Problems down the Pipeline
On how pipeline operators can take legal action
against States responsible for the interruption of
oil or gas flows through their territory
LLM Thesis International and European Law: Public International Law
Investment Law
Marit van Zandvoort (10895051) Supervisor: Prof. Dr. S.W. Schill Date of submission: 29 May 2017
Table of Contents
Introduction 3
Definitions 6
Outline and Methodology 8
Example case 10
Chapter 1 – Freedom of Transit as a Principle of Public International Law 12
1.1 Freedom of Transit in Public International Law: Treaties on Transit 12
1.1.1 Earliest Conventions: 1921 Barcelona Convention and 1965 New York
Convention 12
1.1.2 United Nations Convention on the Law of the Sea 13
1.1.3 General Agreement on Tariffs and Trade (1994) 14
1.1.4 The Energy Charter Treaty 16
1.2 Reflections 17
1.3 The principle of free and uninterrupted transit – extension to pipeline operators? 18
1.4 Reflections 21
Chapter 2 – Freedom of Transit: Commitment in Agreements or Bilateral Investment
Treaty 23
2.1 Host Government Agreements 23
2.2 Bilateral Investment Treaties and investment protection provisions 26
2.2.1 Umbrella clause 26
2.2.2 Fair and Equitable Treatment, Legitimate Expectations 27
2.2.3 Non-discrimination 29
2.2.4 Full protection and security 29
2.2.5 Expropriation 30
2.3 Two scenarios 31
2.4 Reflections 35
Chapter 3 – Drafting pipeline agreements in an integrated manner 37
3.1 Intergovernmental Agreements 37
3.2 Strengthening the pipeline operators’ position through dovetailing the
Intergovernmental Agreement and the Host Government Agreements 39
3.3 Enforcing transit obligations: procedural rights for pipeline operators 42
3.4 Reflections 44
Conclusion 46
Bibliography 49
Introduction
On the first of January 2009, Russian gas company Gazprom decreased its gas transports to Ukraine, with the aim of entirely cutting off gas transports to Ukraine while maintaining the flow for gas destined for the European market.1 Following subsequent allegations made by
Gazprom that Ukrainian State company Naftogaz was “stealing” gas meant for the European market, Gazprom further reduced and then entirely cut off the flow by the 7th of January.
Certain parts of Europe, especially those located in the East, severely suffered from the cut off, exposing the continent’s vulnerability to disruptions in its gas supplies.2 Ukraine is a
so-called transit State for Russian gas supplies to Europe. Energy transit is the process that describes the flow of energy in some form, originating in one State, passing though the territory of one or multiple other States and destined for one or more receiving States.3
Transit of oil and gas generally takes place either by tankers or through pipelines. A pipeline is a connected series of pipes with pumping installations and control devices for the
conveyance of liquids, gasses, or materials.4 A pipeline is subject to the territorial sovereignty
of the State through which it runs.5 One can distinguish between cross-border and transit
pipelines: while a cross-border pipeline merely crosses the border between the State of origin and the State of destination, a transit pipeline runs from the State of origin through the territory of another State to the State of destination. 6
The 2009 gas dispute was not the first dispute between Russia and a Ukraine which caused disruptions to European energy supplies. Earlier, in 2006, supplies to Europe coming from Russia through Ukraine witnessed shortfalls.7 Transit through Ukraine, and the terms and
conditions on which it occurs, cannot be seen separate from the political relationship between the respective governments of the Russian Federation and Ukraine. Gas price negotiations for example between Gazprom and Naftogaz are closely overseen by the respective
governments.8 Those who control the oil or gas supplies have a strong bargaining position, as
1 S. Pirani, J. Stern and K. Yafimava, ‘The Russo-Ukrainian Gas Dispute of 2009: a comprehensive assessment’ (Oxford Institute for Energy Studies, 2009).
2 ‘The Russian-Ukrainian Gas Dispute: Europe’s vulnerability exposed – again’ (2009) 15 The International
Institute for Strategic Studies: Strategic Comments.
3 Y. Selivanova, ‘The WTO Agreements and Energy’ in Talus (ed.), Research Handbook on International Energy
Law, (Edward Elgar 2014) 289.
4 R. Lagoni, ‘Pipelines’ (2011) MPEPIL, sub A(1). 5 Ibid, sub B(2).
6 Energy Charter Treaty Secretariat, ‘Intergovernmental Agreements and Host Government Agreements on Oil and Gas Pipelines: A Comparison’ (2015), 18.
7 J. Stern, ‘The Russian-Ukrainian Gas Crisis of January 2006’ (OUP 2006). 8 Stern (n. 7), 13.
they can use their power over supplies as leverage to put pressure on the country that is receiving the oil or gas9 – i.e. to influence negotiations on the price of oil or gas units. But
there is also a possibility that the supplier pushes a political agenda. In the aftermath of the 2006 crisis, some of the European press suggested that the shut-off was an attempt of President Putin to unsettle the Ukrainian leadership.10 Some went even so far to speak about
“blackmailing”.11 The 2009 shut-off was likewise called “a confrontational move” by Russia
aimed at Ukraine.12
In January 2009, several affected EU Member States seemed unwilling or unable to address either Ukraine or Russia or the respective state-owned companies. Referring to the 2009 gas crisis, Azaria remarks: “Despite widespread effects of interruptions of transit of energy via pipelines in violation of transit obligations, affected states are often silent about international law and international responsibility.”13 The EU’s Member States remain highly dependent on
Russian oil and gas.14 Trust in the existing routes and their stability has however been
severely damaged.15 In response to the 2009 crisis, European countries have looked for
alternative transit routes, in which respect a vital element is the guarantee of uninterrupted transit of oil or gas flows. One such alternative route was the Nabucco pipeline project. An interesting aspect of the Nabucco project (the entirety of the construction and operation of the pipeline and all contractual engagements made in light thereof) was that the State Parties agreed that the pipeline would be constructed and operated by subsidiaries of Nabucco GmbH, an Austrian company established solely for this project. Nabucco GmbH’s
stakeholders were a mix of public and private parties from States participating in the project through whose territory the pipeline would run (Austria, Hungary, Romania and Turkey) and Germany.
9 ‘Ukraine’s talks with Russia fail to resolve Gas Dispute’, New York Times (Moscow, 28 December 2005). 10 After the Orange Revolution in 2004, Kiev adopted a more pro-European position in its foreign policy. Shortly thereafter, Gazprom started to demand higher gas prices. See M. Siddi, ‘The EU’s gas relationship with Russia: solving current disputes and strengthening energy security’ (2016) 15 Asia Eur J, 107, 109.
11 Stern (n. 7), 11, with reference to ‘Press shivers from gas woes’ BBC (3 January 2006).
12 A. Kramer, ‘Russia Cuts Off Gas Deliveries to Ukraine’ New York Times (Moscow, 1 January 2009) 13 D. Azaria, Treaties on Transit of Energy via Pipelines and Countermeasures (OUP 2015), 4.
