Negotiation Of Transit Pipeline Agreements: Bargaining in the Shadow of Stability Provisions
Dr. H. Akif KARACA
TABLE OF CONTENTS
ACKNOWLEDGEMENT V
LIST OF MAPS XVI
LIST OF ABBREVIATIONS XVII
ABSTRACT XXI
CHAPTER I INTRODUCTION: HISTORY, CERTAIN DEFINITIONS AND THE CONTEXT OF THE THESIS 1
11 Historical Context of Transportation via Pipelines 1
12 The Transit State: The Weakest Part of the Chain and
Transit Disputes 4
13 Transit Pipeline Agreements and Their Particular Aspects 8
131 Contractual Structure of Transit Pipeline Arrangements 8
132 Taxation 10
133 Transit Tariffs and Fees 13
1331 Conceptual Clarification 13
1332 Imposition Method of Transit Tariffs 14
134 Capacity and Access Rights 18
1341 Concept 18
1342 Access to Transit Pipelines in the
Caspian Region 19
1343 Take or Pay, Ship or Pay Clauses and
Capacity Rights 20
14 Stability: Maintaining the Economic Equilibrium
of the Contract 21 15 Research Questions 25
16 Aims and Significance of the Research 26
17 Methodology 28
18 Structure of the Thesis 29
CHAPTER 2 NEGOTIATION FACTORS IN THE OPERATION
STAGE OF TRANSIT PIPELINE AGREEMENTS 33
21 Introduction 33
22 Bargaining: Theory, Factors and Outcome 33
221 Milestones in Bargaining Theory 33
2211 Nash’s Game Theory 34
2212 Rubinstein’s Alternating Offers Model 36
222 Bargaining Factors and Bargaining Outcome:
Reaching a Deal 37
2221 Discount Rates 37
2222 Risk Aversion 38
2223 Outside Options 39
2224 Inside Options 39
223 Reclassification of Bargaining Factors Based on
Their Scope in the Context of Transit Pipeline
Agreements 40
23 Shift of the Deal Pursuant to the Obsolescing
Bargain Model 41
231 Obsolescing Bargain Concept 41
232 Obsolescing Bargain and Transit Pipelines 44
233 Cycles in the Oil and Gas Industry and Their
Effects on Transit Pipelines: A Contributing
Factor to Obsolescence 45
234 Is Obsolescence Inevitable or Preventable?
Economic, Geopolitical and Legal Constraints 47
24 Transit Pipeline: A Multidimensional Project 50
241 Economic Factors 50
2411 Transit Fees and Tariffs 50
2412 Realizing Profit through Reaching Markets 51
2413 Approach of Transit Country to Foreign
Investment 52
2414 Approach of Pipeline Company to Existing
and Future Investments in Transit Country 52
2415 Equity Participation of Transit Country
in Pipeline Project 53
242 Geopolitical Factors 53
2421 Energy Security Concerns and the
Emergence of the Caspian Region 53
2422 Control of Energy Routes: Pipelines as a
Geostrategic Asset for the Transit State 56
2423 Availability of Alternative Pipelines 58
2424 Relationship between Transit State and
Participating Countries 59
2425 Relationship between Transit State, Home
Governments of Investors and International
Institutions 60
243 Legal Factors 61
2431 The Relationship between Bargaining
and the Law 61
2432 The Energy Charter Treaty Framework
and the Stability Provided by Treaty
Provisions to Contracts 64
24321 The Energy Charter Treaty
Transit Provisions 64
24322 Stability Provided by the
ECT to Transit Contracts 65
2433 Contractual Leverage: The Role of
Contract Clauses 67
24331 Applicable Law Clause 67
24332 Stabilization Clauses, In Particular,
Economic Equilibrium Clauses 73
24333 Renegotiation Clauses, In
Particular, Adaptation Clauses 76
25 Conclusion 78
CHAPTER 3 INTERNATIONAL TREATY FRAMEWORK OF
TRANSIT PIPELINES AND THE STABILITY PROVIDED BY
TREATY: THE ENERGY CHARTER TREATY EXAMPLE 81
31 Introduction 81
32 Regulation of Transit under the Energy Charter Treaty 81
