Arbitration and meeting the demands of the future energy sector
Last month, Dispute Resolution partners Pierre Duprey and Roland Ziade took the opportunity to discuss their views on the implications of the global energy transition on international arbitration in a guest blog for the International Chamber of Commerce (ICC).
On 8 March 2019, the Government Pension Fund Global (GPFG) of Norway, currently the world’s largest sovereign wealth fund, announced a major divest from certain fossil fuel investments. Even though GPFG intends to maintain investments in oil majors that are partially involved in the development of renewable energy, such as BP, Shell or Total, the divestment is still significant, representing an estimated GBP£5.7billion in investment assets – the largest divestment of fossil fuels. The divestment was undertaken to mitigate exposure to declining oil and gas prices and to respond to the effects of climate change and the transition to zero-carbon energy resources. During the summer of 2018, French President Emmanuel Macron had already attempted to persuade a number of the world’s largest sovereign wealth funds, including those from Qatar, Saudi Arabia and the United Arab Emirates, to undertake divestments from companies that explore and produce fossil-based fuels in the hopes of starting a global transition to renewable energy-based investments. Whether other sovereign wealth funds will follow the example set by GPFG remains to be seen, but it has become clear that the energy transition movement has found its place in global finance.
As international and domestic laws develop to support the energy transition, it will become more important than ever for international arbitration practitioners to prepare for and adapt to the implications of the energy transition on future disputes.
Spain is a good illustration of how the increase of regulation in the renewables sector—with the passing of a series of Royal Decrees starting in 2010 to 2014 to regulate the production of renewable energy—has translated into numerous arbitration claims filed by foreign investors against the state. In the same vein, in the context of the United Nations Sustainable Development Goals, the Paris Agreement and the rise of regulation concerning climate change —new types of climate change litigation have developed against governments (e.g., Urgenda vs. The State of the Netherlands) and even against the European Union (e.g. Carvalho and Others vs. Parliament and Council (Case T-330/18), known as the “People’s Climate Case”) or against companies (e.g., Saul Luciano Lliuya vs. RWE AG, Germany). Arbitration institutions have also started to adapt to these changes, including ICC who has created a task force on arbitration and climate change related disputes.
The market players that are most immediately affected by the transition to renewable energy resources are found in sectors that draw directly from the energy production market, such as the storage, transportation, conversion and shipping sectors. ICC has seen a steady increase in its caseload in the energy sector, with the registration of 155 new energy cases, which represented 19% of its caseload in 2017. The most traditional of these disputes concern price reviews caused in first instance by (sharp) price fluctuations in oil and gas prices or by the introduction of government legislation which adversely affects the market value of fossil-fuel commodities. Conversely, renewable energy resources are also seeing an increase in legislation regulating the trade and marketing of hydrogen-fuels, synthetic fuels and liquid fuels.
However, many transportation and storage contracts that are currently in place are not adequately equipped for these developments as they are traditionally benchmarked against conventional oil and gas price standards. The modern arbitration practitioner, however, will be expected to anticipate these developments and acquaint themselves with appropriate tools to support or challenge a price amendment based on changed economic circumstances. In that respect, many domestic jurisdictions already offer well-developed statutory laws on the application of hardship.
The energy transition has also caused a surge in technological advances which allow for conventional energy commodities to be converted into more environment-friendly transport and storage applications as well as alternative commodities. Current technologies make it possible for oil and (liquified) gas to be converted for electrified transportation, hydrogen-based storage facilities and battery power stations. The transition from traditional transportation and storage contracts, which are typically concluded for a long-term duration, is likely to give rise to new disputes. Market players already face increased pressure to adapt to the requirements of the renewable energy market and will, just as GPFG, wish to mitigate the risk of the increasingly volatile oil and gas prices. Knowledge of these sectors and new technologies will be key for arbitration lawyers to anticipate their clients’ needs in these future disputes.
These are but a few ongoing developments within the context of energy transition that will change the traditional framework within which energy disputes have typically been resolved. As technological advances appear in the energy sector at an incredible speed, the arbitration community is presented with the challenge to offer a forum and mechanism for dispute resolution that meets the demands of the future energy sector.
