In the widely cited and sometimes wildly interpreted 1982 arbitration award issued by the tribunal in Aminoil v. Kuwait, the Government argued that compensation for its expropriation of Aminoil’s concession should be based on precedents resulting from a series of transnational negotiations and agreements arising out of other recent nationalizations in the Middle East. According to the Government, these precedents had generated a customary rule valid for the oil industry – a lex petrolea in some way a particular branch of a general universal lex mercatoria. For this reason, Kuwait offered no more than net book value of the redeemable assets as compensation for its expropriation. For reasons of fact and law, the arbitral tribunal rejected this characterization of these so-called precedents as a lex petrolea. Aware of the complex nature of any negotiations about compensation in this context, the tribunal stressed that these settlement arrangements were more often than not complex, comprising not simply payment of indemnity but also bilateral arrangements of every type, not all of which had been made public or known with certainty. The tribunal also cited several reasons of law that weighed heavily against its finding any lex petrolea on this issue, among other things observing that Concessionaires often gave such consents under pressure of strong economic and political constraints having nothing to do with law. Despite this initial, notable rebuff of the notion of a lex petrolea, today four possible sources of a lex petrolea can be identified and considered – national petroleum laws, international petroleum contracts, custom and practice in the international oil industry, and international arbitration awards – and questions about the existence and composition of a lex petrolea can once again legitimately be asked.
National Petroleum Laws as Forming a Lex Petrolea
Perhaps surprisingly, some host governments appear to recognize that the petroleum laws of other oil exporting countries form a universal lex petrolea. This recognition ranges from referral to a specific source of law to invocation of general petroleum principles. In the 1995 Karabakh Production Sharing Contract, SOCAR, the national oil company of Azerbaijan, agreed to apply principles of law common to Azerbaijan and England, and to the extent no common principles exist as to a matter then in accordance with the common law of Alberta, Canada. Alberta, of course, is the leading oil producing province of Canada. Ten years later, CNOOC, a Chinese oil company, agreed in its petroleum contracts to application of the laws of China, and failing relevant Chinese law for interpretation or implementation of the contract, to apply principles of laws widely used in countries acceptable to the parties. Even more recently, in its 2012 Model Production Sharing Contract the Kurdistan Regional Government of Iraq expansively proposed: “This Contract, including any dispute arising therefrom, thereunder or in relation thereto, shall be governed by English law . . . together with any relevant rules, customs and practices of international law, as well as by principles and practice generally accepted in petroleum producing countries and in the international petroleum industry.”
Even the petroleum laws of some oil producing countries recognize the existence of a lex petrolea. Still in effect today, the 1996 Madagascar Petroleum Law declares in three different provisions that Malagasy law shall apply to hydrocarbon activities, but goes on to state that “Malagasy law and the international principles of law generally agreed on the subject of hydrocarbons are also applicable to contracts entered into by the ‘Societe nationale’ and the foreign companies operating in the territory of the Republic of Madagascar.” For better or worse, no set of petroleum laws has gained wide acceptance internationally. At the end of 1963, the Fifth OPEC Conference resolved “that the Secretary General shall invite a number of experts from Member Countries and, if necessary, from other countries, to work on the compilation of a Code of Uniform Petroleum Laws.” But a uniform petroleum law – a lex petrolea – failed to materialize from this initiative. In an important paper prepared in 2001, William Onorato and Jay Park identified ten basic elements of petroleum laws dealing with: State ownership of petroleum; establishment and vesting of the Competent Authority to implement policy; petroleum operations; petroleum agreements; petroleum regulations; qualifications, duties, and rights of Rights Holder or Contractor; taxation of profits; other taxes, duties, and exchange controls; fiscal stabilization; and environmental protection and safety. Significantly, however, while observing that the objectives of technical assistance programs in this area were to aid in development of acceptable, international-standard, legal, contractual, and fiscal frameworks, the authors emphasized that their article “concentrates exclusively on providing an explanation of principles and elements of such model regimes, but pointedly offers neither model language, clauses, nor codes for their drafting.” In short, the multitude of national petroleum laws, although containing basic elements in common, cannot be considered to provide specific examples of laws of general acceptance or application.
