THE QUEST FOR INVESTMENT STABILITY IN

UPSTREAM PETROLEUM EXPLOITATION:

A LEGAL CRITIQUE OF THE ROLE OF

STABILIZATION CLAUSES IN INTERNATIONAL
HOST STATE AGREEMENTS

JOSEPH OBLA
1001810

INTRODUCTION

This paper is intended to present a legal critique of the role of

stabilisation clauses in international host state agreements in the
quest for investment stability in upstream petroleum exploitation.
The paper is going to take a look at the upstream petroleum
industry and the contractual terms that govern host state
agreements and dispute resolution mechanisms included in these
contracts creating an international obligation on the host states. The
protection offered by the various forms of stabilisation clauses will
also be illustrated through the use of international investment
agreements such as multilateral, bilateral and sector specific
treaties and the extent to which it will serve to prevent the host
state from exercising its powers of sovereignty over its natural
resources. The views, benefits and detriments of these clauses on
the parts of the host states and the investors will also be taken into
consideration looking at the effects the inclusion of these clauses
will have on either of the parties as the requirements and needs of
the host state and those of the investors may be different
depending on the circumstances in question as even though both
parties come together to form contractual relationships with the aim
of economic and financial maximization, because of the high-value
and time consuming nature of petroleum activities these forms of
investment are vulnerable to several acts which may not be
envisaged at the time the contractual terms were negotiated. This
paper will point out the roles and extent to which these clauses
have helped in the quest for investment stability in Upstream
Petroleum Exploitation.

UPSTREAM PETROLEUM EXPLOITATION

The process of petroleum exploitation and production processes are
divided into two sectors namely; upstream which deals with
exploration and production activities and, downstream which deals
with the refining and processing of natural resources. 1 The focus
here is on the activities of the upstream petroleum sector and the
quest for investment stability and the role of stabilization clauses in
international host state agreements.
The upstream petroleum industry consists of various activities and
processes namely;
Exploration, which is the first stage of gathering information
through activities like the review of geological maps, aerial
photography, magnetic, gravimetric and, seismic surveys and
exploratory drilling in determining the viability of natural
resource reserves.
Appraisal, which involves the drilling of additional wells where
an exploratory drill has been successful in order to determine
the sizes of the resource reserves. This process is involved in
the evaluation of size, and attributes of reserves, which helps
identify the required number of wells to be drilled, and finally
to determine if further seismic work is required.
Development and Production, this process deals with the
identification of production wells and the recovery of the
natural resources through primary, secondary and tertiary
activities.
Construction of Infrastructure, permanent structures are
needed to support full-scale production activities. These are
required to gather and separate the recovered natural
resources. This is the stage of separating water, oil and gas
and processing the oil before it is transported to refineries.

Decommissioning of installations at the end of their

commercial life, which is usually, 20- 40 years involves the
removal of installations from the site when it is no longer in
use. It is important to consider decommissioning at the
beginning to ensure minimal environmental obstruction as the
process is very expensive and abandoned installations may
pose environmental risks. And,
Transportation, this involves the transfer of natural resources
before it is distributed. This is usually done using pipelines,
tankers or trucks, which convey them to the refineries to be
converted into commercial products.2
1 Overview of the Oil and Gas Exploration Process
http:www.etectinternational.org/new_pdfs/lessImpact/AttOverview
3

Contractors who offer specialist services on behalf of the host state

or the owner of natural resources are relied upon mostly carry out
these activities. Upstream petroleum exploitation involves the initial
stages of searching for the natural resources, the extraction of these
resources up to the refining and distribution to the downstream
petroleum sector. The relationship between these contractors and
the natural resource owners are governed by different types of
petroleum contracts such as the grants of licenses and concessions,
production sharing agreements, joint operating or joint venture
agreements and service contracts which contain the terms of the
contract and also points out the obligations of the parties to the
contract. These contracts are known as Host State Contracts, which
bind both parties and provides for the running of industrial
operations, deals with the distribution of costs and profits, it also
provides for investment protection, dispute resolution and taxation
but, these forms of contracts are subject to the laws of the Host
State and to result in issues unfavorable to the investors as the host
states may unilaterally alter statutory provisions which may lead to
direct or indirect expropriation. There are other issues, which may
arise in the petroleum industry, which include political, economic,
environmental and physical security issues and will depend on the
nature of the investment and where it is located . These issues are
complex in nature and most of the times would not be provided for
in national legislation
and may require the application of
international law in resolving these issues.3

