Abstract:
The petroleum industry is beset with risks that can threaten the commercial viability of extractive companies. These risks also pose a danger to the economies of countries and the jobs of the men and women on the ground. Some of these risks are unavoidable and come part and parcel with extracting hydrocarbons. However, fiscal risk is something that can be managed and thereby minimized ? for the good of both the state hosting the resource and the extractive company. A number of tools exist to manage this risk; this study looks at the fiscal stabilisation clause as it is a particularly popular option for investors.
The study takes a qualitative approach through an investigation into literary works and explores how and why the fiscal stabilization clause has become a popular option for fiscal risk management. These clauses have been heavily criticized by various stakeholders and yet they remain as relevant today as when they were first shaped in the 20th century. The study also looks at the controversy surrounding the validity of such clauses by examining various legal sources ? particularly doctrinal writings and international arbitration rulings. The investigation reveals a shift in the stabilisation clause?s scope, and more importantly its objective, over the years. Drafters as well as legal opinion seems to be at odds with the restrictive nature of yesteryear clauses, which may unjustly tie the hands of a host state ? and as such a more balanced approach is sought.
These considerations lead to the main thrust of the study which is to determine what practical drafting steps can be taken to ensure the efficacy of these clauses. The focus leans on the most pertinent substantive components that such a clause should contain to ensure the risks and benefits of resource development are shared fairly. The procedure and objective of the renegotiation mechanism contained the clause is particularly important as it is this key ingredient that makes or breaks the fiscal stability of a project. The study builds on extensive writings on the subject and attempts to build a body of best practice in this regard.
