University of Dundee

Stabilization Clauses
Cameron, Peter

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2020

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Cameron, P. (2020). Stabilization Clauses: Do They Have a Future? BCDR International Arbitration Review ,
7(1), 109-132.

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 Bahrain Chamber for Dispute Resolution
INTERNATIONAL ARBITRATION
REVIEW
Volume 7 June 2020 Number 1

GENERAL EDITOR
Nassib G. Ziadé

CONSULTING EDITOR
Antonio R. Parra

DEPUTY GENERAL EDITOR

Judith Freedberg

EDITORIAL COMMITTEE
Yousif Al Saif
Faris K. Nesheiwat
Salim S. Sleiman
Adrian Winstanley
 Bahrain Chamber for Dispute Resolution
INTERNATIONAL ARBITRATION
REVIEW
Volume 7 June 2020 Number 1

OIL AND GAS ARBITRATION IN THE MIDDLE EAST

Note from the General Editor 1

Articles

Aramco: The Story of the World’s Most A.Timothy Martin 3

Valuable Oil Concession and Its Landmark
Arbitration

Oil and Gas Disputes in the Middle East: A Essam Al Tamimi 53

COVID-19 Era Perspective

Petroleum Concessions in Egypt:A Recipe for Mohamed S. 73

Disputes? Abdel Wahab

Stabilization Clauses: Do They Have a Future? Peter D. Cameron 109

Arbitration of LNG Price Review Disputes Jonathan Sutcliffe & 133

Jonathan Blaney

Oil and Gas Arbitration: A Perspective from Thomas Williams & 143
Qatar Ahmed Durrani

COVID-19 and the Exceptions to Contractual Michael Polkinghorne & 149

Liability in Arab Contract Law Yasmine El Achkar
 JOURNAL OF INTERNATIONAL ARBITRATION

Caught Between a Rock and COVID-19: Graham Coop & 171

Sharing the Pain of Onerous Oil and Gas Roberto Lupini
Contracts in the Middle East

Changed Circumstances and Oil and Gas Roland Ziadé & Andrew 193
Contracts Plump

ICSID and Investor-State Petroleum Disputes Antonio R. Parra 225

in the MENA Region
 Stabilization Clauses: Do They Have a Future?

Peter D. CAMERON*

ABSTRACT

There are three pillars of legal stability in international oil and gas investments: stabilization
clauses, expectations of a stable legal framework under an investment treaty and guarantees set
out in the host state’s domestic legislation. The diverse and pervasive character of stabilization
clauses in investment agreements makes them the most important in practice.This article reviews
their resilience alongside the other two pillars and concludes that they retain significant
advantages. Even in a wider context of policies favouring a lower carbon consumption in the
energy sector, and consequent long-term change, such clauses are likely to remain a continuing
feature of investment agreements as a legal response to investors’ needs for predictability in
making long-term commitments.

1 INTRODUCTION
Rapidly changing energy markets, evidenced by sharp falls in the stock of the
most established international oil companies, pandemic impacts on demand and
daily media reporting on a historical shift to lower carbon usage in the global
economy, invite us to ask what future, if any, stabilization clauses have as the
guardians of stability in long-term energy contracts?
The answer need not involve an exercise in speculation since the future of
stabilization clauses has already been questioned, implicitly at least, by the growth
of alternative ways of providing legal stability to investors. Such clauses have
already evolved considerably as risk allocation mechanisms between investor and
host state. Further, they operate alongside the legal protection offered to investors
by international investment treaties, as well as protections embedded in domestic
laws. Taken together, we might call these protections the three pillars of legal
stability in international investment law, each one with a different character. In this
context of enhanced choice for investors, we may ask whether, over time, the

*
Peter D. Cameron is Professor of International Energy Law and Policy and Director of the Centre for
Energy, Petroleum and Mineral Law and Policy, at the University of Dundee. He is a Fellow of the
Royal Society of Edinburgh and acts as an international arbitrator at ICSID. His latest publication is
International Energy Investment Law (second edition, Oxford University Press, 2021), on which this
article draws.

Cameron, Peter D., ‘Stabilization Clauses: Do They Have a Future?’. BCDR International Arbitration Review
7, no. 1 (2020): 109–132.
© 2021 Kluwer Law International BV, The Netherlands
110 BCDR INTERNATIONAL ARBITRATION REVIEW

contract-based clauses have become less effective or less necessary? A more

speculative question about stabilization clauses is whether, given the abundant
economic and health problems in the 21st century that require flexibility in public
policy, and the need for states to implement their commitments to reduce
CO2 emissions under the Paris Agreement, clauses that seek to stabilize a bargain
struck between international investors and host states for the next 20 to 30 years
make any sense? For states, they surely impose unacceptable constraint on their
freedom to regulate, and for investors they may limit their ability to respond to the
unprecedented uncertainty that they face in energy markets.
This article responds to the first of these questions by examining the three
legal pillars of investment stability, concluding that stabilization clauses are likely to
remain with us for some time to come, partly because they have become diverse
and flexible in character, and partly because they still enjoy significant advantages
over the alternatives. The long-term cooperation between states and investors that
they presuppose is as urgent today as it was in decades past, especially since the
objectives of each of them – and perhaps especially of states – have become more
complex and challenging than ever before. Subsequently, the article makes a brief
exploration of the future of stability mechanisms in the context of rapidly
changing energy markets.
Although there is already a very substantial literature on stabilization clauses,
recent years have seen a significant expansion in contract transparency, allowing
contemporary scholars an opportunity to examine a much wider range of
contracts than was available to those in the past. Conclusions drawn are likely to
have surer foundations as a result.With respect to investment treaty awards, the role
of ICSID in publishing arbitral awards it has administered and of other websites
dedicated to their publication means that there is a rich supply of data on
stabilization clauses to the extent that they have figured in oil and gas disputes.This
trend towards greater transparency has been enhanced further by publication of
hitherto confidential awards through enforcement proceedings before national
courts.

2 HOW ARE STABILIZATION CLAUSES WORKING TODAY?

2.1 WHAT IS A STABILIZATION CLAUSE?

The inclusion of a clause or clauses on stability has long been a common practice
in the basic contracts reached by investors and host states in the international
energy industry, originating from as far back as the early 1930s. Its starting point
was a concern by international investors that a host state might unilaterally
nationalize their assets as had been done in parts of Latin America, and later in the
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 111

Middle East and North Africa. Although there are multiple ways in which contract
stabilization may be achieved, the essential idea is the same: the parties to the
agreement seek to provide contractual assurance that the investment terms at its
core on the date of signature will remain the same over the life of the agreement
unless they have agreed otherwise. Essentially, the parties are seeking to secure by
law both the economic terms and the ability to implement the project on a
commercial basis. Sometimes the scope of the investment terms may be defined
narrowly to comprise only fiscal matters; states may prefer to limit it to fiscal
matters and set out a list of the taxes and levies that are covered by it. Others may
permit a wider scope but insist on a ‘carve-out’ of matters such as public health,
safety, environment and national security. For many investors, a wider formulation
tends to be the preferred option, including the right to monetize (which may
include the right to export products, and sell interests in the investment), the right
to develop a petroleum discovery deemed to be commercial, an exchange regime
(to keep payments in hard currency, repatriate funds outside the host state and
make payments) and the governance of the project itself. Behind this choice of
scope will be the concern about a host state’s many levers within as well as outside
the contract to ‘persuade’ the investor that a change in fiscal terms should be
accepted. If, for example, the host state’s authority to approve an investor’s
development plan for a petroleum discovery is unfettered, it could be used to tie a
grant of approval to increased fiscal obligations and other conditions such as state
participation. Conversely, the scope of the clause may be defined in an asymmetric
or dynamic way to capture future benefits from changes in the legal and fiscal
regime to the advantage of the investor.
If a working definition of stabilization is required, the following may suffice:
in the context of an international energy contract, the term stabilization applies to all of
the mechanisms, contractual or otherwise, which aim to preserve over the life of the
contract the benefit of specific economic and legal conditions which the parties
considered to be appropriate at the time they entered into the contract.1
In many agreements, references to the parties’ aim of maintaining the
relationship which prevailed at the time of signature of the contract are explicitly
provided. However, quite often, the term ‘stabilization’ is applied less to the
exclusion of future legislative acts that may adversely impact on that relationship

