February 2019
In this February edition, we are delighted to present legal and industry updates from the firm's global network of offices. The selection is based upon our experience of the wide variety of issues faced by our clients in their business operations and investments around the world.
We hope that you enjoy the edition, and would welcome the opportunity to discuss further any matters which impact your business today.
Chris Bailey Partner, Tokyo
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John McClenahan Managing Partner, Tokyo
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" [T]heir written and oral advocacy is outstanding"; "[h]as standout experience of disputes arising in the oil and gas sector and offers additional expertise in construction arbitration"; "[t]heir lawyers are intelligent, resourceful, creative, hardworking and very responsive"; "the firm has more experience than most others in investment arbitration".
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Edition No. 31
Disputes in the International Oil & Gas Industry
Best Practices for Effective and Quick Resolution
Disputes in the oil and gas industry take an almost infinite variety of forms. Therefore, when considering best practices for resolution of oil and gas disputes, no one size fits all. Some disputes will be more amenable to resolution through a particular process or in a particular forum than others.
Introduction: Disputes in the Oil & Gas Industry
In the oil and gas industry, disputes can be vertical or horizontal. Vertical disputes occur between parties in different industry segments (tiers). When viewing the industry as a pyramid made up of four tiers:
at the apex, the first tier consists of the host governments (as the owners of the resources);
the second tier of oil and gas companies (the ConocoPhillips, Ecopetrols, Shells);
the third tier of service providers (the Halliburtons, Schlumbergers, Transoceans); and
at the base of the pyramid, occupying the fourth tier, the equipment providers.
Disputes between first and second tier protagonists normally concern host government contracts, such as concessions, production sharing contracts, risk service contracts. Disputes between oil companies and service providers often concern master service agreements.
Horizontal disputes occur between parties of the same tier: between States (e.g., border disputes), between oil companies in co-venturer relationships (e.g., joint operating agreement, farmout agreement, asset sale, and other disputes), and among service and equipment providers (e.g, Deep Water Horizon disaster). Construction disputes often involve owners, contractors, subcontractors, and equipment suppliers.
Disputes can also be categorized based on where they occur in the oil and gas value chain (upstream, midstream, downstream). And finally, these disputes can be classified based on when they occur during the project life-cycle (for example, in the upstream sector: exploration, appraisal, development, production, decommissioning).
The complexity of the legal framework and commercial matrix in which these disputes arise almost guarantees the impossibility of any facile solution.
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Methods of Dispute Resolution
Disputes can be resolved by the parties themselves, by the parties with help from a third party (e.g., a mediator), and directly by third-party decision makers (courts, arbitrators, expert determinators). The parties can design a multi-step dispute resolution process that progressively channels their disputes into more rigorous forms of dispute resolution when one form fails.
Best practices require that this arrangement specify how this process begins and when it transitions from one form of dispute resolution to the next. Typically, the aggrieved party delivers a written notice of dispute, and commencement of each stage of the dispute resolution process ties back to the date of this notice. The parties can provide in their contract that any dispute that cannot be settled amicably within 30 days from the date of the notice of dispute shall be submitted to senior management review. Often in the oil and gas industry, disputes can be resolved when removed from the individuals who may for commercial or other reasons have a vested interest in the outcome that impedes settlement.
Next, the parties can provide for submission of the dispute to formal mediation; if not resolved by mediation within 90 days from the notice of dispute, either party may submit the dispute to the forum selected by the parties, either a court or arbitral tribunal. Certain types of disputes may be better suited for determination by a third-party expert.
International Arbitration of Oil and Gas Disputes
Best practices in the international oil and gas industry call for submission of disputes to international arbitration. The Association of International Petroleum Negotiators' 2017 Model Dispute Resolution Agreement (AIPN Model) provides state-of-the art dispute resolution provisions and guidance regarding various procedural options.
Unless compelling reasons exist, best practices warrant use of the AIPN basic model arbitration clause (or comparable clause from a respected arbitral institution), without the many optional provisions also offered:
"Any dispute, claim, or controversy of any nature arising out of or relating to this Agreement, including but not limited to its
formation, existence, performance, interpretation, breach, validity, or termination ("Dispute"), shall be resolved by final, binding arbitration [by three arbitrators] [by a sole arbitrator] in accordance with the [designated international arbitration rules] ("_____ Rules"), in [specify language to be used]. [For ad hoc (non-administered) rules, designate an arbitral institution as the appointing authority.] The seat of the arbitration shall be [City, Country]. [Judgment on the award may be entered by any court of competent jurisdiction.]"