Contracts as the Lex Petrolea between the Parties
International petroleum contracts might be considered, individually and collectively, as forming a lex petrolea. At one time, the view that petroleum contracts constituted the law between the parties seemed widespread, and for good reason. National petroleum laws were still in their infancy, or absent altogether. As famously explained by the sole arbitrator in the 1951 award in Petroleum Development Ltd. v. Sheik of Abu Dhabi: “it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments.” In more diplomatic terms, and relying directly on the parties’ contract, the arbitral tribunal in Saudi Arabia v. ARAMCO ruled in its 1958 award that the “Concession Agreement is thus the fundamental law of the Parties, and the Arbitration Tribunal is bound to recognize its particular importance owing to the fact that it fills a gap in the legal system of Saudi Arabia with regard to the oil industry.” Not long thereafter, Fouad Rouhani, the first Secretary-General of OPEC, told a United Nations Inter-Regional Seminar on Techniques of Petroleum Development in 1962: “The Petroleum Act lays down the general principles under which agreements may be made, and describes the varieties of authorized relationships, but once an agreement is made and is ratified by the Legislature, the Petroleum Act virtually fades away because the agreement itself is the appropriate and sufficient law.” In the same year, and preceding the birth of the short-lived New International Economic Order in the next decade, the United Nations General Assembly, with strong support from developed and developing countries alike, approved Resolution 1803, which declared in part: “Foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith . . . .”
Although much has happened since these relatively early pronouncements to call into question the sanctity of the petroleum contract, under certain circumstances and on the basis of certain contractual language international petroleum contracts continue to constitute the law between the parties. These circumstances and terms include: in those countries, such as Egypt, Qatar, and Azerbaijan, where the host government enacted the contract into law; in civil law countries where under the applicable municipal law contracts have the force of law between the parties; when in the applicable law provision in the petroleum contract the parties have expressly incorporated the international legal principle of pacta sunt servanda (the contract shall be honored); when the host government has expressly granted enclave status to the international petroleum contract through “intangibility” and “inopposability” forms of contract stabilization that insulate the contract from changes in law; and for those contracts in which the parties have incorporated a set of arbitral rules, such as the UNCITRAL Arbitration Rules, which require that “[i]n all cases, the arbitral tribunal shall decide in accordance with the terms of the contract . . . .”
Furthermore, in three basic ways international petroleum contracts can create a lex specialis, a special form of lex petrolea. First, the parties can agree in their contract to incorporate by reference a host country’s law as of a certain date or by other means of identification (e.g., decree number and date of promulgation) as a system of law for the duration of their agreement. These provisions represent the most common form of so-called “freezing” clauses. Second, the parties can include specific elements of the host country’s laws by repeating that law verbatim in their contract as a contract term. By “contractualizing” the law in this way, even if the government changes or repeals the law, it remains an express term governing their contractual relationship for the life of their agreement. Third, the parties can by allocation of sovereign risk to the State or state oil company create a lex specialis that overrides even the parties’ choice of the applicable law, as held by the tribunals in the Himpurna v. PLN 1999 Final Award and more recently in the Mobil Cerro Negro v. PDVSA Award at the end of 2011.
More than one writer, having in mind the model contracts prepared by the Association of International Petroleum Negotiators, has suggested that the lex petrolea of international oil & gas commercial agreements can be determined by referencing the industry’s business practices, as captured in its model contracts. Currently, the AIPN has 19 “operative” model contracts and 13 “archived” model contracts. These model agreements may evolve over time, most notably, as seen with the 1990, 1995, 2002, and 2012 Joint Operating Agreements, and most recently the 2014 Unconventional JOA. Most tellingly, however, the AIPN model contracts contain numerous alternative and optional provisions, allowing the parties to adjust the terms of their contract to fit their bargain, relative leverage, and needs. The AIPN model contracts are intended first and foremost to provide a familiar framework from which to start drafting and negotiations, in other words, to function as tools rather than as standards. Notably, at least to any lawyer, the front cover of these model agreements prominently bears an extensive disclaimer emphasizing, among other things, that the model was prepared only as a suggested guide. In short, it may be easier to say that these model contracts represent a lex petrolea than to establish these agreements as the law.