1
Peter D Cameron, International Energy Investment Law: the Pursuit of Stability (Oxford: Oxford
University Press, 2010), 69. The purpose is not necessarily to subject an IOC to all relevant legal
conditions that prevail at the time the agreement is concluded since the parties may wish to provide
that the host government shall exempt or protect the IOC from the application of certain laws that are
in fact applicable as of the date at which the agreement was concluded. Further, the “specific
economic and legal conditions” may include an adaptation condition: the investor and/or state may
benefit from changes that occur in the wider fiscal environment during the life of the contract.
112 BCDR INTERNATIONAL ARBITRATION REVIEW

than to the provision of mechanisms which can manage the impacts of any new
legislation (a change in law) on the contract.

2.2 WHICH STABILIZATION CLAUSE?

If a host state decides to offer stabilization in an energy investment agreement,

there are a variety of ways in which it can do so. Many commentators have sought
to classify the various kinds of clause typically found.2 International practice is
highly diverse and is not standardized. In this section four principal types of
contract stabilization available to investors in the international petroleum industry
are described and briefly examined. In practice, there may be several forms of
stabilization in the same contract, an outcome the parties can agree to as a result of
what are usually lengthy, complex negotiations.
Freezing The most familiar (and possibly notorious) kind of stabilization
clause is usually known by its legal effect as a ‘freezing’ clause. In its strictest form,
such a clause prohibits the host state from changing its laws, and in a sense
‘handcuffs’ the host state so that it cannot exercise its sovereign rights to change its
laws. In this way the investor creates an enclave arrangement for itself.
Alternatively, it may seek to prevent the host state from applying changes in the
host state’s law made after the effective date of the contract to the specific
investment contract. Such an approach would aim to limit the legislative
competence of the host state with regard to the contractual relationship between
the parties in order to secure the investment under discussion. The state may not
act to amend or abrogate the contract in question. Alternatively, the contract may
be granted an enclave status by making it exempt from any legal changes
occurring in the wider legal regime of the host state. In effect, the parties ‘freeze’
the law governing the parties’ contract, by limiting it to the legislation of the host
state on the effective date of the petroleum contract. One commentator concludes
that this “cannot be considered as lex contractus” and is better viewed as a “system of

2
Piero Bernardini, ‘The Renegotiation of the Investment Contract’, ICSID Review—Foreign Investment
Law Journal 13, no. 2 (1998): 411–425; and ‘Stabilisation and Adaptation in Oil and Gas Investments’,
JWELB 1 (2008): 98–112 at 100–101; Abdullah Al Faruque, ‘Typologies, efficacy and political
economy of stabilization clauses: A critical appraisal’, Transnational Dispute Management 4(5), no. 1
(2007): 30–32; Ian Brownlie, Public International Law, 7th ed (Cambridge: Cambridge University Press,
2008), 550–551; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law 2nd
ed (Oxford: Oxford University Press, 2013), 82; M. Sornarajah, The International Law on Foreign
Investment (2004) 407; Esa Paasivirta, ‘Internationalisation and Stabilisation of Contracts versus State
Sovereignty’, BYIL 60 (1989): 315 at 323; and Peter D Cameron, ‘Reflections on Sovereignty over
Natural Resources and the Enforcement of Stabilization Clauses’, in Yearbook of International Investment
Law & Policy, 2011–2012, ed. Karl P Sauvant (OUP, 2013), 311–344.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 113

reference chosen by the parties to be incorporated into their contract.”3 With this
form of freezing clause, the parties do not purport to restrict the host state’s ability
to change its laws, but instead agree as a matter of private contract that this ‘lex
specialis’ will govern their respective rights and obligations towards each other,
irrespective of the host state’s exercise of its sovereign powers.4
Inviolability This is often described as an ‘intangibility clause,’5 and might be
viewed as a sub-category of the freezing variety above, with which it has
similarities. It ‘freezes’ the contract rather than the law. Usually short and simple in
its construction, it prohibits unilateral changes to the investment agreement and
requires the consent of both parties before any changes may be made. Instead of
indirectly restraining the state’s legislative capacity to intervene at a later date by
freezing the law applicable at the time of the contract signature, this form of
stabilization tries to limit the state’s capacity directly by requiring mutual consent
to contract changes. By requiring mutual consent (in contrast to the freezing
approach to stabilization), this approach has the advantage that it establishes a
procedural mechanism for discussion – and probably negotiation – between the
parties about the future of the agreement.
Another example is to be found in an agreement between the government of
Yemen and a foreign investor in 1992, which reads:
Contractor shall be solely governed by the provisions of this Agreement and [the contract]
may be altered or amended only by the mutual agreement of the Parties.6
Adjustment There are contract clauses that address stability in a different
manner, envisaging automatic adjustments or renegotiation of contract terms in
the event of specified circumstances occurring. These stabilization provisions are
described within this study as balancing clauses. Essentially, they stipulate that if the
host state adopts a measure after the conclusion of the contract – a triggering
event – that is likely to have damaging consequences to the economic benefits of
the original bargain for one or both of the parties, a re-balancing has to take place.
Petroleum contracts differ in their treatment of how that balancing will be made.
On one view, the adjustment may be automatic or achieved in a manner stipulated

3
Bertrand Montembault, ‘The Stabilisation of State Contracts Using the Example of Oil Contracts: A
Return of the Gods of Olympia?’, RDAL/IBLJ, no. 6 (2003): 593–643 at 608.
4
An example is cited by Algerian scholar, Nour Eddine Terki, from a Sonatrach LNG Sales Contract
(1975): “The law applicable shall be Algerian law as in force at the date when this contract is signed.”
See Nour Eddine Terki, ‘The freezing of law applicable to long-term international contracts’, Journal of
International Banking Law 6 no. 1 (1991): 43–47 at 44.
5
Montembault calls it an inviolability clause: Montembault (2003) 615; see also in this context, Proper
Weil, ‘Les Clauses de stabilisation ou d’intangibilité insérées dans les accords de développement
économique’, in Mélanges Rousseau (Paris: Pédone, 1974) 301–329.
6
Article 18.2: Mayfair Production Sharing Agreement between the Ministry of Oil and Natural Resources and
Yemen Mayfair Petroleum Corporation (Al Zaydiah, Block 22,Tihama Area), dated 29 July 1992.
114 BCDR INTERNATIONAL ARBITRATION REVIEW

