Q&A: Energy sector arbitration in Latin America
December 2019 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
December 2019 Issue
FW moderates a discussion on energy sector arbitration in Latin America between Mark W. Friedman at Debevoise & Plimpton LLP and Ricardo A. Ampudia at Shook, Hardy & Bacon LLP.
FW: In your opinion, what is the current appetite for arbitration among energy companies operating in Latin America? Is it the primary method for resolving their disputes?
Ampudia: The current appetite for arbitration is as strong as ever. The arbitration culture in Latin America has exploded, driven largely by a desire to avoid litigation in the courts. Many states have adopted arbitration laws that are similar to the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration, and many public and private energy companies in the region have adopted contracts or legislation that select arbitration as a dispute resolution mechanism. The leading arbitral institutions keep statistics on this, and they tell us that arbitration of energy-related disputes in the region is strong – whether such disputes are pursuant to a contract or an international investment protection treaty. Nothing here is surprising, and in fact growth has been sustained for years.
Friedman: International energy companies operating in Latin America regularly choose arbitration as their primary means of resolving important contractual and investment disputes. Arbitration offers many advantages for these companies, including flexibility, efficiency, confidentiality and access to high quality and expert decision makers. The most significant advantages for these companies, however, may be the neutrality of the forum, the ability to have a significant say over the process and the worldwide enforceability of arbitration awards. Latin America comprises many jurisdictions with different regulatory approaches to arbitration and to the energy sector. However, across many of those jurisdictions the energy sector needs and actively seeks investment of foreign capital, technology and human resources. Acceptance and promotion of arbitration has been an important element of attracting that kind of investment. Many Latin American jurisdictions have adopted arbitration-friendly legal regimes, both international and local arbitral institutions have flourished in Latin America and the practice of arbitration has grown dramatically across the region.
FW: What are the key trends and developments to have impacted Latin American arbitration in the energy sector over the past 12 to 18 months?
Friedman: There have been some important developments in Latin American energy arbitration over the past year or two. First, there have been some large awards in the energy sector, including awards in the Conoco case against Venezuela and the Perenco case against Ecuador. These awards demonstrate the continuing importance of arbitration for energy clients at risk of adverse state action. Second, there have been some strong reaffirmations of the role that arbitration can play with respect to energy investments. For example, Mexico, the world’s 11th largest oil producer, ratified the International Centre for Settlement of Investment Disputes (ICSID) Convention and signed a revised agreement with the US and Canada that preserves typical investment-treaty substantive protections for ‘covered sectors’, including power generation, oil and gas. Third, the wave of corruption scandals across Latin America has impacted many arbitrations in the energy sector, as various parties to arbitrations have pled corruption to avoid otherwise applicable obligations. Finally, increased investment in and attention to renewable energy sources is likely to give rise to more arbitral disputes in this subsector.
Ampudia: There are some recent highlights to keep in mind. For example, in October 2019, nine Latin American countries announced an agreement to reach 70 percent renewable energy use by 2030. Those countries are currently Chile, Colombia, Peru, Ecuador, Costa Rica, Honduras, Guatemala, Haiti and the Dominican Republic. Reportedly, Panama and Brazil are considering joining. In the non-renewable sector, in late 2019, new reserve discoveries were announced in Guyana, and offshore exploration plans were announced in Brazil, Colombia and Suriname. Finally, the region’s political landscape continues to be fluid, as we are seeing today in Chile, Argentina, Ecuador, Mexico and Venezuela, just to name a few. The region’s substantial renewable and non-renewable resources are likely to see effects from these shifting dynamics.
“As the region continues to build stronger institutions, I expect the influence of politics to diminish as a cause of energy-related disputes.”
FW: Could you outline the underlying causes of disputes being seen in the energy sector and the range of issues these generate, such as the impact on supply chains?
Ampudia: Deep down, many disputes are ultimately driven by politics. The region boasts some of the most important energy resources in the world, which attracts state and private investment. But by the same token, energy is particularly susceptible to public scrutiny, changes in the political landscape, and the potential for significant gains in revenue for industry actors. Of course, there are disputes driven by other factors, such as the interpretation of a contract or compliance with laws or regulations. But even those often respond to some underlying political motive. As the region continues to build stronger institutions, I expect the influence of politics to diminish as a cause of energy-related disputes.
