Queen Mary University of London has undertaken a major International Arbitration Survey, focusing on the energy sector entitled “Future of International Energy Arbitration, Survey Report 2022”. This was led by Professor Loukas Mistelis FCArb[1] and his team. The Survey was based on feedback from over 900 respondents from a diverse range of jurisdictions, end users, leading practitioners, arbitrators and experts, as well as arbitral and academic institutions.
This Survey examines two main themes which have come into sharp focus as a result of the present volatility of the international energy markets following the Russian- Ukrainian conflict:
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- The prevailing drivers of disputes in the short to medium term.
- How international arbitration can adapt to this environment to best serve the needs of the energy sector; and whether it is still fit for purpose.
The full report is a worthy read[2] by practitioners and all those involved with International Arbitration, and what follows below is a high level birds eye view summary of the findings.
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- Causes of Energy Disputes – both past and future:
- The biggest change is expected to be price volatility of raw materials and energy.
- Next five years will see potential disputes facing the energy sector arising from raw material costs and energy unit prices to develop, operate and maintain energy projects.
- Issues arising from construction process of energy assets and associated infrastructure projects.
- Next five years will see potential procurement and supply chain issues. In descending order, the other causes anticipated were to those arising from changes in regulatory frameworks, oil and gas supply and demand and changes in technology.
- 73% thought that Europe will most likely see an acceleration in energy disputes. Again followed in descending order by Asia, the Middle-East and Africa.
- Impact of the energy transition:
- The transition to cleaner sources of energy was perceived in at least the short term to likely give rise to more disputes. Parties whilst getting acclimatised to new technologies, may fail to grapple with allocation of risks.
- “Reviewing contracts” and “strengthening contract management/supply chain scrutiny” – were both cited as strategic imperatives brought on by energy transition.
- Security of energy supply:
- This is seen as an increasing concern globally. The reliance on Russia, at least by Europe, has focused domestic energy security to the top of the agenda. This has accelerated domestic investments to invest in alternative green energy, but also has focused attention on the “here and now” for energy security, particularly the desire for more nuclear power stations.
- It is perceived that energy supply and security issues triggered by Russia’s invasion of Ukraine may lead to delay the global energy transition to clean green energy, and a possible reversion to abandoned fossil fuel projects. This in turn may postpone the onset of energy transition disputes.
- Any changes being brought in to alleviate the immediate issues of energy supply to the regulatory frameworks and investment environment may, in the long term, give rise to potential disputes between foreign investors and a host state.
- The Survey identifies that in descending order the following are most likely to give rise to disputes are: regulatory changes (such as the implementation of treaties – such as the 2016 Paris Agreement), infrastructure/construction, and price volatility.
- It is not surprising that the need for security of energy will mean more nuclear power projects. Respondents cited cost of nuclear power projects and supply chain risks as most likely to lead to disputes.
- Sanctions and impact on contractual performance:
- Most respondents believed that sanctions will cause a rise in force majeure and hardship claims.
- That suspensions and terminations will continue to rise due to sanctions.
- A small amount of respondents identified an increase in bond calls as a result of the sanctions.
- “Arbitration is seen as the most suitable forum for resolving energy disputes with London and Singapore the most popular seats of choice”:
- Arbitration was the most preferred dispute resolution method amongst respondents by a long shot, and considered very suitable for resolving energy disputes.
- I was also perceived as being least suitable to climate change disputes compared to the other sub-sectors due to the public interest element of corporate accountability. These elements were considered better for resolution via negotiations or formal court proceedings.
- Surprising it was found that that dispute boards are “relatively unpopular” in the energy sector.
- 49% of respondents selected London as their first choice of arbitral seat. Reasons for this included “the stability of its commercial law”.
- “Energy users like arbitration because they see it as neutral, enforceable and benefitting from the technical expertise of arbitrators, but they want to see innovation driving more efficiency and early decision-making”
- The Covid-19 era has accelerated the embracing by tribunals and courts of technology, possibly out of necessity rather than just choice. In any event, this has meant enforced “lean processes”, particularly with regard to use of technology within hearings.
- The features of arbitration considered to be the most important to the energy sector were neutrality, choice of arbitrators, expertise and enforceability of arbitral awards.
- “Although arbitrations are becoming ‘greener’, green credentials have only minimal influence on the choice of participants”:
- As mentioned above, the widespread adoption of virtual hearings and meetings brought on by the Covid-19 pandemic has allowed for more diversified and global participation in international arbitration.
- Promotes innovation in making international arbitration more economical, efficient, and accessible.
- The green agenda was not a persuasive factor for the choice of arbitration.
- Third party funding:
- Not surprisingly, the importance and relevance of third party funding in arbitration in this sector will likely to increase. Funding large scale arbitrations, as with litigation, is costly, and in some cases without third party funding may not be possible to pursue claims.
- 84% of respondents indicated they believe there will be an increase in third party funding of international energy disputes.
- Investor-State Dispute Settlement
- Many end users noted indicated in the Survey that they would only consider investor-state arbitration as a last resort, or as part of a larger strategy to exit business operations in the host country in question.
- Allows investors to avoid disputes in local courts, where issues of unfairness in treatment and host nation bias may be an issue.
- Notwithstanding the ongoing uncertainty of enforceability in intra-EU treaty awards caused by the Achmea and Komstroy decisions[3], enforceability was high on the list of benefits.
- Modernisation of the Energy Charter Treaty[4] was cited as the major development most likely to influence their view on the suitability of investor-state arbitration for energy disputes.
- Causes of Energy Disputes – both past and future:
Whilst this Survey is in the Energy space, some of the trends arguably may have relevance to other globalized market sectors. The importance of this type of industry research is crucial for those in businesses which operate across borders; being dispute savvy/astute is a necessary business acumen. The globalization of market sectors will give rise to cross border disputes. What the Survey reinforces is the resilience and adaptability of arbitration over the centuries as the preferred means of dispute resolution, and that arbitration, whilst in domestic jurisdictions may endure cyclical bouts of being in and out of fashion, still remains in relation to global cross boarder projects not only fit for purpose but the preferred choice of resolution.
[1] Clive M Schmitthoff Professor of Transactional Law and Arbitration, School of International Arbitration, Queen Mary University of London (sponsored by Pinsent Masons)
[2] https://www.qmul.ac.uk/media/news/2023/hss/queen-mary-research-reveals-effects-of-ukraine-war-on-energy-disputes.html
[3] https://blogs.duanemorris.com/london/2021/12/20/so-long-farewell-auf-weidersehen-is-this-the-end-of-intra-eu-bit-arbitrations/
[4] https://blogs.duanemorris.com/london/2022/01/17/revenge-of-the-energy-charter-treaty/