EVENT SUMMARY: THIRD ANNUAL HOUSTON CONFERENCE ON OIL AND GAS INVESTMENT ARBITRATION.

AuthorCardenas-Garcia, Julian

September 16, 2016

Hosted by the Environment, Energy and Natural Resources Center at the University of Houston Law Center

EVENT SUMMARY SPECIAL PRESENTATION: CONSIDERATIONS FOR NATURAL GAS INVESTMENTS IN AN EVOLVING GLOBAL MARKET PANEL 1: THE TRANS-PACIFIC PARTNERSHIP--IMPACT ON INVESTMENT ARBITRATIONS IN THE OIL AND GAS SECTOR PANEL 2: ANNULMENT IN THE OIL AND GAS SECTOR KEYNOTE: A CRITICAL VIEW OF INVESTMENT ARBITRATION BASED ON ECUADORIAN EXPERIENCE: AN ANALYSIS OF THE INVESTOR-STATE DISPUTE SETTLEMENT, ITS FLAWS, CONTRACTIONS AND PROPOSALS FOR A CHANGE PANEL 3: APPLICABLE LAW IN ENVIRONMENTAL COUNTERCLAIMS PANEL 4: RENEWABLE ENERGY AND INVESTMENT ARBITRATION CONCLUSION EVENT SUMMARY

On September 16, 2016 the University of Houston Law Center, in collaboration with the Washburn University of Law and the International Law Institute (ILI), brought together leading legal experts from around the world to discuss hot topics regarding oil and gas investments in an evolving global market. (1) The panels covered subjects such as: the impact of the Trans-Pacific Partnership (TPP) on oil and gas investment arbitrations, how annulment standards applied in the oil and gas standard, applicable law in environmental counterclaims, and renewable energy and investment arbitration. The event's keynote speaker Dr. Diego Garcia Carrion, the Attorney General of Ecuador, presented his book, A Critical View of Investment Arbitration Based on Ecuadorian Experience. The book illustrates the Ecuadorian perspective of the investment dispute settlement system by focusing on the main criticisms and observations made by Ecuador's legal defense, international practice, and academic works; using examples and references to cases that Ecuador has managed; and providing proposals to improve the investment dispute settlement system.

SPECIAL PRESENTATION: CONSIDERATIONS FOR NATURAL GAS INVESTMENTS IN AN EVOLVING GLOBAL MARKET

Speaker

Greg W. Hopper (2)

Summary Description: An overview of the long-term outlook for natural gas and the commercial considerations that will shape future market transactions.

The theme of Greg Hopper's discussion was that growing markets bring new commercial uncertainties and contractual challenges. First, Mr. Hopper noted that with the discovery of unconventional natural gas, the amount of North American gas had hit new levels. He added that this has created a new role for American companies because they are now exporting more, reversing their pipeline systems, and adding distribution systems to accommodate more exports and less imports. Mr. Hopper highlighted that North America sits on approximately 475 trillion cubic feet of natural gas below $3.30. (3)

Mr. Hopper then discussed how this growth in supply correlates with the growing global demand for natural gas. He emphasized the importance of the power market, and the usage of natural gas for electric generation in other countries. He noted that the price of natural gas in North America is now becoming a determining factor of the price of electricity in other markets around the globe.

While the United States has a growing market for gas, Mr. Hopper noted several problems that the United States could face. Mr. Hopper used the northeast pipelines delay in the Marcellus Shale as an example of the problems the United States could face. He also mentioned that the EPA's issuance of new methane regulations could affect prices in the contracts. Mr. Hopper further added that battles for new production will have a huge bearing on price.

Despite the potential issues in the United States, Mr. Hopper stressed that gas and renewables are the future for the world. He used the role of gas in the power generation market to exemplify how gas continues to take market share from coal even as renewables increase to penetrate the market. Given the novelty of renewables, however, it is still uncertain how both will coexist in the market.

To exemplify the growth, he mentioned that there is nearly 7.5 billion cubic feet per day being added across the border to facilitate U.S. imports. (4) However, he did note that there is a tremendous amount of uncertainty regarding the value of assets related to natural gas, and consequently, there is a tremendous amount of uncertainty for the stakeholders as well. Despite the uncertainty, Mr. Hopper highlighted the Mexican market as one of the promising markets for natural gas.