Friedman: Many disputes in the energy sector arise out of the kind of circumstances that characterise energy deals and projects. For example, energy-sector projects tend to have a good deal of technical complexity. Contracts to design and build energy infrastructure, such as power or processing plants or offshore oil rigs, or to explore for and produce oil, or to ensure a supply of electricity, typically involve many elements, each of which is at risk of having a problem that can give rise to a dispute. Many energy-sector construction disputes arise out of the allocation of risk for such technical problems when they appear. Additionally, energy projects tend to be relatively high-stakes and long-lived. Many gas pricing disputes derive from having long-term contracts whose pricing may need to be adjusted, based on changed market conditions. Moreover, many energy-related investment disputes in Latin America have been triggered by shifts in a government’s resource nationalism policies. Cycles of privatisations and nationalisations are recurrent in Latin America. States in need of foreign investment make promises and grant rights to investors over natural resources. Upon price increases or during political turmoil, states sometimes modify or revoke those promises and rights through one means or another, including new taxes and royalties, additional performance requirements, demands for new contracts or even outright expropriation.
FW: Have any recent, high-profile energy-related arbitration cases in Latin America caught your attention? What lessons can the sector learn from the outcome of these cases?
Friedman: Latin America is no stranger to high-profile, energy-related arbitrations. The recent ConocoPhillips v. Venezuela decision stands out as the largest compensation awarded by an ICSID tribunal – US$8.1bn – and reaffirms several well-settled principles under international law. Another tribunal recently rendered the third and largest award against Ecuador stemming from Ecuador’s imposition of Law 42, a measure by which the state took 99 percent of oil revenues sold above a low ‘reference price’. While both of these proceedings took many years to conclude, they confirm that investors who pursue claims diligently and with perseverance can secure significant victories through international arbitration.
Ampudia: Without commenting on specific cases and outcomes, there is an observation to be made across the board. Politics in the region, like anywhere else, is ever-shifting, and 2019 has seen this very vividly. Add to that the fact that the region is still reeling from hemisphere-wide corruption scandals that have had effects in practically every industry, including energy. To the extent possible, the industry must be prepared for the very high possibility that an energy deal that happened in one year will not be subject to a completely different political, regulatory or legislative environment four or six years later. To be sure, the opportunities are tremendous, but one must be prepared for anything.
“Once a dispute arises, and even well before an award is issued, knowledge of state assets against which the award may be executed is paramount to devising a successful enforcement strategy.”
FW: What advice would you give to Latin American energy companies in terms of evaluating and preparing strategies when involved in arbitration proceedings? Are there any sector-specific nuances which they should consider?
Ampudia: Never lose sight of international investment protection treaties. Many key energy participants in Latin America are state-owned and foreign, all of which can directly implicate these treaties depending on the circumstances of each case. These treaties can impose important obligations on states and state-owned companies regarding energy projects, such as obligations related to pricing agreements, licensing and regulatory schemes. In an industry that is rapidly changing due to technological advances and recent emphasis on renewables, regulatory schemes struggle to keep up and are bound to be a key subject of many energy disputes in the future.
Friedman: Energy companies should, of course, try to avoid having disputes in the first place, which they often do by achieving clear agreements on legal rights and obligations at the outset, and by good project management. But when arbitration disputes arise, they can take many steps to improve their chances of a satisfactory outcome. Among these steps are, first, getting the right people involved. This is not just selecting the right arbitrators or hiring the right counsel and experts, but also making sure that the company is ready for the case and has good internal leadership who can provide direction, access resources within the company and make timely decisions. Second, parties should develop case strategies that align with the company’s overall strategy for the sector, the region and the project. For example, if a dispute relates to a one-off project that cannot be salvaged, the company might make strategic decisions that differ from those it would make in a case involving a long-term project in which it will continue to have to work with its adversaries in the arbitration. Disputes of this kind may be more suitable for resolution through constructive negotiations or mediation, which experienced arbitration counsel can help facilitate. Finally, companies should master the technical issues and develop a deep understanding of how effectively to relate them to the legal rights and claims. Energy sector disputes often will turn on technical issues. A party that is sophisticated about those issues, and how to frame and present them to the tribunal, will find itself with a distinctive advantage over a party that treats them superficially.
FW: How would you describe the ease of enforcing awards following energy-related arbitration? What steps can parties take to improve their chances on this front?