PROTECTION OFFERED BY INTERNATIONAL LAW

International law plays an important role in the protection of
investments by imposing obligations on host states through the
provision of remedies for foreign investors in treaties. The treaties
set a standard of treatment to be accorded to foreign investments
by host states such as full protection and security, fair and equitable
treatment, prohibition against expropriation without compensation,
and the arbitration process. In order for these international
provisions to apply there has to be a provision included in the state
contract which provides for the laws applicable to the contract
thereby, giving international law jurisdiction over national
legislation.4 These standards are found in provisions of the treaties,
which the host states will only be subject to through the inclusion of
2 The Upstream Petroleum Sector.
http:www.pc.gov.au/data/assets/pdf_file/0007/87982/05/chapter2>
3 Jessica G, Nicola L, Energy and investment Security: Protection
under International Law ( International Energy Law Review
2013)168.
4 Bertrand Montembault, The stabilization of state contracts using
the example of oil contracts. A return of the Gods of Olympia?(
International Business Journal 2003)593.
4

stabilisation clauses which freeze the provisions of national

legislation in order to prevent the imposition of future unilateral
alterations to national legislation adversely and further imposes an
obligation on the state subject to the law applicable to the contract.
The purpose of the inclusion of the stabilisation clause in state
contracts by investors is to minimize the risk of change in the
political and socio-economic framework in which the terms of the
state agreement was negotiated as a result of unilateral alterations
which may be made by the host state.
An example, which shows the protection offered by international law
through the stabilisation clauses, could be found in the case of
AMCO v Indonesia,5 which was a contract between AMCO, an
American company and a P.T Wisma, which was an
Indonesian
company operating under the guidance of the Indonesian
government. This was a production sharing agreement in which
AMCO was to invest and manage a hotel/office complex for 30
years. After a while disputes arose between AMCO and P.T Wisma ,
which led to P.T Wisma through the help of the Indonesian army and
police personnel forcefully taking over management of the hotel.
Furthermore, AMCOs license to engage in business activities in
Indonesia was revoked following a request by the chairman of the
Capital Investment Coordinating Board. AMCO had included an
arbitration clause in the contract, which made it subject to Art. 42
(1) ICSID Convention,6 which provides for the freedom of
contract allowing the parties to a state contract to choose the law
applicable to their contract. AMCO brought proceedings in an ICSID
arbitration and it was found that Indonesia had been in breach of
their duty to protect AMCO against the forceful takeover of the hotel
and thus constituted a breach of international law obligation to
protect aliens against unlawful acts of its citizens. It was also found
that by the unjustly revocation of AMCOs business license Indonesia
was in violation of the principle of due process and were therefore
liable to compensate AMCO for loss suffered as a result of the
revocation. This case shows an example of the international
obligation placed upon host states as a result of the presence of
stabilisation clauses which enable investors bring actions with
reliance on international law as the national legislation of the host
states most of the time would not provide sufficient protection for
investors and how it offered AMCO protection against the direct
expropriation which had taken place. The treaties give investors a
high level of confidence in their investments as well as making them
aware of the protections and remedies available to them while
planning contractual activities by providing a mechanism for
enforcement within the treaties.7
5 Case No. ARB/12/14
6 ICSID Convention, Regulations and Rules .
7 Jessica G, Nicola L, Energy and investment Security: Protection
under International Law ( International Energy Law Review
5

