GOING GREEN – PART 4 – DISPUTES IN THE ENERGY SECTOR

As we have seen throughout the Going green series, the energy transition is drastically altering the sector. Energy participants must respond to political changes, international investment strategy, and businesses must navigate complex partnerships and joint ventures if they hope to make the transition successfully.

The Going green series has highlighted that energy projects are capital-intensive, with long-life spans and may carry significant risk.  Naturally, some of these projects may encounter disputes between parties.

However, the risks are not whether a project will have a dispute, but rather in how well a party can manage that dispute to get a satisfactory result.

Upstream, downstream and midstream

In the energy sector, consider these four main activities:

1. Production;
2. Transporting;
3. Refining; and
4. Selling at retail.

Each of the identified activities has its own unique series of risks.

Upstream: may involve exploring for oil, gas reservoirs, drilling wells and producing hydrocarbons (exploration and production).  The upstream segment is the largest segment within the industry and may require joint operating agreements between parties.

Downstream: involves refining, processing, distributing and marketing the products produced.

Midstream: involves the transportation of the products in-between the initial production and the end user of the hydrocarbons. It may also refer to the storage of energy – such as hydrogen storage.

The energy transition has seen a rise in the construction of solar, wind and hydrogen infrastructure to facilitate these activities. Consequently, companies will likely need to prepare and effectively manage disputes related to the construction of these energy facilities, specifically with respect to delays, disruption, defective works and costs.

Alternative Dispute Resolution

Alternative Dispute Resolution (ADR) describes a dispute resolution process often identified in the contractual relationship between the parties. There are various ADR processes such as negotiation, mediation, conciliation, expert determination, arbitration, and litigation. ADR can be highly effective for parties wanting to maintain and continue their working relationship.

ADR is commonly provided for in contracts by inclusion of a tiered dispute resolution clause, also referred to as a ‘stepped’ or ‘escalation’ clause. Each step of the clause will attempt to resolve the dispute if it has not already been resolved by the preceding step in the clause (such as a Dispute Notice, followed by an Expert Determination, then Mediation, and ultimately an arbitration or court proceedings).

If drafted correctly, an ADR clause can provide the parties with a commercially cost-effective mechanism for resolving a dispute. Alternatively, if drafted poorly it can leave parties in an endless cycle of meetings and bureaucracy.

Resolving Energy Disputes

Arbitration is the most widely accepted and used dispute resolution process in the energy sector.

Arbitration is a legally binding mechanism that provides flexibility for parties on how they want to resolve their dispute. An arbitrator will ultimately make a determination (an arbitral award) which is enforceable, this is distinct from other dispute resolution processes which are not enforceable, such as mediation.

Typically, parties to an arbitration gain the advantage of:

1. Less formal procedural and evidentiary rules;
2. Confidentiality;
3. Efficient cross border transactions resolution; and
4. Ease of international enforcement.

Typically, for international commercial disputes, arbitration is most useful as it allows for cross border transactions to be dealt with impartially by neutral third-party arbitrators, and under a neutral legal system by the parties’ choice.

Planning for your dispute

When drafting an arbitration clause parties should carefully consider, among other things, the following:

1. Whether the parties want their arbitration to be administered and supervised by an institution or an ad hoc procedure (eg. ICC rules or by separate agreement);
2. The governing law of the main contract (or separate arbitration agreement);
3. The seat (place) of arbitration;
4. The appointment process for arbitrators;
5. The number of arbitrators;
6. Mandatory rules; and
7. Confidentiality.

There are many other considerations in addition to the ones above, such as document production, allocation of fees, qualifications, and enforcement. Engaging an experienced lawyer to assist in identifying these issues will neutralise the risks associated with resolving highly technical disputes.

Lamont Project & Construction Lawyers

Lamont Project & Construction Lawyers can assist you in any energy dispute and can effectively evaluate risk allocation and your rights and obligations in complex agreements.

If you would like to discuss any matters raised in the above article as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact: Peter Lamont or Natalie McNeill

Email: [email protected] or [email protected]

Phone: (07) 3248 8500

Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064