Originally from World Arbitration and Mediation Review (WAMR)

ABSTRACT

The energy industry is a key source of growth stimulation for developing states.  This is true not only in terms of economic growth, but also in terms of the transfer of knowledge and skills as well as  the provision of employment opportunities. Understandably, developing states are well-disposed towards international investors, and are eager to enter into petroleum investment contracts with the expectation that this will bring the aforementioned benefits to their countries particularly where the host state is less able to act as a provider of such resources autonomously.  On a global scale, regardless of their type, all investments face risks.  These risks are volatile in nature and reach as the world economy globalises.  It is, of course, true that political risk phenomena per se are potentially destructive to all industries.  However, it is fair to say that due to its high stakes, the energy industry is more acutely exposed and subject to political risk than most sectors.  The purpose of this article is to examine political risk, particularly direct expropriation risk, in long-term energy investment projects.  This paper will refer to arbitral decisions with regard to expropriation cases, as well as the valuation techniques applied by the investment arbitration tribunals in unlawful expropriation cases.

I.  INTRODUCTION

The main purpose of international investment law, at least from the perspective of alien investors, is to provide a safeguard against political risks that many international investors face in other countries.   Energy projects, such as oil and gas exploration and their transportation through pipelines, can be subject to unpredictable economic and political risks.  If a dispute arises from energy-related investment projects between a host government and an alien investor, presumably the alien investor would wish to resolve the dispute in an unbiased environment.  In that sense, the International Centre for Settlement of Investment Dispute (ICSID) is a good example as it offers an autonomous and self-contained system for the resolution of conflict between host states and foreign investors.   Host states that instigate these risks may take either entire or specific parts of the property from alien investors.