in the contract so that the economic balance struck between the parties on the
effective date of the contract is re-established. On another view, however, neither
the manner of such adjustment nor a requirement that it should be the result of
mutual agreement between the parties should be specified: what might be called
the open-ended approach.This approach might result from the host state’s refusal to
agree to a more detailed clause. A third approach is to make express provision for
the parties to enter into a negotiating process to identify which amendments should
be made to the contract to permit a balancing of the economic core of the
contract.7 Inevitably, the large number of petroleum contracts in existence around
the world allows for considerable diversity of approaches including hybrids of the
ones outlined above.
All of these versions of balancing have one important feature in common:
they do not seek to prevent a change in the law by the host state but rather seek to
address the economic impact of such a change on the bargain originally struck and
to establish a framework in more or less detail for its preservation. If there is a
National Oil Company (NOC), it may (on an optimistic view) be expected to
take an active role in promoting a solution on behalf of the foreign company in its
discussions with the state party.
Secondly, if there is a trend towards an increasing use of balancing (and there
is evidence that this is indeed so), it is not because such clauses are any more
effective than the freezing variety in preventing expropriation. Indeed, by focusing
upon the effects of host state actions, it would appear that they are implicitly
recognizing the futility of any express prohibition on expropriation or any similar
acts that could be said to fall within a state’s sovereign capacity. Instead, they
commit the host state to participating in a process in which the parties have
stipulated, in more or less detail, that other adjustments must be made to restore
the status quo or that a renegotiation has to take place with the aim of restoring
the status quo. However, this aim is usually stated in fairly clear terms, sometimes
with provisions on how damages might be calculated. The goal remains one of
keeping the original bargain stable, not one of re-opening it.
Allocation of burden Another common form of stabilization involves the
use of clauses that seek to allocate the burden created by an attempted unilateral
change in the law. These clauses can take different forms but usually require the
NOC to play the key role in burden sharing. Essentially, in the event of any
changes in the legal framework that are applicable to the investment contract, such

7
F C Alexander Jr refers to these three approaches as, respectively, ‘Stipulated Economic Balancing’,
‘Non-Specified Economic Balancing’, and ‘Negotiated Economic Balancing’: see ‘The Three Pillars of
Security of Investment Under PSCs and Other Host Government Contracts’, Institute for Energy
Law of the Centre for American and International Law’s Fifty-Fourth Annual Institute on Oil and Gas
Law (Publication 640, Release 54) (LexisNexis Matthew Bender, 2003).
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 115

as an additional tax, the clause shifts the burden of change in the fiscal regime
(payment) to the NOC. In some versions, however, the burden may be shifted
simply to ‘the state.’ This can happen at any stage in the potentially long life of a
petroleum agreement.
Another example of such an express exemption is to be found in the
Egyptian model concession agreement, which exempts the NOC and the foreign
investor from all taxes and duties (Art XVIII (c)), except for income tax, which the
NOC pays on behalf of the foreign investor (Art III (g)).
Asymmetry Inevitably, there are hybrid forms of stabilization clauses.
Perhaps a more unexpected feature is that some stabilization clauses – of whatever
variety – are expressly asymmetrical in character. They work to ensure that the
contractor is protected from negative changes arising from state action and at the
same time give the contractor a right to benefit from any positive changes after
contract signature such as a reduction in tax rates or a more liberal approach to the
recovery of costs in a Production Sharing Contract (PSC).8 The effect of this
contractual anticipation of both negative and positive changes in law is to create a
‘one-way street’ that works in the investor’s favour if, at a later date, the
government decides to reduce tax rates and broaden the tax base.9

2.3 THE PRACTICE OF STABILIZATION CLAUSES

Diversity There is some evidence that scholars have significantly underestimated

the plethora of clauses and approval procedures that states are prepared to accept if
these appear conducive to providing legal support for a potentially long-term
investment. In a much-cited article,Thomas Waelde and George Ndi noted many
years ago a trend in energy industry practice towards the use of adaptation forms
of stabilization clause and to forms which I have called ‘allocation of burden.’10 In

8
Philip Daniel and Emil Sunley, ‘Contractual Assurances of Fiscal Stability’, in The Taxation of Petroleum
and Minerals: Principles, Problems and Practice, eds. Philip Daniel, Michael Keen and Charles McPherson
(Abingdon: Routledge, 2010), 405–424. The authors were at the time employed at the Fiscal Affairs
Department of the International Monetary Fund (IMF), and as a result of its many missions made to
member state governments had access to a multiple unpublished contracts.
9
The company protected by the stabilization clause “will be entitled to the reduced rates but may not
be subject to the provisions that broaden the tax base. This can make future tax reform very difficult,
especially if large contractors are protected by stability agreements that entitle them to all beneficial
tax changes”: Daniel and Sunley, 417.
10
Thomas W Waelde and George Ndi,‘Stabilizing international investment commitments: international
law versus contract interpretation’, Texas International Law Journal 31, no. 2 (1996): 215: “Instead of
targeting the legislative power of the state founded on sovereignty, these commitments are designed to
set up a contractual mechanism of allocating the financial effect of political risk to the state enterprise.
Their nature is thus moving from that of a sovereign and state-related promise to a mechanism of
commercial contracting with regard for the implications of damages for breach of obligation….”
(p. 218).
116 BCDR INTERNATIONAL ARBITRATION REVIEW

each case, the evidence the authors gathered from industry practice, drawing upon
contracts then available, showed that investors no longer considered it worthwhile
to use ‘static’ or so-called freezing clauses which strive to prevent the state from
modifying a bargain once concluded, even if it was made in different
circumstances, with a host government that had different priorities in its policies.
Instead, they noted that industry practice was attempting to build into the design
of the long-term investment contract a mechanism that achieved two goals: first, it
protected the investor and the investment from adverse changes made by the state
as sovereign regulator, in contrast to its role as party to the contract, and second, it
took into account any change in law or interpretation of the law by striving to
achieve performance of the original bargain even if such change or interpretation,
perhaps by a tax authority, were taken unilaterally. Crucially, these mechanisms did
not attempt to prevent the exercise of sovereign power or to impose penalties on
its exercise. Instead, the emphasis was upon the design of mechanisms that
corrected any adverse material effects of such an exercise upon a single investment
and restored the economics of the project to the status quo ante.11 There was no
attempt to prevent the state from taking the action if it chose to do so, although
the economic consequences of doing so were set out in more or less detail. Of the
two forms of stabilization above, the ‘allocation of burden’ variety is probably the
neatest way of achieving this set of investor objectives. However, both kinds of
clause are likely to secure a greater degree of acceptability on the part of host states
than their more rigid predecessors.
What Waelde and Ndi could not have foreseen at the time – now more than
a quarter of a century ago – was that investors would embrace this new approach
to stability on the scale that they did. Instead of moving from one distinct type of
clause to another, rejecting a ‘traditional’ approach in favour of a ‘modern’ one, the
pattern in industry practice seems rather to have been to adopt a greater diversity
in the kind of stabilization clauses, including the design of hybrid forms, and most
strikingly, in some cases to include multiple forms of stability in the same contract.
During negotiations, both the investor and the state, wearing a commercial hat,
will have come to an agreement in which not one but several elements in the
contract design combine to promote the stabilization objective. Indifferent to the
kind of neatness favoured by scholars and commentators, this heterogeneous
industry practice does not necessarily imply an inconsistency and may well be a
practical approach to the management of a wide range of possible areas in which
disputes may arise at some future date. In other words, the contract drafters may
prefer to build redundancy into the contract: if one form of stabilization appears
11
Another possible explanation for the shift in practice (which is not absolute) may be that the damages
awarded by a tribunal would be less than the investor’s expectations, while the balancing form of
stabilization in its various forms would result in the investor being ‘kept whole.’
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 117

unsuited to addressing a problem arising between the parties, then there is at least
one other form available in the contract that may do so.This practice follows from
the greater variety of choice which an investor now enjoys in its negotiations with
a host government on this subject. An instance of this is the Anadarko-Sonatrach
contract in Algeria.12 Nor does this approach imply a rejection of ‘traditional’
clauses (by which is usually meant ‘freezing’) in favour of ‘modern’ ones, such as
those balancing arrangements that include a goal of economic equilibrium or the
allocation of burden ones.13 If the parties agree during their negotiation to include
several kinds of stabilization in their contract, and the result meets the formal legal
requirements of the host state, then such agreements arrived at will be reflected in
the final contract. After all, ‘traditional’ clauses are likely to be found useful and
sought after by investors even if they are deemed a higher risk option for both
parties – in terms of their long-term sustainability. The effect of including various
mechanisms to achieve stability is to ensure that no significant part of the fiscal
regime remains open-ended, allowing the investor to calculate its financial
out-turn or cash-flow from the project, making assumptions about costs and
profits which are essential to the decision whether to invest or not. Behind this
shift in practice lies an awareness that it may be neither possible or desirable to try
to bind the state for decades not to change its law, but rather quite possible to
anticipate the effects of any such change on the investment under negotiation, to
encourage an amicable resolution of differences, and to have the option of higher
damages if the latter fails.
Impact of Negotiations Although standard forms and model contracts are
commonly used in the energy sector as in many other fields of commerce, the
negotiation that often takes place based on such contracts is lengthy and detailed,