14 In 2014, the EU Member States’ total crude oil imports originated for 29,0% from Russia; as well as 37,5% of the total gas imports, making Russia the main supplier in all three categories. Source: Eurostat, accessed lastly on May 2017: http://ec.europa.eu/eurostat/statistics-explained/index.php/Energy_production_and_imports. These figures should be seen in light of the overall energy consumption of the EU; more than half of the energy is imported. See Siddi (n. 10), 108.
15 J. Fuchs, ‘Kooperative Erdgassicherheit – Energietransit im Völkerrecht unter besonderer Berücksichtigung des Nabucco-Abkommens vom 13.7.2009’ (2011) 71 ZaöRV 103, 110.
The participating States agreed to guarantee that transit was not to be interrupted, but also to respect the ownership and operation rights of the pipeline which were conferred entirely upon the subsidiaries of Nabucco GmbH. A distinguishing feature of the project is that it excludes the involvement of States or state-owned companies in transporting natural oil or gas and operating the corresponding pipelines.16 Describing this construction, Fuchs notes that transit
rights are therefore maintained “unabhängig von politischen (Macht-) Interessen.”17 While
the ownership and operational rights of the pipeline are allocated to private companies, those companies’ positions “wird in ein völkerrechtliches Regime eingebettet, welche staatliche Einflussnahmen weitgehend unterbindet.”18 Leal-Arcas notes that the Nabucco Pipeline was
meant to be “a purely commercial project”, adding that the creation of Nabucco GmbH “may have been influenced by the parties’ wish to maintain the project’s neutrality and detachment from any affiliations with specific states and companies.”19
Unfortunately, as the Nabucco pipeline was never realized, it has not been tested whether this concept of a privately owned and operated pipeline would indeed have created the desired distance between operation of the pipeline and States’ political interests. Is a company detached from the political sphere of the involved States indeed better positioned to prevent or act upon interruptions in oil or gas flows through cross-border pipelines than affected States or state-owned companies? An important caveat to this question is that, while transit interruptions may occur in State A, parties (States and oil or gas companies) situated “down the pipeline” can be affected:
16 I. Grigoriadis, ‘The Nabucco Project: Implications for the EU Strategic Energy Review’, ELIAMEP 62, 63. 17 Fuchs (n. 15) 120.
18 Fuchs (n. 15), 123.
19 R. Leal-Arcas, C. Grasso, J. Rios, Energy Security, Trade and the EU: Regional and International
Perspectives, (Edward Elgar 2016) 171.
A
B
C
Company L is a state-owned company: it is owned by and registered in State A. Company L, on instruction of the government of A, shuts down the oil or gas supplies meant for States B and C. Pipeline operators M and N are private companies, not owned by States B or C respectively. Due to the interruption, M and N can no longer operate and fail to meet their supply commitments to purchasers. They also suffer reputational damage in the sense that they are perceived as less reliable suppliers. This may in the future affect their ability to negotiate prices for oil or gas with purchasers. Finally, they incur costs if the flows are reassumed and the pipeline needs to be made “operative” again.
It was noted earlier20 that States may be unwilling to address other States, or state-owned or
controlled companies to whom the interruption is attributable, to avoid political tension.21
Companies, such as pipeline operators, are arguably better positioned to address the interrupting actor because their interests are commercial instead of political. But the prerequisite condition is that they have the means – that is, the grounds and standing to protect their position– to do so. This thesis will examine if and how pipeline operators like M or N can address a State which fails to protect and guarantee the uninterrupted flow of oil or gas from its territory to other States. The research question this thesis aims to answer is therefore:
“Does a pipeline operator have a remedy against a State, interrupting a gas or oil flow through a transit pipeline, when it is not operating in that specific State, has no direct or indirect investment in the territory of that State and does not maintain any contractual relations with that State?”
Definitions
In this thesis, I will examine the possibility for foreign pipeline operators, established in a country other than the Host State in which they operate, to address an interruption caused by a State or state-owned or -controlled company, of oil or gas flows through transit pipelines,
20 Azaria (n. 13).
21 Dow et al. remark that cross-border pipeline problems “rarely ended up in court and there have not been any instances when any legal problems been solved by arbitration or otherwise other than dialogue between the parties.” S. Dow, I.A. Siddiky and Y.K. Ahmmad, ‘Cross-border oil and gas pipelines and cross-border waterways: a comparison between two legal regimes’ (2013) 6 JWELB 107, 123.
which causes that operator to suffer damages. I will here briefly discuss the meaning of these terms as they will be used throughout this thesis.
In the introduction, the terms “pipeline”, “energy transit” and “transit” have already been defined. It is important to note at the outset that a transit pipeline consists of different parts which run through the territory of several States. The State can fulfil three different positions in the transit process. It is either the State of origin, where the oil or gas was explored and exploited; a transit State, through which the oil or gas passes; or it is a State of destination, where the oil or gas remains for production or consumption purposes. Each part of the pipeline is normally subject to the jurisdiction of the State through which it runs; the Host
State. The term Host State refers in this thesis to the State on whose territory the pipeline
operator conducts its activities; that State is the “host” to (a part of) the pipeline and its operator. The actual operation of the pipeline, its maintenance and sometimes its construction is done by the pipeline operator. Pipeline operators are active in the so-called midstream sector, described as “the intermediate phase of crude oil and gas transportation, that takes place through pipelines or in ships.”22 The exploration and production (upstream) phase and
refining (downstream) phase will not be discussed in this thesis.
A transit interruption is the definition used in this thesis to describe the situation when the oil or gas flows from or through a State are decreased or entirely halted. The term interrupting
actor will in this thesis be used for the government of either a transit State or a State of origin
or a state-owned or –controlled company from one such State. If the interrupting actor is a company, the exercise of control by the government in case of interruption will be assumed to be sufficiently strong to justify attribution of the interruption to the State.23
In the agreement underlying the Nabucco project, the States Parties together agreed to confer the ownership and operation rights of the pipeline to local Nabucco GmbH subsidiaries; these
22 C.O. Garcia-Castrillon, ‘Reflections on the law applicable to international oil contracts’ (2013) 6 Journal of
World Energy Law and Business 129, 130.
23 Chapter II of the International Law Commission’s Draft Articles on Responsibility of States for Internationally Wrongful Acts (“ARSIWA”) lays down principles to determine when conduct consisting of an act or omission or a
series of acts or omissions is to be considered as the conduct of the State.
Although the ARSIWA are not legally binding, they are generally considered customary international law and of great authority. See for example M. Paparinskis, ‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL, 618.
are pipeline operators.24 This thesis will focus on pipeline operators active in the midstream
sector, and how they can protect their right to operate the pipeline, transport oil or gas and receive revenues. Furthermore, the pipeline operators referred to in this thesis are not Host state-owned companies (unless otherwise indicated), meaning that the Host State is not the owner of nor sole shareholder in the pipeline operating company. The Host State and pipeline operator are separate entities with potentially conflicting interests. In the oil and gas sector, companies often work together in specially created vehicles owned by a consortium: “an agreement, combination, or group (as of companies) formed to undertake an enterprise beyond the resources of any one member.”25 The consortium can be a mix of public and
private stakeholders with different nationalities.