THE NEED FOR INTERNATIONAL PROTECTION IN

HOST STATE AGREEMENTS
As a result of the expensive nature of upstream petroleum
exploitation and the risks taken by foreign investors when
contracting with host states, there is a need for additional protection
of the investments of the contractors as not only are they faced with
the issues of expropriation (direct or indirect), they are also
vulnerable to risks such kidnapping, natural disasters, piracy,
terrorism and national crisis. All this goes to show that more
protection is required to safeguard the interests of the foreign
investors. There are several forms of international law that provide
for the protection of foreign investments which are mostly in the
form of bilateral investment treaties (BITs), multilateral investment
treaties, investment promotion and protection agreements (IPPAs)
and regional free trade agreements.8 These treaties provide
protection for foreign investments by creating an obligation for the
host states subject to international law, allowing investors bring
claims with reliance on international law without a need for an
action in the national courts.9
Another example of the protection investors derive from the
applicability of international law was seen in the case of Texaco
Overseas Petroleum Company v Libya,10 where all properties,
rights and assets relating to the deeds of concession were
nationalized and recourse was taken with reliance on clause 28
included in the deeds of concession which contained an arbitral
clause even though the Libyan government was cooperative by
refusing to designate an arbitrator even after the company had
designated an arbitrator. The President of the International Court of
Justice appointed an arbitrator and during the proceedings it was
found that the state had the power to make international
commitments under both state and international laws and such a
commitment couldnt be seen as a negation of the sovereignty of
the state but rather proof that such sovereignty exists and as a
result would not be allowed to use its sovereign powers to escape
commitments it made freely through the exercise of its sovereignty.
It has been established that a country has sovereignty over its
natural resources and the case of Libya identifies the important
issue and problems foreign investors may face as a result of
contracting with these countries and why stabilisation clauses have
become important tools in the management of political risks when
entering into oil contracts as not only are these commitments of
2013)168.
8 Ibid.
9 ibid.
10 53 I.L.R 389, 422.
6

great substantial value and for a long period of time but that the
presence of the state party in the contract poses a risk of unilateral
alteration of the states legislation as a result of these sovereign
powers which may affect the investors adversely.
The fact that the protection offered by contract law is usually less
than that offered by the stabilization clauses together with the
intentions of the foreign investor not being to place itself in a less
position than that enjoyed by nationals of the host state is an
additional reason the inclusion if these clauses have become
important during the negotiation of oil contracts. 11 Stabilisation
clauses play different roles in protecting foreign investments, which
are listed as follows;
Creates a stable international legal framework to facilitate and
protect foreign investments by guaranteeing substantive
standards of treatment to be accorded to investors.
Protection from unlawful expropriation and provision for
compensation to investors where the criteria sufficient for
expropriation has been met.
Promotion of economic relations between host states and
investors.
Protection from potential threat of exercise of the host state of
its sovereign powers .
Protection from nationalization .

VALIDITY OF STABILISATION CLAUSES IN HOST

STATE AGREEMENTS
In order for these clauses to be functional it must be agreed by the
parties during negotiations on what form of international law the
contract would be subject to. These clauses are drafted in various
forms of investment protection mechanisms like bilateral investment
treaties which set out rules in which investments made by two
member states in each others territories will are to be regulated and
protected, regional investment treaties or multilateral investment
treaties which is the most effective form of protection for long-term
foreign investments. The Energy Charter Treaty is an example of a
multilateral investment treaty, which creates a widely recognized
and specific legal framework to address energy security issues and
supply disruption. Its objectives are to strive towards open,
efficient, sustainable and secure energy markets and to promote a
constructive climate conducive to energy independence on a mutual
basis of trust between parties. This level of protection is necessary
11 Bertrand Montembault, The stabilization of state contracts using
the example of oil contracts. A return of the Gods of Olympia? (
International Business Journal 2003) 593.
7

because energy investments are a target for piracy, hostage taking,

and civil unrest, terrorism which lead to security crisis and
international emergencies to ensure effective collaboration between
states by creating an international obligation to treat the foreign
investors as the nationals of the host state would be treated. 12 The
oil contract plays the most important role which will determine how
the treaty provisions are applied as it is the clauses contained in the
contract that allow the rules of international apply over national
legislation.13 Various forms of stabilization clauses which can be
included in state contracts and the roles they play will be discussed
in further detail below. Some of the clauses found in bilateral
investment treaties are:

