Economic
Stability and Change of Law provisions in a PSC
The use of stabilization clauses is a direct response to material changes in legislation that altered the economic positions of foreign companies under previously concluded long term investment agreements. Investors rely on stabilization clauses to ensure relative stability of the main investment conditions needed for the successful performance of their investment ventures.
For the foreign investors and their bankers, stabilization concerns among other things, the stability of the fiscal regime to ensure investment recovery, security of tenure over property and title, the ability to sell, the ability to retain and repatriate foreign exchange earned and the ability to operate the project under reasonably foreseeable conditions. Foreign Investors would also be concerned about non financial matters like changes in labour and environmental law or changes in the interpretation of the existing law to the extent that it affects their interests adversely.
Stabilization Clause can be primarily of 2 types:
· Saudi Arabia v. Arabian American Oil company (Aramco)
· Kuwait v. American Independent Oil Company (Aminoil)
· Agip Company v. People’s Republic of the Congo
· Amoco International Finance Corporation v. Islamic Republic of Iran.
It is important to note however that there are many petroleum rich host countries that do not offer clauses designed to provide STABILIZATION and that IOCs have no difficulty living with such a legal regime, as the legal and political risks are low in those host countries (UK, Norway are few examples).
In other countries, while the legal and political risks may be high, the perception of the geological risk is so low that IOCs accept a contract without stabilization provisions (Saudi Arabia, Brazil are some examples).
The use of stabilization clauses is a direct response to material changes in legislation that altered the economic positions of foreign companies under previously concluded long term investment agreements. Investors rely on stabilization clauses to ensure relative stability of the main investment conditions needed for the successful performance of their investment ventures.
For the foreign investors and their bankers, stabilization concerns among other things, the stability of the fiscal regime to ensure investment recovery, security of tenure over property and title, the ability to sell, the ability to retain and repatriate foreign exchange earned and the ability to operate the project under reasonably foreseeable conditions. Foreign Investors would also be concerned about non financial matters like changes in labour and environmental law or changes in the interpretation of the existing law to the extent that it affects their interests adversely.
In
the period between the first and second world war, American companies began to
include stabilization clauses in the concession contracts to prevent acts of
nationalization by Latin American governments.
Stabilization Clause can be primarily of 2 types:
1.
Freezing provision
2.
Economic Balance provision
1. Freezing Clause :
It
stipulates that neither the fiscal, nor the non-fiscal elements (social &
environmental issues) of the contract
may be changed
by the host government during life of the contract without the two parties consent (Angola,
Tunisia, Mozambique etc) .
Examples:
a.
Cl 30.7(d) Mozambique PSC Model (2001) :
The
Government shall not revoke or amend the Autorisation granted to ENH to explore
for and produce Petroleum from the contract Area without taking effective
measures to ensure that such revocation or amendment does not affect the rights
granted to the Contractor hereunder
CL 30.7(e)
The Government will not without the agreement of the contractor exercise its
legislative authority to amend or modify the provisions of this Agreement and
will not take or permit any of its political subdivisions, agencies and
instrumentalies to take any administrative or other action to prevent or hinder
the contractor from enjoying the rights accorded to it hereunder.
b.
Cl. 18(m) Ivory Coast 1996 Petroleum Code
The
petroleum contract in particular must set…. The legal conditions concerning the
applicable law, the stability of conditions, the cases of force majeure and the
regulation of disagreements
c.
Cl. 24.1 Tunisia 1989 PSC Model
The contractor shall be subject to the
provisions of this Contract as well as to all laws and regulations duly enacted
by the Granting Authority and which are not incompatible or conflicting with
the Convention and/or this Agreement. It is also agreed that no new
regulations, modifications or interpretation which could be conflicting or incompatible
with the provisions of this Agreement and/or the Convention shall be applicable
2. Economic Balancing Clause:
Essentially, the provision stipulates
that if the host government adopts a measure subsequent to the conclusion of
the petroleum contract in which the fiscal terms are stated, that is likely to
have damaging consequences to the economic benefits for one or both parties, a
re-balancing will take place in order to restore the economic balance of the
contract.
Two
(2) ways to achieve the economic balance:
i.
Adjustment may be automatic or achieved in a
manner stipulated in the contract.
ii.
Make express provision for the parties to
negotiate how amendments should be handled
Examples
of this are Vietnam, India, Indonesia, Egypt etc.
a.
Vietnam PSC Cl 18.1.3
If after the Effective Date, existing
law(s) and regulation(s) are amended or annulled or new law(s) and
regulation(s) are introduced in Vietnam, or an official interpretation or
application of changes of regulations of a law, or licence is cancelled, not renewed,
or the conditions therefore are revised adversely affecting the economic
interest of the CONTRACTOR under this Contract, then upon notice from the
CONTRACTOR the Parties shall consult promptly with each other and make such
changes to this Contract as are necessary both to maintain the CONTRACTOR’s
rights, benefits and interests hereunder, including CONTRACTOR’s share of
Profit Oil or Profit Gas, as at the Effective Date and to ensure that any
revenues or incomes or profits, including any one or more of the foregoing,
derived or to be derived to the CONTRACTOR under this Contract, shall not in
any way be diminished in comparison to that which was originally contemplated
as a result of such changes of laws or annulment therefrom or their interpretation
or application or as a result of such changes, cancellation or non-renewal of
approvals or licences.
b.
Egypt
Exploration, Development and
Production of Petroleum, which take place after the Effective Date, and which
significantly affect the economic interest of this Agreement to the detriment
of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the Arab
Republic of Egypt the proceeds from sales of CONTRACTOR’s Petroleum, CONTRACTOR shall notify EGPC (the
NOC) of the subject legislative or regulatory measure.
c.
Indonesian PSC Cl 15.4.3
It is agreed further in this CONTRACT
that in the event that a new prevailing Indonesia Income Tax Law comes into
effect, or the Indonesia Income Tax Law is changed, and CONTRACTOR becomes
subject to the provisions of such new or changed law, all the percentages
appearing in Section VI of this CONTRACT as applicable to the portions of
CONTRACTOR and GOI’s share so affected by such new or changed law shall be
revised in order to maintain the same net income after tax for CONTRACTOR or
all Participating Interest Holders in this CONTRACT.
d.
Indian PSC Cl 17.10.
If any change in or to any Indian law,
rule or regulation dealing with income tax or other corporate tax,
export/import tax, excise, customs duty or any other levies, duties or taxes
imposed on Petroleum or dependent upon the value of Petroleum results in a
material change to the expected economic benefits accruing to any of the
Parties after the date of execution of the Contract, the Parties shall consult
promptly in good faith to make necessary revisions and adjustments to the
Contract in order to maintain such expected economic benefits to each of the
Parties, provided, however, that the expected economic benefits to the Parties
shall not be reduced as a result of the operation of this Article.
In
the early 1980s, revision of petroleum contracts and nationalisation of
petroleum industry assets triggered confrontational arbitration procedures: a few cases:
· Saudi Arabia v. Arabian American Oil company (Aramco)
· Kuwait v. American Independent Oil Company (Aminoil)
· Agip Company v. People’s Republic of the Congo
· Amoco International Finance Corporation v. Islamic Republic of Iran.
It is important to note however that there are many petroleum rich host countries that do not offer clauses designed to provide STABILIZATION and that IOCs have no difficulty living with such a legal regime, as the legal and political risks are low in those host countries (UK, Norway are few examples).
In other countries, while the legal and political risks may be high, the perception of the geological risk is so low that IOCs accept a contract without stabilization provisions (Saudi Arabia, Brazil are some examples).
