Mechanisms for Protection of Petroleum Contracts Against Unilateral Action of Host States

Abstract

Petroleum contracts are subject to unilateral alteration or termination by the host states. Their economic and political sensitive nature along with their long duration adds to their vulnerability. The high sunk cost in such projects which must be reimbursed during the long period of the contract makes it necessary for the foreign investors to devise mechanisms for creating stability and predictability in the contract. This paper reviews the existing protecting mechanisms and their flaws and concludes that renegotiation clauses provide better protection than freezing or economic balancing clauses. It also offers some recommendations for enhancing their functioning in countering unilateral action by the host states.