Disputes risk rises from energy security concerns

The growing risk of disputes arising from energy security issues was highlighted in a major study undertaken by Queen Mary University of London (QMUL) in partnership with Pinsent Masons (50-page / 20MB PDF). The study found that arbitration remains the favoured method for resolving energy-related disputes.

The main study findings on energy security

Across the world, countries face ongoing and increasing pressures in ensuring growing demand for energy is met with available supply. Whilst there has been significant investment in nuclear and renewables in many countries, there remains widespread dependence on sourcing energy from fossil fuels.

Many respondents to our study, which included parties to energy-related arbitrations, disputes practitioners, arbitrators, academics, experts and arbitral institutions, cited the ongoing impact of and fallout from Russia’s invasion of Ukraine as exacerbating existing energy security pressures – respondents highlighted the impact of international sanctions on their supply chain and on the availability and price of raw materials, for example – and there was widespread recognition that issues with security of supply can trigger disputes.

According to the respondents, matters concerning security of energy supply will be one of the primary causes of the most international energy disputes in the short to medium term. When asked to rank factors which they think will cause disputes relating to security of energy supply, 47% of respondents identified supply chain risk, recognising that geopolitical tensions like those arising from the war in Ukraine only serve to put added pressure on supply chains that faced significant challenges throughout the Covid-19 pandemic. Other interconnected risk factors – price volatility and sanctions – scored highly as likely causes of security of supply disputes too.

In Western countries, beyond the imposition of sanctions , there has been a significant policy response to the war in Ukraine. In Europe, for example, some countries have moved to expand gas storage capacity and others have sought to source gas from other jurisdictions in light of the threat of Russia withdrawing its supply of gas to them. This has had an impact on global gas supply availability and pricing, not just in the European market.

The desire to reduce reliance on Russian fossil fuels has also encouraged many Western policymakers to examine how this can be achieved in the wider context of achieving climate change targets. The REPowerEU plan is an example of this, which envisages a greater focus on domestic, clean, energy generation.

The acceleration of renewable and alternative energy sources, such as nuclear, was also identified by respondents to our study as a likely cause of disputes relating to security of energy supply as policymakers seek to address longer term need – 47% of respondents indicated that the cost of nuclear projects would be the factor most likely to lead to disputes in the context of nuclear projects.

Some respondents to our study, however, believe that energy security pressures, exacerbated by geopolitical tensions, will spur a shift in Africa, the Middle East, and Asia back to traditional sources of fossil fuels, and others see potential for previously abandoned fossil fuel projects to resurface and resultant disputes arising from reversing decommissioning. The long-term direction of travel towards cleaner energy seems set, however, and so short-term changes to the investment environment and regulatory framework aimed at addressing security of supply concerns have the potential to lead to disputes between foreign investors and host states in the longer term if these policies are reversed.

There are, however, different views on how energy security issues will impact on the energy transition – some respondents expect the renewed focus on security of supply to cause delay to the energy transition, but bp said recently (53-page / 2.2MB PDF) that it expects the opposite. In our experience, however, there are geographic nuances: outside of Europe, including the more economically-developed Middle Eastern countries including Saudi Arabia and the UAE, we see acceleration of the energy transition.

In many parts of regions such as the Middle East, there are no directly applicable sanctions or regulatory changes linked to the Russia-Ukraine conflict. Instead, there is a continued focus on clean energy and renewables with those projects moving ahead at speed. For example, Saudi Arabia is investing heavily in clean hydrogen production and renewables such as wind and solar as it aims to achieve net zero carbon emissions by 2060. In the UAE, the UAE energy strategy 2050 aims to achieve an energy mix combining nuclear, renewables and clean energy sources to meet the UAE's economic requirements and environmental goals by 2050. The country has already seen significant investment in nuclear and solar energy.

Whilst there are regional variations in the areas of impact of security of energy supply, an almost uniformly negative impact has been on the supply chain. Disruption of the global supply chain of materials needed for construction projects continues to be a problem, together with associated price volatility and escalation of raw materials and energy. This leads to a greater number of disputes as project timetables are delayed and scopes of work need to be varied, whether those projects are for the production of fossil fuels or renewables.

To mitigate risks now, parties should be reviewing their energy and infrastructure contracts carefully with a focus on change of law and force majeure, delay and prolongation, termination and dispute resolution provisions. They should also look ahead to manage risk and plan for delay and disruption by realistically assessing the potential impact of security of energy supply concerns and other factors – this will help parties reduce the risk of, or at least be better prepared for, formal dispute resolution.

However, if parties find themselves in formal dispute resolution proceedings, the findings from our study show that arbitration remains the most favoured forum. Respondents reflected on international arbitration’s features of neutrality, choice of arbitrators and technical expertise, enforcement and confidentially as among those most important for resolving energy-related disputes. Value was also attached to procedural aspects, such as the technical expertise of counsel, arbitrators and experts and the availability of expedited procedures.