For energy companies, these issues provide both opportunities and cause for concern. The increased demand, coupled with the threats to supply, mean there is an ever greater potential return for energy investments.
In turn, this means energy companies are more willing than ever to invest in uncharted territory.
Such investments can be risky and the investor will look to have as much protection as possible, should things go wrong. This may come from the agreements the investor enters into when investing in a new state — with state entities, private domestic companies of the host state or other global players. However, when investing in new territories, energy companies will also seek protection from actions of the government of the host state. This protection may be found in international law and, in particular, in treaties between the state of the investor and the state in which it is investing.
Such a treaty may take the form of a bilateral investment treaty between two states, providing for international law standards of treatment to be applied to investments by investors of one of the state parties in the territory of the other state party. Alternatively, it may be a multilateral treaty, offering similar protection, but covering all of the state signatories to that treaty. For energy investors, one such multilateral treaty, the Energy Charter Treaty, is particularly relevant.
Geographical scope
The Energy Charter Treaty is an unprecedented treaty, providing the broadest multilateral framework of rules in existence under international law governing energy co-operation. To date, 51 states and the European communities have signed or acceded to the Treaty. Signatories include members of the European Union, most of the former
A number of important states have observer status to the Energy Charter Treaty. Observer status allows them certain privileges concerning the Treaty, such as access to certain information and the right to attend meetings. For some (but not all) of these observer states, this is the first step to becoming a full member. Until that happens, however, investments within observer states will not be protected by the Energy Charter Treaty. Observer states include the
The Treaty focuses on the following three broad areas:
(i) the protection of investment;
(ii) trade and transit; and
(iii) the environment.
The signatories have also entered into separate protocols on energy efficiency and trade (although the latter was not signed by all of the original Treaty signatories). It is, however, the investment protection provisions that will be most relevant to energy companies. These are based on the provisions found in many investment treaties and are supported by the right of investors to bring claims directly against the state in which they have invested. Such a right, which was revolutionary when it was first introduced, has now been established for many years and companies have successfully exercised their right to bring claims against sovereign states on many occasions. The Energy Charter Treaty breaks new ground, however, in its unprecedented geographical reach.
The investment protection provisions of the Energy Charter Treaty include:
(i) protections offered by international law including “fair and equitable treatment”, “the most constant protection and security” and no “unreasonable or discriminatory measures”;
(ii) requirement of the state to observe any obligations it has entered into with the investor;
(iii) most favoured nation treatment;
(iv) no expropriation without prompt, adequate and effective compensation;
(v) full freedom of transfer of profits and repatriation of investments; and
(vi) compensation for losses due to war or other armed conflict, states of national emergency or other similar event.
The exact scope of these protections, as they are found in other treaties, has been the subject of a number of arbitration awards as well as extensive academic consideration. This body of international law and opinion, as it relates to other treaties, can also be used to define the extent of the obligations of the state to investors under the Energy Charter Treaty.
Dispute resolution
The Energy Charter Treaty provides three possible avenues for investors to bring disputes against states to international arbitration. The dispute may be submitted to:
(i) the International Centre for the Settlement of Investment Disputes (ICSID);
(ii) a sole arbitrator or an ad hoc arbitration tribunal established under the rules of the United Nations Commission on International Trade Law; or
(iii) the Arbitration Institute of the Stockholm Chamber of Commerce.
A party may take into account a number of considerations when deciding the type of arbitration it wishes to pursue. If it wishes to keep its dispute as confidential as possible it may wish to avoid ICSID, where disputes are publicised openly. A further consideration when deciding to use ICSID is that awards made pursuant to ICSID arbitrations can generally not be challenged in domestic courts (for example on the basis of a lack of jurisdiction), because the intention of the ICSID framework is to provide for the settlement of disputes free from the oversee of municipal law. However, ICSID has its own internal annulment system which some perceive to be less reliable than the arbitration review courts of the most prominent arbitration jurisdictions.
As of February 2007, the Secretariat of the Energy Charter Treaty was aware of 14 arbitration claims that had been brought by investors pursuant to the Treaty. Of those cases, 10 are still pending, two have been settled by the parties and in two cases the arbitral tribunal has made an award. Given that ad hoc or Stockholm Chamber of Commerce arbitrations may remain confidential, it is possible that there are other disputes pending or that have been resolved.
These cases have involved a number of different subject matters covering electricity sales agreements, nuclear power plants, oil and gas distribution and many other energy-related topics.
It is clear that energy investors are becoming increasingly comfortable with the use of the Treaty. Perhaps the most high-profile dispute to date has involved a series of cases being brought by the majority shareholders of the Russian oil giant Yukos following the alleged expropriation of their investment by
Valued at $33bn (£16.5bn), the dispute is the largest investment arbitration ever. With the former Yukos chief, Mikhail Khodorkovsky, currently serving eight years in a Russian jail, this dispute is politically highly-charged and there will be great interest in how Vladimir Putin or his successor’s government reacts to the claims. The first important hearing is expected to take place in June 2007, but it is expected to be a lengthy process before any resolution is reached.
The future
One major question mark remaining over the Energy Charter Treaty is the ratification by
It is hoped that an increasing number of states will join the Energy Charter Treaty in the future to ensure that investors have the security they need when making investments. In November 2006,
Where investors wish to invest in states that are not signatories to the Energy Charter Treaty, they will have to rely on any other treaties in existence if problems arise. This may be a bilateral investment treaty or one of the increasing number of regional multilateral treaties, such as the Economic Community of West African States Energy Protocol, itself modelled on the Energy Charter Treaty. Whichever instrument is used, it is likely that the number of energy disputes can only increase while the energy sector remains so volatile.
Matthew Weiniger is a partner and Nigel Mackay a lawyer in the litigation and arbitration practice at Herbert Smith.