Outline and Methodology
The idea behind the Nabucco project was that, by taking the transport of gas out of the hands of States and by putting it into the hands of private companies, this would arguably separate the pipeline’s operation from any of the political interests of the States involved. As
companies operating the pipeline have commercial rather than political interests, they are more likely to be willing to push for a resumption of the flow in comparison to States in case of interruptions.26 To address transit interruptions, it is required that those companies are
actually able to put States under pressure or to force them to ensure transit is not interrupted or, in case of an interruption, swiftly resumed. In the 2009 Russia-Ukraine gas dispute, solving the dispute through diplomatic negotiations proved inefficient as it could not prevent a cut-off.27 The question is what alternative means there are to address interruptions that are
available to companies. This thesis will examine the possibilities for pipeline operators to pressure States into ensuring free and uninterrupted transit flows not through political
24 According to the Exemption Decisions by the Bulgarian, Romanian and Hungarian governments on the Nabucco pipeline, “Nabucco International [GmbH] is the owner and financing company of five national Nabucco companies, which will be responsible for the operation and maintenance of the Nabucco pipeline.”
25 Definition as given by Merriam Webster Dictionary. For example: the Baku-Tbilisi-Ceyhan pipeline is owned by the South Caucasus Pipeline Company, a consortium. The shares are held by BP, SOCAR, Lukoil, Petronas, TPAO and Naftiran Intertrade.
26 Joint UNDP/World Bank Energy Sector Management Assistance Programme, ‘Cross-Border Oil and Gas Pipelines: Problems and Prospects’ (2003), §4.13-14.
27 See D. Gow, ‘Russia-Ukraine gas crisis intensifies as all European supplies are cut off’ The Guardian (7 January 2009). Dow et al. (n. 21, 124-125) add that neither party opted for mediation by the ECT Secretariat or resolution through the WTO Dispute Settlement Mechanism even though those options were open to them. See also D. Azaria, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’ (2009) 27 JENRL 559, 583.
pressure, but through litigation.28 To test whether independent pipeline operators are indeed
better suited to act on interruptions, this thesis will examine different routes to pursue claims against the State that fails to ensure uninterrupted transit through its territory.
The first potential claim examined in this thesis is one for a breach of public international law. An interruption could amount to a breach of public international law when there is an obligation that prohibits States to interfere with the oil or gas flows – a principle to respect free and uninterrupted transit. Chapter 1 will examine the existence of such a principle, its status and scope. Most importantly, Chapter 1 will look at if pipeline operators are entitled to free and uninterrupted transit, and if they can enforce such a right against a State.
Apart from potential rights (and claims) for pipeline operators based on a general principle of free and uninterrupted transit, such rights may also follow from specific commitments made by the State. Chapter 2 will look at two types of such commitments, and potential claims pursuant to a breach thereof. It will look at so-called “Host Government Agreements”, contracts characteristic to the oil and gas sector, concluded between the government of the Host State and a company active on its territory – such as pipeline operators. The second part looks at commitments made by way of a bilateral investment treaty (“BIT”). The pipeline operator is then considered an investor in the Host State, and should be treated according to certain norms and standards as laid down in the BIT. Throughout Chapter 2, the example case of Ampal v Egypt (see below) will illustrate how claims on these two grounds can be construed. Chapter 2 will finally also highlight the problematic aspects to these claims.
Chapters 1 and 2 identify the bottlenecks for pipeline operators relying either on a general principle of public international law, a Host Government Agreement or an investment protection provision. Chapter 3 examines whether these bottlenecks can be overcome by integrating both inter-state (treaty) commitments and Host Government Agreements in a unified legal framework. Chapter 3 examines if the approach taken in the Nabucco project would have been effective in ensuring that Nabucco GmbH and its subsidiaries have standing when it comes to addressing interruptions. The Chapter first describes the “Intergovernmental Agreements”: treaties concluded between States that govern their mutual obligations in relation to a certain pipeline that runs through their territories. It then continues to discuss
how the agreements with operators can be made an integral part of such Intergovernmental Agreements, and how this in turn may open the door for pipeline operators to address not just its Host State, but any of the involved States interfering with the transit of oil or gas.
Example case
The issues set out above are rather abstract and complex and it is therefore useful to illustrate them by way of an example case. Throughout this thesis, I will refer to the Ampal case to clarify how transit interruptions can cause damages to pipeline operators and how those operators can turn to States for redress. The Ampal case is illustrative of how government and/or (State) company conduct can severely affect gas or oil flows. In addition, it shows how the pipeline operator may suffer damages due to interruptions of the flow. Such damages may consist of loss of revenue for the operator or damages to reputation (as a stable supplier) and the relationship with customers. Operators may suffer outage and reconnection costs.29
On 23 May 2012, Ampal-American Israel Corporation (“Ampal”) filed a Notice of Arbitration at the International Center for Settlement of Investment Disputes (“ICSID”) against Egypt. 30 US company Ampal invested in the East Mediterranean Gas Company SAE
(“EMG”), an Egyptian company. EMG concluded, in 2005, an agreement with two Egyptian state-owned companies, the Egyptian General Petroleum Corporation (“EGPC”) and the Egyptian Natural Gas Holding Company (“EGAS”), 31 to transport gas from Egypt to Israel.
In its claim assessed by the tribunal established under the auspices ICSID, Ampal alleged that Egypt breached its obligations under the US-Egypt BIT on multiple occasions. Those alleged breaches include a failure by the Egyptian government to provide the pipeline protection and security against military attacks during the Arab Spring.32
29 UNDP/World Bank, (n. 26), 6. See also S. Sinclair, ‘World Bank Guarantees for Oil and Gas Projects’ (1998) 157 World Bank Public Policy for the Private Sector Note, 3. Reconnection costs for gas are generally higher than for oil – Dow (n. 21), 109.
30 The Notice of Arbitration is not public, but Investment Arbitration Reporter has reported on the case: ‘ICSID Tribunals constituted in gas, mining and electricity cases against Indonesia, Slovakia, Egypt and Peru’ (J. Hepburn, 22 October 2012).
31 Ampal-American Israel Corp., EGI-Fund (08-10) Investors LLC v EGI-Series Investment LLC and BSS-EMG
Investors LLC v Arab Republic of Egypt, ICSID Case No. ARB/12/11 (hereafter: “Ampal v Egypt” – this will be
the Decision on Liability, unless otherwise specified), §27 and §32.
32 J. Hepburn, ‘In new Egypt ruling, disproportionate contract termination and failure to prevent pipeline attacks underpin Fortier-chaired tribunal’s findings of BIT breach’ Investment Arbitration Reporter (28 February 2017).
