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Law energy

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Law 2

Abstract

The fact that trade is now a reality in the global market due to globalization, has brought

many investors and countries together the main issue being to do business. In such a large scale

market, regulations ought to be put in place to avoid over or under exploitation of one by the

other. A fair and non-biased market platform encourages every player to contribute his input and

gain from the market. Such kinds of regulations can be in form of contracts, pledges or even

treaties. The Energy Charter is one such treaty which puts regulations and rules in the oil

business arena. Charters are created to bring countries together and improve on business

agendas. For the oil and energy sector, not all countries have energy resources though they

require to use energy. On the other hand, not all countries with energy resources have enough

resources and expertise to explore that of their own. This calls for the need of partnership with

such nations to do collaborative business and create a win – win situation. A commonly

acceptable document is therefore of importance to such trade. One such document is the Energy

Charter signed in 1994 which addresses prospects for investments in energy resources (Axelrod,

1996). The charter provides for examination of the implications to the Environment of any

investment and the national control and exemptions to national action. Its key agenda is to

promote global collaboration in the energy arena. The charter made it possible for the birth of an

open global energy market where investors would freely invest in other countries other than their

own. Countries that become partisan to the charter are required to adhere to its laid down

principles and the execution of the principles and commitments in their respective countries

(Kemper, 2004). One of the challenges though in this treaty is the adherence to the

Environmental protection and Energy efficient clause while aiming at getting the maximum

output from an investment.

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Introduction

The Energy Charter is of significant importance in a dynamic word we live in today with

the growing globalization and the need for business interactions between importers and exporters

(Kemper, 2004). It offers and equilibrium and effective structure for international cooperation

and a wide range of multilateral rules and regulations. The charter has 54 signatories who pledge

to abide by it. It has it claws on reinforcing the rule of law on matters to do with energy. This is

made possible by the presence of non-biased rules to ensure that misunderstanding often arising

from trade and investment of energy related products does not occur. The charter also makes it

clear that any state interested with exploitation of energy resources ought to set up policies

regarding improvement of energy efficiency and minimize the negative impacts to the

environment by the energy cycle. This part on environmental matters is covered by the Energy

Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEERA) that was

penned alongside the Energy Charter Treaty (Kemper, 2004). Settling of disputes has well been

incorporated in the Energy Charter Treaty with laid down procedures for contracting parties

between states (article 27) or between investors and contracting parties (article 26) or amongst

contracting parties. This is to ensure confidentiality in the treaty by the states, investors and

contractors and ensure their interests are well protected. The case of Ruritania Island and the

OGCI oil company is just one of the many disputes that arise between states and contractors.

This excerpt elucidates on the international laws that regulate the extraction of energy resources

from marine sources, the various regulating laws under the Energy Charter Treaty informing on

the way contracting parties and investors ought to conduct themselves in the event that they have

had a contract and the channels to follow in order to settle disputes if the happen to arise like that

of Ruritania vs OGCI on breach of contract and regulations of the Energy Charter Treaty.

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The problem

In order to fully understand the backdrop setting the scene of Ruritania vs OCGI, it is

important to understand how two very different entities can come together despite great

disparities. OCGI is set out in the North, having the capabilities and equipment required to

excavate resources however, very few such opportunities are present in the North. Ruritania on

the other hand boasts a wealth of untouched resources of undetermined potential. Perhaps oil, gas

or other minerals, however, low on funds, skill and equipment the untapped potential could

remain just that, untapped. Energy Laws govern the use of energy and its uses. It mainly takes

into account provision of oil, gasoline and even extraction of taxes. The practice of Energy Law

includes contracts for siting, extraction and who can carry out these rights. In some cases such as

the OGCI an International Law would come in, as it involves different States and an

International Oil Company.

In this case, OGCI came to an agreement with Ruritania for exploration of oil in the

Ruritania continental shelf for a period of five years with an agreed reimbursement amount of $

11 million. After a 3 years period, OGCI had managed to drill 11 wells for oil extraction at an

estimated 500, 000 barrels each day but Ruritania is not pleased with it. It boasts for its

exceptional Natural beauty probably enhanced by the presence of coral reefs. Ruritania is

concerned with the distraction of the Environment by the OGCI which is killing the fish and

interfering with the life of the coral reefs. This prompted the Ruritania Environmental Agency to

investigate their contractors and tabled a bill in their parliament to cut off any new awards of

contracts which was supported and passed. OGCI is suffering from the loss being accrued by the

immediate sabotage of their activities by surfers and the government though the government had

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offered a verbal assurance of consideration to the OGCI for subsequent licensing in the future in

case they were successful in their exploration.

