International energy projects carry inherent legal and political risks. Changes in law or tariff regimes, restrictions on currency transfers, expropriation, contract repudiation by state counterparties, political violence, and difficulties enforcing rights against host states or state-owned entities can all materially undermine project profitability and may complicate, or even prevent, the financing needed to complete a project.
These risks are heightened by the long-term nature of energy projects, which typically require substantial and extended capital commitments, involve immovable assets, government licences or concessions, and ongoing actions by public-sector counterparties, including regulators, offtakers, transmission entities, and fuel suppliers. Together, these features increase the potential for governmental interference, delay, disruption, or frustration of the project.
This note identifies measures that energy investors can use to mitigate or allocate these risks. Our firm brings together the full range of disciplines needed to advise you on all those measures and deliver a comprehensive investment protection strategy under one roof: treaty and corporate structuring, assistance with political risk insurance, project documentation and stabilization, multilateral and development finance institution (DFI) engagement, international arbitration and enforcement, commercial structuring, and pre-investment diligence.
That integration matters. A coherent strategy, designed at the outset rather than assembled reactively, is the most effective way to manage risk and limit exposure.
Treaty Structuring
Treaty structuring involves organising project ownership so that the ultimate investor can benefit from the strongest available investment protection instrument, such as a bilateral or multilateral investment treaty, an investment chapter in a free trade agreement, the Energy Charter Treaty, or another international investment agreement
Most investment treaties provide protections against unfair or inequitable treatment by the host state, direct or indirect expropriation, discriminatory treatment, and restrictions on the free transfer of funds. They may also include protections for full protection and security, national treatment, most-favoured-nation treatment, umbrella clauses, and access to investor-state arbitration.
The precise wording of each treaty is critical. Even a narrow textual difference, including a single word, can have significant legal consequences. Investors should be wary of several issues when structuring their investments:
Timing
Planning should start before the investment. Investors should avoid artificial or last-minute restructurings after a dispute has arisen or become foreseeable, as such steps will be heavily scrutinised by arbitral tribunals. Treaty structuring should be supported by genuine business reasons and sufficient substance in the relevant holding jurisdiction.
Treaty Provisions
The analysis should consider not only whether a treaty exists, but also the quality of the protections, the dispute resolution mechanism, cooling-off periods, fork-in-the-road provisions, tax carveouts, denial-of-benefits clauses, limitation periods, umbrella clauses, transfer provisions, and any sector-specific exclusions.
Denial of Benefits Clauses
These clauses allow host states, in certain treaties, to deny treaty protection to entities that are owned or controlled by nationals of a non-party or of the host state and that lack substantial business activities in their state of incorporation. Where a treaty route depends on an intermediate holding company, investors should therefore consider board composition, management activity, books and records, local office arrangements, bank accounts, tax residence, commercial rationale, and other indicia of real business activity in the treaty jurisdiction.
We regularly advise clients with such structuring, including the selection of appropriate holding jurisdictions, review of treaty protections, assessment of denial-of-benefits risk, and implementation of structures that are commercially defensible and supported by adequate substance.
Political Risk Insurance
Political risk insurance is designed to mitigate risks arising from adverse government action or inaction. It can help stabilize investments in developing markets and improve access to finance.
Different providers, host countries, sectors, and investment types offer different terms on coverage, pricing, tenor, and eligibility. Investors should compare public providers, export credit agencies, multilateral agencies, and private insurers.
Political risk policies may cover risks such as currency inconvertibility and transfer restrictions, expropriation, war, civil disturbance, terrorism, sabotage, breach of contract, and failure to honor financial obligations. Some policies also include breach of contract cover, which may respond where a host government breaches or repudiates a contract and the investor is denied recourse or obtains an award that is not paid.
Where an energy project depends on concessions, power purchase agreements, government support agreements, licenses, or obligations of state-owned enterprise, political risk insurance can be important not only as a risk mitigating tool, but also to improve the bankability of the project.
Political risk insurance does not replace treaty protection. It provides a parallel source of recovery, strengthens the financing case, and gives lenders greater comfort on country risk.
We can assist you throughout the political risk insurance process, including by preparing project-specific risk assessments, identifying and connecting you with suitable public, multilateral, export credit agency, and private insurance providers, and coordinating with those providers and brokers to secure appropriate policies. We can also help align the requested coverage with the project documents, financing requirements, host-state risk profile, and overall investment protection strategy. We also have specialist experience of representing clients in arbitrations relating to the scope of coverage under political risk insurance policies.
Contractual Allocation of Political and Regulatory Risks
Project owners should also ensure that the core project documents contain protections that allocate political, regulatory, and economic risk as clearly as possible.
Depending on the project and jurisdiction, these may include change-in-law provisions, tariff adjustment mechanisms, tax and fiscal stability protections clauses addressing such issues (known as “stabilization clauses”), foreign exchange protections, termination compensation, deemed commissioning or availability protections force majeure and political force majeure clauses, and international arbitration provisions.
Stabilization clauses should be used carefully rather than mechanically. Investors should distinguish between fiscal stabilization, which is often directed at preserving the agreed tax or economic basis of the investment, and broader non-fiscal stabilization, which may be more difficult to defend where it affects areas such as climate change, environmental protection, human rights, or labour rights.
Where stabilization protection is justified, a targeted fiscal or economic-equilibrium clause will often be more defensible and bankable than a broad freezing clause. This is particularly true where the clause is time-limited, commercially justified, tied to objective economic effects, and designed to preserve the project’s agreed economic bargain without unduly constraining legitimate public regulation.
