Complexity and Commercial Disputes in Production Sharing Contracts - Chapter 14 - Leading Practitioners’ Guide to International Oil & Gas Arbitration

Author(s):

James Lloyd Loftis

Robert Reyes Landicho

Francesca Fraser

Page Count:

20 pages

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Published:

August, 2015

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Originally from The Leading Practitioners' Guide to International Oil & Gas Arbitration

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I. INTRODUCTION

The governments of hydrocarbon-producing countries have

utilized a variety of different forms of contracts in their arrangements

with domestic and foreign investors in the exploration and

development of those resources. Featuring prominently in these

arrangements for a considerable period is the Production Sharing

Contract (“PSC”), in which the state retains ownership of the

resources and compensates the investor with a share of the

production, from which it recovers its costs and earns its profit.

The PSC was popularized as an alternative to older concessionstyle

arrangements and, beginning around the mid-1960s, became for

many years a dominant form of agreement. Since that time, many—

perhaps most—hydrocarbon-producing countries have used some

form of production sharing as a tool for securing investment in their

upstream sectors. As a complex, valuable and long-term arrangement

involving a resource that is the subject of often surpassing political

and sovereign concern, the PSC has frequently been the subject of

disputes. This chapter focuses on identifying those disputes which

commonly arise from the most common forms of PSC and gives a

brief overview of the main features of disputes arising from PSCs and

brief case studies illustrating some of them.

Despite the ubiquity of PSCs and the broad range of potential

disputes they represent, the subject matter of this chapter is, in fact,

fairly narrowly circumscribed. The goal herein is simply to identify

the types of commercial disputes that (i) have arisen in PSCs during

the half-century (more or less) that they have been broadly used in

the oil and gas industry, and (ii) have occurred with sufficient

regularity that they merit inclusion on a list of “commonly

encountered disputes” and then to inform the reader of what drives

each type of dispute and how it might be addressed as a matter of

risk management. This chapter is not an attempt to survey all PSC

commercial disputes—that would require a book of its own. It does

however seek to demonstrate the complexity of the subject is such

that the issue of “PSC disputes” merits its own discussion.1

A great deal of the literature and jurisprudence that involves or

touches upon PSCs is excluded by this definition. For example, cases

arising under investment treaties and investment laws, particularly in

the last fifteen years, have involved a number of PSCs. However, the

commercial issues that are generated by the peculiar type of

investment memorialized in a PSC are typically not at the forefront of

the investment treaty claim being pursued. For example, the dispute

at the center of Occidental Exploration & Production Co. v. the Republic of

Ecuador, ICSID Case No. ARB/06/11, involved the cancellation (or

caducidad) of a “Participation Contract”, a form of production sharing

arrangement.2 The dispute, however, had very little to do with thev