Examining the Relevance of Stabilization Clauses in Petroleum Sharing Agreements Vis-À-Vis State Sovereignty- Lessons for Uganda

Abstract

Stabilization clauses are clauses in private contracts between IOCs and HGs that largely protect the interests of the IOCs in case of changes in the host country's law during the project's life cycle. Stabilization clauses are thought to be a good strategy to encourage investment since they provide a favorable investment environment.

Despite the necessity and importance of stabilization clauses, as shown above, these clauses are said to be in conflict with the principles of State sovereignty in general, which allows a particular State to decide on how to manage its internal affairs, and in particular, the principle of state sovereignty over natural resources (PSNR), which allows the host state to explore and exploit its natural resources without interference.

In the case of Texaco v. Libya,1 it was held that stabilization clauses limit the host State’s sovereignty because the HG committed to waiving its sovereignty. Further in the case of LETCO v. Liberia (ICSID),2 the tribunal held that the major rationale of stabilization clauses is to protect against arbitrary actions of HGs and can therefore not totally impair the sovereign power of states.

The Doctrine of State sovereignty enables States to exclusively control among others, their natural resources. These clauses, however, inhibit exercising State sovereignty by limiting HGs from exercising their sovereign powers such as enacting or amending the national laws. Thus, this research undertakes to examine the relevance of stabilization clauses in petroleum sharing agreements vis-à-vis State sovereignty with an aim of providing lessons for emerging oil and gas economies to developing countries such as Uganda.