PANEL 1: THE TRANS-PACIFIC PARTNERSHIP--IMPACT ON INVESTMENT ARBITRATIONS IN THE OIL AND GAS SECTOR

Panelists

Tracy Hester (5)

Teddy Baldwin (6)

Moderator

Lorena Perez-McGill (7)

Summary Description: The panelists addressed the ongoing debates about the Trans-Pacific Partnership and how it impacts oil and gas investments in the Pacific region, particularly focusing on the implications of the TPP investment in ongoing oil and gas investments in the region as well as future prospects.

Professor Tracy Hester's discussion was about the connection between oil and gas investor-state arbitration, NAFTA and the TPP. In his view, the most salient comment regarding the TPP was from the U.S. Trade Representative's office stating it was a "renegotiation of NAFTA" and "an opportunity to address NAFTA's shortcomings." (8) He discussed NAFTA and how side agreements became necessary because many felt that NAFTA lacked the strength to protect labor and the environment.

Professor Hester mentioned that the enforcement of environmental laws is an issue that colors oil and gas arbitration. With this he segued into the discussion of the enforcement of environmental laws under the North American Agreement on Environmental Cooperation (NAAEC), a side treaty of NAFTA that deals with the environment. The NAAEC has mechanisms to hold nations belonging to NAFTA accountable for not following their own environmental laws. He described the Submittal of Environmental Matters Process, which allows any citizen of any of the three nations of NAFTA to submit a claim to the Commission of Environmental Cooperation (CEC) alleging that one of the nations has failed to enforce its own laws. According to Professor Hester, this makes the NAAEC a unique treaty in that it empowers private citizens to bring a claim and "shine the light of truth" on a nation's improper conduct. Professor Hester argued that the TPP is weaker than the NAAEC because there is no factual record or submittal processes to hold a party accountable for a violation of their environmental law. He observed that the TPP's domestic transparent process is weak because it does not lay out the process for managing or enforcing the claims. He then tied it back to oil and gas investment by highlighting that the TPP lacked any mention of climate change. He concluded that in the event the TPP is ratified, it is imperative to ensure there is harmonization between the TPP and the NAAEC.

Teddy Baldwin elaborated on how the TPP could affect oil and gas investments subject to either NAFTA or bilateral investment treaties (BITs). In the event a party is not protected by a BIT, Mr. Baldwin noted that the TPP would cover the investment. Mr. Baldwin stated that there are three ways the TPP could affect oil and gas investments. First, one must have an investment in order to bring an investment claim. The definition of "investment" is set out in the treaty. Second, the TPP allows states to determine what rights oil and gas producers have. The parties' law dictates, in large part or completely, what is an investment and therefore what rights are applicable to oil and gas producers. Third, investor expectations will also be affected by the TPP. Investors expect fair and equitable treatment for their investments. That is what is established in agreements such as NAFTA and CAFTA; however, the TPP diminishes the right to be treated fairly because it removes the expectation factor of fair and equitable treatment. According to Mr. Baldwin, a consequence of this is that there could be an increase in expropriations.

PANEL 2: ANNULMENT IN THE OIL AND GAS SECTOR

Panelists

Freddy Sourgens (9)

Alvaro Galindo (10)

Moderator

Silvia Marchili (11)

Summary Description: The panelists addressed how the annulment standards of the International Centre for the Settlement of Investment Disputes (ICSID) are applied in the oil and gas sector. They provided insight in how to apply the manifest excess of power annulment standard to questions typically faced by investment arbitrations, namely whether typical oil development project structures are at odds with legal rules constraining tribunal jurisdiction and questions of applicable law in the oil and gas sector.

Alvaro Galindo provided the Ecuadorian perspective of annulment by talking about the case of Occidental v. Ecuador (Oxy II). (12) He used this case to illustrate how the manifest excess of power annulment standard can be applied. This was a case that arose out of a 1999 participation contract between Occidental (Oxy) and Petroecuador for exploration and exploitation of hydrocarbons. The arbitration award found Ecuador could terminate the participation contract because Oxy had transferred...

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