The Energy Charter Treaty keeps in mind the sovereignty of the country over its

resources but also provides for the protection of the investors properties in a foreign country by

that government. Open and level ground for energy trade for all signatory countries is provided

for in the charter. This allows for cross country business opportunities for all players making

investments a little bit easier. This is because of the legal protection offered by the treaty to

investors and their investments from political risk in the foreign country.

International Energy Law

These are laws based on the same principle. Two different parties coming together to

excavate resources. This usually emanates a few challenges that affect international trade.

International trade is mainly governed by World Trade Organization guidelines. (Farah 2013)

Only by adhering to these rules can trade between different countries take place. However, this

Case Study brings about the irrefutable yet sensitive question on resources such as oil and gas.

Known to fuel not just homes but, also nations in a literal sense, disputes are likely to occur. In

the last two decades more challenges have put into question clauses drafted two decades ago.

Thus the Energy Charter Treaty was born.

Energy Charter Treaty

The charter was drafted to protect the interests of International Oil Companies seeking to

excavate oil from host nations (Nwaokoro, 2010). This treaty was set up in the event contracts

were drawn up but, during the tenure, either a change in constitution or government affected the

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terms of the contract. The treaty was set up to ensure, protection and fairness of both parties

involved (Nwaokoro, 2010). Usually International Oil Companies have the funds and resources

to carry out the due diligence required to estimate the level of resources available on the ground.

Once this investment has been carried out, the International Oil Companies cannot just simply

pull out, whether a dispute occurs or not. The International Oil Company is at the mercy of the

host country (Kemper, 2004). This charter is a show of political good will for the signatory states

involved but it has no financial obligation nor is it legally binding. It deals with the documents

drafted in the last two decades and the new challenges they face in this new era. It also regards

the need for resource-rich nations with struggling economies and the dilemma of energy security,

economic development and environmental protection.

Interested partners could be part of the Energy Charter process that allows for multilateral set

of rules for Global Energy governance. The Charter reflects most of the usual energy hurdles of

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Century, for instance:

 The documents drafted up on energy, developed in the last two decades, and the

synergies among energy-related multilateral forums.

 Developing countries needing global energy security.

 The challenge between energy security, economic development and environmental

protection.

 Energy trade for development.

 Promotion of energy services, poverty reduction and clean-technology for building

capacity.

 Diversifying of energy sources.

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 Role of energy in regional markets.

All these are relevant issues on the International Energy Charter. Cooperation among nations for

the sake of energy security and sustainability is paramount. The charter offers several benefits to

being a contracting party or a signatory to the charter including;

 Avenue for dispute resolution.

 Expectation of a positive effect on the geographical expansion of the Energy Charter.

Encouraging warm-relationships between members and non-members possibly leading to

expansion. Opening up the new trade routes and strengthening the energy security.

 By signing the Energy Charter they confirm their commitment to the Charter and benefit

from its authority and expanded unions with other states. Application of common

principles in particular in view of the enhanced investment climate, with other countries.

 The Energy Charter non-signatories are encouraged to advance to signatory status to

enjoy observership status, with the Energy Charter Conference. It will open up efficient

tool for other signatories, especially for those with developed economies and also

opening up, transit routes through developing nations.

 All members wishing to join must attend the Conferences held at Headquarters at the

Hague in Netherlands.

International Energy Charter presents a stepping stone to global energy governance. Interested

countries could take part in the goals of the International Energy Charter, which are:

 Emphasis on established principles of energy cooperation.

 Create a platform to address energy challenges.

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 Encourage the modernization of the Energy Charter process.

 Solid energy governance by facilitating new growth to the Energy Charter Treaty.

Marine Conservation and Oil drilling

Today’s oceans are fraught with problems. Issues that spread from the little islands to the

worlds ecological systems. Marine conservation is the study of nurturing physical and biological

marine life, including endangered species, damaged marine ecosystems and limiting human-

damage to our marine life (McCormick et al, 2014). Take for instance,

 Coral Reefs are essential in sustaining an ecosystem but, many coral reefs are far from

pristine. Many are damaged by sedimentation and bleaching thus affecting the entire

marine life that depends on the coral. Conservation of these reefs are paramount as they

affect the world’s socio-economic systems.

 Human Impact. Man is by far the ultimate culprit when it comes to dissipation of marine

life. One of the biggest causes of ocean acidification is simply due to the absorption of

Carbon Dioxide absorbed by the ocean. Most of which is produced by humans.