EMG was established with the main purpose of purchasing gas from Egypt and transporting that gas to Israel. EMG purchases its gas from EGPC and transports it to customers in Israel.33 EMG also attracted the funding for the construction of the pipeline, relying on
commitments made by both the Egyptian government and the Israeli sellers.34 EMG
contracted both with Egyptian suppliers and with several Israeli purchasers. The ICSID tribunal has found in its recent decision that EGPC’s and EGAS’s conduct could be attributed to Egypt. The tribunal made that assessment based on the principles for attribution as
formulated in the ARSIWA. Finding that both companies acted “at all times under State direction and control in the sense of ILC Article 8”,35 their acts were “clearly attributable to
the Egyptian State”.36
According to Ampal, the Egyptian government has taken certain actions that would have “destroyed” Ampal’s investment – that is, the value of its shares in EMG. Amongst other things, Ampal alleges that Egypt has breached its supply obligations. This has in turn led EMG to suffer from “delivery irregularities, which impacted its ability to reimburse its loan instalments to NBE and to supply full contractual volumes to its customers.”37 Ampal also
blames the Egyptian government for failing to protect the pipeline from attacks during the Arab Spring in 2011, and for failing to make the necessary reparations in the months that followed. This has led the supply to come to a halt, and EMG “never received its full contractual volumes.”38 These delivery failures have “deprived EMG of its sole source of
revenue” and “strained EMG’s relationships with its customers.”39 For Ampal, the losses
were suffered indirectly, as it was merely a shareholder in the operating company. Ampal was as such “only seeking in damages the diminution of the value of their shares as a result of the damages sustained by EMG.”40
33Ampal v Egypt, §30-31. 34 Ibid, §31 and §33. 35 Ibid, §140. 36 Ibid, §140. 37 Ibid, §54. 38 Ibid, §57. 39 Ibid, §58. 40 Ampal v Egypt, §268.
Chapter 1 – Freedom of Transit as a Principle of Public International Law
To assess whether pipeline operators can address transit interruptions caused by States, a first step examines whether States have any general rights or obligations not to interrupt the transport of oil or gas, independent from specific agreements. This chapter will analyze whether States are under any such obligation of public international law to respect and not interfere with transit flows. This obligation will be referred to throughout the chapter as the “principle of free and non-interrupted transit”. Because transit takes place through the territory of sovereign States, those who enjoy the benefits of the principle of free transit cannot do so without limitations.41 To assess the scope of the principle, exceptions to this
principle will be highlighted. After examining whether States are indeed bound to abide by such a principle, it is crucial to find out to whom States owe such obligations – just to other States, or also to non-State entities? This chapter aims to answer the question whether pipeline operators derive any rights from an international law principle of free and non-uninterrupted transit.
1.1 Freedom of Transit in Public International Law: Treaties on Transit
1.1.1 Earliest Conventions: 1921 Barcelona Convention and 1965 New York Convention
In 1921, the Barcelona Convention on Freedom of Transit42 was concluded. It served as the
practical implementation of article 23(e) of the Covenant of what was then still the League of Nations,43 which determined that its members should “make provision to secure and maintain
freedom of communications and of transit (…).” The substantial obligations of the
Convention can be found in its Annex, the Statute on Freedom of Transit. Article 2 creates a positive obligation to States to “facilitate” free transit by rail and over waterways. While the Barcelona Convention only applies to transport over rail- and waterways,44 it has been used
as a starting point for later treaties on the freedom of transit. Therefore, its impact should not be underestimated.45 Some of the Convention’s principles arguably acquired the status of
customary international law.46
41 UNCTAD, ‘Freedom of Transit and Regional Transit Arrangements’ (2011).
42 Barcelona Convention and Statute on Freedom of Transit, signed in Barcelona on 20 April 1921, entered into force 31 October 1922, League of Nations Treaty Series, Vol. 7, 12-33.
43 Azaria (n. 13), 52.
44 T. Einhorn, ‘Transit of Goods over Foreign Territory’ (2014) MPEPIL §11.
45 Azaria (n. 13), 53. See also the addendum to article V of the GATT, II (A), on the scope of article V.
46 I.A. Siddiky, ‘The international legal instruments for cross-border pipelines’ in Talus (ed.), Research Handbook
The importance of freedom of transit is particularly poignant for landlocked countries and can even be considered “an essential condition for their integration in the international economy.”47 The wish of landlocked States to guarantee easy access to the sea led in 1965 to
the adoption of the New York Convention on Transit Trade of Landlocked States.48 The
Convention determines that “freedom of transit shall be granted for traffic in transit and means of transport.”49 States can agree that those “means of transport” include pipelines.50
The impact of the New York Convention on the principle of freedom of transit has remained limited, due to the small number of ratifying States. The 1965 NY Convention is however important because it served as the basis for what later became part X of the United Nations Convention on the Law of the Sea51 (“UNCLOS”).
1.1.2 United Nations Convention on the Law of the Sea52
UNCLOS contains, in part X, provisions on the principle of freedom of transit applicable in the context of landlocked States. Article 125 paragraph 1 determines that “landlocked States shall enjoy freedom of transit through the territory of transit States by all means of transport.” The use of the word “shall” indicates that under UNCLOS, the landlocked States have
enforceable rights to transit through the territory of transit (mostly coastal) States.53 Article
125 paragraph 2 determines that “the terms and modalities for exercising freedom of transit shall be agreed” between the involved States “by bilateral, regional or subregional
agreement.” Einhorn notes that the need for such agreement “does not call into question the existence of the right itself.”54 In their agreement on the transit modalities, States can also
agree to extend the right to include transit through pipelines.55 The principle of freedom of
transit under UNCLOS can thus be extended to pipeline transit, but this requires the States’ consent.
47 UNCTAD (n. 41).
48 New York Convention on Transit Trade of Land-locked States (8 July 1965) 597 UNTS, 3 (“1965 NY
Convention”).
49 Article 2(1).
50 Einhorn (n. 44). See also article 1(d)(iii) of the Convention.
51 United Nations Conventions on the Law of the Sea (10 December 1982, entered into force 16 November 1994) 1833 UNTS 3.
52 Any provisions in UNCLOS referring to maritime pipelines will not be discussed here as that would go beyond the scope of this thesis.
53 Azaria (n. 13), 57. 54 Einhorn (n. 44), §26.
55 Azaria (n. 13), 12. The definition of all means of transport as given by article 124 paragraph 1 sub (d) does not mention pipelines as a means of transport.
The right to freedom of transit for landlocked States is not unlimited; transit States may take all necessary measures to ensure their legitimate interests are not infringed upon. While some authors argue that the right of free transit for landlocked States it not considered an
established principle under public international law as it clashes with the sovereignty of States over their territory, others have defended that a right of free transit does exist and can be claimed by landlocked States.56 The conclusion of an agreement on the exact terms and
conditions however seems, in line with article 125(2), necessary for effective implementation of the principle. It could be argued that freedom of transit does not apply instantly, but is conditional upon agreement on the modalities between the involved parties.
