Developing countries which tend to attract foreign investors to invest in energy sector, have signed numerous Bilateral Investment Treaties (“BIT”) to secure potential investors from financial and environmental risks. A BIT, is a legally binding agreement that offers reciprocal legal protections and obligations of investments between two contracting states. The purpose of the BIT’s is to advance the economic linkages of the signatory parties, with an ultimate objective of economic development. As early 1778, USA negotiated and signed their first Treaty on Friendship, Commerce and Navigation, which may be regarded as the pioneer of the BITs, with France which emphatically highlighted the protection of foreign property by the rules of international law. However, this treaty were focused on only protection of the investor, but not covered the protection of host states. Since then, necessity of safeguards upon both parties became salient and the world’s first BIT was signed between Germany and Pakistan in 1959. [1]

The most common risks that energy investors may be listed as business risks, transfer of funds and currency, direct/ indirect expropriation as other sectors. At this point, BITs provide in detail Standards of Protection and Treatment clauses acting as a useful mean for potential investors to provide essential reassurance.

Standards of Protection Clauses

The general standards of protections in BITs regarding energy investments are typically based on the clauses as follows;

  • Expropriation,
  • Environmental Clauses,
  • Fair and Equitable Treatment,
  • National Treatment,
  • Most- Favored Nation Treatment.


In customary international law and international investment agreements, states have the right to expropriate foreign investments in their territories as long as subsequent conditions are met[2]:

  • The expropriation should serve for a public purpose,
  • It should not be done in a discriminatory and arbitrary manner,
  • It should include fair and equitable compensation,
  • It should be done with due process.

Direct expropriation refers to states taking control of an economic sector or industry or taking physical possession of the property. An indirect expropriation however, refers to regulatory actions such as amending the legislation on taxation and creating a financial burden on investor. Indirect expropriations have become a prevalent way of depriving investors’ of the possibility to utilize the investment as intended. Expropriation clauses in BITs often guarantee that the investments of the contracting party in the territory of the other contracting party shall not be nationalized, expropriated or subjected to measures having equivalent effect to nationalization or expropriation. [3]Hence, the parties to the agreement can manage to understand the balance being created between private and public interests.

Environmental Clauses

Another issue is that the oil and gas industry faces strict environmental standards in developed countries. However, the majority of the world oil reserves are located in developing countries but there are often inconveniences of monitoring and enforcing environmental regulations. Environmental clauses in BITs attempt to prevent the states from failing to enforce its environmental regulations and also provide a framework for the transfer of clean technologies. These clauses basically support the principles of environmental protection and sustainable development.

Fair and Equitable Treatment (“FET”)

Fair and Equitable Treatment (“FET”) clause is a broad and evolving clause which grants full protection and security to investors. As for the concept of the FET, the judges of the MTD v. Chile case in regards to the provisions of the BIT, stated that fair and equitable treatment encompasses such fundamental notions as good faith, due process, non-discrimination and proportionality. FET clause in that sense has a magnitude importance for the foreign investors to be fully treated in a just and even- handed manner.

In any related cases of unreasonable or discriminatory measures upon management, maintenance, use, enjoyment or disposal of such investments; investors may claim that they are not treated in compliance with the FET. In practice, the FET standard may offer a redress where the facts that do not support a claim of expropriation. Such that, majority of claims successfully raised in international arbitration are based on violations of the FET standard.

National Treatment and Most- Favored Nation Treatment (“MFN”)

National Treatment and Most-Favored Nation Treatment (“MFN”) clauses are deemed as different faces of a same coin. National Treatment means that compelling a host state to make no differentiation between foreign and national investors in its territory when enacting and applying its rules and regulations. Whereas, MFN requires the host state not to treat investor differently than the other investors based on the foreignness.

Many energy producing and exporting countries have expressed their concern that high consumption and excise taxes imposed by importing countries on energy materials and products reduce the revenues received by exporting countries for their finite resources. In this respect, these energy exporting countries and their investors would benefit from National Treatment with respect to domestic taxation and MFN treatment with respect to charges and duties.

Dispute Resolution

Lack of impartiality and sovereign immunity of domestic courts pave the way for dispute resolution to be preferred. International arbitration offers investors direct access to international procedures and impartial decisions and remedies by independent arbitrators. Some agreements establish institutions for dispute resolution but mostly rely on binding arbitration under International Centre for Settlement of Investment Disputes (“ICSID”). Parties to the agreement also may agree on ad hoc arbitration however ICSID arbitration creates certain advantages. At first, ICSID establishes a legal framework by setting standard clauses and rules of procedure. Second, it provides institutional support for the conduct of proceedings and reassurance of non- frustration of proceedings. Last but not least, ICSID also facilitates the enforcement and recognition of the awards. Notable here is that, these advantages apply both for the host state and the foreign investors. Foreign investors gain the advantage of direct access to an effective international forum should a dispute arise while host states gains the advantages of improving its investment climate and attracting more international investments. [4]

Energy investments are concerned of many obstacles for energy investments in developing economies, and policies promoting energy investments such as restructuring, privatization and financial incentives are assumed to promote energy FDI inflows. In order to reduce these obstacles, foreign investors and host states should utilize the privileges that BITs often offer and engage into arbitration procedure to settle the potential disputes in a meaningful way.