploads/2019/01/CIETAC-International-Investment-Arbitration-Rules-China-International-Economic-and-Trade-Arbitration-Commission.html.

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