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Energy Law Exchange

March 13, 2020

Risk Mitigation in International Petroleum Contracts

Risk mitigation provisions in an upstream petroleum contract between host government (HG) and international oil company (IOC) can make the difference between success and failure when the HG exercises its legislative competence unilaterally to take a greater share of project value. Over the course of a century of sometimes highly contentious dealings between HGs and IOCs, a complex system of contract stabilization developed, typically on a one-off basis in negotiation of a concession or production sharing agreement. To be most effective, this system requires stabilization clauses, choice of law provisions, and agreements to submit disputes to international arbitration. After identifying the reasons HGs and IOCs employ these provisions, this Article examines ten basic types of contract stabilization, plus hybrid systems comprising multiple clauses. Choice of law provisions form an essential element of risk mitigation for these projects and may themselves constitute stabilization mechanisms. The HG wants its municipal law to govern the parties’ relationship; the IOC often wants to expand the governing law to include international laws and norms and to limit the scope of the HG’s law to an agreed set of laws. The applicable law provisions in international arbitration rules, as well as the arbitration seat, can directly impact the effectiveness of the stabilization protections. The Article concludes with a series of recommendations for mitigating IOC risk in international petroleum contracts.