12
The Agreement on the Exploration and Exploitation of Liquid Hydrocarbons between Sonatrach and
Anadarko Algeria Corporation, 23 October 1989: https://www.resourcecontracts.org/contract/ocds-
591adf-9645096819/view#/pdf. (last visited 20 September 2020). It contains a freezing clause, a
renegotiation clause and an ‘allocation of burden’ or taxes deemed paid clause. Of course, in an
arbitration proceeding it can be expected that the state or its energy company may argue that only
one of these is a ‘real’ stabilization clause, and that what appears to be one is not or is in some way
limited in scope or application.
13
The view set out here is different from that of several scholars and jurists, such as: Norbert Horn:
‘Standard Clauses on Contract Adaptation in International Commerce’, in Adaptation and Renegotiation
of Contracts in International Trade and Finance, ed. Norbert Horn (Deventer: Kluwer, 1985), 111, 119:
“modern mining agreements contain both stabilization or freezing clauses as well as clauses on
adaptation and renegotiation….”; Georges R. Delaume, ‘The proper law of state contracts revisited’,
ICSID Review—Foreign Investment Law Journal 12, no. 1 (1997); Dolzer and Schreuer, supra fn 2, 75–78;
Piero Bernardini,‘Stabilization and Adaptation in Oil and Gas Investments’, supra fn 2, 98. For a recent
statement of this view, and evidence of its practical implications, see the Dissenting Opinion of
Professor Stern in Occidental Petroleum Corp., Occidental Exploration and Production Company v Republic of
Ecuador, ICSID Case No AB/06/11 of 5 October 2012, para 12. As Professor Charles Leben says,
however, the readjustment clauses to which Delaume and others refer are usually found in contract
clauses with the heading ‘stabilisation’: The Advancement of International Law (Portland: Hart Publishing,
2010), 159, note 137.
118 BCDR INTERNATIONAL ARBITRATION REVIEW

resulting in a complex and individually tailored commercial agreement. Given the

number of negotiable items that need to be hammered out, each negotiation is
unique and different from any other, even if it starts from similar or identical
contract formulae. In the oil and gas sector, it can take a couple of years to finalize
such a text.14 Even if the structure remains the same as the original model, it
would be surprising if the outcome is not different in some important respects.
One aspect that has been identified is the extensive role of asymmetry of benefits
in contract design, with some states agreeing to both a positive and a negative
stabilization, creating a ‘one way street’ of benefits to the investor. For the
researcher,15 this contract realm has been hard to access given the commercial
conventions about confidentiality. However, access to this contract practice has
become far less restricted with the establishment of sites that publish contracts
online,16 and the promotion of transparency by governments, international
organizations, civil society groups and industry itself. As a result, data is now
available to the researcher that is much richer than in the days of Prosper Weil,
when he had to base his seminal work on legal stability on a sample of contracts
obtained through his own legal practice, and a few that were in the public domain.
In this article an effort has been made to draw upon some of the many final
contracts that are now available, and so to base an analysis on the final text. This
can illustrate and support the above points about contemporary stabilization. This
increased transparency also helps to highlight the differences between models and
negotiated outcomes and underline the range of pragmatic choices made by the
parties.
Form and Procedure There is also an institutional aspect to the practice of
contract stabilization. If the contract is concluded between the investor and a
particular state agency, perhaps involving other parts of the executive as well, and
parastatals such as national energy companies, there may be advantages in securing
approval of the final contract by the legislature. This procedural approach to legal
stability is adopted as standard practice in Egypt and Ghana, for example.
This role played by procedure in relation to contract stability leads to another
aspect: the interplay with institutions. Again, reference may be made to the
Anadarko contract, with its interplay between contract protection and the
legislation on which it was based and further its use of a Protocol with the state as
an approving instrument. In this sense, the stabilization clause becomes part of a

14
The natural resources will also impact on the fiscal and other commercial terms on matters such as
whether they involve high risk exploration in new areas; low risk exploration in mature areas; frontier,
onshore, shallow water or deep water development; high cost or low cost resources; oil prone or gas
prone areas; or a large or small resource base, for example.
15
To the extent that the researcher is aware of this feature at all: little is written about it even though it is
readily identifiable in investment agreements in the oil, gas and mining sectors.
16
For example, www.resourcecontracts.org.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 119

package of negotiated and legislative legal instruments, involving the state, the state
energy company and the investor.
Testing Stabilization Clauses As is well-known, the classical arbitration
awards based on contract largely relate to tests of stabilization in the face of events
such as outright expropriation that are marginal today. There have been few tests
of stabilization clauses before tribunals in commercial arbitrations, but the results
have not taken our understanding of their legal significance forward much other
than to provide further support for the conventional wisdom that stabilization
clauses will be enforced by international tribunals. The reasons for this lack of a
clear legal development include the willingness of parties in oil and gas disputes to
settle their differences before an award is reached. Another is the complexity of
disputes, meaning that a stabilization clause is only one element in a series of
claims and calculations by the parties. An example of the former is the dispute that
emerged between Anadarko and Algeria some years ago concerning the
above-mentioned Anadarko contract. When the Algerian Government sought to
change its hydrocarbons regime in a way that would increase its share of revenues
at a time of rising oil prices, Anadarko Petroleum Corporation, relying on its
stabilization clauses, challenged the action before an international arbitral tribunal.
One report claimed that the compensation sought was around US$11 billion.17
However, while these and other investors had the right to take their claims to
international arbitration (following an attempt at conciliation), none of the
disputes appear to have reached a final award by an international tribunal; all
appear to have been – ultimately – concluded through a commercial agreement
between the parties.There was therefore no arbitral ruling on the alleged breach of
any of the stabilization clauses discussed above.
An example of the latter – the impact of complexity of oil and gas disputes
on a tribunal’s assessment of a stabilization clause – can be derived from the Erha
arbitration in Nigeria. In 2009 the Nigerian subsidiaries of Esso and Shell initiated
an arbitration against the Nigerian National Petroleum Corporation (NNPC) over
the interpretation and performance of certain provisions in a PSC entered into in
1993.18 The claimants argued that the PSC contained clear provisions that
regulated the allocation, nomination and lifting (loading onto an oil tanker) of
crude oil, and that NNPC had breached these by denying the claimants’ right to
allocate, nominate and lift crude oil and by unilaterally and repeatedly lifting crude

