An Analysis of Petroleum Contract Renegotiation under Changed Circumstances

  • Mohammad Namdar Zangeneh

    Student thesis: Doctoral ThesisDoctor of Philosophy


    Renegotiation is an integral feature of upstream petroleum contracts, given their vulnerability to unforeseen supervening events. The underlying assumptions or expectations upon which the parties enter into contracts change over time due to the special character of these agreements. In petroleum contracts, the conflicting interests of the parties are a major source of instability. While the investor is understandably concerned about the stability of its investment in order to recover its costs and attain a minimum rate of return, the State, as a sovereign entity with the public interest on top of its agenda, prefers contractual flexibility and seeks economic development through the investment. The need for renegotiation of petroleum contracts derives from the necessity of introducing flexibility into petroleum agreements, while maintaining contractual stability.

    The principles of pacta sunt servanda and rebus sic stantibus are at the heart of any discussion of contractual adjustment. While the importance of the sanctity of the contract always has to be underlined, yet the rigid insistence on the contractual stability in the field of upstream petroleum agreements may lead to explosive reactions by the host State. Therefore, renegotiation of such contracts subsequent to change of circumstances resulting in a breach of the parties’ legitimate expectations is essential if the contract is to survive the turbulent times of the future.

    Many, if not the majority of petroleum contracts, do not seem to contain contractual adjustment provisions, mostly because the investor is fearful that those clauses will be used as a lever by the State party to impose unilateral changes in the investment’s underlying circumstances. However, even in the absence of adjustment mechanisms in the agreement, the petroleum industry practice has shown that renegotiation is still happening outside the parties’ express will. Renegotiation outside the contract, however, may impose the contract to high risk of instability, and therefore, must be qualified. While the necessity of renegotiation of petroleum contracts has been highlighted in this dissertation, it is argued that renegotiation practices outside the contract will be effectively qualified through establishing or finding a duty to renegotiate by recourse to the general principles of law. Finding an implicit or inherent obligation to renegotiate petroleum contracts based on the general principles of law will keep the rights and obligations of the contracting parties, as set out in the contract, consistent with the economic interests of the parties throughout the duration of the contract.

    Although the principle of protection of legitimate expectations may well be perceived as a source for an inherent or implied renegotiation duty in the field of petroleum contracts, but major municipal laws in the world seem to still adhere to the principle of the sanctity of contracts and narrowly interpret and apply the principle of rebus sic stantibus. That is because the approaches of the prominent national legal systems in the world have been influenced by the rules originally designed to govern contractual relationships between parties with equal bargaining powers in purely private and commercial contracts. This will lead to the conclusion that inserting contractual adjustment clauses in petroleum contracts may be the best way for the parties to ensure contractual adjustment(s) during the performance of the contract in the event that change of circumstances will lead to disturbance of economic equilibrium of the contract.
    Date of Award2016
    Original languageEnglish
    SupervisorStephen Dow (Supervisor) & Peter Cameron (Supervisor)

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