The Limits of Contractual Stabilization Clauses for Protecting International Oil and Gas Investments Examined Through the Prism of the Sakhalin-2 PSA: Mandatory Law, the Umbrella Clause, and the Fair and Equitable Treatment Standard

Abstract

The events surrounding Gazprom obtaining a controlling stake in the Production Sharing Agreement (PSA)-governed Sakhalin-2 presents a useful historical case study for examining the limits of stabilization clauses for safeguarding transnational oil and gas investments in emerging markets. The Sakhalin-2 PSA’s broad stabilization clause applied to any type of legislative modification that prejudiced the investors’ rights. However, the Russian government was able to circumvent the clause’s promise: it achieved equity participation in the project and a greater share of its gains by invoking environmental protection legislation to re-negotiate the PSA’s fiscal terms. This twist in events makes it worthwhile to reexamine the extent of utility of even the most pro-investor contractual stabilization clauses. The Sakhalin-2 type clause provides a weak legal basis for protection of investors as a contractual matter because under the PSA’s provisions, mandatory law would exclude environmental regulations from the scope of stabilization. Because the actual content of the stabilization clause is capable of being ascertained from other terms of the PSA and must be considered against the background of National law, it also follows that as a bilateral investment treaty (BIT) matter, the breach of an umbrella clause claim would lack basis and the PSA’s stabilization provisions would not constitute a legitimate expectation for a convincing fair and equitable treatment (FET) violation claim, including under the rubric of good faith and detrimental reliance on the clause on its face.

Keywords: umbrella clause, fair and equitable treatement, mandatory law, international oil & gas law, international investment law, production sharing agreement, PSA, Production Sharing Agreement, Russia, Sakhalin-2, Enviornmental Law