THE LEGAL IMPLICATION OF STABILIZATION CLAUSES ON INTERNATIONAL PETROLEUM CONTRACTS

Abstract

This paper examined the legal implications of stabilization clause on International Petroleum Contracts, with the objective of identifying the significant benefits of inserting such clauses into petroleum contracts. Stabilization clause are contractual provisions incorporated into international energy contracts with the aim of shielding the investment from political risk. The paper employed a doctrinal research methodology, relying on primary sources such as statutes, judicial decisions and international legal instruments, while secondary sources including textbooks, journal articles and reports were also examined. The paper examined the legal effect of stabilization clause on petroleum contracts, the nature of expropriation of foreign investment, the principle of permanent sovereignty over natural resources amongst others. The paper observed that although stabilization clause insulates petroleum contracts from legislative and regulatory changes, the inclusion of such clauses negates the principle of permanent sovereignty over natural resources and erodes the sovereignty of states. It further revealed that the use of stabilization clause could have the effect of precluding sovereign states from amending its laws to achieve new economic objectives. The paper concluded that stabilization clause is required to enhance legal certainty for international petroleum investment and recommended that stabilization clause provision in petroleum contracts should be able to strike a balance between safeguarding foreign investments and preserving state sovereignty.