National Treatment Clause;

This is a term of which provides guidance for parties to the
investment treaty, establishing the standard of protection the state
is required to accord foreign investors. It imposes an obligation on
the host state to accord foreign investors the same treatment as it
would national investors. An example of the role of this clause could
be seen in the case of, Occidental Exploration and Production
Company v The Republic of Ecuador 14 where Occidental who in
past times had been reimbursed amounts of VAT paid by it for
purchases made pursuant to exploration and production activities
undertaken by it were denied and asked to refund amounts
previously reimbursed on the grounds VAT was already accounted
for in the contract. It was found that Ecuador had been in breach of
its obligation by according treatment less favorable than that
accorded to other national investors who continued to benefit from
VAT returns and were liable to compensate Occidental. The national
treatment clause is intended to place foreign investors and national
investors in identical situations.

Most Favored Nation Clause;

Such a clause is another, which places an obligation on the host
state to refrain from any discriminatory activities, which would result
in depriving a foreign investor, its profits. The host state is required
to accord treatment no less favorable than that granted to other
12 Jessica G, Nicola L, Energy and investment Security: Protection
under International Law ( International Energy Law Review
2013)168.
13 Bertrand Montembault, The stabilization of state contracts using
the example of oil contracts. A return of the Gods of Olympia?
(International Business Journal 2003) 593.
14 Case No. ARB/06/11
8

investors.15 As a result of this provision any preferential treatment

accorded to any investor shall be accorded to all investors allowing
an investor to rely on the contents of the agreement where an
investor receives treatment which appears to be more favorable as
the concept behind this clause is that of equality of states or
investors. The Most Favored Nation Clause could also be combined
with a National Treatment Clause as could be found in Art.3 (1) &
(2) of the German 1998 Model Treaty.16

Fair and Equitable Treatment Clause;

This clause was introduced to investment treaties to ensure host
states provide foreign investors with a conducive environment and
to maintain a stable framework for investment and maximum
utilization of economic resources. This was also seen in the case of
Occidental Exploration and Production Company v Ecuador, 17
where the Fair and Equitable treatment standard was interpreted to
be an objective one whether the host state acted in good faith or
not and also added that the standard was one which required the
stability of the legal and business framework and had to meet the
requirements of stability and predictability which Ecuador did not
satisfy as a result of the actions taken by the tax authority without
providing any clarity about the meaning , extent and practice of the
laws it unilaterally altered amounted to an inconsistency with the
concept of Fair and Equitable Treatment. Ecuador was therefore
found to be in breach of an obligation under international law. This
case shows the standards required by the Fair and Equitable clause
and the protection it offers foreign investors but certain issues may
be taken into consideration also when applying this rule as was held
in the case of LG&E v Argentina,18 it was found that the Fair and
Equitable Treatment standard required not only the essential
element of stability of legal and business framework but also that
expectations of investors and business risks that may arise be taken
into consideration and acknowledged a state may be in breach of its
obligation where it fails to act transparently. Argentina was found to
be in breach of its obligation by failing to honour the guarantees it
had provided to investors therefore violating the stability and
predictability requirement. The courts recognized that Argentina
had been in a state of necessity and should be absolved from
international responsibility for losses that occurred during the period
and disallowed the claim for future damages. The clause aims to
protect foreign investors and provide a conducive environment to
conduct business activities by setting an objective standard of
15 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in
Investment Contracts (International Business Law Journal 2009) 267.
16 http://www.oecd.org/daf/inv/investment-policy/33773085
17 Case No. ARB/06/11.
18 Case No. ARB/02/1.
9

treatment setting out under what conditions a host state will be in

violation of its obligations taking into consideration there may be
exceptions to actions of host states but not without recourse.