The authors would like to thank Maria Mitaeva and Marc Noldus for their valuable contribution to this blog article.
This article was originally featured on the International Chamber of Commerce (ICC) website.
On 8 March 2019, the Government Pension Fund Global (GPFG) of Norway, currently the world’s largest sovereign wealth fund, announced a major divest from certain fossil fuel investments. Even though GPFG intends to maintain investments in oil majors that are partially involved in the development of renewable energy, such as BP, Shell or Total, the divestment is still significant, representing an estimated GBP£5.7billion in investment assets – the largest divestment of fossil fuels. The divestment was undertaken to mitigate exposure to declining oil and gas prices and to respond to the effects of climate change and the transition to zero-carbon energy resources. During the summer of 2018, French President Emmanuel Macron had already attempted to persuade a number of the world’s largest sovereign wealth funds, including those from Qatar, Saudi Arabia and the United Arab Emirates, to undertake divestments from companies that explore and produce fossil-based fuels in the hopes of starting a global transition to renewable energy-based investments. Whether other sovereign wealth funds will follow the example set by GPFG remains to be seen, but it has become clear that the energy transition movement has found its place in global finance.
As international and domestic laws develop to support the energy transition, it will become more important than ever for international arbitration practitioners to prepare for and adapt to the implications of the energy transition on future disputes.
Spain is a good illustration of how the increase of regulation in the renewables sector—with the passing of a series of Royal Decrees starting in 2010 to 2014 to regulate the production of renewable energy—has translated into numerous arbitration claims filed by foreign investors against the state. In the same vein, in the context of the United Nations Sustainable Development Goals, the Paris Agreement and the rise of regulation concerning climate change —new types of climate change litigation have developed against governments (e.g., Urgenda vs. The State of the Netherlands) and even against the European Union (e.g. Carvalho and Others vs. Parliament and Council (Case T-330/18), known as the “People’s Climate Case”) or against companies (e.g., Saul Luciano Lliuya vs. RWE AG, Germany). Arbitration institutions have also started to adapt to these changes, including ICC who has created a task force on arbitration and climate change related disputes.
The market players that are most immediately affected by the transition to renewable energy resources are found in sectors that draw directly from the energy production market, such as the storage, transportation, conversion and shipping sectors. ICC has seen a steady increase in its caseload in the energy sector, with the registration of 155 new energy cases, which represented 19% of its caseload in 2017. The most traditional of these disputes concern price reviews caused in first instance by (sharp) price fluctuations in oil and gas prices or by the introduction of government legislation which adversely affects the market value of fossil-fuel commodities. Conversely, renewable energy resources are also seeing an increase in legislation regulating the trade and marketing of hydrogen-fuels, synthetic fuels and liquid fuels.
However, many transportation and storage contracts that are currently in place are not adequately equipped for these developments as they are traditionally benchmarked against conventional oil and gas price standards. The modern arbitration practitioner, however, will be expected to anticipate these developments and acquaint themselves with appropriate tools to support or challenge a price amendment based on changed economic circumstances. In that respect, many domestic jurisdictions already offer well-developed statutory laws on the application of hardship.
The energy transition has also caused a surge in technological advances which allow for conventional energy commodities to be converted into more environment-friendly transport and storage applications as well as alternative commodities. Current technologies make it possible for oil and (liquified) gas to be converted for electrified transportation, hydrogen-based storage facilities and battery power stations. The transition from traditional transportation and storage contracts, which are typically concluded for a long-term duration, is likely to give rise to new disputes. Market players already face increased pressure to adapt to the requirements of the renewable energy market and will, just as GPFG, wish to mitigate the risk of the increasingly volatile oil and gas prices. Knowledge of these sectors and new technologies will be key for arbitration lawyers to anticipate their clients’ needs in these future disputes.
These are but a few ongoing developments within the context of energy transition that will change the traditional framework within which energy disputes have typically been resolved. As technological advances appear in the energy sector at an incredible speed, the arbitration community is presented with the challenge to offer a forum and mechanism for dispute resolution that meets the demands of the future energy sector.
The authors would like to thank Maria Mitaeva and Marc Noldus for their valuable contribution to this blog article.
This article was originally featured on the International Chamber of Commerce (ICC) website.