Friedman: The prevailing party in an energy arbitration typically has strong rights to enforce the award and will often succeed in doing so. The New York and Panama Conventions are widely applicable, and most Latin American states have arbitration laws based on the UNCITRAL Model Law. The content of these instruments is coherent and guarantees a strong legal framework for enforcement. That legal framework means that most awards, in practice, are complied with directly or through a settlement, and that in other cases award creditors can go to courts to attach and execute against the award debtor’s assets. The ease of enforcement against states varies. Failing voluntary payment of the award, creditors have resorted to enforcement proceedings abroad and to diplomatic intervention from their home country. Not infrequently, post-award disputes end with a settlement between the parties. Successful claimants have also been increasingly able to sell awards to third parties, such as litigation funders, although those transactions tend to occur at a significant discount to face value. To aid enforcement, parties can take steps at the time of project or contract origination to put themselves in a better position for any later enforcement efforts if they become necessary. For example, consent to jurisdiction clauses and waivers of sovereign immunity can speed up enforcement. Once a dispute arises, and even well before an award is issued, knowledge of state assets against which the award may be executed is paramount to devising a successful enforcement strategy.
Ampudia: International treaties, such as the New York and ICSID conventions, facilitate the enforcement of arbitral awards including those related to energy disputes. But parties should be careful to research the law in the jurisdiction where enforcement is to be sought. For example, some jurisdictions might read and apply the New York convention in a manner that imposes greater requirements for enforcement than other jurisdictions. Parties should identify the jurisdictions relevant for enforcement as early as possible, ideally during project origination.
FW: What are your predictions on the outlook for energy sector arbitration in Latin America?
Ampudia: Every signal indicates that arbitration in Latin America’s energy sector is here to stay, with new types of disputes and new claimants coming into the scene. Energy companies want to stay out of local courts, the region continues to discover vast energy resources that attract large and foreign industry participants, the region’s energy policy toward renewables is changing rapidly as its legal and regulatory frameworks try to keep up, and key industry participants continue to be closely linked to the national governments and thereby susceptible to political currents. Furthermore, three of Latin America’s largest energy investors – the US, Spain and China – have investment protection treaties containing arbitration provisions with several countries in the region, with a growing number of countries embracing China’s Belt and Road Initiative. In the next decade, we should expect to see not just an increased use of arbitration in the energy sector, but more specifically disputes involving renewables and Chinese parties.
Friedman: Arbitration will continue to grow in Latin America for energy-related disputes. Commercial arbitration is the leading mechanism for international dispute resolution, as evidenced by the continuous increase in Latin American cases filed with the International Chamber of Commerce (ICC) over the last decade. Such a trend has been promoted by states in myriad forms, which include reforms in the hydrocarbons sector allowing private parties to resort to arbitration in Mexico and Peru, through legislation permitting the incorporation of arbitration clauses in public-private partnership contracts in Argentina and Brazil, and through other initiatives. Investment treaty arbitration for energy-related disputes will also continue to increase. Latin America remains the most active region for investment treaty arbitration, and such disputes primarily involve energy sectors, especially in the oil & gas and electricity spaces, which comes as no surprise given the region’s wealth in natural resources. Ultimately, though Brazil has notably shunned the investment treaty system, the system’s overall popularity in the region is supported by the steady adoption of international investment agreements, which dwarf the small number of denounced treaties.
Mark Friedman is a litigation partner and a member Debevoise’s international dispute resolution group. His practice concentrates on international arbitration and litigation, and he also has broad experience in civil and criminal matters. Mr Friedman has represented clients in a wide variety of complex commercial and investor-state disputes across many industry sectors, including energy, mining, finance, insurance, construction, shareholder relationships, joint ventures, media, telecommunications and manufacturing. He can be contacted on +1 (212) 909 6034 or by email: mwfriedman@debevoise.com.
Ricardo A. Ampudia represents clients in a wide variety of high-profile international and cross-border disputes, including investor-state, commercial and state-state arbitration, as well as litigation in matters pertaining to securities, international trade, international human rights and international proceedings before Interpol. His experience includes a wide range of industries, and he has also assisted clients in civil and criminal investigations related to the procurement of public contracts. He can be contacted on +1 (305) 755 8949 or by email: rampudia@shb.com.
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