1.1.3 General Agreement on Tariffs and Trade (1994)
Article V of the General Agreement on Tariffs and Trade (“GATT”) 199457 – a multilateral
agreement within the WTO framework - is titled “Freedom of Transit”. The following
provisions of article V GATT are most relevant in light of the principle of freedom of transit:
2. There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties (…).
3. […] Such traffic coming from or going to the territory of other contracting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, (…).
Article V reflects to a large extent the freedom of transit principle as included in the Barcelona Convention, but is its scope is broader as it includes other routes of transport. GATT V does not make explicit reference to transit through pipelines. Considering the principle of sovereignty over natural resources, energy exporting countries particularly have been reluctant to incorporate specific energy provisions in the GATT/WTO framework.58 The
language of the provision however does not oppose a reading that includes transport through
56 K. Uprety, ‘The Transit Regime for Landlocked States’ (The World Bank Law, Justice and Development Series 2006), 29. See also Einhorn (n. 44).
57 General Agreement on Tariffs and Trade 1994 (15 April 1994) Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 UNTS 187.
pipelines.59 Pogoretskyy concludes similarly.60 In a communication to the WTO in 2002, the
European Communities remarked that “in addition to ‘classic’ modes of transit such as air, road, rail or boat, (…) the carriage e.g. of oil and gas and other products via pipelines or other means may also fall within the scope of transit.”61 Siddiky maintains the view that the role of
negotiations and inter-state agreements can be considered vital in establishing transit relations, making the role of GATT arguably a subsidiary one.62
V GATT places States under a positive obligation to ensure the above-mentioned provisions are met. It is possible to distinguish between obligations of result (to achieve a particular result regardless of how this is done) and of conduct (to behave in a certain manner without having to reach a certain result).63 Azaria remarks that the provisions of article V “establish
obligations of result” and that “WTO members incur responsibility when the result is not achieved.” 64 Paragraph 3 in particular recognizes an obligation not to delay or restrict transit.
This obligation is qualified by use of the word “unnecessary”. Necessary interruptions can be justified, although what exactly should be understood by necessary will depend on the
context of the case. A link may also be sought with other GATT articles or guidelines and models developed by related agencies.65
Article XX GATT on general exceptions allows the State to take measures to protect inter alia human, animal or plant life or health. Security exceptions are also allowed, for example measures “taken in time of war or other emergency in international relations.”66 Finally, the
freedom of transit needs to be guaranteed on the “most convenient” routes only. A GATT member is thus not required to ensure freedom of transit on any route the operator wants to use.67
59 Azaria (n. 13, chapter 1, paragraph 5.2) argues that oil and gas are indeed included, as the contrary does not follow from the travaux préparatoires or any subsequent State practice. In addition, she argues that the term “routes” (§2) includes fixed infrastructures such as pipelines. She refers to Case 266/81 SIOT v. Ministero delle
Finanze (1983) ECR-731, 28. See also Azaria 2009 (n. 27), 565-66.
60 V. Pogoretskyy, ‘Freedom of Transit and the Principles of Effective Right and Economic Cooperation’ (2013) 16 JIEL, 322.
61 WTO Council for Trade in Goods, Communication from the European Communities, 30 September 2002, G/C/W/422, 5.
62 See also Siddiky (n. 46), 324. 63 Azaria (n. 13), 67.
64 Azaria (n. 13), 65. 65 Pogoretskyy (n. 60), 327.
66 Article XXI GATT, paragraph (b)(iii).
As Pogoretskyy concludes, “what appears to be of key importance for the effective implementation of the principle of freedom of transit is that gas transit is established on reasonable terms as opposed to how exactly this should be done.”68 As WTO rules are not
tailored to energy trade and transit, the regime laid out by GATT and the WTO’s dispute settlement mechanism offers only an “incomplete framework”,69 and requires States to
conclude additional bi- or multilateral agreements.
1.1.4 The Energy Charter Treaty
The creation of the Energy Charter Treaty70 (“ECT”) was initiated by Western European
governments after the collapse of the Soviet Union and aimed to provide a legal framework for energy-related trade, transit and investment activities.71 Unlike the WTO regime, the ECT
provisions have been tailored to the specificities of the energy sector.
According to article 7(1) ECT, States are under a positive obligation (“shall”) to “(…) take the necessary measures to facilitate the Transit of Energy Materials and Products consistent with the principle of freedom of transit (…).” Paragraph 5 furthermore determines that parties “shall, subject to paragraphs (6) and (7), secure established flows of Energy Materials and Products to, from or between the Areas of other Contracting Parties.” The content of article 7 draws from article V GATT72 and includes similar phrases on non-discrimination and
“unreasonable” delays and restrictions.
In 1999, the ECT Member States developed a Draft Transit Protocol. Article 6(1) of the Draft Protocol prohibited the unauthorized taking or interruption with the flow of energy products; article 16 prescribed (swift) restoration of any interruptions of reductions. Although the negotiations were suspended and the mandate repealed before parties reached agreement, the ECT Secretariat indicates that it is currently conducting “broad consultations among government and industries representatives” to see whether the negotiations could be revived. 73
68 Pogoretskyy, (n. 60), 340. See also Einhorn (n. 44), §68.
69 M. Cossy, ‘Energy Transport and Transit in the WTO’, (Centre for Trade and Economic Integration 2010), 5-6. 70 Energy Charter Treaty (17 December 1994, entered into force 16 April 1994) 2080 UNTS 95.
71 See extensively on the ECT and transit: P. Laffont, ‘An Energy Charter protocol on transit’ (2003) 8 IELTR 239. 72 Azaria (n. 13), 560.
73 See the website, energycharter.org, ‘What we do’ / ‘Trade and Transit’/ Transit Protocol. Lastly accessed May 2017.
Article 7(6) ECT states that a State is not allowed to interrupt or reduce transit in the event of a dispute, or to allow an entity “under its control” to cause such interruption or reduction, unless there is an agreement or contract which allows such interruption or when such is “permitted in accordance with the conciliator’s decision.”74 Article 7 ECT creates in
paragraphs 1 and 5 an obligation to act in line with the principle of freedom of transit, which qualifies as an obligation of conduct;75 the State must make an effort to guarantee free and
uninterrupted transit, but is not under an obligation to achieve that result. Again, there are exceptions that excuse the Contracting Party if it fails to meet its obligations as long as this does not result in an unreasonable delay or interruption. Similar to other treaties, 7(6) shows that treaty obligations (not to interrupt or reduce flows in dispute) can be amended and concretized by (contractual) agreement between parties.