We can help investors review and negotiate these provisions across the project documents, assess whether they are enforceable under the relevant domestic law, and ensure that they are appropriately aligned with international law protections. This is particularly important given the nuances of stabilization, public law constraints, treaty protection, lender requirements, and the evolving treatment of environmental, climate, human rights, and labour-related regulation
Involvement of Public Sector Lenders or Guarantors in Finance Structuring
Investors should also consider involving multilateral development banks, DFIs, export credit agencies, or other creditworthy public-sector participants in the financing structure. These entities can provide non-commercial risk guarantees, credit enhancement products, and trade finance guarantees to both investors and lenders, helping to mobilise private capital and reduce exposure to political and sovereign risk.
Multilateral or DFI participation can serve both a financing function and a risk-mitigation function. By anchoring the capital structure with a public-sector lender or guarantor, investors can help address currency mismatch, extend loan tenors, and reduce uncertainty around long-term government performance. The involvement of a multilateral institution may also create a deterrent effect, as host states are generally reluctant to take adverse action against projects backed by institutions with which they have a broader development relationship.
We have significant experience in structuring multilateral and DFI participation across energy projects, including identifying appropriate institutions, advising on eligibility and application processes, negotiating guarantee and credit enhancement documentation, and coordinating multilateral requirements with the broader project and financing documents.
Carefully Negotiated Dispute Resolution and Waiver Clauses
Investors should build enforcement optionality into both their investment structure and their contracts. Dispute resolution clauses should be aligned across the project documents so that related claims can be pursued efficiently and without jurisdictional gaps.
Arbitration seats and institutional rules should be selected with enforcement in mind, taking account of the legal framework at the seat, the availability of interim measures, and the enforceability of awards in jurisdictions where the host state or its entities hold commercial assets.
Sovereign immunity waivers should be obtained where available, and award enforcement should be supported, where possible, by security, escrow arrangements, letters of credit, guarantees, or reserve accounts.
Treaty-based arbitration should be treated as an option rather than the sole remedy. Contractual arbitration, treaty arbitration, political risk insurance claims, local-law remedies, and negotiated government engagement should be planned as complementary routes, not mutually exclusive options. A well-designed enforcement strategy layers these mechanisms so that investors can pursue the most effective path, or multiple paths, as circumstances develop.
We have extensive experience in international arbitration and advising on arbitration agreements, having acted in over 150 arbitrations, including some of the largest cases under all leading arbitral rules. We can advise on the design and coordination of dispute resolution and enforcement strategies across the project documents, including the selection of arbitration seats and rules, the structuring of security and escrow arrangements to support award enforcement, and the alignment of contractual, treaty, and insurance-based remedies into a coherent enforcement framework.
We can also assist in the negotiation and drafting of enforceable sovereign immunity waivers, a field in which we have particular depth of experience. By way of example, we recently represented the successful party in the complex jurisdictional dispute in Dynasty Company for Oil and Gas Trading v The Kurdistan Regional Government of Iraq and Dr Ashti Hawrami [2021] EWHC 952 (Comm), which was listed among The Lawyer's Top 20 cases to watch in 2021 and in which claims quantified at over $1.6 billion were dismissed on sovereign immunity grounds.
Reduce Financial Exposure
It is important to seek to reduce exposure through careful commercial structuring. Key considerations include whether revenues can be denominated or indexed in hard currency, whether local-currency financing can be used to reduce foreign exchange exposure, whether offshore collection accounts or waterfall structures are permitted under the host-state regulatory framework, and whether the offtaker's payment obligations can be supported by liquidity facilities, guarantees, or other forms of credit enhancement.
These techniques do not eliminate political risk, but they can materially reduce the likelihood that a political or currency event translates into a project-level default. Where structuring is done well, it can also improve bankability and reduce the cost of political risk insurance.
Our practice covers commercial structuring for energy projects in high-risk jurisdictions, including the design of revenue protection and currency hedging mechanisms, the negotiation of offtaker credit support and guarantee arrangements, and the structuring of offshore collection and waterfall accounts. We work closely with project finance teams, lenders, and insurers to align commercial structure with broader risk-mitigation framework.
Enhanced Due Diligence
Energy projects in developing markets are particularly vulnerable to risks that are difficult to predict or price at the outset: tariff disputes, especially where tariffs are linked to foreign currencies or variable input costs; lack of coordination among government bodies; major policy shifts; and the financial weakness or legal ambiguity of state-owned counterparties. Utility and public-service projects are especially exposed to these dynamics. Early mapping of decision-makers, regulators, ministries, sub-sovereign entities, and state-owned enterprises is therefore a core component of investment protection, not a separate compliance exercise.
Enhanced country, sector, and stakeholder diligence before committing capital is essential. While many commercial risks can be mitigated through diligence on the parties involved and the economic viability of the project, political risks are harder to anticipate and require a broader assessment. For energy investments, diligence should cover the host state's treaty network, its history of expropriation or contract non-performance, its tariff-setting record, foreign exchange controls, regulator independence, procurement and permitting processes, environmental and social approvals, land rights, local-content obligations, sanctions exposure, corruption risk, and the financial strength and legal status of state-owned counterparties.
We regularly assist investors with pre-investment diligence for energy projects, including country risk assessments, institutional mapping, regulatory and permitting analysis, counterparty financial and legal due diligence, and identification of treaty and insurance options at the structuring stage. This work informs and strengthens each of the other protections discussed in this note.
For Your Next Project, We Are Here
As this note illustrates, effective investment protection requires coordinated advice across multiple disciplines. We have the experience and capability to advise on all of them from treaty structuring and political risk insurance through project documentation, multilateral engagement, commercial structuring, and pre-investment diligence to international arbitration and enforcement. We have successfully represented clients in some of the largest international arbitrations in the energy sector with billions of dollars in dispute. We are well placed to help you design and implement a strategy that protects your investment from the outset.
