Stabilization Clauses are not Sacred Cows: OIES Research
Stabilization clauses in the oil and gas industry are nothing new. They became an integral part of contracts between countries and energy companies as their aim is to guarantee foreign companies assurances for returns on their investments. Hence, the clauses are mainly deal with taxation, royalties, etc.
Stability clauses, according "Fiscal Stabilization in Oil and Gas Contracts: Evidence and Implications", a study published this month by The Oxford Institute for Energy Studies are standard practice mainly in developing countries: 19 out of the 20 countries surveyed in the study are developing countries from Africa (13), Eurasia (3), Middle East (1) Pacific (1) and Central America (2). Mexico is the exception to the rule. Most of the countries are not democracies in the western sense of the term and were chosen for the study because of "the importance of oil and gas activities in the country (or its potential)" and since "stabilization is primarily found in these countries," the report claims.
The study spans over 6 sections (Introduction; fiscal stability: raison d'être and models` Effectiveness of stabilization clauses` Review of fiscal stabilization mechanism in developing and transition economies; conclusion and references), diagrams and tables quite a lot.
The most important inference coming out of the paper is that stabilization clauses are not sacred. They basically set the opening positions for both sides to when they inevitably would have to renegotiate the terms of their agreement following changes in business conditions. That happens, mainly, when prices are either going up (and then the government take should be increased) or when prices plummet (and then investors' terms should be improved). Then both sides have to re-negotiate terms sometimes in front an arbitration panel or through litigation in order to "re-balance the same economic equilibrium initially agreed between the parties."
The research identifies 6 "Variations of Stabilization Provisions," among them "Full Freezing" and "Limited Freezing" clauses, "Full Economic" and "Limited Economic" clauses and "Full Hybrid" and "Limited Hybrid" clauses.,
It concludes that value of those clauses is "questionable… when the fairness of fiscal regimes is so often called into question." It also says that when a stabilization clause is in conflict with a national law it would not "receive the protection of international law."
Fiscal Stabilization in Oil and Gas: Evidence and Implications
By Mario Mansour and Dr Carole Nakhie
The Oxford Institute for Energy Studies
January 2016
OIES Paper: SP 37
Ya'acov Zalel