321 Background to the Treaty, Context and the
Concept of Transit 81
322 Access to Transit and Conditions Thereof 84
323 Non-Interference Obligation 86
324 Dispute Settlement Mechanism: Binding Conciliation 87
33 Draft Transit Protocol of the Energy Charter 89
331 Background and Context 89
332 Obstacles to Ratification 90
3321 Access Regulations and Right of First Refusal 90
3322 Imposition of Transit Tariffs 92
3323 Regional Economic Integration Organisation
Clause 93
333 Compliance with Transit and Swap Agreements
and Dispute Settlement under ECT Article 27
(inter-state arbitration) 94
34 Viability of the Transit Provisions of the ECT and the
Draft Transit Protocol 95
341 Inefficiency of Dispute Settlement and Enforcement
Mechanisms 95
342 Russia’s Draft Convention on International Energy
Security and the Energy Charter Conference’s Road
Map for Modernizing the Energy Charter Process 96
343 Arbitrability of Transit Disputes under Article 26
Investor-State Arbitration Mechanism 100
35 Stability Provided by the ECT Investment
Provisions to Transit Contracts 102
351 Umbrella Clause 102
3511 Background, Scope and Function 102
3512 Arbitral Jurisprudence on the Umbrella
Clause 104 3513 Clarifying the Criteria for Application of the
Umbrella Clause 108
3514 Implications of the Umbrella Clause of the
ECT on Transit Pipeline Agreements and on
Transit Disputes 112
352 Fair and Equitable Treatment Standard 115
3521 Concept, Scope and Function 115
3522 The Content of the FET Standard in the
Light of Arbitral Jurisprudence and Doctrine 119
3523 Observance of Contractual Obligations under the
FET Standard and Implications of the ECT FET
Standard for Transit Pipeline Agreements 122
36 Conclusion 125
CHAPTER 4 STABILIZATION CLAUSES: FROM TRADITIONAL
FREEZING CLAUSES TO MODERN ECONOMIC EQUILIBRIUM
CLAUSES 127
41 Introduction 127
42 Theoretical Context 128
421 Sanctity of Contract Principle 128
422 Stabilization Clause as a Tool for Political Risk
Management 130
43 Traditional Stabilization –Freezing- Clauses 131
431 Concept, Scope and Types 131
432 Arbitral Jurisprudence 133
4321 Texaco v Libya Award 133
4322 Liamco v Libya Award 135
4323 Agip v Congo Award 137
4324 Kuwait v Aminoil Award 138
4325 Duke v Peru Award 140
4326 Paushok v Mongolia, Parkerings
v Lithuania and Methanex v US Awards 143
4327 CMS v Argentine Award 144
433 The Legal Effect of Stabilization Clauses 146
4331 The Effect of Arbitral Awards 146
4332 The Doctrinal Views 148
4333 The Effect of Applicable Law 149
44 Economic Equilibrium Clause: A New Hybrid
Tool for an Old Purpose 150
441 The Reasons behind the Evolution from
Freezing to Economic Equilibrium Clauses:
The Negotiation Context 150
442 Concept, Types and Scope 152
4421 The Meaning of Economic Equilibrium 152
4422 Types of Economic Equilibrium Clauses
According to the Method of Restoration in
the Light of Contractual Practice 153
44221 Specified Economic Equilibrium
Clause 153
44222 Non-specified Economic Equilibrium
Clause 154
44223 Negotiated Economic Equilibrium
Clause 155
44224 Hybrid Economic Equilibrium
Clause 156
443 The Legal Effect of Economic Equilibrium Clauses 156
45 Environmental and Human Rights Exemptions 161
46 Conclusion 164
CHAPTER 5 THE QUEST FOR STABILITY FROM THE OTHER
END: APPLICABLE LAW ON CONTRACT CHANGE AND
CONTRACTUAL FORMS OF RENEGOTIATION 165
51 Introduction 165
52 Causes of Renegotiation 166
521 Long-Term Nature of Contract: Incompleteness
