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A study of the legal problems of state contracts

par Odilon Evrard NGOUNDOU
Institute of International Law of Wuhan University
Traductions: Original: fr Source:

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Section 1- Some causes of the violation of petroleum contracts

(Here, it is just about a transition chapter because did not found a lot to say)

1- Breach of contract;

The violation of petroleum contract comes from the breach of contract. But what is in fact the breach of contract? We can talk about the breach of contract when there is unilateral revocation of the contract by one of the contracting parties. It also happens that the breach of contract comes from the non-fulfillment or incapacity of one the contracting party to respect its contractual obligations. This is the case of dispute between the partners of a joint venture company SONATRACH and REPSOL and GAS Natural. Since September 2007, the company Sonatrach just confirmed the termination of a contract concluded in 2004 with Repsol and Gas Natural for the integrated project of petroleum development.

2-Change of legislation;

Political regimes and governments can follow one another and the laws can be changed. In several stable countries, after the presidential or legislative elections, the new governments have always tendency to change their laws in their countries to satisfy their people. Even after a «military coup d'Etat», the new regime may be attempted to change the petroleum contract if the former regime was selling cheaply the petroleum in their country to certain countries or foreign companies which have their industrial activities in this area. Even in some countries where peace reigns, in view of these serious crises or for the needs of management openness of petroleum resources, of (good) governance, of autonomy and financial independence or economic, certain governments may seek renegotiation or revision of former petroleum contracts. This is the case of Venezuela (with the President Huguo Chavez) or Libya (26/12/2007). However all revision can be done only by mutual agreement between the contracting parties of petroleum contract and whether the contract contains of course a stabilization clause. Any revision of the petroleum contract made without the agreement of the other signatory party is a pure and simple breach of contract. Certain revisions of petroleum contracts consist in:

- making all contracts and all new agreements in compliance with the production sharing
agreements applicable to all petroleum agreements between a government and foreign
petroleum company for instance for a period of 25 years, renewable for other 5 years. Cases

of Libya (26/12/2007);

- allowing the State to achieve the greatest benefit from the exploitation of natural resources and an increase from 25% to 50% national share in a state-owned firm of transport of gas across the Line maritime and the increase in National participation in the marketing of gas to other countries;

- creating a unified petroleum and gas producing company which will be in charge of management of petroleum operations, of the execution of projects targeted promotion and the achievement of the highest possible capacity of petroleum and gas reserves by the intensification of development projects of oilfields, the use of mechanisms of the new legislation on the petroleum production sharing agreements;

- reviewing a memorandum on the revision of the process of contracts with the foreign petroleum companies40;

- establishing a memorandum relating on the development of the basic conditions for the signing of contracts for the prospecting and production-sharing of certain marine areas while emphasizing the need for training and reinforcement of national staff capacity during the period of prospecting;

- revising of the technique of contract and production sharing zones and oilfields with foreign companies41 and the drop in the share of the foreign partner and ratify certain provisions and the fundamental conditions stipulated by sharing agreements, so as to achieve an increase in the daily income.

3-Damages caused to the investment by local messes;

When civil war, disorders or any local messes cause substantial damages to investment or the investments of the private foreign investor, this is seen as a breach of petroleum contract. A host country of the investment is supposed to protect the assets of the foreign investor. This failure could be described as a breach of contract.

4-The problems born to the legislation on the environment;

If the petroleum contract included a clause of respect for the environment in the host State of the investment, and that if the private foreign company does not respect its environment, the host country can unilaterally break petroleum contract after several warnings. And also if

40 case of the decision of the Libyan supreme energy jurisdiction, the Libyan High council oil and gas in their meeting held on December 26, 2007 on Western American companies «Oxydental» and Austrian «OMV" for the reduction of their current shares and the implementation of new programmes for the promotion, production and exploration in the areas and oilfields in which these companies operate.

41 case of the aforementioned decision of the High council of Libyan oil and gas company with the "Petro Canada"

the law of the host country relating to the respect of environment change, it should not overly affect the rights of foreign private companies, if not this situation can also lead a legal dispute between the contracting parties. This situation is also one of the causes of the breach of petroleum contracts.

5-Problems of the nationalization or the expropriations of enterprises;

When a state contract or a petroleum contract is signed between a State and a petroleum company, in any clause it may be mentioned that the host state can nationalize or expropriate this alien company. Include such a clause in a petroleum contract would be suicide for a foreign investor. But sometimes it happens that in certain circumstances that the host State nationalizes or expropriates a private foreign company. Such a decision would be considered a violation and at the same time as a breach of contract. Any nationalization or expropriation must be done according to the rules established by international investment law. Such is the case law Kuwait v. Aminoil42. In this case, in 1948, a concession was granted to Aminoil by Kuwait "for the exploration and exploitation of petroleum and natural gas in what has been called Kuwait" Neutral Zone "(the Neutral Zone of Kuwait). In 1961, Kuwait became completely independent, and the concession was amended by a supplementary agreement. In December 1974, OPEC (Organization of Petroleum Exporting Countries) adopted the "Abu Dhabi formula" which effectively increased taxes on oil produced by Aminoil; Aminoil protested against this new law. Negotiations between the parties were unsuccessful, and in 1977, the Kuwait expropriated the assets of Aminoil43

In an international arbitration award, the company Aminoil claimed that the action of OPEC countries, which has caused the expropriation of its assets, was a violation of the stabilization clause contained in the concession agreement or in their petroleum contract. In a nutshell, the expropriation is seen here as a cause of a breach of petroleum contract.

6-Political risks.

A political risk is a risk associated with unanticipated changes (or unexpected) in the law of any country, and which seriously affects an investor (or a petroleum company). This risk is likely to reduce the value of its investment. It is also the result of unexpected government intervention. These kinds of risks are possible or even inevitable when in crisis situations of hydrocarbons in the world, a country becomes one of the world's largest producers of crude oil and natural gas; and also when its petroleum industry is in lack of capital, good management and technology to effectively exploit its vast reserves, the country may be attempted to amend or restructure the entire legal regime for the petroleum industry.

42 Government of Kuwait v. American Independent Oil Company (Aminoil) 66 ILR 518 (Mar. 24, 1982) (Reuter, Sultan, and Fitzmaurice Arb.)

43 See also the discussion of the Aminoil case in the paper written by Fernando R. Tesbn, «State Contracts and Oil Expropriations: The Aminoil Kuwait Arbitration», 24 VA. J.IW'L L. 323 (1984); and Geoffrey Marston, The Aminoil Kuwait Arbitration, 17 J. WORLDT RADLE. 177 (1983).

We must know that these kind of political risks include: the increase of taxes in the framework of import and export, tax increases; the imposition of new regulations; nationalization or expropriation of goods or assets of the investor. In view of this kind of situation caused by government intervention, the options of the investor can be very limited, especially if the country does not have an independent judicial system capable of controlling its powers of legislation. We noticed that in most cases, some governments act so because they know that investors (or the petroleum companies) have no status under the terms of international law, with regard to this kind of situation, to appeal to an international court because the international law traditionally considers these kinds of matter as relating in the jurisdiction and discretion of the host country of the investment concerned. It is important to note that the recent trends in international law suggest that this principle can not be applied if violations of the human rights of the investor are involved44.

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