Full Protection and Security;

This clause is usually included to ensure constant protection and
security is available to foreign investors as there are several forms
of risk in which investments will be vulnerable to such as piracy,
terrorism, theft, hostage taking, natural disasters by virtue of their
high valued nature and will require more protection than that
provided in national legislation as investors also face economic and
political risks which may determine whether a host state will act in
good faith when such issues arise.19 This clause could be found in
different forms of investment treaties such as, the Energy Charter
Treaty,20 which provides for the encouragement and stable,
equitable, favorable and transparent conditions for investments and
a commitment by the host state to ensure foreign investments
ensure constant protection and security at all times. Such a clause
could also be found in the United Kingdom-Vietnam BIT UNCTAD
2002,21 and the NAFTA 199222 which also provides for full
protection and security of investments but in 2001 also in addition
issued guidance statements stating that the standard did not
require any treatment beyond that which is required by the
customary international law minimum standard of Aliens. 23 The Full
Protection and Security clauses could also be found in U.S. Model
BIT (U.S. State Department, 2004)24 which requires each party
to provide the level of police protection required under customary
international law as well as the case of AMT Inc. v Zaire,25 where
Zaire was found to have manifestly failed to comply with the
standard of vigilance required by Art II (4) of the U.S-Zaire BIT
which provided that investments shall enjoy protection and security
no less than that recognized by international law, by not taking the
measures necessary to ensure AMTs investments were secure and
thus were liable to compensate AMT for losses resulting from the
actions of the agents of the state as there was also a provision in
Article IV of the BIT which provided for compensation for damages
resulting from acts of war, riots, violence and similar events. This
clause places an obligation on the state
to provide foreign
19 Jessica G, Nicola L, Energy and investment Security: Protection
under International Law ( International Energy Law Review
2013)168.
20 Energy Charter Treaty, Art. 10(1).
21 Article 2(2) UNCTAD 2002
22 Article 1105(1) NAFTA (1992)
23 NAFTA Free Trade Commission, 2001.
24 Article 5 (2) (b).
25 Case No. ARB/93/1.
10

investments with full protection and security but the standards

required are those recognized by international law which in most
cases is higher than that which would be provided according to
national laws but there has to be a failure on the part of the state to
exercise due diligence in protecting the investments which is seen in
the case of Tecmed v Mexico,26 where claims of a breach by
Mexico of the BIT provision of full protection and security were
dismissed as it was held that the authorities had acted reasonably
and were only found to be in violation of its fair and equitable
treatment obligation as its actions also constituted expropriation.
These cases show the level of the standard of protection offered by
this clause which is that the states are required to act reasonably
and does not impose a strict liability on the state as the responses a
state will make in such situations might depend on the resources
available to it at the time.

Umbrella Clauses;
Such a clause has the effect of creating an international obligation
from a contractual obligation between a state and an investor. C.
Schreuer states these clauses are included in BITs to provide
protection which is beyond the traditional international standards
as it is broad and could provide for several obligations host states
will be required will be required to fulfill in accordance with
international law. An example of an umbrella clause could be found
in the Energy Charter Treaty,27 which provides Each contracting
party shall observe any obligations it has entered into with an
investor of any other contracting party. These clauses change the
position of a states contractual obligation into one under
international law making a breach of contractual provisions a breach
of international law but will not apply where the courts do not have
jurisdiction which will be clear from the claims arising from the
contract and treaty provisions .28The UNCTAD 2004, describes this
clause as one so broad it covers not only contractual obligations but
also may cover explicit, implied and non contractual obligations but,
T. Walde adds that umbrella clauses make it possible to freeze the
powers of the host state to make any unilateral alterations to the
regulatory and legislative framework of the state and that these
clauses will only protect investors against breaches which are
subject to government powers and the government has exercised its
powers to either escape or interfere with commitments between the
host state and the investor.29 The case of SGS v Pakistan,30 the
26 Case No. ARB(AF)/00/2.
27 Art. 10 (1)
28 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in
Investment Contracts (International Business Law Journal 2009) 267.
29 ibid
30 Case No. ARB/01/13.
11