and Contingency 166
522 Change in Economic Circumstances and the
Particular Case of Windfall Profits 167
523 Government as a Party to the Contract: The Effect of
Geopolitics, Change in Politics and Perceived Imbalance
of the Contract 170
53 Renegotiation without a Clause 172
531 The Role of Applicable Law 172
5311 Comparative Law on Contract Change 173
53111 English Law 173
53112 US Law 176
53113 French Law 177
53114 German Law 179
53115 Conclusion 180
5312 The Law of Treaties and Contract Change 182
5313 Customary International Law and Soft Law 185
532 The Reality in Practice: Forced Renegotiations
and the Need to Legalize Renegotiation 188
54 Contractual Forms of Renegotiation 190
541 Adaptation Clauses 190
542 Renegotiation Clauses 193
543 Hardship Clauses 194
544 Force Majeure Clauses 197
55 The Procedural Aspects of Renegotiation 200
551 Triggering Events 200
552 The Duty to Negotiate in Good Faith 202
553 Adaptation by the Arbitrator: The Role of the
Contract and the Applicable Law 208
554 The Extent of Contract Change 213
56 Conclusion 214
CHAPTER 6 VIABILITY OF STABILITY PROVISIONS IN THE
SETTLEMENT OF TRANSIT PIPELINE DISPUTES 215
61 Introduction 215
62 Caspian Pipeline Consortium Oil Transit Pipeline 217
621 Geopolitics and Economics of the Pipeline 217
622 Legal Arrangements and Regulation of Transit 219
6221 Capacity Rights 219
6222 Tax Exemptions and Tariffs 220
6223 Adaptation Clause 221
6224 Stabilization Clauses 221
6225 Dispute Settlement and Applicable
Law Clauses 222
6226 Contingency Clause 223
623 Disputes on Capacity Expansion and Adaptation of the
Agreement, and the Settlement of these Disputes 224
624 Assessment 226
63 The Baku-Tbilisi-Ceyhan Oil Transit Pipeline and the
South Caucasus Gas Transit Pipeline 227
631 Geopolitics and Economics of the Pipeline 227
632 Legal Arrangements and Regulation of Transit 230
6321 Transit fees 231
6322 Stabilization Clauses 232
6323 Dispute Settlement and Applicable Law 233
633 Disputes on Operating Fees, Throughput
Guarantees and Adjustment of the Contract
and the Settlement of these Disputes 234
634 Assessment 235
64 The Kirkuk-Ceyhan (Iraq-Turkey) Oil Transit Pipeline 238
641 Economics and Geopolitics of the Pipeline 238
642 Legal Arrangements and Regulation of Transit 240
6421 Tariffs 240
6422 Adaptation Clause 241
6423 Dispute Settlement and Applicable
Law Clauses 241
643 Disputes on Tariffs, on Non-payments by the Off-taker
Transit Country and Their Settlement 241
644 Assessment 242
65 The Russia-Ukraine Gas Transit Pipeline 243
651 Economics and Geopolitics of the Pipeline 243
652 Legal Arrangements and Regulation of Transit 244
653 Disputes on Tariffs, Gas Prices and on Non-payment by the
Off-taker Transit Country and Their Settlement 245
6531 The January 2006 Crisis 245
6532 The January 2009 Crisis 248
654 Assessment 251
66 Conclusion 253
CHAPTER 7 CONCLUSION 255
71 Summary of the Findings 255
72 Recommendations 267
721 Minimizing the Effect of Geopolitics 267
722 Stabilizing the Legal Regime 268
723 Adaptation of Financial Terms 269
724 Authorization of Arbitral Tribunal for
Contract Adaptation 269
725 Creating a Fast, Binding and Enforceable
Dispute Resolution Mechanism 270
BIBLIOGRAPHY 271
LIST OF MAPS
Map of Oil Pipelines, as of October 2007 31
Map of Gas Pipelines, as of October 2007 32
Map of the Energy Charter Treaty Contracting Parties 82
Map of Caspian Region Pipelines 217
Pipelines Passing through Turkey 290