17
GAR, 24 August 2009: ‘Algerian oil-tax gives rise to ICSID and contract claims’.
18
Esso Exploration and Production Nigeria Limited and Shell Nigeria Exploration and Production Company
Limited v Nigerian National Petroleum Corporation, Final Award, 24 October 2011 (Erha Award). By this
time the consortium had invested over US$6 billion in the project: US District Court Southern
District of New York, Petition in Civil Action, No. 14cv8445, Opinion & Order (the award was
attached to the petition for enforcement submitted to the US court).
120 BCDR INTERNATIONAL ARBITRATION REVIEW

oil to which it was not entitled. The stabilization claim emerged during the
arbitration, rather than being fully fledged at the outset. The clause formed the
basis for an alternative and an additional claim to the primary claim that “the law
remains in all material respects as it was or was agreed to be on the effective date
of the PSC” and the conduct of the tax authority, the Federal Inland Revenue
Service (FIRS), in relation to PTT (a petroleum tax) did not alter this position.19
The alternative claim was based on events occurring only days before the
submission of the Notice of Arbitration. The FIRS had issued a Notice of
Assessment to the claimants for 2008 PPT, which in the claimants’ view was based
on erroneous calculations and constituted a change in practice from the FIRS’
previous approach.20 Subsequently, the 90-day negotiation period in the
stabilization clause (Clause 19.2) was triggered by the claimants, but NNPC
informed them that no meaningful negotiation of the issues could be held unless
the ongoing arbitration was withdrawn or suspended.
By majority21 the tribunal found that the four requirements to trigger a
stabilization claim had been met:22 there had been a change in policy when the
authorities ceased to apply a tax credit or to deduct certain heads of costs; the
change pertained to a Government department or agency; it had a material
adverse impact on the claimants; and the parties were unable to agree on a
modification of the PSC to compensate the claimants within the 90-day
negotiation period. However, since the claimants were granted the primary claim,
the alternative claim under the stabilization clause was dismissed (to avoid double
recovery). Nevertheless, the tribunal did grant relief under the claim based on the
stabilization clause, to prevent future overlifting by NNPC based on the changes in
the FIRS’ policies. It did so by ordering the PSC to be modified with language
that provides that future profits be made available to compensate Esso and Shell for
the future impact of the breaches by NNPC.23 For past impacts, compensation
could derive from NNPC’s breaches in oil allocation. The Claimants’ valuation of
US$1.8 billion in losses was not contested by NNPC.24

19
Erha Award, para 327.
20
Erha Award, para 105.
21
There was a Dissenting Opinion by Professor Paul Obo Idornigie, for whom the claimants’ invocation
of rights under Clause 21 (arbitration) meant a waiver of rights under the stabilization clause (which
required a negotiation), since they could not be invoked concurrently, in his view; further, the 90-day
notice period started earlier than alleged by claimants, and was not complied with.
22
Ehra Award, paras 346-367.
23
Ehra Award, para 370.
24
Subsequently, the award was set aside at the seat of the arbitration in Nigeria. The local court found
that the lifting dispute was a tax matter and so not arbitrable under Nigerian law. On appeal, the
Nigerian Court of Appeal restored the parts of the award that found that NNPC had overlifted, and
improperly prepared its tax returns, on the ground that these claims were contractual in character, but
would not award damages. It also found that the claimants had essentially waived their argument based
on the stabilization clause.The claimants commenced enforcement proceedings in the US courts: Esso
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 121

The saga of legal events in the Erha case illustrates more than legal
complexity – a stabilization claim intertwined with a primary claim, each with
distinct procedural requirements. It demonstrates the risk that an award favourable
to a claimant may not ultimately be enforceable and, linked to this, that the
enforcement stage might prove very costly to many claimants. That said, it also
supports the view that a determined claimant may draw upon the global
adjudication system to pursue confirmation of an award, with the option of a
denial of justice claim to address a set aside at the seat. There is also the positive
feature of a tribunal ordering changes to the contract as a way of providing relief
to the claimant under the stabilization clause.
A caveat to the continued support of stabilization clauses by tribunals may be
added however. It is well-known that governments seek to limit their scope
through ‘carve-outs,’ such as public health, environment and safety matters. For
fiscal stability, the parties may go to great lengths to list the various taxes that are
covered by the stability provision. Given the importance of national measures in
responding to the environmental challenges that are often addressed in
international initiatives such as the Paris Agreement, the precise definition of the
items to be included in the scope of a stabilization clause assumes greater
significance. A tribunal may distinguish the stabilization clause and hold that an
environmental tax or charge is not included in the clause’s scope, making the
clause inapplicable in an instant case.

2.4 STABILIZATION BY CONTRACT TODAY

The risks of unilateral action by host states remain as significant for investors today
as ever before and are evident among various regions around the globe. We might
even hypothesize that they represent a structural feature of the investor-state
relationship in the oil and gas sector, so permanent do they seem. For that reason,
the provision of a stabilization clause holds out the prospect of additional security,
especially important if project finance is sought. However, an over-eager
willingness on the part of host governments to offer such security may easily arise
from a policy of investment promotion and a lack of full appreciation of the
commitment that is being undertaken, leading to demands for renegotiation later.
A prudent investor would be wise to ensure that contract enforcement
mechanisms are soundly drafted.

Exploration and Production Nigeria Limited, et ano., against Nigerian National Petroleum Corporation, Case 1:
14-cv-08445-WHP, Opinion & Order, US District Court Southern District of New York (the court
declined to confirm the award).
122 BCDR INTERNATIONAL ARBITRATION REVIEW

Indeed, several states continue to offer stability in the form of ‘freezing’

obligations in the contract. However, given the high risk of unilateral action at
some future date this is an unreliable protection mechanism on its own. Perhaps in
recognition of this, the consensus among observers that economic balancing is
now more usually favoured by states is one that surely carries some weight, often
involving as it does, negotiations between the parties about the result in the event
that differences arise. However, it adds weight to the question of whether such
clauses will be recognized and enforced by international arbitral tribunals in treaty
based cases.

3 STABILITY AND THE INVESTMENT TREATY FRAMEWORK

Arguably, the highpoint of influence for the contractual stabilization clause was
several decades ago when the available instruments for foreign investors’ protection
were far fewer than today. In the classical period of awards, including those from
the Libyan oil cases and Aminoil, the claimant in the arbitration was an investor
which had based its protection on contract and the relevant provisions therein.The
principal change in the legal landscape for investor protection is the availability of
protection under investment treaties. To achieve this, an investor has the option of
becoming a covered investor under a Bilateral Investment Treaty (BIT) or other
International Investment Agreements (IIAs) and taking advantage of its option to
take any breach of its provisions to international arbitration. In barely three
decades this form of protection has acquired a remarkable influence on the
international investment scene.25 However, the contract-based form of legal
stability remains, and continues to figure in model contracts offered by states. Has
it been superseded by the newer form of protection?
There are two principal and well-known advantages for the investor.The first
is the access to substantive protections such as a guarantee of Fair and Equitable
Treatment (FET), prohibition on expropriation without compensation, whether
directly or indirectly, and prohibition of discrimination. FET has come to be
commonly used as the basis for investor claims in preference to reliance on
provisions expressly prohibiting expropriation.The second is procedural: the state’s
open offer to all covered investors of consent to international arbitration for claims
that may be brought against it by foreign investors. However, the treaty protections
offered by FET are subject to interpretation by tribunals which often take widely
different views of the guarantees in a particular case. The tribunal has to consider
the source of an expectation of stability, the investor’s reliance upon it, as well as