tribunal interpreted an umbrella clause did not derogate from the

international law standard of a breach of contract will not by itself
amount to a violation of international law. It was also held that the
clause was not one of first resort as it provided further commitment
on the part of the host state to ensure the effectiveness of state
contracts and it was concluded in this case that the umbrella clause
in the contract did not create an international obligation in the
present situation. 31 This interpretation is unclear and in a case that
followed SGS v The Philippines,32 the contract between the two
parties contained a provision, which stated the courts of the
Philippines would have exclusive jurisdiction over any disputes
arising from the contracts and SGA initiated proceedings claiming
that under the BIT between the Philippines and Switzerland its
contract claim could be elevated to a treaty claim and it was held,
the umbrella clause in principle had the effect to confer jurisdiction
on the arbitration tribunal identified in the BIT to resolve contractual
disputes between investors and host states and found that even
though it had jurisdiction under the BIT to arbitrate purely
contractual claims, it would not do so in the present situation as the
parties to the contract had agreed on the courts of the Philippines to
have exclusive jurisdiction. The interpretations offered from both
cases do not provide a clear or uniform description of the umbrella
clause but shows that it offers greater protection than host state
legislation as seen in the approach adopted by the Philippines which
showed that a breach of a state contract would amount to a
violation of a primary obligation under the BIT therefore creating an
international obligation.

STANDARD OF PROTECTION OFFERED BY

INTERNATIONAL LAW
Investment stabilisation in upstream petroleum agreements play an
important role in the protection of foreign investments as they offer
a greater level of protection through the imposition of an
international obligation as a result of agreements previously made
between the host states and the investors including dispute
resolutions which may be subject to bilateral, multilateral or sector
specific treaties which contain various forms of stabilisation clauses
offering a higher standard of protection than that offered by host
states in most cases. These clauses as mentioned above and seen in
the cases mentioned offer an international objective standard of
protection and a host state may or may not be found to be in breach
of
its international obligation depending on the particular
circumstances of the case.

31 UNCTAD, State Contracts, UN 2004.

32 Case No. ARB/02/6.
12

In order for these investment agreements to have effect on

contractual agreements between the host state and an investor will
depend on the scope of the definition of an investment in the
agreement. Where this has been satisfied and it has been
established what actions would constitute a breach of contractual
obligations owed by the host state to the investor regarding its
protected assets, which may include concessionary rights or other
rights which are similar such as rights to exploit natural resources
as could be found in Article1.(a)(v) of the 1994 BIT between
Ecuador and the United Kingdom which extends to business
concessions conferred by law or under contract. 33 Also Article.1(f)
(vi) of the BIT between Canada and the Philippines, which define
foreign investment as broad enough to include a large number of
contractual rights which may not be provided for by the host states
national legislation and elevates these contractual agreements in
the host state agreements to be covered by the investment treaty.
The Energy Charter Treaty,34 defines investments as every kind
of asset, owned or controlled directly or indirectly by an investor and
includes: any right conferred by law or contract or by virtue of any
licenses and permits granted pursuant to law to undertake any
Economic Activity in the Energy Sector. As a result of this definition
it would appear that state contracts could fall within the view of this
treaty because of the conferment of rights to undertake economic
activity by law or contracts by the state on an investor which, may
be in the forms of joint venture agreements, production sharing
agreements, concessions, licenses and other forms of state
contracts that involve petroleum exploitation.
The Energy Charter Treaty,35 also extends the protection offered
by the treaty in order to encourage the provision of a stable and
transparent business environment for foreign investors in order to
attract foreign investments by the inclusion of the most favored
nation, national treatment, fair and equitable treatment, full
protection and security and dispute resolution mechanisms which
protect foreign investments from acts of expropriation and those
which may be discriminatory in nature which guarantees an investor
and its investments the stability, transparency and predictability of
contractual agreements. This treaty has been ratified by over 50
states but some states have not ratified because these treaties tend
to provide investment stabilisation for the foreign investors alone
without providing a balance between the protection offered between
the host state and an investor, which will create a more flexible
business environment for both parties to a contract. This factor
therefore will limit the ability of the treaty to encourage investment
stability as it appears to ignore the sovereignty of a host state as a
natural resource owner as host state as. This might discourage host
33 UNCTAD, State Contracts, UN 2004 pg 15
34 Article.1(6)(f)
35 Energy Charter Treaty, Art.10, 21(5) and 26
13

