Stability of Agreement Clauses in Oil Contracts
This Column touched earlier on what the Model Petroleum Contract describes as a Stability Clause, the objective of which is to provide assurance to international oil companies that they will be protected from any variation in fiscal or economic policies by governments for a period of as much as thirty years. Here is how the Model Agreement describes that clause:
Government shall not, following the Effective Date, unilaterally increase the contractual obligations of the contractor under this Agreement or diminish the contractual rights of the Contractor hereunder as such obligations and rights exist as of the Effective Date.
If any level of government, promulgates new or amended laws, decrees or regulations, which negatively impacts the contractor’s economic benefits, the Parties shall promptly make revisions and adjustments to this Agreement as necessary to maintain the contractor’s economic entitlements at the level existing as of the effective date.
Critics who are inclined to attack such a clause need to bear in mind that that clause appeared in the Model Contract of the early nineties, long before the constitutional amendment guaranteeing protection against nationalisation and the compulsory acquisition of private property. The Constitution alone protects private property in more than one way. For example, in a 2001 Amendment, Article 17 declares that “Privately owned economic enterprises are recognised, and shall be facilitated in accord with their conformity with the aims and objectives stated or implied in articles 13, 14, 15 and 16.” But there is more.
As a measure of protection of a fundamental right, Article 142 provides that:
No property of any description shall be compulsorily taken possession of, and no interest in or right over property of any description shall be compulsorily acquired, except by or under the authority of a written law and where provision applying to that taking of possession or acquisition is made by a written law requiring the prompt payment of adequate compensation.
The Investment Act passed in 2004 provides added guarantee when in section 13 it states that the Government of Guyana shall – strong and mandatory language – protect investments and the property of investors in accordance with the laws of Guyana. Moreover, such acquisition must not be done on a discriminatory basis, must be in accordance with the procedures provided by law, for a purpose set out in the law, and must provide prompt payment of adequate compensation together with interest calculated from the date of acquisition or taking possession of the investment.
The question then is whether the stability clause in the Petroleum Agreement really has a place in Guyana in the light of the strong constitutional and statutory protection which all investments enjoy. One of the cases which can be advanced then is that in the contemporaneous conditions of the early nineties, they would have been eminently justifiable. The reality however is that stability clauses have been a feature of petroleum agreements across the petroleum world, although they are not all alike.
Forms of stability protection
A publication by the international accounting firm Deloitte has identified several types of stability clauses as follows:
Comprehensive – All the terms of the PSA are insulated against any subsequent change arising in the legislation of the host state. This type is becoming rare as they fly in the face of the accepted norm that no parliament can bind successor parliaments.
Limited – A limited range of PSA terms are insulated against subsequent changes in legislation. These could pertain to terms such as taxes, social security, import and exportation and the free transferability of currency. Such limited scope of stabilisation clauses is more appealing to the developing countries because it does not limit legislative powers.
Freezing clauses – These ordinarily preclude the host state from changing its legislation. This is criticised as an encumbrance on the host state’s sovereign legislative prerogative and the permanency of sovereignty over its natural resources. It has come under scathing attacks from civil society organisations and is frowned upon by most governments. In the alternative, any changes in host state legislation subsequent to the PSA do not apply to the specific project. PSA terms take precedence in the event of a conflict with new legislation. For example, in Uganda, PSA terms take precedence over the provisions of the Income Tax Act in relation to the taxation of petroleum operations.
Prohibition on unilateral changes – They are commonly dubbed intangibility clauses. The terms of the PSA may not be modified or abrogated except with the contracting parties’ mutual consent. The criticism of this type of stability would be the same as that in relation to comprehensive terms.
Balancing clauses – They are commonly dubbed the economic stabilisation clauses. They provide for automatic adjustments or negotiations to restate the initial economic balance of the PSA should legislative changes be introduced after signature. The stability clause in Guyana’s model petroleum agreement would fall under the balancing clause type, as is that found in the Tanzania Model PSA of 2004.
The case for stability
The justification is that international oil companies contend with serious risks of changes to the fiscal terms of petroleum agreements signed with the host state which may adversely affect the commercial viability of the exploration and exploitation project as previously appraised. Petroleum exploitation projects are not only capital intensive but also span a long period of time. They often are entered into with unstable governments whose country is unable to attract investment insurance so the only protection is the stabilisation clause. Another justification is that stabilisation clauses affirm to the international community and foreign investors that the host country is committed to the principle of the sanctity of contracts – that they are to be honoured whatever the circumstances. Such clauses are usually in addition to any constitutional and statutory protections available to investors.
The case against that is usually made is that stabilisation clauses fetter their sovereign legislative prerogative as well as their permanent sovereignty over natural resources. Such clauses also take any contractual risks out of the petroleum sector, offering giant oil companies whose very success depends on their management of business risks. In effect, they transfer those risks to host countries which are least able to manage such risks or indeed to bear them. Of course no worker, business, or indeed most other sectors enjoy such protection. Year after year, a Government can impose new or additional taxes on the whole body of taxpayers, including those who have invested hundreds of millions in plant and equipment. Such new taxes can move marginal businesses to high risk ones. They do not receive any compensation – but the oil companies do.