Dispute Resolution Mechanisms in the Petroleum Sector

1. Why Disputes Arise and How to Avoid Them

Typically disputes arise when circumstances that form the foundation of the underlying relationship change in an unexpected way, or due to an occurrence of an event that has not been foreseen by the parties, such as an accident with significant environmental and social impacts. Changing policies and changing governments (political risk) may also result in disputes if, for example, an incoming government regards the existing contractual arrangements as ‘unfair’ or ‘imbalanced’.

The risk-reward relationship and sunk capital features of the petroleum sector exacerbate the potential for disputes: geological risk can be high at the exploration stage so that the incentives have to be above average and if successful, the required investments in developing a project will be sunk once they are made, making the investor vulnerable to a variety of changing circumstances in the country concerned.

Therefore, effective dispute avoidance and prevention mechanisms may be helpful to employ before potential areas of disagreement escalate into a dispute. An example of good practice is the establishment of effective mechanisms through government agencies to monitor potential breaches of contracts and licenses and compliance with treaty provisions. Enabling information sharing among relevant government agencies and transparent communication of regulatory policies to investors also contributes to dispute prevention and avoidance, as it creates awareness within the relevant government departments of the potential areas of disputes and helps allow the private sector to prepare for any policy change.