The parties should incorporate by reference a set of well-respected administered or non-administered arbitration rules to govern arbitral procedure. If choosing the non-administered UNCITRAL Arbitration Rules, the parties should designate an appointing authority and also incorporate the Emergency Arbitrator/Emergency Measures provisions from the AIPN Model. Most sets of modern arbitration rules contain emergency arbitrator and expedited procedures based on the amount in dispute. (See, e.g., ICC Arbitration Rules arts. 29 & 30 (1 March 2017)). Best practices, however, generally reject setting arbitrary deadlines for the hearing or for delivery of the arbitral award.
To encourage the arbitral tribunal to move the proceeding forward expeditiously, the parties should include appropriate language, such as this from the AIPN Model: "The Parties want the arbitration of any Dispute to proceed efficiently and expeditiously."
Simplicity and clarity should be the goal. The more complex the dispute resolution provisions, the more likely they will themselves generate disputes over their scope and application.
Expert Determination
The technical and commercial issues arising in the oil and gas industry sometime lend themselves better to expert determination than to arbitration or the courts, but anticipating what disputes should go to one forum instead of another can be difficult and even dangerous.
Host government contracts and joint operating agreements typically contain procedures for breaking impasses that call for submission of discrete disputes to binding or non-binding expert determination. For example, disputes over the
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boundaries of a discovery, declarations of commerciality, calculation of oil value for purposes of buy-backs, look-back valuations following an asset sale, qualification of certain costs for cost recovery, audit exceptions, and the costs of decommissioning can be determined by an expert.
Care should be given, however, to ensure procedural due process and to define precisely the issues the expert can decide. With expert determination, there exists the risk of disputes over the scope of the expert submission, the problem of piecemeal dispute resolution, with some elements of a dispute going before the expert and others before the arbitral tribunal, and the downside that unlike for foreign arbitral awards, no international treaty exists for their enforcement, which means that expert decisions can only be enforced in the courts as executory contracts.
Somewhat famously, the 1990s Venezuelan Association Agreements contained an elaborate dispute resolution architecture comprising a broad arbitration clause, a primary carve-out for disputes within the competence of the Control Committee, secondary carve-outs of specific matters to be submitted to an independent expert, and four arbitration opt-ins, including requiring baseball arbitration (final-offer arbitration) of the amount of the abandonment payment, but how this complex architecture actually worked in practice, one can only wonder.
Concluding Comments
Ultimately, best practices for effective and quick dispute resolution in the oil and gas industry depend on the parties, counsel, arbitrators, and courts at the seat of arbitration, rather than on any quick procedural fixes. Parties and their counsel must act in good faith and without engaging in dilatory practices or actions that aggravate the dispute. Arbitrators must take firm control of the proceeding and demand adherence to the procedural schedule.
Local courts must help when needed and avoid interfering when not. The 2015 amendment to Section 29 of the Indian Arbitration Act, which calls for the award to be made within 12 months from the date the arbitral tribunal enters upon its reference (6-month extension by agreement), probably goes as far as reasonably possible to expedite the process through changes to the lex arbitri. For highly technical oil and gas cases, such as those
involving preparation of reservoir simulation models based on performance data, 12 months may not be enough time.
As noted in Section 10.12.2, Best Practices, Dispute Resolution, in the 2016 Good International Petroleum Industry Practices (GIPIP) guidelines prepared by the Indian government:
"Dispute resolution through arbitration is currently considered the principal method of dispute resolution in the oil and gas industry, especially when there is an international contract spanning many countries."
For this method to be effective and efficient, all of the stakeholders in this process must be dedicated to making it work. Article 22(1) of the 2017 ICC Arbitration Rules requires:
"The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute."