In conclusion, the principle of free and uninterrupted transit is recognized and protected in the Energy Charter Treaty. The obligation however is one of conduct and not of result, and is furthermore subject to several exceptions. The ECT is a regional treaty and only a limited number of State Parties are bound to its provisions.76
1.2 Reflections
The principle of free and uninterrupted transit is recognized in a number of treaties, and applies to transit through pipelines. It can subsequently be argued, as Einhorn does, that “in view of the multiplicity of pertinent conventions and the wide participation and practice that have developed in this area, States have a right, recognized by customary international law, to demand that transit States will negotiate in good faith and conclude with them agreements that will allow goods to be carried on the most convenient routes over their territory on a non-discriminatory basis.”77
UNCLOS, GATT and the ECT (in articles 125(2), V(2) and 7(6) respectively) all allow States to inter se agree on the terms and modalities of mutually owed transit obligations.
74 Note that the scope of paragraph 6 is more limited in comparison to other paragraphs, as it deals with entities under the States’ control and not merely within its jurisdiction – private parties therefore do not fall under the scope of this subsection unless their conduct is somehow attributable to the State. See Azaria (n. 13), 71. 75 Ibid.
76 The ECT has currently been signed by 52 States, the EU and Euratom. See energycharter.org, ‘Process’ / ‘Energy Charter Treaty’.
These provisions all point out the importance of concluding transit agreements. The principle cannot be seen separate from another principle: that of territorial sovereignty. What seems essential is that the principle of freedom of transit applies on the basis of reciprocity: it only creates specified and enforceable rights and obligations if, in a bi- or multilateral setting, the relevant States consented to limiting their absolute territorial sovereignty. The principle requires States to negotiate in good faith the modalities on transit with other States and to facilitate rather than impede transit of goods – such as oil and gas – through its territory. The next paragraph will discuss whether the principle of free and uninterrupted transit extends beyond States and has any relevance for States in their conduct vis-à-vis pipeline operators.
1.3 The principle of free and uninterrupted transit – extension to pipeline operators?
Paragraphs 1.1 and 1.2 demonstrated that States may accept, on mutually agreed terms, that they have an obligation towards other States not to interfere with transit through their territory going to or coming from other States’ territory. It is not evident that the principle applies at any other level than between States. GATT, as part of the WTO framework, only creates obligations for and can only be enforced by its Contracting Parties: States.78 The only
effect GATT V may have on pipeline operators is indirect; if a State imposes its own
obligations on private parties under its jurisdiction. Siddiky remarks that “article V of GATT (…) does not provide any effective obligation on the members of the WTO to ensure that companies owning the pipelines abide by the transit obligation enshrined in Article V.”79
Selivanova on the contrary argues that States "must take appropriate measures vis-à-vis the private owner of infrastructure in order to meet its WTO obligations."80 Even if the latter
statement is true, these obligations would exist under national law only and would not play a role vis-à-vis third States. As for UNCLOS, article 125 singles out landlocked States as the entities that enjoy freedom of transit.
The ECT on the other hand contains provisions protecting the interests of non-state parties, such as pipeline operating companies, if they qualify as investors under the definition of the ECT. An investor is, according to article 1(7) ECT, either a natural person residing in or a company organized in accordance with the law applicable in the Contracting Party. An
78 Pogoretskyy, (n. 60), 342. With reference to WTO Panel Report, United States – Measures Treating Export Restraints as Subsidies, WT/DS194/R, adopted 23 August 2001, §8.49
79 Siddiky (n. 46), 325.
80 L. Ehring and Y. Selivanova, ‘Energy Transit’ in Selivanova (ed.), Regulation of Energy in International Trade
“Investment” is defined in article 1(6) ECT as “every asset, owned or controlled directly or indirectly by an investor” and includes property, a company or business enterprise or equity participation therein, claims to money or performance pursuant to a contract and “any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law.” “Investment” refers to any investment associated with an Economic Activity in the Energy Sector.81 Article 1(5) ECT defines “Economic Activity in the Energy Sector” as an
economic activity concerning the exploration, extraction, refining, production, storage, land
transport, transmission, distribution, trade, marketing, or sale of Energy Materials and
Products (…).” [emphasis added]
Under these definitions, pipeline operators would qualify as investors under the ECT when the country where they are established or registered (“in accordance with the law
applicable…”) is one of the ECT’s Contracting Parties. The asset could be the pipeline itself or operation rights. The Economic Activity in the Energy Sector would most likely be land transport or transmission, or the construction thereof.82
If pipeline operators qualify as investors in the sense of article 1(7), the ECT creates for them a possibility to enforce their rights through the dispute settlement mechanism of article 26 ECT. The dispute settlement mechanism however only applies to disputes arising out of a breach of obligations of part III of the ECT.83 Part III is titled “Investment Promotion and
Protection”. It contains provisions that oblige Contracting Parties to treat investors according to certain standards. For example, investments must enjoy “the most constant protection and security.” Investors from other Contracting Parties need to be treated no less favorable than its own investors or investors from a Third State (article 10). Part III is also concerned with the position of key personnel (article 11), compensation for losses (article 12), and sets conditions for lawful expropriation or nationalization of investments (article 13). Investors can act against a breach of any of the obligations of part III through the investor-state dispute settlement mechanism of article 26 ECT.
81 Article 1(6) ECT, final sentence.
82 According to the understanding with respect to 1(5), the laying of oil, gas and coal-slurry pipelines also qualifies as an economic activity in the energy sector.
As article 7 falls under part II, the dispute settlement mechanism of article 2684 seems, at first
sight, useless in the context of transit interruptions. The conciliation mechanism of paragraph 7 of article 7 only applies between Contracting States, which consequently means that if “a (…) private entity's contractual entitlement to delivery of natural gas is interrupted or curtailed due to a state acting strategically further up the pipeline, that entity may have little recourse of its own as against the offending state.”85 Yafimava however argues that if the
transit dispute is also an investment dispute, the dispute settlement mechanism of article 26 will apply.86 The last sentence of article 10(1) ECT (in Part III) determines that a Contracting
Party “shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”87 If the transit obligation is thus included in an
agreement with the pipeline operator (the investor), a claim for damages suffered by an interruption of transit may be brought to arbitration on the basis of article 26 ECT.88 That
possibility thus hinges on the existence of a project-specific agreement with provisions on transit and/or a prohibition on transit interruption. Those agreements, concluded between State and investor, are called “Host Government Agreements” and will be further discussed in Chapter 2.
Transit interruptions may also amount to breaches of one or more substantive obligations of part III ECT. For example, in the example case of Ampal v Egypt, the gas flow was
interrupted because at some point during the Arab Spring, the pipeline was attacked and the flow cut off.89 This can be a failure to provide “constant protection and security” (10(1)
ECT). Ampal also argued that the flows to Jordan were more swiftly recovered than the flows to Israel.90 This would be an example of discriminatory measures that impair the
84 Article 26 ECT is the investor-state dispute settlement mechanism of the ECT. Article 26 determines that a dispute should be settled amicably within three months. When parties fail to settle their dispute, a party can submit the dispute either to the national courts of the Host State or to arbitration. Such arbitration can, according to subsection three, be initiated at ICSID, ad hoc arbitration according to the UNCITRAL Rules, or at the Stockholm Chamber of Commerce.
