In big news at the intersection of the international arbitration and energy communities, Queen Mary University of London (QMUL), sponsored by Pinsent Masons LLP, published Future of International Energy Arbitration Survey Report (the ‘Survey’) on 20 January 2023. This article discusses the findings of the Survey, which is focused on energy-related disputes, and the use of international arbitration to resolve such disputes.
The authors polled over 900 respondents from a wide and diverse range of jurisdictions and stakeholders, professions and arbitral bodies on, among other things, the expected drivers of disputes in the energy section in the next 5-10 years, and the suitability of international arbitration to handle those disputes. The results of the Survey are as informative as they are timely, set against the background of the energy transition towards green(er) alternatives and current geopolitical events caused by the Russia/ Ukraine conflict, and with many in this space expecting energy disputes to increase significantly in the near to mid-term.
As we summarise here some of the key takeaways from the Survey, one sentiment was near unanimous: international arbitration as the primary means for dispute resolution in the energy sector appears here to stay, and is the preferred method of dispute resolution for international projects.
Causes of Energy Disputes – Past and Future
One of the most interesting views the authors gleaned from respondents was their perception on how the sources of disputes in the energy sector will change in the coming years. To that end, the Survey asked respondents to rank causes of disputes in the energy sector in the preceding five years. The authors used these retrospective selections as a benchmark against which to understand answers to and draw conclusions from ensuing forward-looking questions on what will cause the most international energy disputes in the short to medium term future.
Price Volatility
The leading cause of disputes selected by respondents for the near to medium term future, and by far the category with the largest increase in selections from the retrospective question was “price volatility of raw materials and energy supply (oil and gas; other)”. In post-Survey interviews, respondents articulated many ways that price volatility drives contractual instability, causing parties to not perform or exit a contract that is no longer commercially feasible. In all, the authors concluded the primary issue now facing the energy sector is the fluctuating cost of necessary raw materials to develop, operate, and maintain energy products, and the unit prices of energy the projects can attain once complete.
Construction
Respondents in the Survey expect construction of energy infrastructure to continue as a substantial source of disputes in the short to medium term. Respondents selected construction as the leading cause of disputes in the preceding five years, and construction issues were the second most likely cause of disputes moving forward.
Energy Security and Transition
As might be expected, respondents anticipate “energy security and transition” disputes to be far more prevalent in the coming years, while perceiving a downward trend in disputes relating to oil and gas activities (changing from the second to the fourth leading cause of disputes). In post-Survey interviews, however, many respondents opined that the uptick in energy transition disputes will not materialise until the end of the decade.
Prior to the conflict in Ukraine, there was a large push following COP26, and more recently COP27, for the need for global economies to accept that climate change had to be top of the economic agenda to achieve the climate change targets agreed. The Russia/Ukraine conflict has certainly thrown a spanner in the works and potentially impacted on the previous momentum. Energy security is now a real issue in the ‘here and now’ for global economies as the dependency on Russia for oil and gas, particularly in Europe, has opened up vulnerabilities. Will this lead to a reversion of fossil fuel? The hysteria to build more nuclear power stations will not offer a quick fix and will take many years to build, construct and operate.
Regulatory Instability
Respondents consistently selected regulatory changes as a primary driver of energy disputes both in past years and looking forward, with no considerable increase in such disputes expected in the future. The types of regulatory changes that impact energy investments and disputes are, however, expected to change. For instance, respondents indicated that regulatory changes will be the most likely cause of disputes relating to climate change and energy transition in the future.
There is also an expectation of increased regulatory attention (and scrutiny) around abnormal or unexpected ‘spikes’ in energy-related pricing. One recent example where regulatory scrutiny received international attention was during the February 2021 Winter Storm Uri, wherein the Texas power grid experienced catastrophic failures resulting in market conditions with astronomical energy pricing ( for both natural gas as well as electricity). The impacts from Winter Storm Uri resulted in tragic loss of life as well as billions of dollars in unexpected losses for businesses and consumers. Brad Thompson, a Texas-based energy practitioner noted “Increasing regulatory attention could upend economic expectations of long-ago negotiated commercial instruments in the energy arena. Where regulatory actions fundamentally alter the previously negotiated economics among counterparties to, for example, long-term domestic or international supply agreements, adversely affected counterparties are going to be looking for ways to leverage any contractual outs. Whether it be through force majeure clauses or other avenues to potentially limit their exposure, impacted energy businesses will look for ways to mitigate any regulatory impact. As many of these energy contracts increasingly call on arbitration as their dispute resolution mechanism, we will likely see an increase in regulatory action spurring more arbitration—both domestically and internationally.”
