Arbitration to Resolve Energy Disputes, Grow Investor Confidence
Considered to be one of the final energy frontiers, Africa holds abundant natural resources that offer the ability to drive long-term, sustainable socioeconomic success for the host country and sizable returns for investors. Yet as the sector grows more complex, large-scale projects gain traction and competition amplifies, energy investments can face disputes, especially during COVID-19, which has challenged contract sanctity and the associated structures in place to ensure market stability. Süleyman Boşça, President of the Energy Disputes Arbitration Center (EDAC), speaks to Africa Oil & Power about the role that arbitration centers can play in building back investor confidence in the African energy market.
Restoring Investor Confidence
One of the main challenges for Africa’s energy sector is the establishment of a business-friendly environment, in which investors are assured of regulatory certainty and balanced contractual terms. Despite robust investment opportunities, several African markets present elevated risk profiles, in which a lack of transparency and a high level of government bureaucracy can deter investment. Additionally, ineffective legislation is a challenge in which frontier markets, often with outdated or redundant energy regulations, present a high-risk and difficult-to-navigate environment.
“International cooperation in the field of energy has gained increasing importance,” says Boşça. “However, it is inevitable that some risks and disputes arise due to the various activities within this cooperation. Examples include unclear negotiation and license conditions, uncertain legislation and violation of license rights and contracts. It is therefore essential to minimize possible mutual risks and provide a basis for compromise.”
To ensure the continuous and sustainable flow of investment, energy companies are turning to arbitration methods, pre-established through contractual clauses, as a strategy for resolving both existing and future disputes. In some cases, the use of arbitration in dispute management and contract negotiation acts as an effective risk mitigation and management strategy, in which investor confidence can be restored.
“We strongly believe that the arbitration method in the energy sector is more appropriate for the interests of the parties and will provide a faster and fairer trial,” says Boşça. “We know that foreign investments are vital and beneficial for Africa and so it is necessary to attract such investments. Investors require confidence in the host country due to the capital-intensive nature of energy investments. I believe the presence of EDAC, an effective and reputable arbitration center that specializes in energy disputes, will ensure a serious assurance and establish investor confidence in Africa.”
The Advantages of Arbitration
Arbitration may, in fact, be better suited to energy disputes throughout Africa due to the timely, mutually beneficial and specialized nature of the dispute resolution method. According to Boşça, in state judicial systems, the judgement process is slow and often cannot meet the needs of the dynamic nature of the energy sector. Accordingly, Boşça notes that arbitration centers such as EDAC can ensure more timely processes in which disputes are resolved more effectively and efficiently.
“Significant investments are made each year from both private and public sectors,” Boşça explains. “The fact that disputes that may arise in all of these investment processes can be resolved quickly, fairly and impartially through arbitration will facilitate and encourage further investment.”
Additionally, arbitration utilizes a specialized team to deliver mutually beneficial results. Unlike state judgements, arbitration centers such as EDAC are independent, and therefore, impartial in their position. As energy disputes are often complex in nature, a specialized team that works independently can guarantee a fair and objective evaluation.
“Due to the sui generis structure of the energy sector, where there are large investments that often posit high risks, the participation of expert and impartial arbitrators in the settlement of disputes will ensure investor confidence,” says Boşça. “Expertise is of great importance in building back confidence. The organization of experts through a center will provide both practicality and standard in dispute resolution. EDAC offers a tailored and sophisticated service, specific to the types of disputes that arise out of energy related transactions.”
Cooperation is Key
While arbitration offers distinctadvantages, the method can only be successful through cooperation with host governments. With the majority of cost and risk associated with extracting natural resources left to foreign investors who expect to be compensated, any domestic legislation imposed by the host government can cause disputes between parties. Meanwhile, growing skepticism has emerged among African governments of international arbitration rulings, which can often favor foreign investors and lead to rejections of domestic decisions. By establishing strong relationships with African governments based on fair and mutually beneficial rulings, arbitration centers can have a significant role to play within the African energy sector.
“It is necessary to create legal security and a safe market for all parties,” says Boşça. “It is also important for host countries to make their own legislation suitable for international arbitration. After COVID-19, the appetite for investment, especially in energy, will significantly increase. EDAC is seeking cooperation opportunities with organizations currently operating in the region, as we believe our Center has an important role to play in the realization of investment by ensuring disputes between investors and host countries are resolved in the best way possible.”