85 C. Flynn, ‘Russian Roulette: the ECT, transit and Western European Energy Security’ (2007) 1 International
Energy Law & Taxation Review, 12, 15.
86 K. Yafimava, ‘Transit: The EU energy acquis and the Energy Charter Treaty’ in Talus (ed.) Research
Handbook on International Energy Law (Edward Elgar 2014), 620.
87 A number of countries have withheld their unconditional consent to arbitrate in light of disputes arising out of the last sentence of article 10(1), see article 26(3)(c) ECT. See also G. Coop, ‘Liquefied natural gas projects and investment protection under the Energy Charter Treaty’ (2008) 2 IELR 30, 31.
88 The last sentence of article 10(1) is an umbrella clause. On umbrella clauses, see paragraph 2.2.1. 89 Ampal v Egypt, §217 and further.
maintenance, use, enjoyment or disposal of the investment (10(1) ECT).91 In these situations,
the existence of an investment opens the door for the pipeline operator to take legal action against the Host State through the dispute settlement mechanism provided for in the ECT. If it is however not the Host State, but another State further up the pipeline that is causing the interruption, the investment protection provisions of part III do not offer any help, because the operator is not an investor in that State according to the definition of the ECT. Chapter 2 will further elaborate upon these issues, as the standards of protection of Part III ECT are similar to the investment protection provisions of BITs.
If there is an agreement between the pipeline operator and the Host State, there will be other courses of action that are open to the operator, such as a claim before domestic courts, or commercial arbitration, for a breach of contract.92 If there is a BIT in place between the Host
State and the operator’s Home State,93 the operator may, as an investor, be able to initiate a
claim for a breach of the BIT’s investment protection provisions also when there is no contractual relationship. These actions will be discussed in Chapter 2.
1.4 Reflections
The obligation to respect, guarantee or facilitate free and uninterrupted transit is contained in several treaties. It follows from paragraph 1.3 that those treaties do not envisage non-state actors as parties that enjoy freedom of transit, except where an interruption may amount to a violation of one of the investment protection obligations of Part III ECT. The ECT does not have universal application, and Part III provisions only protect against conduct of the Host State. Those provisions do not offer a means for redress if the interruption is caused in a part of the pipeline located in another State, because the dispute settlement provision of article 26 ECT only applies to disputes between the investor and the Host State.94 Furthermore, the
91 Note that it was EMG that was (allegedly) directly affected by Egypt’s conduct, and Ampal suffered from this indirectly because the value of its shares would have decreased.
92 As the example case of Ampal v Egypt also illustrates: EMG initiated commercial arbitration at the international chamber of commerce (ICC Case (18215/GZ/MHM)) against the two state-owned Egyptian companies EGAS and EGPC.
93 In investment law terms, the Host State is the State in which the operator owns certain rights in regards the pipeline, or where the operator is performing operational activities. The Home State is the State where the operator is registered, or where the shareholders in the operator company are located. In Ampal v Egypt, the operator, EMG, was established according to the laws of Egypt, but Ampal, as a shareholder in EMG, had the US nationality and was able to bring a claim for an alleged breach of the US-Egypt BIT.
obligation not to impede or interrupt transit is placed outside the part on investment protection.
The mentioned treaties may at the utmost require Host States to ensure that, at the national level, transit is not interrupted by private entities. For example, according article 7(2)(c) of the ECT, Contracting Parties “shall encourage relevant entities to cooperate in measures that mitigate the effect of interruptions in the supply of Energy Materials and Products.” The principle of free and uninterrupted transit in international law cannot be presumed to automatically extend to pipeline operators. The obligation not to interrupt or interfere with transit cannot be imposed on pipeline operators (or other parties) in treaties, but neither do operators have a right to free and non-interrupted transit. This may be different, however, when States commit to the operator not to interfere with or interrupt transit, as was already briefly touched upon at the end of paragraph 1.3. Because the principle of freedom of transit applies on the basis of reciprocity (see 1.2), the pipeline operator must secure from its Host State a commitment which grants the operator specifically the right to free and uninterrupted transit. That right remains, after all, a limitation to the State’s territorial sovereignty.
Article 49 ARSIWA mentions the suspension of transit rights as a countermeasure in response to another State’s wrongful conduct:
“(…) if the injured State suspends transit rights with the responsible State in accordance with this chapter, other parties, including third States, may be affected thereby. If they have no individual rights in the matter they cannot complain.”95
To be able to “complain” when transit is interrupted, the pipeline operator must have obtained an individual right to uninterrupted transit from the Host State. The following chapter will discuss how the pipeline operator can obtain such an individual right, and how that right can be enforced against the Host State.
Chapter 2 – Freedom of Transit: Commitment in Agreements or Bilateral Investment Treaty
Chapter 1 established that the principle of free and uninterrupted transit only applies
between States and does not extend any rights or obligations to any other than State Parties. A State’s failure to adhere to the principle of free and uninterrupted transit does not offer pipeline operators grounds to initiate a claim against an interrupting State. That situation changes when the State has committed to non-interruption vis-à-vis such the operator. Chapter 1 already touched upon the investment protection provisions of Part III of the ECT. Not only can States commit to non-interruption towards other States, they are similarly able to make such commitments to others. Agreements made with international oil and gas companies, such as pipeline operators, are subject to certain specificities. These so-called Host Government Agreements (“HGAs”)contain provisions on non-interruption of transit, and may create rights and obligations for pipeline operators. These provisions, as well as the dispute settlement provisions contained in most HGAs, will be discussed in this chapter. Other commitments by the State to non-state actors are found in Bilateral Investment Treaties. These commitments, while they do not pertain to a specific pipeline project, can also offer the pipeline operator a possibility to initiate investment arbitration against an interrupting State. The second part of this chapter will therefore discuss how transit interruptions can arguably amount to a breach of BIT investment protection provisions.
2.1 Host Government Agreements
A Host Government Agreement (“HGA”) can be defined as “each agreement entered into between a host government, on the one hand, and project investors, on the other hand, relating to the pipeline system.”96 The use of the term “investor” does not correspond with
the term investor in international investment law and BITs. A project investor that is a party to an HGA is not necessarily an investor in the sense of a BIT. That will depend on other factors, such as whether the project investor is foreign, whether there is a BIT in place between its Home State and the Host State97 and on the definition of investor or investment
used in the BIT.
96This is definition as used in the Model Agreements drafted by the ECT Secretariat. See article 1(1) of the
Model Intergovernmental Agreement.
97 ‘Host State’ both in the definition used in this thesis, so host to the pipeline, and in the definition as used in investment law – the State ‘host’ to the investment.
