Stabilization clause extremely disadvantageous for nations on the road to first oil

Apr 09, 2018 ExxonMobil, News

– Int’l Group

For nations on the road to first oil, it would be unwise for the respective governments to sign on to contracts with a stability clause.
This is according to the Open Society Institute (OSI), an international body that aims to shape public policy to promote democratic governance, human rights, and economic, legal, and social reform.
On a local level, OSI implements a range of initiatives to support the rule of law, education, public health, and independent media. At the same time, OSI works to build alliances across borders and continents on issues such as combating corruption and rights abuses.
According to the body, stabilization provisions protect oil companies from governmental or legislative changes affecting any contract term and grant them compensation from the host government for any added costs due to future legislative changes, unless otherwise agreed.
It noted that originally, stabilization clauses addressed specific political risks that could affect the contract. In developed countries, the Institute said that the greatest worry was that the host government would nationalize the investors’ assets or terminate the contract by unilateral decision.
It said that in the 1970s, there were several disputes between foreign investors and Libya following the nationalization of the oil companies’ interests and properties in that country. It noted that the arbitrating court decided that Libya’s unilateral decision to nationalize the oil companies’ interests was a breach of contract that gave rise to liabilities and required remedy.

Chartered Accountant, Chris Ram

Be that as it may, the international body said that times have changed. It further stated that “a stabilization clause is extremely disadvantageous for the government which ‘agrees’ to it because it freezes the legal and regulatory situation of the country for an extended period of time and requires the government to pay compensation if changes affect an investor.”
The body emphasized that the Governments of oil producing nations must closely analyze stabilization clauses from a time perspective. It said that all governments must ask one fundamental question before signing on to contracts with this provision, “What does it mean today and what will it mean tomorrow?”
THE GUYANA-EXXONMOBIL DEAL
Different countries have used various forms of the stabilization clause. Ghana for example, has from time to time, used a version of the stability clause which allows for changes of contract terms by mutual consent.
In Guyana’s case however, one gets the distinct impression that ExxonMobil went above and beyond to strangle Guyana’s parliament and future governments with the use of a rigid stability clause.
This was pointed out in the writings of Chartered Accountant and anticorruption advocate, Chris Ram.
The lawyer said that Article 32 of the Guyana-ExxonMobil oil deal speaks to the stability clause. The Chartered Accountant said that when one compares the Janet Jagan Agreement to the 2016 Trotman Agreement, one notices several worrying additions in the latter.
The anticorruption advocate said that additions to the 2016 Agreement only serve the interest of Exxon Mobil as it limits the role of the government in applying new laws made in the petroleum sector. Ram revealed that if Guyana were to amend any of its laws which would affect the entity’s operations then the Government would have to restore the benefits so lost.
Ram noted that the Stability Clause provides, inter alia, “that any delay by the government to respond to any notification from the contractor that they may have suffered any adverse effects can result in the contractor taking the matter to arbitration.”
The Chartered Accountant added, “In such a case, the arbitral tribunal is authorized to modify the agreement to reestablish the economic benefits under the Agreement to the Contractor. Where such restoration is not possible, the tribunal has the power to award damages to the Contractor that fully compensates for the loss of economic benefits under the Agreement, both for past as well as future losses.”

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