Custom and Practice in the International Oil Industry
Custom and practice plays an important role in the international oil & gas industry, and therefore it seems appropriate to ask whether this custom and practice has become so engrained, widely recognized, and followed that it operates as a binding rule or, if such a distinction can be made, as a precedent that tribunals, otherwise unsure of the proper outcome, should apply to resolve disputes and guide future conduct. Most sets of arbitral rules, normally in an article captioned “Applicable Law” or “Applicable Rules of Law,” make reference to custom and practice and/or trade usage. The Rules of Arbitration of the ICC International Court of Arbitration, for example, provide that “[t]he arbitral tribunal shall take into account the provisions of the contract, if any, between the parties and of any relevant trade usages.” Those few sets of arbitral rules requiring the tribunal to decide in accordance with the terms of the contract assign custom and practice and trade usage a lesser, non-compulsory status, with tribunals instructed to “take them into account.” Thus, the AAA ICDR International Arbitration Rules state: “In arbitrations involving application of contracts, the tribunal shall decide in accordance with the terms of the contract and shall take into account usages of trade applicable to the contract.” One notable exception, the LCIA Arbitration Rules, makes no reference to industry custom and practice or trade usage.
Custom and practice thus performs an important gap filling role. As explained by the tribunal in the previously referenced award in the Saudi Arabia v. ARAMCO arbitration, “the Tribunal will be led, in the case of gaps in the law of Saudi Arabia, of which the Concession Agreement is a part, to ascertain the applicable principles by resorting to the world-wide custom and practice in the oil business and industry.” On considering oil industry custom and practice, some tribunals have determined that this practice includes application of general principles of law to petroleum contracts. In the 1982 RAKOIL Final Award, the tribunal concluded that application of internationally acceptable principles of law governing contractual relations had become a common practice in international arbitrations particularly in the field of oil drilling concessions and especially to arbitrations located in Switzerland. It could be fairly asked, of course, whether this custom and practice arose in the international oil industry or in the international arbitration industry.
International oil industry custom and practice has been elevated to a legal obligation in JOAs and host government contracts in one particularly important area, that of petroleum operations. The well-known 1997 Kashagan PSA lists among the obligations of Contractor “the obligation to be responsible for all Petroleum Operations, whether carried out directly or through Subcontractors, to perform them diligently, safely and efficiently in accordance with International Good Oil Field Practice, and the highest reasonable international conservation and environmental standards necessary to protect the special ecological conditions of the Caspian Sea . . . .” The Kashagan PSA defines “International Good Oil Field Practice” to mean “all those uses and practices that are at the time in question then generally accepted in the international petroleum industry as good, safe, economical and efficient in exploring for, developing, producing, processing and transporting Petroleum.” The Production Sharing Contracts used by India in recent years impose on Contractor the obligation to perform in accordance with Good International Petroleum Industry Practices (“GIPIP”) in more than a dozen provisions in the contract. Unusually, the definition of GIPIP includes a proviso that in the event a question of what constitutes GIPIP cannot be agreed by the members of the Management Committee, the Government will decide the question with input from the Director General Hydrocarbons or from a list of organizations or persons recommended by the DGH, with the Government’s decision binding. In this peculiar way, these Indian PSCs arguably contain a mechanism by which these industry practices become the law.
International Arbitration Awards
In theory, international arbitration awards dealing with oil and gas disputes should provide a fertile soil for the flowering of a lex petrolea. For one thing, concession agreements dating back at least 60 years have relied upon decisions of international tribunals as a source for the parties’ chosen law. The Libyan Model Concession (Second Schedule to Petroleum Law No. 25 of 1955) stated: “This Concession shall be governed by, and interpreted in accordance with, the principles of law of Libya common to the principles of International Law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by International Tribunals.” (Emphasis added.) Fast forward 50 years to a Ghana 2006 Petroleum Agreement to find: “This Agreement and the relationship between the State and GNPC on one hand and Contractor on the other shall be governed by and construed in accordance with the laws of the Republic of Ghana consistent with such rules of international law as may be applicable, including rules and principles applied by international tribunals.” (Emphasis added.) This broad reference to rules and principles applied by international tribunals undoubtedly encompasses those rules and principles relied upon tribunals such as the International Court of Justice, the U.S. – Iran Claims Tribunal, the European and Inter-American Courts of Human Rights, and the International Tribunal for the Law of the Sea, but could also be construed to cover rules and principles applied by international arbitration tribunals in commercial and investment disputes, especially those involving the international oil & gas industry.