Despite all these warnings there are some more detrimental factors. In Ruritania for instance, was

the barricade caused by surfers warranted?

Off shore drilling has had negative publicity and with good reason. Off shore drilling can

cause oil spills and emission of toxic metals such as chromium and mercury along with

dangerous carcinogens into the ocean. With oil spills seeping through many ocean floors, the pH

balance is affected leading de-colorization or coral reefs. Once launched on the coast, oil drilling

machines seem big and imposing often characterized with a continuous buzzing or humming

sound depending on the equipment. At night though they blast off the shore with amazing lights

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that are silently reflected on the water surface. Birds migrating during the night have been

spotted to hover around the lights in complete disarray only to die of exhaustion due to

confusion.

Oil rigs not only poison the waters but have the shoals swimming in these areas feeding

on the same waters contaminated leading to shoals of dead fish, ‘going with the flow’ as it were.

It’s not just the little creatures that are affected, but, also large ones too. Deep-sea divers such as

the sperm whale are known for simply lounging on the surface from time to time. Unsuspecting

whales have been sighted only after collusion with the oil-rigs equipment.

Environmental Regulations while Oil Drilling

Every Society in the world needs oil, natural gas and minerals but, land, air and water

must be protected during siting, development, operation and closure of gas wells. After drilling

and acquiring the minerals, land should be in good condition. In that it can be productive again.

Well-drilling or plugging permit before beginning work on site in required. Permits usually

protect land, air and water. Land protection is paramount during and after oil and gas extraction.

These permits hold the mining and drilling companies accountable to oil spills, water

contamination and proper disposal of wastes from the process including highly saline brines.

Departments with the responsibility of regulating permits are also responsible for monitoring

drilling sites. Ensuring that compliance of conditions mentioned in the permit. The conditions

include:

 A casing and cementing program for each well.

 Casing and cementing prevent the flow of oil, gas or salt-water between underground

levels.

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 Also setbacks are required from municipal water wells, water bodies and streams.

 Proper disposal of wastes and proper containment of drilling fluids.

Environmental Conservation Law Authorities ensure wells are drilled, constructed, operated,

plugged and surrounding land reclaimed. This is done to “remedy” or heal the land and prevent

gas, brine or water of one formation and pollution of fresh water bodies in the surrounding area.

In the event of violation of any of these regulations, immediate suspension of the project may

occur. In the United States, a company could accrue a hefty fine of $1,000 per day counting from

the start of violation date.

Fair and Equitable Treatment

Although fair and equitable treatment sounds fair, it is conditional to the standards of

conduct of the host country towards the investor. It has been seen in many other cases tribunals

being formed to elucidate on the meaning of the term ‘fair and equitable’ (Hirsch, 2011) Even so,

there are a set of minimum stipulated guiding principles drafted to guide the international laws of

fair and equitable treatment when it comes to dealing with a foreign country or investor (OECD,

2004). These minimums have to be adhered to no matter what their local legislation is. Article 10

of the Energy Charter Treaty requires that every contracting party that is signatory to the charter,

provide a stable, fair and equitable environments for investors of foreign contracting parties. This

package comes along with security and protection of the investor’s properties at all times by the

host country nor interference with the investor’s management, maintenance, enjoyment and

disposal at any time unless there are reasonable and un-discriminatory basis of doing that

(Schreuer, 2008).

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The International Energy Charter states that the Investment shall at all times be ascended

fair and equal treatment and provided against physical violence and extended to the obligation

for secure investment environment (International Energy Charter, 2015). Fair and equitable

treatment means that the Host State is refrained from acting in a certain manner. In this case, it is

obvious that the Ruritanians had already broken their side of the agreement by barricading the

OGCI’s path to work. The same Energy Charter state that protecting the investment against such

actions by private persons or State organs is prohibited.

This section of the Energy Charter also includes that fair and equitable treatment should

be followed by the Host State towards the International Oil Company, failure to do so could lead

to hefty charges. Leading to a court case in which the International Oil Company may have

plenty of evidence to bring to court.

Dispute resolution

Modernization has brought the world together making foreign investments possible.

International trade created by various partnerships between contracting parties or between

contracting parties and investors has made it easier for the issuance of licenses and direct

investments (Luki & Abubakar, 2016). It is these fruits that come along with misunderstandings.

Investors have to ensure that their returns are safe and secure while contracting host parties have

to ensure that their rule of law is not breached and when one crosses the line of the other, dispute

is inevitable. Such is the case between Ruritania and OGCI.