International Arbitration Seen as the Most Suitable Forum for Energy Disputes
Another major takeaway from the Survey was the dominance of international arbitration as the preferred means to resolve disputes in the energy sector. The Survey asked respondents to grade, on a scale of 1-5, how suitable international arbitration is for resolving energy disputes. The respondents overall strongly approved of international arbitration with 55% of respondents choosing the highest rating of 5 and 26% choosing a rating of 4, while only 5% of respondents chose a rating of 1 or 2.
Interestingly, the Survey included end-users of arbitration as respondents and isolated their responses to this question. Though international arbitration scored lower among the end-user subset, this group still largely endorsed international arbitration with 72% of end-users choosing a rating of either 4 or 5 and only 4% of end-users selecting either a 1 or 2 rating.
In a separate query, the Survey asked respondents how they would choose to resolve main categories of dispute (i.e., energy infrastructure, renewables, etc.). In each category polled, arbitration was by far the top choice, nearly doubling the next highest answer choice of negotiation, and more than doubling litigation and mediation.
Reasons End-Users Favour Arbitration
The Survey further questioned respondents on which features of international arbitration are most important for resolving energy-related disputes. Intuitively, the most important feature driving international arbitrations is neutrality, as respondents desired the opportunity to avoid any real or perceived prejudice in their counterparties’ or host state’s domestic court system. The second and third most popular features of international arbitration were autonomy on the choice of arbitrator, particularly the technical expertise of arbitrators, and the enforceability of arbitral awards, respectively.
Areas to Improve Arbitration
The Survey also allowed respondents to identify ways to improve international arbitration. One of the most prevalent responses was a desire to improve initial case management to prevent delay tactics, narrow issues, and provide for summary disposition of claims. Another popular response was the institution of virtual hearings and online case management. Other respondents expressed a dissatisfaction with overly legalistic and confrontational arbitrations.
Owen Newman adds “The Survey reinforces what we continue to hear from clients across all industries: while International Arbitration remains the preferred and generally most suitable mechanism for formal resolution of cross-border disputes, expediency and cost effectiveness are critical areas for improvement.” Jeff Hamera goes further and says: “As counsel and as arbitrators, it is therefore imperative that we continue to advise on, advocate for and demonstrate the courage to implement procedural efficiencies such as summary disposition, expedited proceedings and bifurcation as appropriate.”
Where will International Arbitrations Occur Moving Forward?
Based on Survey responses, London is likely to remain the foremost venue for international energy arbitrations with 49% of respondents selecting it as their first choice.
Singapore was the second most preferred choice among respondents and seems to be growing in popularity. Singapore tended to be a favorite venue for disputes located in India, Australia, China, and Southeast Asia. Jerald Foo elaborates further in saying “Singapore is a global arbitration hub, not only because of its arbitration-friendly judiciary, but also its hard-earned reputation of independence and neutrality”.
Third Party Funding
Not surprisingly, the importance and relevance of third party funding in arbitration in this sector is likely to increase. 84% of respondents indicated they believe there will be an increase in third party funding of international energy disputes.
Funding large scale arbitrations, as with litigation, is costly, and in some cases without third party funding it may not be possible to effectively pursue claims. These cases are also ones which will fit the business model for litigation funders.
Investor State Dispute Settlement
Many end users indicated they would only consider Investor-State arbitration as a last resort, or as part of a larger strategy to exit business operations in the host country in question. The perception was that treaty based arbitrations allows investors to avoid disputes in local courts, where issues of unfairness in treatment and host nation bias may be a concern. Interestingly, notwithstanding the ongoing uncertainty of enforceability in intra-EU treaty awards caused by the Achmea and Komstroy decisions, enforceability was high on the list of benefits. Modernisation of the Energy Charter Treaty was cited as the major development most likely to influence their view on the suitability of Investor- State arbitration for energy disputes.
Conclusion
The Survey is detailed and a fascinating piece of industry research that reinforces that, at least for the energy sector, Arbitration is still king in the dispute resolution world. Of course, as with litigation the ultimate aim for any process is the effective resolution in the most cost effective and proportionate manner, and to that extent, ADR processes are equally relevant to arbitration. The findings in this Survey, in our view, have equal relevance to other business sectors. The Survey provides a fascinating insight into market perceptions and trends, and those interested are encouraged to read the Survey in its entirety. Understanding where the market risks are heading will be wholly relevant to those who are business savvy.
Republished by permission.
