Energy Arbitration: Navigating Disputes in a Transforming Global Sector

The International Energy Sector

The energy sector is enormously complex, characterised by high-value, long-term, and capital-intensive projects. It encompasses the exploration, production, transportation, and distribution of both traditional and renewable energy sources, with transactions regularly spanning multiple jurisdictions and being subject to a web of contractual arrangements, regulatory frameworks, and international treaties. The industry is naturally sensitive to state interests and political factors, with resource nationalism, market volatility, and the global push for decarbonisation playing critical roles in shaping its landscape. As a result, the energy sector is an incubator for disputes, needing robust mechanisms for their resolution. Arbitration has emerged as the preferred method, with the energy sector representing its largest user.

Key Legal Frameworks for Resolving Disputes

Broadly speaking, players involved in cross-border energy projects or contracts have two legal frameworks to which they may resort for resolving disputes that arise in the context of these projects or contracts: (1) investment treaty arbitration and (2) international commercial arbitration. (Resort to local courts may offer a third option, but, as discussed further below, arbitration is frequently preferred to local courts in a cross-border context.)

On the investment treaty front, the Energy Charter Treaty (ECT), effective 1998, traditionally provided a key framework for energy cooperation and offered a dispute-resolution procedure for energy-related investment disputes. It was designed to promote energy security through protecting foreign investments, promoting non-discriminatory energy trade, and resolving disputes. However, a wave of withdrawals—among them the United Kingdom, France, Spain, and, more recently, the European Union—reflects concerns that the treaty is outdated and hinders climate action. Aside from the ECT, depending upon the jurisdiction from which they hail and in which they invest, investors may have access to a bilateral investment treaty (BIT) providing substantive protections for their investments and the ability to resolve disputes relating to these investments through arbitration.

Where an investment treaty does not apply, the role of contracts – and the dispute-resolution clauses contained in them – and domestic laws comes into play. Disputes in this scenario are typically resolved through international commercial arbitration. These disputes are often complex, involving sophisticated legal issues and detailed technical matters, and frequently feature a state or a state‑owned/controlled entity.

Sources and Types of Energy Disputes

The energy industry divides into upstream, midstream, and downstream segments, and within these, into traditional sectors such as oil, gas, coal, nuclear, and renewables, including solar, wind, hydropower, geothermal, and hydrogen. The following are illustrative examples of typical dispute scenarios.

The liquefied natural gas (LNG) sector has tended to involve long-term contracts. Buyers must commit to buying large volumes over time before producers can commit the capital investment for extracting and liquefying. Disputes can be rife as the contract evolves over upward/downward price and quantity flexibility rights, take-or-pay provisions (obligating the buyer to either accept delivery of a minimum quantity of goods or, failing acceptance, to pay for the agreed amount), or force majeure claims (where parties seek relief from contractual obligations due to unforeseeable and unavoidable events). For example, arbitration has recently been used to resolve an allegation by energy companies, including Shell, BP, and Edison, that Venture Global LNG wrongfully failed to deliver long-term contracted cargoes due to selling LNG on the spot market where prices were higher.

Common grounds for disputes in the upstream oil and gas sector are expropriation, profit sharing, tax imposition, and regulatory compliance. Geopolitical factors, price volatility, and, increasingly, environmental regulatory changes make this sector highly dispute prone. For example, the case of ConocoPhillips v Venezuela involved ConocoPhillips (a US oil company) initiating arbitration proceedings against Venezuela for nationalising its oil and gas sector and requiring foreign oil companies to convert their interests into joint ventures with a state-owned company. An arbitral tribunal found that Venezuela had expropriated ConocoPhillips’s assets and that the expropriation was unlawful, rendering Venezuela liable to pay adequate compensation.

The construction of renewable energy facilities requires significant investment, likely involving banks or funds. The short-term interests of financiers and lack of construction expertise give rise to a natural tension with the project. Furthermore, the projects are inherently riskier as they use untested technologies. This can cause disputes through longer timelines, failures, and higher costs. The risk of disputes arising from the renewables sector was emphasised in an arbitration study undertaken by Queen Mary University of London, where 61% of respondents said the main driver of renewables disputes was “design and performance issues”, which relate to both defects and delays.

Energy Arbitration

Each of these disputes and the multitude of others that arise in the energy sector are well suited to arbitration. Arbitration is the preferred choice of dispute resolution due to its generation of final awards that are easier to enforce, its neutrality as a forum for multi-jurisdictional parties, its confidentiality, which is particularly important in the arena of new technologies, and the flexibility it offers in choosing a panel of arbitrators with the appropriate legal, technical, or other expertise.

Preferred choices of arbitral institutions include the International Centre for Settlement of Investment Disputes (ICSID), International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), and Singapore International Arbitration Centre (SIAC), among others. Interim measures, sometimes rendered through emergency arbitrator provisions, are frequently sought to preserve assets or maintain the status quo pending resolution, given the critical infrastructure at stake. Expert evidence also plays a more pivotal role than in other sectors; the complex engineering involved often means tribunals rely on expert input to consider the merits of the case as well as quantum. Regarding costs, the scale and complexity of energy disputes have led to a marked increase in third-party funding in the sector.

Drivers of Change in Energy Arbitration

The global shift towards net-zero emissions is giving rise to two new kinds of investor-state disputes: (1) disputes from states phasing out traditional non-renewable energy sources (thus impacting those investments), and (2) disputes from states reversing green energy incentives. Regarding disputes of the first kind, states have invoked defences such as the necessity doctrine or police powers doctrine to defend the move away from traditional energy sources, arguing that climate-related measures are for public welfare. Whether affected investors should be compensated gives rise to the complicated question of who bears the cost of the energy transition.

An increase in disputes of the second kind may be on the horizon as well, as the current political climate exhibits a shift towards prioritising energy security and industrial competitiveness over climate leadership. This was led by Spain and other European countries following their withdrawal of incentives for renewable energy projects between 2010 and 2013. These policy changes led to 51 investment treaty arbitrations against Spain alone and several others against other states. A similar trend is emerging in the United States, with President Trump rolling back renewable provisions, repealing Environmental Protection Agency measures, and withdrawing from the Paris Agreement. 

At the same time, security concerns triggered by Russia’s military action in Ukraine have seen a reversion to previously abandoned fossil fuel projects. The current global instability also instigates a rise in resource nationalism, with governments asserting greater control over their country’s national resources for economic and strategic benefit. Where host states shift from being passive partners to active and controlling participants, this creates a tension between them and energy investors, generating disputes.

Our expertise 

With offices in many of the world’s major arbitration centres, including London, Paris, Geneva, Dubai, Hong Kong and Singapore, we are ideally placed to work with you both to prevent and to resolve disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct arbitrations under both civil and common law systems and regularly act in arbitration-related domestic court proceedings.

Whether you are a state, a state-owned entity, a sovereign wealth fund, a corporate, a sports federation or authority, private business or individual, our strategically focused specialists will work alongside you through every aspect of any arbitration. Please contact Thomas Snider or your usual Charles Russell Speechly LLP contact if you would like to get in touch.