25
As of 1 January 2020, the total number of known ISDS cases based on IIAs had reached 1,023, with
120 countries as respondents in these claims: UNCTAD IIA Issues Note, Issue 2, July 2020.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 123

the timing and nature of the investment play an important part to form a view of
whether the claimant’s expectation of stability of the legal framework was
legitimate and reasonable at the time the investment was made.26 This is where the
familiar, contract-based stabilization makes an entrance. A number of investment
treaty cases have demonstrated that the protection given by a treaty will be
strengthened if the investor has already negotiated a stabilization clause in the
investment agreement with the host state. If an investor has based its expectation
on such a clause, the kind of analysis just outlined becomes largely superfluous for
the tribunal.27 Among many examples, the tribunal in Total v Argentina observed
that an expectation would be “undoubtedly legitimate” if it were based on a
stabilization clause.28 In AES v Hungary the tribunal took a similar view: a
stabilization clause “… could legitimately have made the investor believe that no
change in the law would occur.”29 The essential idea is summarized by the tribunal
in Perenco v Ecuador: “the Tribunal would have little difficulty holding that a fully
stabilized contract that did not admit of any future or other change cannot be
changed unilaterally….”30 However, the absence of a stabilization clause in the
underlying investment agreement has led some tribunals to conclude that a breach
of legitimate expectations did not take place.31 One caveat to this analysis and
conclusion is that it is unclear if it would apply equally to all the stabilization
clauses that are in use in investment agreements such as oil and gas contracts.32

26
Tecnicas Medioambientales Tecmed SA v Mexico, Award, ARB(AF)/00/2, IIC 247 (2003), 10 ICSID Rep
130, 29 May 2000, 154; Occidental Exploration and Production Co v Republic of Ecuador, Final Award,
LCIA Case No UN 3467, IIC 202 (2004), 1 July 2004, 185; LG & E Energy Corp & ors v Argentina,
Decision on Liability, ICSID Case No ARB/02/1, 3 October 2006, 127. Tribunals are often
concerned to emphasize that the guarantee of legal stability does not mean an effect of ‘freezing’: the
doctrine of legitimate expectations does not mean “the virtual freezing of the legal regulation of
economic activities, in contrast with the State’s normal regulatory power and the evolutionary
character of economic life”: EDF (Services) v Romania, ICSID Case No. ARB/05/13, 8 October 2009,
para 217.
27
Parkerings Compagniet AS v Lithuania, Award, ICSID Case No. ARB/05/8, IIC 302 (2007) 14 August
2007; also, Yuri Bogdanov & Yulia Bogdanova v Republic of Moldova, Final Award, 16 April 2013, SCC
Arbitration No.: V (091/2012), para 187; and Sergei Paushok, CJSC Golden East Company and CJSC
Vostokneftegz Company v The Government of Mongolia, Award on Jurisdiction and Liability, UNCITRAL,
28 April 2011, para 302.
28
Total v Argentina, Decision on Liability, ICSID Case No ARB/04/1, IIC 484 (2010), para 117.
29
AES Summit Generation Limited and AES-Tisza Eromu Kft. v Republic of Hungary, ICSID Case No
ARB/07/22,Award, 23 September 2010, para 9.3.31.
30
Perenco Ecuador Ltd. v The Republic of Ecuador, Decision on Remaining Issues of Jurisdiction and on
Liability, ICSID Case No.ARB/08/6, 12 September 2014, para 593.
31
Charanne B.V., Construction Investments S.a.r.l. v Spain, Final Award, 21 January 2016, para 490; Eiser
Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No
ARB/13/37, Award, 4 May 2017, para 362; Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C.
Starmill S.R.L. and S.C. Multipack S.R.L. v Romania [1], ICSID Case No. ARB/05/20, 11 December
2013, Award, para 529 (“The BIT’s protection of the stability of the legal and business environment
cannot be interpreted as the equivalent of a stabilization clause”).
32
This interesting sub-theme is addressed by Dr Rahmi Kopar in his book, Stability and Legitimate
Expectations in International Energy Investments (Hart Publishing, 2021), chapter 6.
124 BCDR INTERNATIONAL ARBITRATION REVIEW

A second qualification to this opportunity of legal redress by investors is

practical and relates to the process itself. Experience to date suggests that the
exercise of the right to make a claim by an investor is a decision to commence a
process that can be lengthy and complex: there is no guarantee that a state will pay,
even if the final award is favourable to the claimant. In terms of quantum, the
amounts awarded may be large relative to those typically found in non-energy
sectors, but they have generally been much less than those claimed and may be
reduced further if challenged.33 The lack of uniform standards in awarding
damages means that tribunals are free to choose their own valuation standards,
leading to diverse methods and contradictory decisions. It is notable then, but
perhaps not surprising, that while certain investors appear in arbitral proceedings
several times, many more appear only once. States may fail in objections to a claim
at the jurisdictional stage but enjoy success on the merits of a case, at least in part,
limiting damage exposure to acceptable levels. Some states have persuaded
tribunals to reject investor claims that allege interference with investments by local
administrative authorities or by regulatory agencies; and tribunals have found that
such interference did not rise to the level of an international treaty violation.34
Protection of the stability of an investment by the investment treaty regime
has to take into account not only these practical features but also the impact of
‘systemic’ ones on the evolution of relevant doctrine. Investment treaty law
develops in a case-by-case manner, a feature evident from the treatment of FET
and legitimate expectations, both of which are of very great importance for claims
based on an expectation about the stability of long-term investments. Initially, this
was drawn upon widely by investment tribunals to accord considerable protection
to investors and their expectations of stability.35 More recently, despite inevitable
differences among arbitrators about the scope of FET, tribunals will not usually
understand FET as according an investor protection equivalent to a contractual
right such as that given by a stabilization clause. It can be used to determine the

33
For example, PwC studies of international arbitration have concluded in 2017 and 2015 that the
disparity in valuations between claimants’ valuations and tribunal awards is high, so that the overall
average award as a percentage of the total amount claimed was 36 per cent and 37 per cent
respectively. A later study of ICC commercial awards produced a much higher average figure of
53 per cent “significantly more than the 36% noted in the PwC Studies of investment treaty awards”:
PwC/Queen Mary University of London, Damages Awards in International Commercial Arbitration: A
Study of ICC Awards, December 2020.
34
EnCana Corp v The Republic of Ecuador, UNCITRAL, LCIA No UN3481, Award, IIC 91 (2006), 3
February 2006 (rejecting jurisdiction over all claims arising out of Ecuadorean tax regulations denying
VAT credits and refunds, except an expropriation claim, which the tribunal denied on the merits).
35
This was especially evident in various Latin American awards involving Argentina: for example, Sempra
Energy International v Argentine Republic, Award and partial dissenting opinion, ICSID Case No
ARB/02/16, IIC 304 (2007), 28 September 2007: the tribunal emphasized that “[w]hat counts is that
in the end the stability of the law and the observance of legal obligations are assured, thereby
safeguarding the very object and purpose of the protection sought by the treaty” at para 300.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 125

scope of compensation, but it needs to be set against the state’s legitimate interest
in policy formation and implementation. This process of evolution in doctrine
continues to impact on claims against states arising from investments in the energy
sector, now understood to include renewable forms of energy as well as other
more traditional ones, such as oil and gas. In recent years, this evolution in case law
has included a notable expansion in the number of awards resulting from claims
based on the Energy Charter Treaty (ECT).
If the evolution of doctrine on FET has been in the direction of becoming
more restrictive in its interpretation of stability, the origin may lie in the wave of
investment disputes that has swept over states, whether in the Global North or the
Global South. This has fueled accusations about unfairness or bias in favour of
claimants in the treaty-based international investment regime.36 Evidence of this is
found much less in the actions by states to withdraw from or terminate BITs or
other IIAs, which have been relatively modest in number, but rather in persistent
demands for reform or modernization. In energy investment, this has affected both
the ECT and the North American Free Trade Agreement, with the latter being
swept away in favour of a successor instrument that is barely relevant in energy
terms. The decisions of several states to withdraw from parts of the system have
been widely publicized. This includes actions by Tanzania, Indonesia, Italy, South
Africa, and at an earlier stage, Bolivia, Ecuador, Russia, and Venezuela. These
formal steps have had only limited, symbolic significance, countered by the
growing number of accessions to ICSID and the New York Convention by small,
investment-hungry states. Most states, particularly new ones, continue to need
capital in their energy economies, irrespective of their country’s energy mix or
policies on growth and development.The offer of stability is particularly important
in signaling an interest to attract international energy investment, and a
commitment to concluding investment treaties is one way of supporting that offer.
Energy – both traditional and new – remains an economic sector in which the
state is heavily involved, often giving disputes an extremely sensitive, quasi-political
character. With international arbitration, there is a political gain for states in
‘legalizing’ a matter that is probably already a sensitive one. If the award ultimately
disappoints, the state can escape blame by noting the decision was taken by an
independent tribunal.
There are many examples to support the proposition that this is a framework
that leads to balanced results in favour of states and investors. If it were to do
otherwise, it would surely have little hope of long-term sustainability. However, it
may be asked whether the advent of this pillar of legal stability – still comparatively