The multilateral Energy charter treaty addresses key investment and trade matters and

strong disputes between parties. The disputes are resolved outside court doors where the claimant

tables his claim to the dispute resolution tribunal created by the charter which therefore boosts

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confidentiality in the charter by the signatories. The advantages of choosing to settle disputes

outside the corridors of the court is that, the two parties have the liberty of choosing their tribunal

to hear their case other than lawyers but other people with expertise in the line of discussion and

also the decision in a non-judicial path is made much faster as compared to the judicial process

(World Bank, 2017). The mechanisms used to settle the disputes are customized in a way that

every single issue is accounted for in a particular subject matter. The disputes may be

categorized into two broad groups: disputes between contracting parties and dispute between a

contracting party and an investor. The Ruritania vs OGCI case is to be taken with much weight

in order to settle their misunderstanding.

Rules guiding dispute resolution under the Energy Charter Treaty

Article 12 of the Energy Charter Treaty details on the compensation for losses incurred

by a contracting party after investing in a fellow contracting party due to several issues including

disturbance. OGCI suffered such kind of disturbance from the Ruritanian Association of Surfers

using private boats and rafts who blocked the OGCI offshore facilities and creates protest against

them. For any exploration activity, every time lost is equal to money lost as time is a factor. The

charter clearly states the penalties to include among other things, compensation that is adequate,

prompt and effective.

The sovereignty of a contracting party is well described under article 18. It states that

contracting parties have sovereign rights over energy resources though this must be I accordance

with the stipulated international laws. The Energy Charter Treaty in this mandate has no mandate

over the rules pertaining to property ownership. For instance it can decide on where to and where

not to exploit energy resources. Even though, the contracting party like Ruritania is required to

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facilitate access to the energy resources of the investor whom they have entered in agreement

with from a foreign contracting party in a non-discriminatory manner. This includes the process

of issuing authorization, licensing, concessions and agreements to all levels of energy sources

exploration.

Article 19 deals with environmental issues where contracting parties are required to

reduce harmful environmental effects in and outside their area of operation resulting from the

energy cycle in an economical manner. Precautionary measures to avert or lessen degradation to

the environment are taken and where pollution is inevitable, the contracting party bears

responsibility and cost of pollution to the host country. It is a requirement that the environmental

prospect be featured in all levels of the exploration in the laid down policies. Energy efficient

methods should be used and those from renewable sources such as solar panels use, cost

effective technologies and minimize environmental impacts.

Dispute resolution between a contracting party and an investor is stipulated in article 26

of the Energy Charter Treaty. It is required that any disputes relating to the two be settled

amicably. But in the event that the dispute is not settled within three months, either of the party

can choose to file the complaint to a court of law, follow previously agreed dispute resolution

process or give the Energy Charter dispute resolution tribunal the mandate to look into their

misunderstanding. The clause states that

For purposes of transparency, Contracting Parties recorded in Annex ID shall deliver a

written statement of its guidelines, practices and state of affairs in this respect to the

Secretariat on or before the date of the deposit of its instrument of confirmation, receipt

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or endorsement in line with Article 39 or the deposit of its instrument of consent in

accordance with Article 41 (Article 26 (3) (b) (ii)).

The Ruritania Environmental Agency and OGCI are required to submit their documents.

This would help the to be formed tribunal to assess the practices of OGCI as Ruritania claims

while checking for any violation of contract on the side of the Ruritania government. The

consent of the dispute is submitted to one of the following;

 The International Centre for Settlement of Investment Disputes, established

pursuant to the Convention on the Settlement of Investment Disputes between

States and Nationals of other States opened for signature at Washington, 18

March 1965 (hereinafter referred to as the “ICSID Convention”), if the

Contracting Party of the Investor and the Contracting Party to the dispute are both

parties to the ICSID Convention; or

 The International Centre for Settlement of Investment Disputes, established

pursuant to the Convention referred to in subparagraph (a)(i), under the rules

governing the Additional Facility for the Administration of Proceedings by the

Secretariat of the Centre (hereinafter referred to as the “Additional Facility

Rules”), if the Contracting Party of the Investor or the Contracting Party to the

dispute, but not both, is a party to the ICSID Convention;

After acceptance, the case proceeds following the stages set by the Energy Charter Treaty for

settling of disputes. OGCI can choose one of the two provisions to make claim of the

interference of their activities by the Ruritarian government.