states from ratifying investment treaties but a failure to ratify means

the foreign investors may also be discouraged from making
investments because there is no assurance its investments will be
safe in the foreign jurisdiction.
Because of the high value and time requiring nature of petroleum
activities and the risks associated with a commercial discovery
being made or not makes it important for the investors to rely on
the stability and predictability an investment treaty offers which
differs from the host states who will require a contract which is
flexible and will allow it exercise its sovereign powers over its
natural resources as further information may be gathered after
these contracts have been negotiated revealing that the investor
might benefit substantially higher than was anticipated during
negotiations which will be against public policy and a stabilisation
clause will impose an international obligation on the host state
preventing it from exercising its sovereign powers over its natural
resources in making alterations to prevent the investors from taking
a higher share of profits generated within the petroleum contract.
This creates a conflict of interests between the host state and the
investors as the stabilisation clause aims to guarantee the
protection of the investor from unilateral alterations to regulatory or
legislative provisions after the contract has been executed which
will make a host state reluctant to the inclusion of a stabilisation
clause.36

RENEGOTIATION CLAUSES AS AN ALTERNATIVE

The reluctance of the host states on the reliance on the part of the
investors on the provisions of investment treaties based on their
individual positions of the extent to which the treaty provides the
stable and flexible requirements of both parties raises the need to
consider an alternative means of stabilising foreign investments
through the inclusion of renegotiation clauses which are provisions
in contracts that enable parties to a contract to renegotiate and also
make alterations to contracts still offering the investors the
international treaty protection and also providing for flexibility of
contract as these contracts are vulnerable to events which are
unexpected and unanticipated but occur and significantly alters the
earlier expectations in which negotiations were based. The clause
operates to offer parties to a contract the opportunity to renegotiate
contracts as it is impossible to anticipate all events that may occur
in the future and so provides an opportunity to settle differences
instead of the imposition of stabilisation clauses, which certain
circumstances might cause a host state to breach its international
36 Bede Nwete, To What Extent Can Negotiation Clause Achieve
Stability and Flexibility In Petroleum Development Contracts?
(International Energy Law & Taxation Review, 2006) 56.
14