36
There are many examples: a recent one is the polemical essay by M. Sornarajah, ‘Resistance and
Change in the International Law on Foreign Investment’, Cambridge University Press, 2015.
126 BCDR INTERNATIONAL ARBITRATION REVIEW

recent – has contributed such protection to the oil and gas investor that it may be
supplanting the familiar stabilization clause.To date, the answer would appear to be
in the negative. The investment treaty ‘system’ is after all highly atomized and
multi-layered, offering diversity and versatility, but also abundant potential for gaps,
inconsistencies, and incoherence. The doctrine of FET and within it the doctrine
of legitimate expectations offer protection to an investor who has relied upon
assurances from the host state about the stability of the legal and business
framework. However, the application of the legitimate expectations test in a
particular case requires the arbitral tribunal to examine the source of the
expectation, the reliance placed by the investor on it (was it reasonable; was due
diligence carried out), the degree of specificity of the expectation (the connection
between it and the investor), and that will exclude an expectation based on the
general legal framework. Hence, the protection of a claim based on a guarantee of
legal stability has to leap over several hurdles. Success is not guaranteed. In practice,
this depends inevitably on the wording in the relevant BIT, the fact pattern in the
dispute, and so on, if protection is to follow.
The first set of tests to this protection came with the Argentinian cases about
energy utilities in the early 21st century, based on diverse BITs, while the second
set have been based largely on the ECT, involving renewable energy cases and
occurring since 2015. The diverse approaches evident in the many renewable
energy cases involving Spain demonstrate how varied the interpretations of this
factor can be.What is offered is neither in law nor in predictability classifiable as a
stabilization clause.
To date, what emerges from the various awards is that there appears to be a
consensus that where a stabilization clause exists in the contractual or
administrative instrument, the investor has a firm basis for an expectation of
stability and, if disappointed, has an expectation of appropriate damages. What is
deemed to be a stabilization clause may prove to be disputed, however.37 In its
absence, tribunals have been required to ask whether there is an alternative source
for expectations. For example, in Charanne, the tribunal sought an ‘equivalent’
commitment directed at the investor, arguing that the regulatory framework itself
could not fulfil that role.Their conclusion was that

37
The disagreement among the parties in Occidental v Ecuador (II) about legal stability is only one
example of this. Scope for differences of opinion is increased by the tendency among many arbitrators
to understand ‘stabilization’ as limited to freezing. If adaptation is envisaged at a later date in a change
of law clause – the balancing, equilibrium or renegotiation variety, discussed above – the parties must
have accepted that laws can change, on this view.The limits imposed by the parties on the scope of a
particular form of stabilization, to cover certain types of tax only, for example, is a further way in
which a clause can be distinguished so as to become irrelevant to a dispute: see Bogdanov v Republic of
Moldova (2013) supra fn 27, for example: environmental charges were not covered by the fiscal
stabilization clause.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 127

in the absence of a specific commitment, the Claimants could not have a reasonable
expectation that the regulatory framework established by RD 661/2007 and RD
1578/2008 remain unchanged.38
In countries with a fluid socio-economic context, the penalty for investors failing
to include a stabilization clause in their agreements with states or state entities in
such volatile circumstances was emphasized in the Paushok v Mongolia case (2011).
The tribunal stated that an investor had no immunity from windfall profit taxes in
the absence of a tax stabilization clause:
... foreign investors are acutely aware that significant modification of taxation levels
represents a serious risk, especially when investing in a country at an early stage of
economic and institutional development. In many instances, they will obtain the
appropriate guarantees in that regard in the form of, for example, stability agreements
which limit or prohibit the possibility of tax increases. As a matter of fact, GEM
attempted, although without success, to obtain such an agreement in 2001, a few years
after Claimants’ initial investment and, in 2002,Vostokneftegaz – a company controlled by
Claimants – did secure a stability agreement on a certain number of taxes. In the absence
of such a stability agreement in favor of GEM, Claimants have not succeeded in
establishing that they had legitimate expectations that they would not be exposed to
significant tax increases in the future.39
This may be a relevant consideration in contexts wider than that of a
post-conflict society or transitional economy. By analogy, it may be applied to that
of a country that has embarked on a programme of rapid reform of a stagnant
energy market to attract investment, or a series of reforms associated with a policy
of transition to a lower carbon economy.
In conclusion, it may be said that, whatever its merits, the investment treaty
system is unlikely to have the effect that the first pillar, the contract-based form of
stabilization, becomes a redundant instrument in an investor’s risk mitigation
strategy. The overall legal environment is richer and generally more positive for
investors than ever before. An investor is now likely to consider the merits of both
treaty and contract-base strategies in making its claim. Moreover, the current,
highly inter-dependent economic relations in energy and indeed the wider
economy would seem to have encouraged many host states and their investors to
avoid the high-profile confrontations of the past – with a few notable exceptions.
This is a process in which settlement is high on the list of the parties’ objectives,
and a stabilization clause has obvious advantages in this negotiation process – as
would a Legal Stability Agreement, common in Latin America but also in mining

38
Charanne, supra fn 31 503 (and 499), citing Electrabel, and early Argentinian cases such as CMS and El
Paso: CMS Gas Transmission Company v Argentina, Award, ICSID Case No ARB/01/8, IIC 65 (2005),
12 May 2005; El Paso Energy International Company v The Argentine Republic, Decision on Jurisdiction,
ICSID Case No ARB/03/15, 22 April 2006.
39
Paushok v Mongolia, supra fn 27, para 302.
128 BCDR INTERNATIONAL ARBITRATION REVIEW

regimes in other parts of the world – if the investor has been able to obtain one
from the host state. In many cases, the availability of these legal instruments
concerning legal stability has proved to be valuable in ensuring that the resulting
negotiations between the parties achieve an outcome that is better for the investor
than might otherwise have been possible.

