Istanbul:Arbitration experts have identified geopolitical shocks, volatile energy prices, and regulatory changes as increasing challenges to contractual arrangements in the energy sector. These insights were shared on the third day of the Istanbul Arbitration Days.
According to Anadolu Agency, during a panel titled "Across the Energy Sector Disputes, Contracts and the Issues that Matter," experts discussed various challenges, including long-term supply agreements, sanctions, investment protection, decommissioning, and damages.
Timothy Smyth, a partner at Boies Schiller Flexner LLP, highlighted a dispute involving Chevron's acquisition of Hess to illustrate the critical role of precise contract drafting. The dispute centered around ExxonMobil's pre-emption rights claim under a joint operating agreement concerning Hess's interest in Guyana's Stabroek Block. Smyth emphasized the importance of drafting change-of-control provisions to account for different types of corporate transactions.
Smyth also stressed the growing significance of price-review mechanisms in long-term gas agreements. He suggested that contracts should include provisions for price review and reopening to cope with major market changes, given recent geopolitical shocks.
Murat Erbilen, senior partner at Lexist, pointed to recent LNG disputes as examples of how changing market conditions can challenge contractual assumptions. Erbilen noted that tribunals typically focus on risk allocation and mechanisms within agreements rather than revising contracts due to changed transaction economics. He also highlighted decommissioning as a significant long-term risk for oil and gas assets, advocating for its inclusion in risk allocation from the outset.
Paul Hinks, CEO of Symbion, discussed risks facing energy investors in Africa, emphasizing the importance of considering investment treaty protections alongside contractual arbitration provisions. Hinks noted that bilateral investment treaties and investor-state arbitration could provide additional leverage when enforcing contractual rights is challenging.
Basar Sahin, general manager of ICM Consulting Ltd., warned that preparing for arbitration only after disputes escalate can lead to evidentiary issues. He stressed the need for maintaining project records, issuing contractual notices, and preserving technical and financial data.
The panel also covered the calculation of damages in energy disputes, including lost profits and the impact of fluctuating commodity prices. Smyth mentioned that tribunals consider the commercial realities of a project, its operating history, prospects, and comparable projects, with the valuation date significantly affecting awards amid sharp commodity price movements.
Erbilen noted that changes to the Energy Charter Treaty (ECT) are prompting investors to consider a broader range of protections, including bilateral investment treaties, contractual arbitration provisions, and political risk insurance, especially as the ECT era concludes in parts of Europe.