Regulatory Change In Oil & Gas Arbitration: The Latin American Experience - Chapter 03 - Leading Practitioners’ Guide to International Oil & Gas Arbitration

Author(s):

Nigel A. Blackaby

Caroline Richard

Page Count:

36 pages

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Published:

August, 2015

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“There is nothing permanent except change”. Heraclitus’

aphorism aptly describes the experience of oil and gas investors in

several Latin American jurisdictions. While reliance upon the stability

of laws and regulations is inevitably a gamble for foreign investors

everywhere, in no other industry are the stakes as high.

The oil and gas industry is one of the most heavily regulated

industries in the world. Investments in the sector are characterized by

significant upfront investments that may bear large rewards or incur

huge losses. Investments that have borne fruit are vulnerable to

regulatory change and other forms of political risk (lawful and

unlawful), particularly at times of rising energy prices as states seek to

claw back a greater share of the spoils than they originally negotiated

or legislated.

The decision to invest in an oil or gas project is premised on a

careful calculation of risk and return based on the regulatory and

contractual framework governing the investment. These frameworks

include rules governing the applicable royalties, taxes, and

environmental standards. The stability of those frameworks is key to

both attracting investments and ensuring they remain viable.

Regulatory changes can transform viable investments into losing

propositions. When changes occur after the investment costs have

been incurred but before they have been recouped, investors can

sustain sizeable losses.

For these reasons, state commitments to maintain the stability of

regulatory and fiscal frameworks are typically made or required at the

time that investments are made. If these commitments are broken by

changes to the regulatory frameworks during the life of the

investment, investors may seek redress through claims against the

host state of the investment either under contract or under

investment treaties, where available. We have seen such claims

emerge from a series of regulatory changes made in four Latin

American jurisdictions – Bolivia, Venezuela, Ecuador and Argentina.

Before turning to those case studies, however, we first describe the

strategies that can be employed to mitigate the risks posed by
potential regulatory changes at the outset of an investment.