In his groundbreaking 1998 paper, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, Doak Bishop, a King & Spalding partner, carefully examined several arbitral awards involving international oil companies, with a large majority concerning disputes with host governments. At the outset, he noted that these awards have created “the beginnings of a real lex petrolea.” His survey covered virtually all reported international arbitration awards relating to the petroleum industry. In all, however, as the annex to the paper makes clear, he was able to examine only ten awards. In 2011, Tom Childs, a King & Spalding counsel, authored Update on Lex Petrolea: The continuing development of customary law relating to international oil and gas exploration and production. This article took up where the Bishop paper left off, the author examining 18 additional awards. In the introduction, Childs observes that the arbitral awards relating to international exploration and production published since 1998 differ in several important respects: (1) many of them arose under bilateral investment treaties; (2) only one award related to nationalization of oil and gas assets, whereas a large number before 1998 dealt with this subject; and (3) several of these new awards deal with claims relating to changes in the host government’s fiscal regime. Since the Childs’ article appeared, arbitral tribunals have rendered several important additional awards concerning oil and gas projects, mainly relating to resource nationalism in Venezuela and Ecuador.
In many of the awards in recent investment treaty cases, the arbitral tribunals have declared their intention to pay due regard to earlier decisions of international courts and tribunals. While recognizing that they are not bound by previous decisions, they also recognize a duty to adopt solutions established in a series of consistent cases, absent compelling contrary grounds. As explained in the 2012 Decision on Liability in Burlington Resources v. Ecuador, “subject to the specifics of a given treaty and of the circumstances of the actual case, it [the tribunal] has a duty to seek to contribute to the harmonious development of investment law, and thereby to meet the legitimate expectations of the community of States and investors towards the certainty of the rule of law.” Most of these investment decisions concern legal issues relating to procedural requirements and substantive State obligations under the applicable investment treaties, rather than issues peculiar to international petroleum contracts or the international petroleum industry. The one important exception: enforcement of stabilization provisions in host government contracts. Time and time again, tribunals have recognized and enforced the State’s or national oil company’s express contractual stabilization obligations (the only exceptions occurring when tribunals have found waiver of stabilization rights), and in the context of a treaty claim have stressed the probative value of the presence of a stabilization clause in the underlying contract in establishing the international oil company’s legitimate expectations.
Sources and Successes of International Petroleum Law
Three of the four potential sources of a lex petrolea appear to have contributed to its development, although a lex petrolea exists today to only a limited degree. National petroleum laws can now be found in all oil and gas exporting countries and in some merely prospective locales. While they may share a basic framework, their terms vary widely and occasionally even suffer from internal inconsistency. These national laws do not appear to have contributed to formation of an international petroleum law. International petroleum contracts frequently constitute the law between the parties, and in that limited sense form a lex petrolea. The effectiveness of some provisions, in establishing a lex specialis that overrides even the parties’ choice of law, has probably caught some host States by surprise. The AIPN model contracts, while tremendously useful to the industry, cannot be said to form a lex petrolea. Custom and practice in the industry can supply rules of conduct that govern pursuant to most sets of international arbitration rules and pursuant to express agreement of the parties. Host government contracts and JOAs that require adherence to good international petroleum industry practices when conducting petroleum operations transform industry practices into legal obligations. Given the nearly universal reliance on these practices to define and set the legal standard for petroleum operations, they can be validly viewed as a form of lex petrolea. Finally, international arbitration awards, the most obvious potential source of a lex petrolea, have not yet generated a significant body of international petroleum law, undoubtedly because of the generally private nature of commercial arbitration and the focus on treaty obligations in investment arbitration. In one area of special importance to the international petroleum industry, namely, contract stability, available awards have established the clear principle of enforcement of stabilization obligations against host governments. More broadly, these awards also stand for the binding nature of international petroleum contracts between international oil companies and States.