International Energy Law International Energy Arbitration

This paper will examine the role of arbitration in the international energy sector over the past 50 years. Discussion is organized around the five decades leading up to the current state of affairs in the international energy sector. In each section, major arbitrations are identified and tied to the categorical intention of arbitrations of that period. For instance, arbitration awards that occurred during a period of substantive concession agreements -- termed the first generation of concession agreements by Kosheri (n.d.) -- include the Abu Dhabi award of 1951, the Qatar award of 1953, and the Aramco award of 1958.

The next period, which occurred roughly in the 1960s and 1970s, was characterized by arbitration awards that evidenced a climate of confrontation, during which host nations took the position of abstaining from participation in arbitration proceedings. These nations were unilaterally interested in bringing the earlier concession relationships to an end. Included here is the Sapphire decision against Iran in 1963, and the three Libyan cases with BP in October in 1973, Texaco in January in 1977, and Liamco in April of 1977. To add color to this stark listing of categorical arbitrations, the discussion turns briefly to the socio-economic and political environments of these two periods.

The International Energy Sector Landscape: In the 1960

It's a well-know, often recited aphorism: America fell in love with the automobile. In the span of four decades following the mass manufacturing of the automobile, cars became a fixture -- almost a member of the family -- that enabled Americans to move to the suburbs, dictated the extension of a national highway system, and compelled Americans to discover their country by car. Inarguably, World War II played a part in the conversion. Eisenhower saw to it that the nations' roads could adequately transport soldiers and tanks and munitions cross-country to the ports. And soldiers returned home after fighting in World War II having learned new and hard lessons about the importance of access to energy resources. But automobiles weren't put up on blocks along with retired tanks. Americans embraced automobiles and developed a concomitant sense of entitlement with regard to oil. In concert with their new post-war prosperity, Americans' expectations about oil extended to other forms of energy. It no longer made sense to rely solely on the coal, natural gas, and petroleum stores held within the borders of one's own country when there were, after all, supplies all over the world.

The power of seven. During the Cold War, most developed countries regarded other nations suspiciously and tightly guarded their national boundaries and the resources enfolded by those boundaries. There was very little interaction between the major industries within these nations, particularly those of the Seven Sisters oligopoly -- a phrase coined by Italian energy magnate Enrico Mattei to refer to the oil companies that dominated the world's oil production after World War II ("Italy," 1962). Mattei was supposed to dismantle the Italian Petroleum Agency (Agip) following World War II because it was considered to be a Fascist enterprise ("Italy," 1962). Instead, the National Fuel Trust or Ente Nazionale Idrocarburi (ENI) was borne through Mattai's efforts as he reorganized and enlarged the Italian Petroleum Agency ("Italy," 1962).

Little Italy breaks the stronghold. The oligopoly of the Seven Sisters was broken by ENI under Mattei's direction when he arranged an important trade agreement with the Soviet Union and negotiated with the Middle East for other oil concessions ("Italy," 1962). A member of the Italian resistance and decorated partisan fighter, Mattei was not afraid to go counter to the flow, but Mattei was a victim of his own shrewd willingness to break the rules ("Italy," 1962). In 1962, he was killed in a plane crash believed to have been caused by enemies he had made as a result of his foreign dealings ("Italy," 1962). At the time, the "Sisters" included Standard Oil of New Jersey, Standard Oil of New York, Standard Oil of California, Golf Oil, Anglo Persian Oil, Royal Dutch Shell, and Texaco (Vardy, 2007). Mattei's initiative was the harbinger of a new age in international energy.

Energy market silos. Energy markets in this decade were quite stable and existed within separate markets (Walde, 2003). The oil industry was dominated by the a few powerful international companies. Gas extraction was primarily limited to domestic and regional consumption...

Trade of liquefied natural gas (LNG) was just emerging (Walde, 2003). In developing countries without the infrastructure to utilize the natural gas that results from drilling for oil, natural gas was being flared, or burned (Walde, 2003). Countries tended to rely on their own resources for generating electricity. Coal was the predominant source of power generation, followed by limited hydropower plants, and an emerging nuclear power industry, the latter particularly in the U.S. And France (Walde, 2003). Very little interaction between these energy markets occurred -- they tended to function like independent silos. The markets were not integrated within individual countries, and certainly there was even less interest in integration on a global level (Walde, 2003).
Energy policies were domestically-focused. The oil industry was being deregulated and price controls were largely going away. However, the breakup of Standard Oil still held sway over the structure of the international oil industry (Walde, 2003). In most countries, gas supplies and electricity supplies were operated by companies owned by the state as monopolies or through an extensive system of exclusive licensing (Walde, 2003). International trade just wasn't occurring in the electricity industry, and only the smallest degree of cross-border trading was being carried out by the Dutch, who actually piped gas to neighboring countries (Walde, 2003). According to Walde, Germany certainly had a state-owned system, but some other countries, the governments provided protection from competition by structuring the gas and electricity industries like the corporativist models of the 1930s or like cartels (Walde, 2003). If the industry sectors adopted tri-partisan, negotiations for the setting of economic policy would take place between business interests, labor interests, and governmental interests (Slomp, 2000, p. 81).

World War I, the Great Depression, and World War II had swept aside entrepreneurship in the energy sector. The international oil industry stood apart, functioning against the background of a competitive international market, such as it was at the time. But a different orientation to the other forms of energy prevailed. As Walde summarized, "It was seen as natural and inevitable that energy…should be produced, transported, and distributed as a key industrial, social, and political service by the state or under its very close control to consumers, often with civil-service types of organization and attitudes" (Walde, 2003, p. 1).

The International Energy Sector Landscape: In the 1970s

As in the 1960s, the beginning of this decade was characterized by nationally segregated coal, electricity, and nuclear industries, and there were no international energy laws -- because there was no trade, to speak of, to regulate (Walde, 2003). The oil industry provides a single exception to this portrayal since it was shipped internationally (Walde, 2003). During the post-war period, the extraction and shipment of oil occurred far from the oil refining and marketing processes. The energy sector did not function as a standard industry within a typical market. National oil markets often experienced price controls and were otherwise tightly regulated (Walde, 2003). The market lacked essential competition as the state dictated the standards by which imports and exports could take place (Walde, 2003). Tariffs were set by the states, reflecting strong preferences for the national oil companies and expectations that these national companies would meet the states' needs for oil (Walde, 2003). Where limited international trade did occur -- electricity swaps or the importing and exporting of gas -- all terms and conditions of usage were established by the states (Walde, 2003). Investments in energy were coordinated and made by the states, especially with regard to the enormous commitments made in the 1960s to the nuclear industry (Walde, 2003).

This decade was tumultuous for the oil industry, in particular. Two major oil supply crises occurred between 1973 and 1981, along with the Arab-Israeli war in 1973 (Walde, 2003). Oil producing countries reclaimed land that held oil supplies and new state-owned oil companies were established. These new oil companies led the world in oil production and now held the winning hand. Negotiations and renegotiation in this decade were often coerced, which led to a rash of incidences of arbitration. A prominent arbitration took place between Libya and three oil companies (Mills, et al., 2005). The arbitration garnering the most attention occurred in 1971 as a result of Libya's expropriation of BPs holdings as a reaction to U.K. political conduct in the Persian Gulf regarding sovereignty over three islands (Mills, et al., 2005). As previously mentioned, this arbitration took place during a period of confrontation. Kosheri (n.d.) describes a second generation of concession arbitrations that differed from the first generation, in that, this second group took place with the full participation of the host nations. State authorities…