Various arbitral organizations have adopted guidelines for effective and quick dispute resolution (see, e.g., ICC Techniques for Controlling Time and Costs in Arbitration; The College of Commercial Arbitrators Protocols for Expeditious, Cost-Effective Commercial Arbitration), but the key to the guidance they offer remains universal: the tribunal must set and hold firm to a reasonable procedural schedule.
About the Author
John Bowman is a partner at King & Spalding in Houston. John specializes in disputes involving the oil and gas industry. As a partner in our International Arbitration practice and leader of our Upstream Oil and Gas practice segment, John represents international energy companies in commercial and investment disputes.
He was chosen by the Institute for Energy Law to receive its Lifetime Achievement in Energy Litigation Award, given to one energy litigator each year whose achievements "have won the admiration of his or her peers," at its annual energy litigation conference in November 2017. In 20142015, he served as President of the Association of International Petroleum Negotiators.
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Resources & Links
The following links provide access to further King & Spalding Dispute Resolution and Crisis Management publications.
Legal Updates
Damages in Large-Scale Energy Projects: Maximizing Recovery of Liquidated Damages
Managing International Energy Arbitration: The Role of Corporate Counsel
Oil and Gas Supply Chain Interruption: The Impact of Force Majeure
Host Government Agreements: Choice of Law as a Pillar of Contract Stabilization
Lex Petrolea: Sources and Successes of International Petroleum Law
Offshore Gas Block Award: India loses billiondollar case over gas migration
BIT Arbitration Clauses: European Court of Justice Calls Into Question the Arbitrability of Energy Disputes Between EU Member States
Anadarko Wins Over $100 Million in Deepwater Horizon Costs: Based on
Undefined Term in Insurance Policy
Lessons Learned from the Crisis in Puerto Rico: Preparing to Document and Mitigate Hurricane Losses Before the Storm
Historical Contamination Sites: Cooperating with Environmental Regulators Could Cost You Your Coverage
King & Spalding News
Market Recognition: Law360 Names King & Spalding a 2018 Law Firm of the Year, and Seven Practices as Practice Groups of the Year
Market Recognition: Law360 Names King & Spalding an International Arbitration Practice Group of the Year for Third Consecutive Year
Market Recognition: King & Spalding Earns Multiple Top-Tier Rankings in Legal 500 Asia-
Pacific 2019 Guide
Market Recognition: Law360 Names King & Spalding an Environmental Practice Group of the
Year
Award Victory: Tribunal Rules That $9.5B Judgment Against Chevron Was Fraudulent
Commentary: Adrian Cole discusses construction arbitration at the 2018 Saudi Centre
of Commercial Arbitration Conference
Award Victory: Global Arbitration Review profiles recent arbitration victory for Denmark's
Athena Investments against Spain
Partner Recognition: Law360 Recognizes Partner Tracie Renfroe as a 2018 Environmental
MVP
F
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Tokyo Dispute and Crisis Management Newsletter Global Contacts (with links to curricula vitae)
Global Arbitration Leadership
Chris Bailey England & Japan* Head of Tokyo
Ed Kehoe New York Office Head of America
The Regional Asia Disputes Team
John Savage, QC London Office Head of EMEA
Wade Coriell Singapore Office Head of Asia
Emerson Holmes (Partner) English Barrister Construction
Simon Dunbar (Partner) New York & England Commercial
Elodie Dulac (Partner) France & Cambodia* Investor Treaty
Manuel Bautista, Jr. (Counsel) New York & Philippines Commercial
Anisha Sud (Senior Associate) Texas Trial and Global Disputes
Kevin Lim (Senior Associate) Singapore Trial and Global Disputes
Donny Low (Senior Attorney) New York & Australia Anti-trust & Investigations
Jia Lin Hoe (Associate) England & Singapore Mandarin
Adam Gregory (Associate) Australia Construction
Hanna Azkiya (Associate) Indonesia Bahasa Indonesia
Global Disputes Partners
David Park (Associate) Australia Korean
Xiaomao Min (Associate) China Mandarin
Reggie Smith Houston
Caline Mouawad New York
Craig Miles Houston
Stuart Isaacs, QC London
John Bowman Houston
Marc-Olivier Langlois Paris
Adrian Cole Abu Dhabi
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Nick Cherryman London
*Registered Foreign Lawyer
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