obligation and under such circumstances the investment treaty

could be said to have failed in its effort to provide the investment
with a stable and predictable environment and the host state with
flexibility by not offering an opportunity to renegotiate the
contract.37
There is a need for a host state contract to have a certain level of
flexibility such as that offered by the renegotiation clause because
of circumstances that may arise which may fall within the scope of a
force majure or hardship concepts denying the state of the
protection they offer as a result of risk which were not envisaged
which will frustrate the performance of its obligations and a
stabilisation clause which hinders the state from making any
unilateral alterations will prevent the host state from exercising its
powers of sovereignty in the public interest of its citizens. 38 An
example of the effect a renegotiation may have on an investment
contract could be seen in the case of The Government of Kuwait
v The American Independent oil company, where the contract
between the parties contained a stabilisation clause which
prevented Kuwait from unilaterally altering the terms of the
agreement, but later on revisions were made to this contract
included a renegotiation clause which was introduced to take into
consideration an account of changes in the global oil market.
Increases were made to the governments share of the profits and
the government tried doing so again under the Abu Dhabi Formula
which Aminoil refused to consent to, resulting in the nationalization
of the concession which Aminoil brought proceedings against Kuwait
on the basis that the stabilization clause prevented Kuwait from
acting as such. It was held that Kuwait was not in breach of this
obligation as a result of the change in circumstances, the
stabilization clause no longer possessed the absolute power it did as
it would only apply where there has been confiscatory expropriation.
Although this case was not one in which the investors came out
successful as a result of the circumstances in which the investment
was expropriated it shows to an extent how the renegotiation
affords the parties to reconsider means of adapting the terms of an
already executed contract to function efficiently in the event of
unforeseen circumstances which may raise a need for a host state
to make certain alterations unlike the stabilization contract which
provides no such room for adaption and may result in a host state
failing to comply with the contractual provisions contained in an
agreement. The outcome of the case also shows that these clauses
are not in themselves perfect or problem free as issues may also
arise as to contractual uncertainty, it increases the contractual
37 Jean-Marc Loncle, D. Philibert- Pollez, Stabilization Clauses in
Investment Contracts (International Business Law Journal 2009) 267.
38 Tade Oyewunmi, Stabilization And Renegotiation Clauses In
Production Sharing Contracts: Examining Thee Problems And Key
Issues. (International Energy Law Review, 2011) 276.
15

costs, some parties to the contract may not be in agreement with a

proposed alteration which may ultimately end up in such a party
contesting alterations as demonstrated in the case.
Some Stabilisation Clauses and the roles they play in host state
agreements have been identified and illustrated through the
interpretation of treaty provisions and effects they have had on
cases as a result of their inclusion in investment agreements as
clauses that aim to prevent the host state from exercising its
regulatory powers to make any modifications to contractual
agreements unilaterally to the host states detriment and in favor of
the investor.39 As a result difficulties may arise in the enforceability
of stabilisation clauses but there are other significant roles these
clauses play in state contracts such as giving the parties to a state
contract the opportunity to select what laws are to govern contracts
and also strengthen the investors bargaining strength as well as
safeguarding investments while preserving the absolute and
sovereign powers of the host state. The Clause no longer aims at
preventing the host states from exercising its sovereign powers but
rather aims at the protection of financial risks that may arise and in
addition no longer makes nationalisation and expropriation unlawful
but rather to set standards which have to be sufficiently satisfied to
consider such acts lawful and inclusion of provisions obliging the
host states to place the investors in the same financial position as
provided by the contract on the date it was signed as a result of any
of the host states actions which would adversely affect the finances
of the investors because of alterations made to contractual terms.

CONCLUSION
It has been seen in this paper through illustrations from provisions
of investment treaties and outcomes of disputes that have arisen as
a result stabilisation clauses in host state agreements and the roles
these clauses play in ensuring investment stability in upstream
petroleum exploitation. These provisions and cases have shown
that stabilisation clauses offer investors a higher level of protection
than that offered by host states and imposes further international
obligations preventing them from unlawful nationalization and
expropriation which are some of the risks foreign investors are
exposed to and may discourage investments. As the host states try
to encourage foreign investments these clauses are included in
contracts in order to guarantee security of investments, which
represents a valuable bargaining chip for the investors. The
stabilisation clause to a large extent offers effective investment
stability but it cannot completely stabilise state agreements as not
all future events can be envisaged at the time contracts are
39 Tade Oyewunmi, Stabilization And Renegotiation Clauses In
Production Sharing Contracts: Examining Thee Problems And Key
Issues. (International Energy Law Review, 2011) 276.
16

negotiated which may result in the state either failing to comply

with its international obligations or preventing the host state from
exercising its powers of sovereignty which is crucial from the stand
point of the host state.

17

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