The oldest example of an HGA is the traditional concession agreement. A concession can be defined as “an arrangement between a concession granting authority i.e. grantor and grantee allowing the international company exploration, development, production and trading of hydrocarbons extracted.”98 While the first concessions were overly beneficial to the
international company, granting long-term rights to extract from large scale areas, this later changed in light of the reassertion of sovereign rights over natural resources.99 The current
model curbs the international company’s power in favour of the Host State, allowing the latter to take up a more active role in the exploration and development process. The sector also saw an increase of joint participation models, such as joint ventures and participation agreements. A HGA can contain elements of the Host State’s national law, but can also declare another legal regime applicable. Even though the HGAs are national contracts and will usually be adjusted to the specific wishes of the Host Government,100 Talus argues that
they have been ‘internationalized’, as they “contain similar clauses and similar structures regardless of the country or region in the world.”101
How does this relate to the pipeline operators and the right to free and uninterrupted transit? The ECT Secretariat has developed a model HGA, which I will use as a standard of reference as it is based on language most commonly used in practice. In the Model HGA, article 5(1) determines that the Host Government “shall take the necessary measures to facilitate the Transport of Petroleum/Natural Gas in connection with the Project, consistent with the principle of freedom of transit.” The Host Government should not impose unreasonable delays, restrictions or charges. The model HGA includes provisions that oblige the Host Government to cooperate with the project investors102 and to facilitate that the necessary laws
and decrees are adopted or adjusted. Other provisions see to, inter alia, the security of land rights, the pipeline system and personnel, (import and export) taxes, and liability.103
98 M. Naseem and S. Naseem, ‘World Petroleum Regimes’ in Talus (ed.) Research Handbook on International
Energy Law, (Edward Elgar 2014), 151.
99 Ibid, 150. Key was the adoption of the UN General Assembly Resolution 1803 (XVII) of December 1962 on Permanent sovereignty over natural resources.
100 K. Talus, S. Looper and S. Otillar, ‘Lex Petrolea and the internationalization of petroleum agreements: focus on Host Government Contracts’ (2012) 5 Journal of World Energy Law and Business, 181, 185.
101 Ibid.
102 Project investors are companies that, according to the language of the model HGA, wish to invest in the construction of the pipeline system and/or operate or utilize its capacity.
103 Regarding liability, article 32 paragraph 5 of the model HGA, the project investors or other interest holders are indemnified from liability to any third party for losses arising out of spillage or release of petroleum or gas, including when the loss or damage was (sub d): “the result of wrongful intentional conduct of a third party”. The ECT Secretariat noted that this provision “comprises a heavy responsibility on the host state” and “a rather
The Annex attached to this paper includes an overview of HGAs.104 Most HGAs contain a
provision on the freedom of transit, and an obligation on Host Governments to ensure uninterrupted and unrestricted transit. Whereas some HGAs use normative, result-based language others use effort-based language. In general, where the freedom of transit
provisions use language as “shall facilitate”, “use its best endeavours” or “undertake every effort”, the State will be under an obligation of conduct. Where obligations are expressed in terms of “shall not interrupt” or “to guarantee the continuous flow”, these will be obligations of result.105 In either case, an interruption may lead to a breach of the agreement. An
obligation of result will per definition be breached if the flow is interrupted (although this not automatically leads to liability, the breach can still be excusable for example in a force
majeure situation106). An obligation of conduct is only breached if it can be demonstrated that
the State did not make all the necessary efforts to prevent the interruption from occurring. In both cases, there are exceptions to the non-interruption obligation, most importantly on grounds such as public health, safety and the environment. Some HGAs also contain a force
majeure provision.
As to breaches of the HGA’s obligations and claims that might arise out thereof; HGAs are essentially contracts between project investors and Host States or Host state-owned
companies - they are thus not governed by international law.107 An HGA will usually contain
a provision on the applicable law – this is the legal regime the parties chose to govern their agreement. In addition, most HGAs provide for arbitration as the appointed means of dispute settlement.108 If the Host State and investor concluded an agreement, the easiest way for the
pipeline operator to claim damages suffered as a consequence of interruption would be on the basis of a breach of agreement. It will then be a matter of applying the applicable law to determine what the criteria are for liability for damages. The Ampal v Egypt example case shows that a pipeline operator or its shareholders may pursue their claim(s) in different
unbalanced division of liability between the host states and project investors”. Such liability is not generally accepted in HGAs. See ECT Secretariat (n. 6), 91.
104 Reference to the sources of information on the HGAs can be found in the Annex. 105 For an extensive discussion of these issues, see Azaria (n. 13), Chapter 3, §2.1.
106 Force majeure is a circumstance – the occurrence of an irresistible force or unforeseen event, beyond control of the State, which makes it materially impossible to comply with the obligation - which precludes the
wrongfulness of an act of State not in conformity with its international obligations. See 23(1) ARSIWA. See extensively F.I. Paddeu, ‘A Genealogy of Force Majeure in International Law’ (2012) 82 BYIL, 381.
107 ECT Secretariat (n. 6), 52.
fora.109 While Ampal pursued a claim against Egypt through the US-Egypt BIT dispute
settlement mechanism, EMG pursued commercial arbitration against EGAS and EGPC for a breach of contract.110 The next paragraph will discuss how a transit interruption can arguably
amount to a breach of substantive BIT obligations.
2.2 Bilateral Investment Treaties and investment protection provisions
For the purpose of this paragraph, it will be assumed that either the pipeline operator itself or one of its shareholders is foreign. That means that either the operating company itself or the shareholder does not have the nationality of the State in which the pipeline is constructed and/or operated, so where investment activities take place – this is the Host State. The company or shareholder instead has the nationality of another country – the Home State. 111
If the Home State and Host State have concluded a Bilateral Investment Treaty (“BIT”), the Host State is not just a host to the pipeline but also a Host State in the definition as used in international investment law. The Host State will have to behave itself towards foreign investors – in our case, pipeline companies and/or their shareholders - in a manner that respects the investment protection provisions of the BIT. For example, the State may have to accord the operator “fair and equitable” treatment, and must treat the operator in a non-discriminatory manner. It goes beyond the scope of this paper to offer a thorough analysis of the substantive content of these provisions, so the paragraphs below will focus on those provisions that may be breached by a State interrupting oil or gas transit. The Ampal v Egypt arbitration will serve as an example throughout.
2.2.1 Umbrella clause
If there is an agreement (for example an HGA) in place between the pipeline operator and the Host State, the pipeline operator or its shareholders may present a breach thereof also before an investment tribunal when the BIT contains a so-called “umbrella clause”. Such umbrella clauses oblige the Host State to fulfill their obligations towards investors.112 Umbrella clauses
have the effect of “elevating” obligations towards foreign investors to the international legal
109 See also Ampal v Egypt, Decision on Jurisdiction, §327-339. Claims cannot be pursued in different fora when this could lead to the double recovery of the same sum.
110 ICC Case (18215/GZ/MHM) – unpublished. See E. Gaillard, ‘Abuse of Process in International Arbitration’(2017) 32 ICSID Review, 1.
111 See also the part on ‘Definitions’ in the Introduction.