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Predetermination

The dispute resolution provision offered by the treaty is the best platform for resolving

the controversy between OGCI and Ruritania. It is with absolute certainty that Ruritania through

its Environmental Agency did not honor their side of the bargain of the contract nor the norms of

the charter of which they are party to. Failure to protect a foreign direct investor and his

properties is lack of goodwill and creates the impression of discrimination. In as much coral reefs

are the boasting factor of Ruritanians, they are bound to be interfered with whenever a

development project commences like any other natural resources. It would have been best if an

Environmental and Social Impact Assessment was conducted before granting OGCI the license

to exploit Oil in their Island. Ruritania ought to have taken tough measures on the Surfers

because of their behavior, interfering with the activities in the oil wells from the investor but that

wasn’t the case. Without coercion or any other method, Ruritania signed to abid by the rules and

regulation of a fair and equitable market platform and failure to honor the very things they

wanted to believe in because of some environmental issues which OGCI had already planned for

its compensation, is an act of lack of goodwill.

OGCI should therefore seek the intervention of the thing common to both of them, the

Energy Charter Treaty. After filling their claim and handing over their operations policy

documents, Energy Charter Treaty would form a tribunal to look into the matter. If it is

determined that indeed Ruritania is on the wrong, OGCI may be compensated for its losses

during the closure period and for other forms of disturbances. Ruritania may also be penalized

for its action as determined by the tribunal.

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Conclusion

Disputes are inevitable in any contract made between contracting parties, investors or

between contracting parties and investors. An avenue for settling these disputes is therefore of

great importance. The court room is mostly the path taken to resolve these disputes but other

non-judicial means can be used. The Energy Charter Treaty offers such an avenue where both

sides of those in dispute receive an opportunity for his/ her case to be listened, reviewed and

determined given that both of them are signatories to the charter. Several clauses of the Energy

Charter including Articles 12, 18, 19 and 26, provide for the necessary laws guiding the decision

of tribunal that maybe formed to determine the case. The clauses effectively address the issues of

disputes between contracting parties and investors and disputes relating to the environment and

protection of the investor in a foreign contracting party. OGCI, an oil company, which is the

investor in Ruritania Island that is an independent country rich in coral reefs and the recent

discovery of Oil, entered a business contract. OGCI was to extract Oil as an energy resource in

the shores of the Ruritania Island at a cost of $ 11 million. Even though verbal assurances were

given by the Ruritania Environmental agency of future considerations, anything not written

should not be counted on. Ruritania has breached their contract with OGCI by interefering with

their operations which is contrary to the laws and regulations stipulated in the Energy Charter.

They should instead offer un-discriminatory protection to OGCI as a foreign investor. In as much

as environmental authenticity and effects on live aquatic life is interfered with, there are better

ways of addressing the issue. Some effects are also inevitable and probably a Cost - Benefit -

Analysis should have been done before jumping into conclusions by Ruritania Environmental

Agency probably by undertaking an Environmental and Social Impact Assessment (ESIA).

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Reference

Axelrod R.S. (1996). The European Energy Charter treaty. Reality or illusion? Energy policy,

vol 24, issue 6. Pp. 497 – 505. https://doi.org/10.1016/0301-4215(96)00022-5

Hirsch M. (2011). International law forum: Sources of International law. The Hebrew university

of Jerusalem. http://ssrn.com/abstract=1892564

International Energy Charter Treaty (2015) https://energycharter.org/process/international-

energy-charter-2015/ review

Kemper R. (2004). Energy charter secretariat: The energy charter treaty and related documents.

http://www.ena.lt/pdfai/Treaty.pdf

Luki B.N and Abubakar N.J. (2016). Dispute settlement in the oil and gas industry: Why is

international Arbitration Important?

McCormick R.J., Hoboken N.J., Wiley B. & Carleton. (2014). Marine Conservation: Scioence

Policy and Management.

Nwaokoro J. (2010). Enforcing stabilization of international energy contracts. Journal of world

energy Law & business. Vol. 3, No. 1

OECD (2004), “Fair and Equitable Treatment Standard in International Investment Law”, OECD

Working Papers on International Investment, 2004/03, OECD Publishing.

http://dx.doi.org/10.1787/675702255435

Schreuer C.H. (2008). Investment protection and the Energy Charter Treaty. Selected standards

of treatment available under the energy charter treaty. Pp. 63 – 155

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World Bank Group. (2017). Public-private-partnership in infrastructure resource center: dispute

resolution systems available. https://ppp.worldbank.org/public-private-

partnership/legislation-regulation/framework-assessment/legal-environment/dispute-

resolution

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