4 STABILITY BY NATIONAL LAW

If contract stabilization has another competitor for investors’ attention as a source
of long-term legal security, it is an older form of legal stability: the domestic
legislative protection.This pillar of legal stability for energy investments – the third
in our perspective – is of less recent origin than the investment treaty framework,
and perhaps has received less attention than it deserves.40 Arguably, in the era of
investment treaty law, it has acquired a greater practical significance.
For many years, governments seeking inward investment have included a
provision in domestic legislation that would have the character of stabilizing the
foreign investment. Typically, such provisions will have a general character in an
investment law or in dedicated energy (or mining) legislation. However, it is also
possible that the legislation may be designed to apply, effectively or deliberately, to
a particular investment, especially if this is large in scale and in its potential impact
on the host country’s economy.41 States as different as Nigeria and Timor-Leste
provide examples of this approach.
A closer review of this legal guarantee reveals pitfalls for unwary investors and
potential shortcomings in effectiveness. In a general investment law or a
sector-specific law such as a hydrocarbons law, it can take the form that closely
resembles that of a stabilization clause in an investment agreement. An example is
the clause in the 1994 Kazakh Law on Financial Investments, later repealed. In this
case, the wording ensured that the investor would retain the legal conditions
applicable to the investment at the time it was made for a period of ten years, even
if there was a change in law, and enforceable by international arbitration. Although
this provision was upheld in a subsequent arbitration concerning the capping of
electricity tariffs, it contains several notable features that can limit the value of such

40
There are exceptions, however: for example, A F M Maniruzzaman, ‘National Laws Providing for
Stability of International Investment Contracts: A Comparative Perspective’, J of World Investment &
Trade 8, no. 2 (2007): 234–241.
41
See for example, the Nigeria Liquefied Natural Gas (NLNG) Decree 1990, Second Schedule, paras 2
and 6. In Niger Delta Development Commission v Nigeria Liquefied Natural Gas Company Ltd, judgement
of Justice RO Nwodo in FHC/PH/CS/313/2005 dated 11 July 2007, the court confirmed the
validity of the Decree in relation to the Nigerian Constitution. See Bayo Adaralegbe, ‘Stabilizing fiscal
regimes in long-term contracts: Recent developments from Nigeria’, Journal of World Energy Law &
Business 1, no. 3 (2008): 239.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 129

guarantees. First, there is the duration. At ten years this is relatively short for an
energy investment project. It recalls the duration commonly agreed by some in
stability agreements offered by some Latin American governments. It is not
inevitable that a domestic law will limit the duration of a guarantee in this way, but
it may be that a government would have difficulty in securing legislative approval
for a period much longer than this. In cases where that has been sought, in Israel
and Nigeria, it has led to judicial challenges – and not only to the duration offered
to the investor. Second, it is a general provision and not aimed at any particular
investor or investment. This has implications for how an investor might form an
expectation about the stability of its investment, particularly in societies
undergoing radical change. Indeed, in the Kazakh example, it could reasonably be
argued that at the time the 1994 Law was adopted, the newly independent state
was still at a very early stage in its understanding of international investment law
and that an investor’s expectations should take that factor into account when
making the investment (and discounting the level of protection it offered). A way
of addressing the lack of specificity in the provision might be to provide the
investor with a supplementary law that expressly refers to the investment itself.
Third, the provision itself requires support from other provisions if it is to achieve
an effect similar to that of a contract-based guarantee. For example, it needs to
address or be linked to provisions addressing applicable law and the venue of
arbitration in the event of a dispute. If the law is wholly that of the host state and
international arbitration is lacking, the value of its guarantee that the state will not
act unilaterally to undermine the economics of a project will be significantly
diminished. There are plenty of examples of what one observer calls the “vagaries
of litigation in the state party’s domestic courts, such as lengthy and inefficient
court proceedings and the real or perceived bias of domestic courts in favour of
their government.”42
Considerations such as the above have understandably fostered some
scepticism among commentators about this form of legal stability, with Waelde
and Ndi declaring that “a stabilization promise made only in legislation is not
sufficient to assume an explicit, formal, and binding stabilization agreement.”43
This is in a narrow sense correct. It is also in line with an older, pre-investment
treaty world, in which such guarantees in national legislation constituted one of
only two pillars to legal stability. Now, one may argue, its form and precise

42
Stephan W Schill, ‘The Interface between National and International Energy Law, in Research
Handbook on International Energy Law, ed. Kim Talus (Edward Elgar, 2014) 44–76 at 70. The setting
aside of the Erha arbitral award by Nigerian courts (discussed in 2.3) above, is only one example of this
phenomenon.
43
Thomas W Waelde and George Ndi (1996), supra fn 10, at 240.
130 BCDR INTERNATIONAL ARBITRATION REVIEW

wording may prove significant in the context of an investment treaty claim.44 It is

highly unlikely that an arbitral tribunal would fail to consider it in a claim.
Moreover, if such a legislative guarantee is available, it may prove to be a valuable
addition to a contract-based guarantee of stabilization, and a factor in determining
damages if the state “subsequently revokes or ignores those same legislative
promises of stability.”45
A procedural rather than a substantive guarantee is also available to investors
in the domestic law of some states, whereby national legal processes to approve
final investment agreements are utilized to give the contract between state and
investor the force of a municipal law. Such procedures do not usually preclude the
inclusion of any or many forms of stabilization clauses and an international
arbitration provision in the contracts themselves. They are merely an additional
form of assurance and as such likely to be viewed as valuable by the international
oil and gas investor.

5 DO STABILIZATION CLAUSES MAKE SENSE FOR FUTURE

ENERGY MARKETS?
Given the pressures on states to meet environmental and social challenges, is it
realistic to expect them to offer clauses that seek to stabilize a bargain struck with
an international investor for the next 20 to 30 years? Indeed, are stabilization
clauses necessary in the oil and gas sector in the present context?
There are at least two responses to such questions. The first is to state the
obvious. At present, there are many thousands of contracts in the international oil
and gas sector of the world economy that contain one or more kind of
stabilization clause. For the foreseeable future such contracts will govern oil and
gas operations, to the extent that there is a market for these commodities. The
issues discussed in this article about the three pillars of legal stability, their
interaction, and the implications of various kinds of stabilization clause seem likely
to be with us for many years to come. For governments to make changes to the
terms of these contracts with adverse economic consequences for existing
investors, provision needs to be made to meet the legal consequences since their
protection in international law seems beyond doubt.
Looking to the future, the picture cannot be the same. The subject matter of
energy investment law is undergoing a significant change. At a macro-level, there is
a major change in public preferences and in political, social, and economic
orthodoxy with policy interventions sought to reduce the negative impacts of
44
For example, Bogdanov and Bogdanova v Moldova, 16 April 2013, supra fn 27, paras 184–192, 195, 207
(where the stabilization clause was in a foreign investment law of the host state).
45
Ibid.
 STABILIZATION CLAUSES: DO THEY HAVE A FUTURE? 131

CO2 emissions. Such sweeping changes are not unfamiliar in the energy sector:
privatization and deregulation in the 1990s proved disruptive to existing legal
frameworks but in the medium to long term had many positive impacts. In this
instance, however, the energy sector itself is deemed to be part of the wider
problem and is therefore embedded in or the target of these policy shifts, and the
legal measures chosen to implement them. Supporting this shift is the multilateral
accord, the Paris Agreement on climate change mitigation, that will require
sweeping changes by national and regional governments at the level of municipal
law, creating challenges for the long-term stability of energy projects. However,
even if the balance of energies in the energy mix changes significantly in the
coming years, the need for international investment in the oil and gas sector seems
highly unlikely to cease.
In this context, an investor cannot argue that its investment was made on the
assumption that circumstances would not change over the long term, or that
public policy would not evolve. However, the examination of stabilization clauses
in this article has hopefully demonstrated the diversity and dynamism that
characterizes the modern suite of stabilization clauses, offering ample opportunities
for states to ‘carve-out’ areas of actual or potential sensitivity in domestic policy.
Moreover, stabilization clauses are only one form of guaranteeing long-term
stability among several, suggesting an underlying commercial need that the law
must respond to. In the energy sector, where investments tend to envisage a longer
duration than most, with larger up-front costs, an international character and a
degree of complexity and technical sophistication, there are a multiplicity of forms
of legal stability to support the various kinds of investment, ranging from
contractual obligations, treaty protections, domestic legislative commitments,
assurances, and representations by government, and in the regulatory frameworks
and licences offered by host states. In meeting this commercial need for stability,
this contractual device has demonstrated a greater flexibility than its critics
expected, and therefore seems likely to remain part of the legal toolkit for investors
and states when making the large investments the global economy will require in
the years ahead.
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